Psybio Therapeutics, Inc. v. Corbin

IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

PSYBIO THERAPEUTICS, )

)

Plaintiff, )

) No. 20 C 3340

v. )

)

RICHARD CORBIN, )

)

Defendant. )

_________________________________ )

)

COLONY CAPITAL, LLC, derivatively on )

behalf of PsyBio Therapeutics, Inc., )

)

Plaintiff, ) No. 20 C 3885

)

v. ) Judge Virginia M. Kendall

)

EVAN LEVINE, ROSS CARMEL, )

ROBERT NATHAN, and )

CARMEL, MILAZZO & DICHIARA LLP, )

)

Defendants. )

MEMORANDUM OPINION & ORDER

The above-captioned cases are pending before this Court as related because they are both

corporate governance issues revolving around PsyBio Therapeutics, Inc. (“PsyBio”) and Richard

Corbin’s role in that company. The issue currently before the Court is whether the law firm of

Carmel, Milazzo & Dichiara LLC (“CMD”) is permitted to represent PsyBio in case number 20-

cv-3340 (the “fiduciary duty action”) and/or itself and a partner and director of PsyBio, Ross

Carmel, in case number 20-cv-3885 (the “derivative action”). Corbin has moved to disqualify

CMD (Dkt. 50 in 20-cv-3340) on the grounds that the firm has a conflict of interest. CMD has

since moved to withdraw from the derivative action and substitute other counsel (Dkt. 42 in 20-

cv-3885), but Corbin does not believe this is a sufficient remedy because CMD is also conflicted

out of the fiduciary duty action. For the reasons set forth below, the Motion to Disqualify is denied

and the Motion to Withdraw and Substitute is granted.

The Court begins by assessing the factual situation that would exist were the Court to grant

the Motion to Withdraw and Substitute. The Parties agree to that relief. In that situation, CMD

would only represent PsyBio in its fiduciary duty action against Corbin. Prior to the events giving

rise to this litigation, CMD was one of four shareholders of PsyBio—the other three being Levance

Prospects, LLC (owned by Evan Levine), Robert S. Nathan, and Colony Capital, LLC (owned by

Richard Corbin). (Dkt. 1 ¶ 18 in 20-cv-3340.) Along with Richard Corbin and Evan Levine, a

named partner of CMD, Ross Carmel, was also one of the three members of PsyBio’s Board. On

May 6, 2020, Corbin received an email from Carmel containing documents signed by the other

three shareholders, Levine, Nathan, and CMD (signed by Carmel, in his capacity as partner of

CMD), which purported to remove Corbin from his position as a director of the corporation. (Dkt.

23 at pp. 27–30.) Thus, the fundamental question that the Court must answer to resolve this Motion

is whether it is appropriate for a law firm that is a shareholder of a closely-held corporation, and

whose named partner sat on the board of directors, to represent the corporation in an action against

a former director who was removed from his position on the board by a vote of the shareholders.

Motions for disqualification are generally disfavored because disqualification “‘deprives a

party of the representative of their choosing.’” RMB Fasteners, Ltd. v. Heads & Threads Int’l, Inc.,

11 C 2071, 2012 WL 245124, at *2 (N.D. Ill. Jan. 25, 2012) (quoting Mercury Vapor Processing

Techs., Inc. v. Vill. of Riverdale, 545 F. Supp. 2d 783, 787 (N.D. Ill. 2008)). That is a “‘drastic

measure which courts should hesitate to impose except when absolutely necessary.’” Id.

Accordingly, the moving party bears a heavy burden of proving facts required for disqualification

under the Model Rules of Professional Conduct. RMB Fasteners, 2012 WL 245124, at *2 (citing

Commonwealth Ins. Cp. v. Stone Container Corp., 178 F. Supp. 2d 938, 943 (N.D. Ill. 2001)).

The American Bar Association’s Model Rules of Professional Conduct generally govern

the professional responsibilities of lawyers appearing before this Court. See N.D. Ill. L.R. 83.50.

Corbin seeks to disqualify CMD from representing PsyBio on the basis that this representation

violates Model Rules 1.7, 1.8, and 3.7. The Court addresses each of these contentions in turn.

I. Model Rule 1.7

Model Rule 1.7(a) provides that a lawyer “shall not represent a client if the representation

involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the

representation of one client will be directly adverse to another client; or (2) there is a significant

risk that the representation of one or more clients will be materially limited by the lawyer’s

responsibilities to another client, a former client or a third person or by a personal interest of the

lawyer.”

In an apparent attempt to avoid a possible violation of this Rule, attorney Christopher

Milazzo of CMD moves to withdraw from his representation of Carmel and CMD, in the derivative

action. The defendants in the derivative action seek to replace Milazzo with John Stimson of the

Law Office of John F. Stimson. Corbin does not believe that this solves any conflict, but instead

replaces one conflicted attorney with another. Mr. Stimson already represents Mr. Levine and Mr.

Nathan in the derivative action and is co-counsel with Milazzo and Michael Nacht of CMD for

PsyBio in the fiduciary duty action.

To determine whether Mr. Stimson’s representation of the derivative action defendants

comports with Rule 1.7, the Court must first assess the nature of the action. Defendants argue that

the derivative action is not a derivative action at all, but rather a direct action brought by Colony

Capital to redress injuries caused to Colony Capital, not to PsyBio. On a superficial level, the

Amended Complaint alleges elements of a direct and derivative nature. On the one hand, the

Amended Complaint seeks redress for the “improper[] dilut[ion] and eliminat[ion] of Colony

Capital LLC’s substantial equity interest in PsyBio Therapeutics.” (Dkt. 9 ¶ 1 in 20-cv-3885). That

is a direct claim because the injury alleged is not an injury to the corporation, but rather to an

individual shareholder. See Weinstein v. Schwartz, 422 F.3d 476, 478 (7th Cir. 2005) (explaining

that whether an action is derivative or direct in nature depends on who suffered the alleged harm

and who would receive the benefit of the remedy sought). On the other hand, the Amended

Complaint also purports to seek redress for “placing the company’s most important contract in

jeopardy,” thereby injuring PsyBio. (Dkt. 9 ¶ 1.) But this second allegation is largely undeveloped

in the Amended Complaint. The main thrust of the Amended Complaint is that the acts of the

derivative action defendants injured Colony Capital (i.e., Corbin). After detailing the injuries

caused to Colony Capital in paragraphs 1–41, the Amended Complaint concludes in paragraphs

42–57, without supporting allegations of fact, that the alleged acts injured PsyBio as an entity.

(See, e.g., Dkt. 9 ¶ 48: explaining that as a result of the dilution of Colony Capital’s interest and

Corbin’s termination, PsyBio was injured). Even these latter paragraphs make clear that this is in

substance a direct action. (See, e.g., Dkt. 9 ¶ 45: complaining of injury caused to Colony Capital

as a result of Corbin’s removal from the board and dilution of his interest in the company; id. ¶ 52:

explaining that Defendants had “a meeting of the minds between and among Defendants to commit

wrongful acts against Corbin described herein;” id. ¶ 53: explaining that Defendants unlawfully

removed Corbin and improperly diluted his ownership interest; id. ¶ 57: explaining that “[t]he

shareholders of PsyBio, including Colony Capital LLC, have been damaged as a direct and

proximate cause [sic] of Defendants’ conduct”).

Were the later-filed action truly a derivative suit, the Court would have to delve into a

somewhat disputed area of the rules of professional responsibility. Having determined that the

second action is a derivative action in-name-only, however, there is no concurrent conflict of

interest here. Mr. Stimson’s representation of PsyBio in the fiduciary duty action is consistent with

his defense of the current directors and shareholders in the “derivative” action.

II. Model Rule 1.8(i)

Model Rule 1.8(i) prohibits a lawyer from taking a “proprietary interest in the cause of

action or subject matter of litigation the lawyer is conducting for a client,” except in certain

circumstances that are not relevant here. Corbin contends that CMD and Milazzo cannot represent

PsyBio in the fiduciary duty action because CMD is a shareholder of PsyBio and as such has a

proprietary interest in the outcome of the litigation. The Comments to Rule 1.8(i) explain that the

rule “is designed to avoid giving the lawyer too great an interest in the representation” because

“when the lawyer acquires an ownership interest in the subject of the representation, it will be

more difficult for a client to discharge the lawyer if the client so desires.” There is little case law,

binding or otherwise, that would assist the Court in resolving the precise question before the

Court—namely, whether a lawyer whose law firm owns a minority interest in a closely-held

corporation and whose partner is one of three members of the Board of the corporation has a

proprietary interest in the litigation when the litigation could result in some monetary gain to the

corporation and, by extension, to its shareholders.

The Court does not find that Milazzo or CMD has a proprietary interest in the litigation

within the meaning of Rule 1.8(i) because regardless of the outcome of this litigation, CMD will

not obtain a greater percentage of the shares of PsyBio. Were PsyBio requesting that Colony

Capital’s shares of PsyBio somehow be eliminated, CMD would stand to gain financially in that

its 1,200,000 shares in PsyBio would equate to a 5.7% ownership interest instead of the present

3.8%. That is not the situation, here, however, where the relief PsyBio seeks is money damages

and injunctive relief that would only benefit CMD if it resulted in each share becoming more

valuable or in the payment of some dividend. In this way, this case is similar to Eon Streams, Inc.

v. Clear Channel Commc’ns, Inc., 05 CV 578, 2007 WL 954181, at 7–8 (E. D. Tenn. Mar. 27,

2007), in which the court held that owning stock in a closely held corporation is not enough to

establish a proprietary interest in the litigation. Here, CMD’s potential financial gains stemming

from this lawsuit are speculative and de minimis. As such, the facts here do not trigger the concern

of Rule 1.8(i) regarding the client’s ability to discharge the lawyer if it so chooses. CMD’s

relatively small ownership interest, which will remain unchanged even if PsyBio obtains all the

relief its seeks in this suit, does not interfere with PsyBio’s ability to fire CMD and Mr. Milazzo

if it so chooses.

III. Model Rule 3.7(a)

Model Rule 3.7(a) prohibits a lawyer from acting as trial counsel if he is likely to be a

necessary witness at trial. It is uncontested that Ross Carmel, as a member of the Board that voted

Corbin out, will be a necessary witness at trial. That being said, Mr. Milazzo, not Mr. Carmel, is

meant to be trial counsel in the fiduciary duty action. Mr. Milazzo is not going to be a witness at

the trial, much less a necessary witness. On these facts, Corbin and Colony Capital have identified

no violation of this Rule.

CONCLUSION

Corbin and Colony Capital have not met their high burden on a motion for disqualification

to identify aclear violation of the Model Rules of Professional Conduct. Accordingly, the Motion

to Disqualify (Dkt. 50 in 20-cv-3340) is denied, the Motion to Withdraw (Dkt. 42 in 20-cv-3885)

is granted, and Colony Capital’s Motion to Jom (Dkt. 35 in 20-cv-3885) is granted. The result is

that Milazzo and CMD may remain as counsel in 20-cv-3340, but Mr. Stimson shall be the sole

attorney for Defendants in 20-cv-3885.

J Hes) States District Judge

Date: January 13, 2021