Shirley A. Smiley v. Director, Office of Workers Compensation Programs Navy Resale and Services Support Office

FERGUSON, Circuit Judge: This case arises from denial of a claim for benefits under the Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-950 (1988) (“the Longshore Act”). An administrative law judge (AU) denied Shirley A. Smiley’s claim for permanent total disability benefits as compensation for a back injury and psychological injury suffered while employed by the Navy. The United States Department of Labor Benefits Review Board affirmed the AU’s decision. We reverse. BACKGROUND In 1983 Shirley A. Smiley (“Smiley”) worked as a security and loss prevention manager for. a Navy Exchange at the Le-Moore Naval Air Station in California. She claims that her disabling back problems developed after a fall at work on October 31, 1983. Earlier in 1983, she investigated her supervisor for various fiscal irregularities. Smiley claims that her psychological problems are the result of harassment in retaliation for these whistle-blowing activities. Smiley transferred to another Naval Exchange at Mare Island in 1984 but had trouble performing her new job. She took a disability leave due to physical and psychological problems. In June 1985, while on leave, she was terminated for poor job performance. In June 1985 Smiley filed a claim for disability, claiming that job stress made it impossible to return to her work as a security manager. She applied for and received temporary benefits on the stress claim from June 1985 until October 1985 and again from June 1986 through June 1988, when the Navy ceased paying, claiming Smiley was not totally disabled from her back injury and that her stress resulted from a legitimate personnel action which was therefore not compensable. By 1986, Smiley had retained an attorney, Sanford Killip (“Killip”), to represent her. At some point, Gates, McDonald & Co. (“Gates, McDonald”) also became a client of Killip’s. Gates, McDonald was the *1465 compensation insurance carrier for the Navy and a named defendant in the proceeding before the AU. In fact, the record contains a letter in which Killip acknowledges that Gates, McDonald is a defendant. A Navy attorney handled the hearing before the AU and the negotiations involved in Smiley’s case. The AU conducted a hearing on June 23, 1988 and issued its opinion on November 23, 1988. Killip represented Smiley at the hearing. The AU found that petitioner’s orthopedic problems were not permanently disabling. He found that her testimony regarding her psychological complaints was not credible, and that her stress resulted from a non-compensable legitimate personnel action. He denied her claim of permanent physical and psychological injury. Killip died in 1989 after filing a notice of appeal with the United States Department of Labor Benefits Review Board (“BRB”). The BRB delayed action to give Smiley time to retain new counsel, which she was unable to secure. The BRB affirmed the AU’s decision on March 27, 1991. In addition to appealing the BRB’s decision denying her benefits, Smiley claims her attorney was incompetent and had a conflict of interest because he also represented the Navy’s compensation insurance carrier, Gates, McDonald. The Navy contends that (1) the issue of her attorney’s representation was not raised below and should not be heard on appeal, (2) there was no actual conflict, and (3) Killip provided competent representation. Because we reverse on the conflict issue, we do not reach the merits of Smiley’s contested disability claim. DISCUSSION Disability for work injuries suffered by Naval Exchange employees is governed by the Longshore Act. 5 U.S.C.A. § 8171 (West 1980). The Longshore Act provides that when a claim for compensation cannot be amicably resolved, a Department of Labor commissioner shall order a hearing before a qualified AU. 33 U.S.C. § 919(c)-(d). Orders of the AU are appealed to the BRB. 33 U.S.C. § 921(b)(3). The BRB must accept the AU’s fact findings if they are supported by substantial evidence. Bumble Bee Seafoods v. Director, Office of Workers’ Compensation Programs, 629 F.2d 1327, 1329 (9th Cir.1980). The court of appeals for the circuit in which the injury occurred reviews the decision of the BRB. 33 U.S.C. § 921(c). We review the BRB’s decision for errors of law and adherence to the substantial evidence standard. Hairston v. Todd Shipyards Corp., 849 F.2d 1194, 1195 (9th Cir.1988). 1. Appellate Review of Smiley’s Claims against her Attorney. The Navy argues that we should not review Smiley’s claims against her attorney because she raised them for the first time on appeal. We disagree. Early in 1988 Killip notified the AU of a possible motion to withdraw as plaintiff’s attorney. By letter dated February 1, 1988, the AU informed him that motions must be put in writing. On February 16, 1988, Killip, the Navy attorney and the AU participated in a telephone conference to discuss a continuance. The resulting Order of Continuance issued by the AU on February 29, 1988, notes that “[djuring the call, the attorneys also discussed a potential conflict of interest between Claimant and Gates, McDonald, another client of Mr. Killip’s. However, they both agreed that there is no real conflict because the Navy is now handling all negotiations as well as the hearing in this matter.” (Emphasis added.) It appears that Mr. Killip never made a formal motion to withdraw. However, the AU, on the record, clearly approved or at least acquiesced in the cozy arrangement agreed to by Killip and the Navy. Killip would represent Smiley at the hearing while keeping Gates, McDonald as his client. There is no indication in the record that Smiley knew of the conflict while her case was before the AU. Killip filed the appeal with the BRB. Thus, Smiley could not *1466 have raised the conflict issue during the time her attorney represented her. Killip died in April of 1989. Smiley wrote to the BRB on July 20, 1989. She asked for more time to retain counsel and described her complaints against Killip. Her letter stated "My attorney had in his possession evidence proving case, but failed to produce it. This might have been because he was ill or possibly because he was retained by the insurance company representing the carrier for the Navy Resale System one month before my first hearing was set.” On October 20, 1989, Smiley again wrote the BRB, informing them that she had received her file, which had been in Mr. Killip’s possession. She told the BRB that she had found a telephone message from the Navy attorney to Killip in the file, offering to settle the case for $150,000, an offer she claims Killip never told her about. On May 16, 1990, the BRB issued an order denying a motion to dismiss made by the Navy. The BRB also stated that it would consider the statements in claimant’s July letter. This court can review issues raised for the first time on appeal in certain situations, including review for “clear error” or where review will prevent “manifest injustice.” Animal Protection Institute of America v. Hodel, 860 F.2d 920, 925 (9th Cir.1988). But we need not rely on these exceptions to reach Smiley’s claim. The conflict issue is an issue of law. The Navy has never disputed that Killip represented Gates, McDonald at the same time he represented petitioner. The ALJ’s acceptance of the representation despite the conflict is part of the record. Smiley alerted the Board to her concerns about her attorney in the July 20, 1989 letter and in its subsequent order the Board agreed to consider them. Although Smiley had raised the conflict issue in the context of her attorney’s alleged ineffectiveness, the BRB had an obligation to address it, especially because Smiley was representing herself at that point. See Haines v. Kerner, 404 U.S. 519, 520, 92 S.Ct. 594, 595, 30 L.Ed.2d 652 (1972) (obligation to construe pro se pleadings liberally). However, in its decision, the BRB did not address the conflict issue at all and instructed Smiley to seek modification of the ALJ’s decision to introduce evidence she claimed her attorney had withheld. The BRB reviews errors of law by the AU. 33 U.S.C. § 921(b)(3). We have no problem in reaching an issue of' law of which both the AU and the BRB were aware, and which the BRB specifically promised to consider. The Navy was fully aware of the conflict and so cannot claim surprise or lack of notice. We therefore reject the Navy’s claim that we may not consider the issue of Killip’s representation because it is raised for the first time on appeal. 2. The Conflict of Interest Claim. The Navy argues that there was no conflict because Killip’s representation of Smiley was unrelated to the matters in which he represented Gates, McDonald. The AU apparently agreed that there was no conflict because the Navy, rather than Killip, was handling the negotiations and the hearing in Smiley’s case. This conclusion is unsupportable. It appears that Gates, McDonald, as the insurance carrier for the Navy, would pay the claim if Smiley was successful. Gates, McDonald was a named defendant in the matter before the AU. There was a serious, direct financial conflict between Mr. Kil-lip’s two clients. The AU’s failure to determine whether Killip should have been disqualified requires reversal. 33 U.S.C. § 919(d) and 20 C.F.R. § 702.-332 (1988) provide that hearings held under the Longshore Act shall be conducted pursuant to the Administrative Procedure Act, 5 U.S.C.A. § 554 (West Supp.1992). Mrs. Smiley had a statutory right to be advised and represented by counsel. 5 U.S.C.A. § 555(b) (West 1977); see also 20 C.F.R. §§ 702.131, 702.334 (1988); Johnson v. Director, Office of Workers’ Compensation Programs, 9 B.L.R. 1-218 (Ben.Rev.Bd.1986). Ethical canons and the common law have long prohibited the representation of ad *1467 verse parties in circumstances such as those presented here. See, e.g., ABA Model Rules of Professional Conduct Rule 1.7(a) (1989); ABA Model Code of Professional Responsibility DR 5-105 (1981). “It is the general and well-settled rule that an attorney who has acted as such for one side cannot render services professionally in the same case to the other side, nor, in any event, whether it be in the same case or not, can he assume a position hostile to his client, and one inimical to the very interests he was engaged to protect; and it makes no difference, in this respect, whether the relation itself has been terminated, for the obligation of fidelity and loyalty still continues.” In re Boone, 83 Fed. 944, 952 (C.C.N.D.Cal.1897). See also National Farmers Union Property & Casualty Co. v. O’Daniel, 329 F.2d 60, 66 (9th Cir.1964) (attorney cannot ethically represent both insurer and assured after conflict developed between them on whether to settle); In re Wooten, 118 Fed. 670, 671 (E.D.N.C.1902) (representation of adverse interests prohibited because it is against the ethics of the profession); 1 Edward M. Thornton, A Treatise on Attorneys at Law § 174 at 308 (1914). The rule against concurrent representation is based not on a concern about confidentiality as the Navy argues, but rather on the duty of undivided loyalty an attorney owes a client. Unified Sewerage Agency of Wash. County v. Jelco Inc., 646 F.2d 1339, 1345 (9th Cir.1981). The rule against representing adverse interests was designed to prevent a dishonest practitioner from committing fraud as well as to prevent an honest practitioner from having to choose between conflicting duties, or attempting to reconcile conflicting interests rather than enforcing a client’s rights to the fullest extent. Thornton, supra, § 174 at 308. Thus, the matters on which Killip represented Gates, McDonald are irrelevant. The clearly adverse financial interests between Smiley and Gates, McDonald meant an intolerably divided loyalty for Killip. Further, Gates, McDonald was actively involved in managing Smiley’s medical treatment starting with her back injury in 1983. Gates, McDonald chose Dr. Kamp-ner, who examined Smiley shortly before the hearing and whose opinion was unfavorable to Smiley. In addition, Smiley alleges that significant favorable medical evidence never obtained by Killip was in the files of the Gates, McDonald claims examiner. Under these circumstances, the fact that Navy lawyers handled the hearing and negotiations was irrelevant. Under principles the federal system has long embraced, Killip’s dual representation was grounds for disqualification if consent was lacking. It is well-settled that courts have the power to enforce the rule against representing adverse interests to assure fairness and the proper administration of justice. See Dunton v. County of Suffolk, 729 F.2d 903, 909 (2d Cir.1984) (where serious conflict exists which might warrant disqualification, court must ensure client is informed because it has a duty to supervise members of its' bar and assure litigants a fair trial), amended, 748 F.2d 69 (2d Cir.1984); McCuin v. Texas Power & Light Co., 714 F.2d 1255, 1263 (5th Cir.1983) (right to counsel of choice must be balanced against the need for the highest ethical standards and effective administration of justice); Gas-A-Tron of Arizona v. Union Oil Co. of California, 534 F.2d 1322, 1324 (9th Cir.1976) (duty of district court to supervise bar members and assure public confidence in the judicial system), cert. denied, 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976); Thornton, supra, § 177 at 315-16, 318 (power to restrain attorney from acting adversely to client necessary to the orderly administration of justice). The ALT also had the authority to make complete inquiries and, if necessary, to disqualify counsel. 20 C.F.R. § 702.339 gives an AU authority to “make such investigation or inquiry or conduct such hearing in such a manner as to best ascertain the rights of the parties.” The BRB has held that applicable regulations give the AU authority to disqualify counsel for conflicts of interest prohibited by the applicable *1468 rules of professional conduct. Baroumes v. Eagle Marine Services, 23 B.R.B.S. 80 (Ben.Rev.Bd.1989) (citing 29 C.F.R. §§ 18.-34(g)(3) and 18.36). However, there is no indication that the ALJ inquired into the ethical conflict posed by the dual representation or asked Killip whether his clients had consented to the conflict. The representation was permitted to go forward on the assumption that there was no “real conflict.” Without informed consent, the AU’s acquiescence violated the long standing principle prohibiting concurrent representation of adverse interests which is necessary to protect the parties’ rights as well as to assure a fair and just result. On the record before us we cannot rule out the possibility that Smiley gave informed consent to the dual representation. We therefore remand to the BRB for further proceedings. 3. Ineffective Assistance of Counsel Claim. Smiley makes serious factual allegations about her attorney’s performance that were not part of the record below, and which we therefore cannot consider. See Anderson v. Cummings, 827 F.2d 1303, 1305 (9th Cir.1987). Nevertheless, it is clear that the incompetency claim is inextricably bound up with the conflict claim. If it is necessary to reach that claim the relevant facts should be developed on remand. All subsequent appeals in this matter will be retained by this panel. REVERSED AND REMANDED.