United States District Court, D. Maryland
K & S REAL PROPERTIES, INC. Plaintiff and Counter-Defendant
OLHAUSEN BILLIARD MANUFACTURING, INC. Defendant and Counter-Plaintiff.
Ellen L. Hollander, United States District Judge
K & S Real Properties, Inc. (“K & S”), plaintiff, filed suit against Olhausen Billiard Manufacturing, Inc. (“OBM”), alleging breach of contract. OBM filed counterclaims against K & S and its lawyers, Timothy Guy Smith, P.C., trading as The Law Offices of Timothy Guy Smith (“Smith, P.C.”), and Timothy Guy Smith (“Smith”) (collectively, the “Smith Defendants”), alleging, inter alia, fraud and legal malpractice.
OBM has moved to disqualify the Smith Defendants as counsel for K & S (ECF 43), supported by a legal memorandum (ECF 44) (collectively, “Motion” or “Motion to Disqualify”) and several exhibits, including a Declaration from Donald Olhausen, the President of OBM. ECF 44-1 at 1-6. According to OBM, Smith is the only lawyer at Smith, P.C.; Smith is the sole owner of K & S; Smith has a conflict of interest in representing K & S against OBM, because OBM is a former client of the Smith Defendants; and Smith is a necessary witness in this suit. ECF 43, ¶ 4; ECF 44 at 3. K & S opposes the Motion (ECF 45, “Opposition”). In support of its position, K & S has submitted exhibits that include documents related to the underlying transaction; an affidavit by Robert L. Harris, President of KH Funding Company (ECF 45-1 at 4-5); and Smith’s Affidavit. ECF 45-1 at 10-11. OBM has replied (ECF 46, “Reply”) and submitted two additional exhibits: the Declaration of Nancy Correa (ECF 46-1), an attorney at Watkins Firm, APC, a law firm that has represented OBM “in many matters over many years” (id. at 1), and the Declaration of Alan F. M. Garten, Esq., counsel for OBM in this case. ECF 46-2, “Garten Declaration.” The Motion has been fully briefed, and no hearing is necessary to resolve it. See Local Rule 105.6. For the reasons stated below, I shall grant the Motion to Disqualify.
I. Factual Background
In a Complaint filed April 27, 2015 (ECF 1), K & S sued OBM, alleging that in October 2008, OBM entered into a Non-Recourse Revolving Line of Credit with K & S (ECF 1-1, the “Note”) and, since January 28, 2009, OBM failed to make any payment on the Note (ECF 1, ¶ 4), which came due on October 31, 2013. Id. ¶ 5. Plaintiff seeks $600, 000 in unpaid principal, interest in excess of $400, 000, and attorney’s fees. ECF 1 at 2. K & S is represented by the Smith Defendants.
In its Motion, OBM alleges that, “during all relevant times in this lawsuit, ” Smith served as OBM’s legal counsel (ECF 43 at 2), including the period when the Note was executed. Id.According to OBM, Smith advised OBM to execute the Note (id.), which was part of a “convoluted, interconnected multi-transactional effort by the Timothy Smith Defendants and K & S which resulted in the misappropriation (or a significant loss in value of) retirement funds from OBM’s president . . . .” ECF 44 at 2.
OBM explains that it “needed an infusion of funds in 2008 due to the recession, and OBM’s president, Donald Olhausen . . . determined to get the funds from his personal IRA and pay any resulting taxes and penalties.” ECF 44 at 2. However, Smith, who was then “representing OBM on diverse legal issues” (id.), allegedly “advised” Olhausen “not to cash out his IRA, but to use Attorney Smith’s scheme to borrow the IRA funds without incurring taxes and penalties.” Id. In particular, OBM claims that Smith “instructed Olhausen to transfer his IRA to KH Funding Company (KHFC), a financial firm with which Attorney Smith was associated, then KHFC would ‘loan’ the funds to plaintiff K & S, which would ‘loan’ the funds back to OBM.” Id. at 3. OBM attached to the Motion a memorandum dated October 30, 2008, signed by Mr. Olhausen, which authorized KHFC to transfer funds from Mr. Olhausen’s IRA to “Timothy G. Smith and Douglas K. Kelly.” ECF 44-1 at 16.
OBM has submitted Olhausen’s Declaration stating that Smith served as counsel for OBM at the relevant time. ECF 44-1, ¶ 3. Olhausen avers in his Declaration that Smith insisted “OBM would not be required to repay the money until it was in a position able to replenish [the] IRA account with KHFC.” Id. ¶ 5. According to Olhausen, Smith claimed that “KHFC would ‘loan’ the funds to a third party, which would ‘loan’ the funds back to OBM. . . . [I]n this way OBM could access virtually all of [Olhausen’s] IRA funds without taxes and penalties for early withdrawal.” Id. Smith advised that the purpose of “OBM’s promissory note” was “only . . . to satisfy IRS guidelines.” Id.
According to OBM, these events make Smith a necessary witness in this case and create a conflict of interest. ECF 44 at 9-11. In particular, OBM states that, “based on the defenses and claims raised by OBM, Attorney Smith’s alleged improper actions are central to OBM’s claim that OBM does not owe any money on the subject promissory note and OBM’s related claim that Attorney Smith misappropriated Mr. Olhausen’s IRA funds for Attorney Smith’s own benefit.” Id. at 11. Further, OBM avers that it “never consented to Attorney Smith serving as counsel for K & S.” ECF 44 at 10.
Along with its Motion to Disqualify, OBM submitted a transcript of a deposition of Smith, conducted in connection with litigation in a Tennessee state court involving Smith’s wife and Olhausen. ECF 44-1 at 40-45, “Transcript.” OBM contends that the Transcript establishes that Smith “admitted that he ‘probably did’ provide legal advice to OBM regarding the IRA transactions that are central to the instant lawsuit.” ECF 44 at 3.
The following deposition exchange is relevant, ECF 44-1 at 42:
[OBM’s Counsel]: All right. Did you give Mr. Donny Olhausen any advice about how to structure this deal with his IRA or 401K money, whichever it was, that was about $768, 000?
[Smith]: I probably did, but that’s about as far as we’re going with that line of inquiry, because . . . .
[OBM’s Counsel]: What did you - what advice did you give him?
[Smith]: We’re not going any further with that inquiry . . . . Thereafter, Smith refused to answer the question, because of the pendency of the case in Maryland, claiming: “It’s not relevant . . . .” Id.
In its Opposition (ECF 45), K & S states, id. at 6 (alterations added):
[T]he undersigned [Smith] was questioned as to whether or not the matter of Mr. Olhausen moving his IRA to KH Funding had ever been discussed and the responsive [sic] was unequivocally “probably.” However, . . . the undersigned had no involvement in the transfer, the preparation of transfer documents or the preparation of indebtedness documents involved in this transaction. Those documents were all prepared by either KH Funding or Mark Kugler, Esquire and no changes, modifications or edits were requested by [Smith].
In his Affidavit (ECF 45-1 at 10-11), Smith does not directly address whether he served as OBM’s counsel at the relevant time. But, he asserts that he “took no part in the preparation of documents” for Olhausen’s IRA transfer and “took no part in the negotiation of interest rates or terms of loans” between KHFC, OBM, and K & S. Id. ¶¶ 3, 4.
K & S also contends that it would suffer hardship if the Smith Defendants are disqualified, because it “has no financial ability to retain and/or pay attorneys for the collection of a non-ambiguous Promissory Note . . . .” ECF 45 at 5. Further, it alleges that OBM has made it “very clear” that its intention in regard to the Motion is to create “protracted and ...