United States District Court, W.D. Kentucky, Louisville
MEMORANDUM OPINION AND ORDER
JOHN G. HEYBURN, Senior District Judge.
In April 2013, Defendants John Ayres and Todd Loehnert left their positions at Wells Fargo for leadership roles at Pinnacle Surety Services ("Pinnacle"). Wells Fargo sued Ayres, Loehnert, and Pinnacle, claiming that Ayres and Loehnert breached their employment agreements and that Pinnacle tortiously interfered with those agreements. Two law firms- Manion Stigger, LLP and Cooper & Elliot, LLC-represented all three defendants in that matter and ultimately negotiated a settlement. In May 2014, Ayres and Loehnert left Pinnacle and formed their own allegedly competing entity, L.A. Surety Solutions LLC. Pinnacle then sued Ayres and Loehnert, alleging that they violated their employment agreements with Pinnacle. Ayres and Loehnert also asserted various counterclaims. Now, Manion Stigger and Cooper & Elliot represent Ayres and Loehnert against Pinnacle, their former client. Pinnacle has moved to disqualify both firms, arguing a conflict of interest precludes them from serving as counsel in this matter.
This case presents difficult questions amid some acrimony. The Court has attempted to accurately assess the events and their significance. Both sides did an excellent job briefing the issues. To that end, the Court engaged in a lengthy discussion with the parties concerning the pending motions. The Court bases its ultimate conclusion upon the discernable hard facts.
Rex Elliot (of Cooper & Elliot, LLC) and Bruce Stigger (of Manion Stigger, LLP) have represented Todd Loehnert for more than two decades, but the chain of events leading to this disqualification motion began just two years ago. On April 12, 2013, Loehnert and Ayres quit Wells Fargo to work for Pinnacle. A day later, they signed the Employment Agreement with Pinnacle. It provided that Loehnert and Ayres would work for Pinnacle for a minimum of three years, beginning on April 13, 2013. If both left early, each would be required to pay Pinnacle $125, 000 in liquidated damages (for a total of $250, 000). This section of the contract explains the basis for the provision:
Executives recognize that Pinnacle is expending significant resources on establishing the Kentucky Office, and that those resources are being expended based on Executive's [sic] promises and representation with regard to their expertise in the industry and their devotion to Pinnacle's business. Executives further recognizes [sic] that Pinnacle will only receive appropriate return on its investment in the Kentucky office if the office remains open and profitable for a period of time, and that Executive(s') termination of employment from Pinnacle will cause Pinnacle to incur injury and damage, the actual amount of which would be extremely difficult to determine....
Pinnacle claims the parties anticipated litigation with Wells Fargo and that this was one of the significant factors the parties considered in reaching the $250, 000 liquidated damages figure. Loehnert and Ayres, meanwhile, claim the figure was totally unrelated to the Wells Fargo matter.
Attorneys from Cooper & Elliot and Manion Stigger represented Loehnert and Ayres in negotiating this employment agreement and its subsequent reformation in December 2013; the law firms did not represent Pinnacle in either negotiation. Nevertheless, the purpose of the liquidated damage provision would reemerge as a potential issue in subsequent litigation.
On April 25, 2013, Wells Fargo sued Loehnert, Ayres, and Pinnacle in Jefferson County Circuit Court, alleging six counts: (1) breach of contract (against Ayres and Loehnert); (2) breach of fiduciary duty of loyalty (against Ayres and Loehnert); (3) breach of covenant of good faith and fair dealing (against Ayres and Loehnert); (4) violation of the Kentucky trade secret statute (against all defendants); (5) unfair competition (against all defendants); and (6) tortious interference with contract (against all defendants). According to Loehnert and Ayres, shortly after Wells Fargo filed this complaint, Pinnacle proposed that Cooper & Elliot and Manion Stigger also represent Pinnacle in order to save money "and because everyone knew Mr. Loehnert and Mr. Ayres were the primary defendants in the case." DN 17 at 5. Though neither had ever represented Pinnacle, both Manion Stigger and Cooper & Elliot agreed and represented Loehnert, Ayres, and Pinnacle in the litigation.
Loehnert and Ayres claim that during this representation Cooper & Elliot had only a few telephone conversations with Pinnacle's owner; used Loehnert and Ayres as the primary points of contact in the litigation; and only provided updates on the status of the litigation without sharing any confidential information. Moreover, they assert that no one from Manion Stigger or Cooper & Elliot has ever personally met the owners of Pinnacle. The lawyers nevertheless submitted an answer and alleged multiple counterclaims on behalf of all three. Pinnacle paid Cooper & Elliot a total of $32, 650 after this matter settled.
Attorneys from Manion Stigger and Cooper & Elliot settled this lawsuit with Wells Fargo on June 4, 2013, and the suit was dismissed three days later. The terms of this settlement are confidential. The parties have nevertheless disclosed that, as a part of this settlement, Loehnert and Ayres agreed to pay Wells Fargo $100, 000 immediately and another $100, 000 a year later; they made the final payment to Wells Fargo on June 4, 2014.
On June 5, 2013, Pinnacle wired $100, 000 to the account of Manion Stigger, who was acting as counsel to Ayres, Loehnert, and Pinnacle. Pinnacle describes this payment as an advance on commissions to assist Ayres and Loehnert in paying their settlement obligations to Wells Fargo. Pinnacle later signed a promissory note requiring it to pay $100, 000 to Todd Loehnert and Brian Ayres "with the interest at the simple interest rate of 4% per annum from June 4th, 2014, until paid...." It further provided: "The whole sum of principal and interest shall become immediately due and payable on June 4th, 2014." The parties dispute liability under the promissory note and for the initial $100, 000 payment, but the arguments on both sides are not really clear and this issue is not currently before this Court. But even under Loehnert and Ayres's version of the facts, the payment and promissory note stem from the first $100, 000 owed under the Wells Fargo Settlement.
On May 23, 2014, Rex Elliot (acting as counsel to Loehnert and Ayres) sent a demand letter to Pinnacle, threatening a lawsuit seeking "any damages... due to the inability make [sic] the second installment payment on June 1st in accordance with the Wells Fargo Settlement Agreement, including Wells Fargo's legal fees to enforce the obligation and the 10% interest obligation set forth in the Note." DN 14-4 at 1. Loehnert and Ayres now note that they eventually paid this out of their own savings and chose not to pursue this remedy.
On May 30, 2014, Loehnert and Ayres resigned from Pinnacle and two days later started doing business as LA Surety Solutions LLC. The parties dispute whether Loehnert and Ayres's early resignation was a breach of the Employment Agreement. Loehnert and Ayres claim they did not breach because Pinnacle failed to pay amounts owed under the Employment Agreement and the promissory note (and have sued Pinnacle to recover these amounts). Pinnacle claims Loehnert and Ayres breached the Employment Agreements and are therefore required to pay $125, 000 each in liquidated damages (and has sued Loehnert and ...