Fincanna Capital v. Cultivation Technologies CA4/3
G058700
| Cal. Ct. App. | Jun 28, 2021Background
- CTI (Cultivation Technologies, Inc.) was the subject of a prolonged corporate control fight between the Probst Faction (incumbent directors) and the O’Connor Faction (outsider shareholders). Catanzarite Law represented members of the O’Connor Faction and filed multiple suits (derivative, direct, and cross‑complaints) while also purporting to represent CTI and its subsidiaries in related litigation.
- FinCanna loaned roughly $6M to CTI and sued; CTI (and subsidiaries) filed cross‑claims; Catanzarite appeared for both CTI (and subsidiaries) and for shareholder plaintiffs in other suits (e.g., Mesa, Pinkerton, MFS, Scottsdale).
- Horwitz + Armstrong (representing the Probst Faction/CTI board) moved to disqualify Catanzarite on grounds of unwaivable concurrent conflicts and lack of authority to represent CTI.
- The trial court (Nov. 2019 & Jan. 2020 orders) disqualified Catanzarite from representing CTI, CTI’s three subsidiaries, and the Mesa Action shareholder‑plaintiffs, but denied disqualification in the Pinkerton and MFS actions.
- Catanzarite appealed the disqualification orders; the Court of Appeal affirmed, holding concurrent representation of CTI and adverse shareholder interests (including a derivative suit) required disqualification and that CTI had standing to bring the motion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to seek disqualification | Catanzarite: movant lacked standing because board control was disputed and Catanzarite’s authority to represent CTI depended on that dispute | CTI (Horwitz): CTI had standing because the loyalty/conflict facts were undisputed and the corporation (through its board) can protect its own interest in counsel loyalty | Court: CTI had standing; no need to decide competing claims of board control because undisputed facts showed conflicting client interests warranting disqualification |
| Concurrent representation/conflict of interest | Catanzarite: its multiple representations were not adverse (derivative actions benefit CTI) and clients later executed waivers | CTI: simultaneous representation of CTI and shareholder faction is per se disqualifying under Flatt and Rules of Professional Conduct; waivers inadequate here | Court: concurrent representation was impermissible; derivative plaintiffs act against the corporation so dual representation created an unwaivable loyalty conflict; disqualification affirmed |
| Representation of CTI subsidiaries after CTI disqualified | Catanzarite: subsidiaries are separate clients and should keep chosen counsel | CTI: subsidiaries share unity of interest with CTI in FinCanna litigation and were jointly represented in pleadings, so conflict extends to them | Court: disqualified Catanzarite for the subsidiaries due to unity of interest and joint cross‑complaint |
| Representation of Mesa derivative‑plaintiffs | Catanzarite: representing derivative plaintiffs is consistent with CTI’s interests or, at least, does not create a disqualifying conflict | CTI: derivative prosecution is adverse to the corporation/corporate counsel duty of neutrality; firm had already acted against CTI’s interests | Court: disqualification proper — derivative counsel’s advocacy conflicts with duty owed to corporation and appearance of impropriety required withdrawal |
Key Cases Cited
- Flatt v. Superior Court, 9 Cal.4th 275 (California 1994) (concurrent representation of adverse current clients ordinarily requires disqualification)
- People ex rel. Dept. of Corporations v. SpeeDee Oil Change Sys., Inc., 20 Cal.4th 1135 (California 1999) (trial court power to disqualify counsel inherent in its authority)
- La Jolla Cove Motel & Hotel Apartments, Inc. v. Superior Court, 121 Cal.App.4th 773 (California 2004) (corporate counsel’s ultimate duty runs to the corporation, not to individual directors or shareholders)
- Shen v. Miller, 212 Cal.App.4th 48 (California 2012) (shareholder derivative counsel acts against the corporation; corporation is a nominal defendant and must remain neutral)
- Banning Ranch Conservancy v. Superior Court, 193 Cal.App.4th 903 (California 2011) (disqualification balances clients’ choice of counsel against duty of loyalty and public confidence)
- Beachcomber Mgmt. Crystal Cove, LLC v. Superior Court, 13 Cal.App.5th 1105 (California 2017) (conflict of one lawyer is generally imputed to the entire firm)