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GATX/AIRLOG CO. v. EVERGREEN INT'L AIRLINES

June 2, 1998

GATX/AIRLOG COMPANY, et al., Plaintiffs,
v.
EVERGREEN INTERNATIONAL AIRLINES, INC., an Oregon corporation, Defendant. AND RELATED CASE NOS. C-97-0378 WHO, C-97-2484 WHO, and C-98-0385 WHO



The opinion of the court was delivered by: ORRICK

OPINION AND ORDER

 The Bank of New York ("BNY"), plaintiff in No. C-98-0385 WHO, moved this Court to intervene in all related cases for the purpose of disqualifying the law firm of Mayer, Brown & Platt ("MBP") from representing GATX/Airlog Company, GATX Capital Corporation, Airlog Managment Corporation, and GATX New Aircraft Corporation (collectively "GATX"). Because the duty of loyalty prevents MBP from representing two current clients with adverse interests in the same "matter" without an informed, written waiver, the Court grants the motion.

 I.

 In 1986, GATX entered into a contract with Pemco Aeroplex, Inc. ("Pemco") *fn1" in which Pemco agreed to design kits to convert 747 passenger aircraft into cargo aircraft. GATX then converted aircraft according to that design. Central Texas Airborne Systems, Inc. ("CTAS") also converted some aircraft utilizing the design.

 Federal regulations require that entities seeking to convert passenger aircraft obtain Supplemental Type Certificates ("STCs") from the Federal Aviation Administration ("FAA"), If the FAA concludes that the converted aircraft will meet applicable Federal Aviation Regulations ("FARs") for airworthiness at a specified payload, the FAA will issue the STC. The FAA granted the STCs to the GATX/Pemco design in 1988.

 Thereafter, GATX entered into a contract with Evergreen International Airlines, Inc. ("Evergreen") to convert several 747 passenger aircraft into cargo aircraft. GATX eventually converted four aircraft for Evergreen utilizing the Pemco design. The Bank of New York is now the beneficial owner of one of these four converted aircraft. GATX and CTAS also converted airplanes for American International Airways, Inc. and Tower Air, Inc.

 In late 1995, the FAA's Seattle Aircraft Certification reviewed its certification of the GATX/Pemco conversion design in light of increasing concerns that the design did not enable the planes to safely carry their certified payloads.

 On January 3, 1996, the FAA issued an Airworthiness Directive ("AD"), imposing operations limitations on the GATX/Pemco-modified planes, reducing the permissible payload of the aircraft from 220,000 pounds to 120,000 pounds. These payload restrictions effectively grounded the aircraft because the planes could no longer carry enough cargo to justify the cost of operating them. In its AD, the FAA stated that it had made a "mistake" in originally granting the STCs. The FAA did not, however, state why it made the error, or whether there was a change in regulation that occasioned the AD.

 All of these cases were brought over the alleged design flaws in the GATX/Pemco design that forced the grounding of the converted 747s.

 After the AD was issued, Evergreen sent a demand letter to GATX asserting various claims, that prompted GATX to retain MBP, and file an action for declaratory relief. When the AD was published, BNY was beneficial owner of one of the converted planes previously owned by Evergreen. As an owner, BNY received regular reports from GATX on efforts to fix the design deficiencies from early 1996 onwards. In February 1996, BNY advised GATX of how concerned they were about the AD because their investment was at risk. Thus, GATX knew BNY was an airplane owner, and that BNY was concerned with the results of the AD before GATX even hired MBP.

 From the time MBP was hired, MBP advanced assertions, in pleadings and dispositive motions with the purpose of providing defenses to the aircraft owners, including BNY. MBP also conducted extensive discovery in an effort to develop facts in support of these assertions.

 BNY was a client of MBP's from 1995 through mid-January 1998. MBP represented both BNY and various BNY subsidiaries in a variety of transactional matters during this time. MBP was BNY's regular Illinois local counsel, and also represented BNY on matters in other states.

 In May 1997 BNY and GATX agreed to toll any statutes of limitations with respect to all of BNY's claims ("Tolling Agreement") because they were involved in settlement negotiations. According to MBP, the Tolling Agreement was the first time MBP realized BNY was an owner of an affected aircraft. Nevertheless, MBP did not inform GATX and BNY of any conflict, and seek written waivers, until February 1998.

 II.

 Justice Cardozo (then Chief Judge) wrote in Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928) (quoting Wendt v. Fischer, 243 N.Y. 439, 444, 154 N.E. 303 (1926)):

 
Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.

 As this Court has previously stated, the standard for the relationship between lawyer and client upheld in this Court is that articulated by Justice Cardozo. Elan Transdermal, Ltd. v. Cygnus ...


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