Beachcomber Mgmt. Crystal Cove, LLC v. Superior Court of Orange Cnty.
13 Cal. App. 5th 1105
| Cal. Ct. App. 5th | 2017Background
- Management (Beachcomber Management Crystal Cove, LLC) and its managing member Douglas Cavanaugh (Defendants) were sued in a derivative action by certain members (Plaintiffs) alleging mismanagement, diversion of funds, unauthorized fees, and refusal to provide books and records; the Company is the nominal defendant but the suit is for the Company's benefit.
- Kohut & Kohut LLP (Kohut) previously represented Defendants for years and represented the Company on at least two occasions (subpoena matter and wrongful-termination advice in 2010–2011); the Company later retained independent counsel for this derivative suit.
- Plaintiffs moved to disqualify Kohut on grounds of (1) successive representation of the Company and Defendants in related matters, (2) concurrent representation, and (3) Kohut attorneys potentially being witnesses.
- The trial court granted disqualification based solely on the ordinary successive-representation rule, finding a substantial relationship between Kohut’s prior representation of the Company and its current representation of Defendants, and that any waiver was ineffective.
- The Court of Appeal granted a writ: it held the trial court erred by failing to apply the line of derivative-insider cases (Forrest and progeny) that allow an attorney who formerly represented a closely held company to represent the controlling insiders in a derivative suit when the insiders possess access to the same confidential information.
- The appellate court remanded, directing the trial court to vacate the disqualification order and re-evaluate (1) whether Forrest and related cases permit Kohut to represent Defendants, (2) whether concurrent-representation or advocate-witness rules independently require disqualification, and (3) whether any waiver was valid.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kohut must be disqualified under the ordinary successive-representation rule because prior representation of the Company is substantially related to current defense of insiders | Kohut previously represented the Company on substantially related issues; presumption of access to confidential information mandates disqualification | Forrest-line authorities allow former corporate counsel to represent insiders in derivative suits for closely held companies because insiders already possess the same confidences | Trial court erred to apply the general presumption without considering Forrest; remanded to determine whether Forrest permits continued representation |
| Whether Forrest and its progeny permit continued representation of insiders despite substantial relationship | Forrest doesn’t apply because Defendants were not sole repositories and other persons (accountants, employees) had access | Forrest applies if insiders had access to the same confidential info as counsel; sole-repository language describes facts, not the test | Applied Forrest principle: focus is whether insiders had access to same confidences; remand for factual findings on that point |
| Whether concurrent (dual) representation independently requires disqualification | Kohut concurrently represented Company and Defendants on some issues, so per se disqualification is appropriate | Kohut did not represent the Company in this lawsuit and Company has independent counsel; any overlapping prior representation doesn’t mean concurrent representation now | Appellate court did not decide; remanded for trial court to assess concurrent-representation claim in first instance |
| Whether advocate-witness rule requires disqualification because Kohut may have to testify | Kohut has been involved and may be needed as trial witness beyond fee testimony | Any trial testimony by Kohut will be limited; fee testimony is allowed under exceptions | Appellate court did not decide; remanded for trial court to assess witness-advocate issue |
Key Cases Cited
- People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., 20 Cal.4th 1135 (disqualification power and standards)
- Forrest v. Baeza, 58 Cal.App.4th 65 (rule allowing former corporate counsel to represent controlling insiders in derivative suits when insiders possess same confidences)
- Ontiveros v. Constable, 245 Cal.App.4th 686 (applying Forrest principle to successive-representation analysis)
- Blue Water Sunset, LLC v. Markowitz, 192 Cal.App.4th 477 (applying derivative-insider exception to ordinary successive-representation rule)
- Gong v. RFG Oil, Inc., 166 Cal.App.4th 209 (similar application of Forrest rationale)