Beachcomber Management Crystal Cove v. Super. Ct.
G054078
| Cal. Ct. App. | Jul 28, 2017Background
- Plaintiffs filed a member-derivative suit on behalf of Beachcomber at Crystal Cove, LLC (the Company) alleging insiders (Management and its managing member Cavanaugh) mismanaged the Company and diverted funds. The Company is a closely held LLC; Management/Cavanaugh control day-to-day operations.
- Kohut & Kohut (Kohut) previously represented Cavanaugh/related Ruby’s entities and represented Management/Cavanaugh in various disputes with investor Salisbury; Kohut also represented the Company on two discrete occasions in 2010–2011. The Company has separate counsel in the derivative action; Kohut represents the insiders (Defendants).
- Plaintiffs moved to disqualify Kohut based on: (1) concurrent representation; (2) successive representation (substantial relationship) between Kohut’s past Company work and current defense of the insiders; and (3) possible need for Kohut attorneys to testify.
- The trial court granted disqualification solely on the successive-representation ground, finding a substantial relationship and presuming Kohut acquired confidential Company information; it did not address the concurrent- or witness-based arguments.
- The Court of Appeal granted a writ: it concluded the trial court applied the general successive-representation rule but failed to consider controlling precedent (Forrest line) allowing lawyers who formerly represented a closely held company to continue representing the insiders in a derivative suit when the insiders possess the same confidential information as counsel. The appellate court remanded for the trial court to vacate its order and determine (with findings) whether the Forrest rule applies and to consider the other disqualification grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kohut must be disqualified under the general successive-representation rule because its prior representation of the Company is "substantially related" to its current representation of insiders | Kohut’s prior work for the Company overlaps with claims here; substantial relationship presumes disclosure of confidential info → disqualify | Forrest-line cases permit continued representation of insiders in derivative suits because insiders already possess the Company’s confidential information | Trial court erred by applying the general presumption without considering Forrest; remand to determine whether Forrest permits continued representation |
| Whether the Forrest (and progeny) exception applies so that successive-representation disqualification is inappropriate in a derivative suit involving closely held entities | Forrest inapplicable because Defendants were not sole repositories and others handled operations/records | Forrest/line controls where insiders possess or have access to the same confidential information as prior corporate counsel; then disqualification is not required | Appellate court: focus is whether insiders had access to same confidential info as counsel; trial court must make factual findings and apply Forrest if appropriate |
| Whether concurrent (dual) representation of Company and insiders requires disqualification | Plaintiffs asserted Kohut concurrently represented Company and insiders on matters now in suit, raising a loyalty conflict | Defendants say Kohut does not represent the Company in this lawsuit and Company has independent counsel | Court of Appeal: trial court did not decide this ground; remand for trial court to resolve concurrent-representation claim with findings |
| Whether Kohut must be disqualified because its attorneys may be witnesses (advocate-witness rule) | Plaintiffs asserted Kohut attorneys may need to testify about services to the Company/Defendants | Defendants argued any testimony would be limited to fees/value (an exception) and not disqualifying | Court of Appeal: trial court did not rule on this; remand to decide whether the witness-advocate rule requires disqualification |
Key Cases Cited
- People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., 20 Cal.4th 1135 (disqualification power and competing considerations)
- Forrest v. Baeza, 58 Cal.App.4th 65 (rule permitting counsel to represent insiders in derivative suits when insiders possess same confidential info as corporate counsel)
- Ontiveros v. Constable, 245 Cal.App.4th 686 (applying Forrest reasoning to successive-representation context)
- Blue Water Sunset, LLC v. Markowitz, 192 Cal.App.4th 477 (applying derivative-action confidentiality exception in LLC context)
- Gong v. RFG Oil, Inc., 166 Cal.App.4th 209 (same principle: disqualification may be unnecessary where insiders are source of company confidences)