The duty of confidentiality generally prevents an attorney from continuing to represent a client if the representation conflicts with the attorney's representation of a previous client in a related matter. Once the previous client establishes a substantial relationship between the successive representations, the court must disqualify the attorney from continuing to represent the second client because the law presumes the attorney received confidential information during the first representation that is relevant to the second.
Here, the trial court concluded disqualification was mandatory based on its findings that (1) Defendants and the Company have conflicting interests because the Company is the true plaintiff in this derivative suit that Plaintiffs brought against Defendants on the Company's behalf, and
We conclude the trial court erred because it failed to apply a more specific line of cases that governs an attorney's successive representation of clients in
Plaintiffs contend these cases do not apply here because the evidence shows Defendants were neither solely in charge of the Company's operations nor the sole repositories of its confidential information. Plaintiffs, however, misconstrue the underlying rationale of these cases. The critical inquiry is not whether the insiders were solely in charge or the solе repositories of the company's confidential information. Rather, the critical inquiry is whether the insiders possessed or had access to the same confidential information as the attorney who previously represented the company.
The trial court made no findings regarding this critical question, and therefore we grant the petition and issue a writ of mandate directing the court to (1) vacate its order disqualifying Kohut; (2) determine whether the reasoning in these cases permits Kohut to continue representing Defendants in the lawsuit; (3) determine whether the additional grounds Plaintiffs raised in their motion support disqualification; and (4) enter a new order on Plaintiffs' disqualification motion.
I
FACTS AND PROCEDURAL HISTORY
In 2006, Management founded the Beachcomber Café аt Crystal Cove, which the Company owns. The Company is a limited liability company and Management serves as its managing member with the exclusive right to operate its business. The Company has five other members who invested in it, but have no right to participate in the day-to-day operations. These members are Plaintiffs and nonparties Ralph Kosmides, Edward and Janis Carpenter, and Michael Hoopis. Management is a limited liability company and Cavanaugh is its managing member with the exclusive right to manage the Company.
Cavanaugh also operates and owns an interest in several other restaurants and food service entities, including Ruby's Diner, Inc.,
In 2011, Management hired Kohut to represent it regarding Salisbury's requests for information and challenges to Cavanaugh's management of the Company. Since 2011, Kohut regularly corresponded with Salisbury and his counsel about Cavanaugh's management of the Company.
It is undisputed Kohut also has represented the Company twice. First, between April 2010 and November 2011, Kohut represented the Company, Management, and some investors when served with subpoenas in an unrelated lawsuit entitled DeCinces v. Ruby's Diner, Inc. (Super. Ct. Orange County, 2009, No. 30-2009-00124231). Second, during September and October 2010, Kohut advised the Company about a former employee's wrongful termination lawsuit, but the Company's insurance carrier hired a different counsel to represent the Company in that lawsuit.
Defendants assert these are the only occasions Kohut represented the Company, and those representations ended by late 2011. The trial court, however, found Kohut also represented the Company along with Defendants relating to Salisbury's inquiries and objections to Cavanaugh's management of the Company before Plaintiffs filed this lawsuit.
In March 2016, Plaintiffs filed this lawsuit on the Company's behalf as a shareholder derivative action against Defendants. The complaint named the Company as a nominal defendant and alleged claims for fraud, breach of fiduciary duty, abuse of control, gross negligence and mismanagement, breach of duty of honest services, unjust enrichment, declaratory relief, and accounting. Plaintiffs allege Defendants abused their position as the Company's managers by diverting Company funds to other Cavanaugh entities, paying themselves unauthorized management fees, misallocating expenses the Company shares with other entities, and refusing to provide Plaintiffs complete access to the Company's books and records. Defendants hired Kohut to reprеsent them in this lawsuit, and the Company hired independent counsel, the law firm of Corbin, Steelman & Specter, to represent it in this lawsuit.
Defendants opposed the motion, arguing (1) there is no concurrent representation because Kohut does not represent the Company in this lawsuit and has not represented the Company in any other matter since late 2011; (2) Kohut's successive representation of the Company and Defendants does not require disqualification because no substantial relationship exists between the firm's prior representation of the Company and this lawsuit, and the successive representation rules allow an attorney to continue representing a company's insiders in a derivative lawsuit so long as the attorney does not continue to represent the company; (3) Kohut will not be a witness in this matter on any issue other than the value of its services, and that testimony is an express exception to the rule prohibiting an attorney from being an advocate and a witness in the same
The trial court granted the motion in August 2016. The court found the conflict of interest arising from Kohut's successive representation of the Company and Defendants required the firm's disqualification. The court explained a substantial relationship existed between Kohut's prior representation of the Company and its current representation of Defendants because the two representations involved many of the same issues concerning thе Company's management raised by Plaintiffs in this lawsuit. According to the court, two letters Kohut sent to Salisbury's counsel in October 2015 showed the firm represented both the Company and Defendants regarding Plaintiffs' complaints. Moreover, a declaration Defendants submitted from Tad Belshe, the Company's Vice President of Operations, confirmed Kohut had jointly represented the Company and Defendants. The court also found the conflict waiver the Defendants submitted was ineffective because Defendants failed to show a disinterested decision maker authorized the waiver. In granting the motion, the court exclusively relied on Kohut's successive representation of the Company and Defendants; the court did not address Plaintiffs' arguments basеd on the concurrent representation or witness-advocate rules.
In September 2016, Defendants filed this writ petition seeking a writ of mandate compelling the trial court to vacate its order disqualifying Kohut and enter a new order denying the motion to disqualify. Alternatively, Defendants sought a writ of mandate compelling the trial court to vacate its order denying their motion for reconsideration and enter a new order granting reconsideration. We issued an order to show cause why a writ of mandate should not issue.
II
DISCUSSION
A. Legal Background on Attorney Disqualification
"A trial court's authority to disqualify an attorney derives from the power inherent in every court '[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.' " ( People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999)
" ' "A conflict of interest exists when a lawyer's duty on behalf of one client obligates the lawyer to take action prejudicial to the interests of another client; i.e., 'when, in behalf of one client, it is his duty to contend for that which duty to another client requires him to oppose.' " ' " ( Coldren v. Hart, King & Coldren, Inc. (2015)
"In successive representation cases, where the former client seeks to
"In instances of concurrent representation, '[b]ecause a conflict involving an attorney's duty of loyalty is "[t]he most egregious" kind of conflict,' a ' "more stringent" ' test is applied. [Citation.] Even if the dual representations 'may have nothing in common, and there is no risk that confidences to which counsel is a party in the one case have any relation to the other matter, disqualification may nevertheless be required . Indeed, in all but a few instances, the rule of disqualification in simultaneous representation cases is a per se or "automatic" one. [Citations.]' [Citations.] This per se rule is appropriate because '[a] client who learns that his or her lawyer is also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel was retainеd, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.' " ( M'Guinness , supra , 243 Cal.App.4th at pp. 614-615,
"Generally, a trial court's decision on a disqualification motion is reviewed for abuse of discretion. [Citations.] If the trial court resolved disputed factual issues, the reviewing court should not substitute its judgment for the trial court's express or implied findings supported by substantial evidence. [Citations.] When substantial evidence supports the trial court's factual findings, the appellate court reviews the conclusions based on those findings for abuse of discretion. [Citation.] However, the trial court's discretion is limited by the applicable legal principles. [Citation.] Thus, where there are no material disputed factual issues, the appellate court reviews the trial court's determination as a question of law. [Citation.] In any event, a disqualification motion involves concerns that justify careful review of the trial court's exercise of discretion." ( SpeeDee Oil , supra , 20 Cal.4th at pp. 1143-1144,
Defendants contend the trial court erred in disqualifying Kohut based on the
A corporate shareholder or member in a limited liability company may bring a derivative lawsuit on the company's behalf when the insiders who control the company refuse to do so. The shareholder or member bringing the derivative lawsuit is thе plaintiff in name only because the lawsuit seeks redress for injury the company suffered and any recovery belongs to the company. Hence, although the company is named as a nominal defendant based on the insiders' refusal to bring the lawsuit on the company's behalf, the company is the true plaintiff. ( Patrick v. Alacer Corp. (2008)
The company's status as the true plaintiff prevents an attorney from representing both the company and its insiders in a derivative lawsuit that alleges the insiders breached their duties owed to the company or otherwise injured the company. Such representation would be an impermissible concurrent representаtion of clients with conflicting interests. ( Ontiveros , supra ,
Successive representation rules, however, generally do not prevent an attorney from continuing to represent insiders in a derivative lawsuit even though a substantial relationship exists between the attorney's previous representation of the company and the attorney's current representation of insiders in the company's lawsuit against them. ( Forrest , supra , 58 Cal.App.4th at pp. 80, 82,
As explained above, client confidentiality is the fiduciary value threatened by an attorney's successive representation of separate clients in substantially related matters. ( M'Guinness , supra ,
In a small or closely held company, the company's operations and its insiders typically are so intertwined that any distinction between the two is entirely fictional. The insiders often are the repositories and source of all confidential information an attorney may receive in representing the company. In a larger company confidential information may be divided among many different people with no individual or small group possessing it all, but in a closely held compаny the few insiders responsible for operating a small company often know all of the company's confidential information. In that situation, it would be meaningless to apply the successive representation rules to prevent an attorney who previously represented the company from representing the company's insiders. ( Forrest , supra ,
For example, Forrest involved a shareholder derivative suit brought by a minority shareholder in two closely held corporations against a husband and
The Forrest court explained the prohibition on concurrent representation of clients with conflicting interests prohibited the attorney from continuing to represent both the corporations and the majority shareholders because the lawsuit essentially was brought by the corporations against the majority shareholders. ( Forrest , supra ,
Here, seven of the eight causes of action Plaintiffs allege are derivative claims brought on the Company's behalf against Defendants for actions Defendants took as the Company's insiders. Management is the Company's sole mаnaging member with the exclusive right to run the Company and its business. Cavanaugh is Management's sole managing member with the exclusive right to run Management, and actively oversaw the Company's management and operations. Kohut has represented both Management and Cavanaugh for a number of years. Although Defendants dispute that Kohut ever represented the Company regarding any of the claims alleged in this lawsuit, the trial court found the firm represented the Company on at least some of the issues before Plaintiffs filed this lawsuit.
Defendants brought these facts to the trial court's attention and relied on the rule established in Forrest and its progeny. Nonetheless, the court disqualified Kohut from representing Defendants in this lawsuit based on the general successive representation rule requiring a court to presume confidential information was disclosed during a prior representation if the two representations are substantially related. Although the court issued a lengthy written order explaining its ruling, the court neither acknowledged nor distinguished Forrest or any of the foregoing cases.
Plaintiffs argue the Forrest line of cases establish a narrow rule inapplicable here because Defendants were not solely in charge of the Company's operations and they are not the sole repositories of the Company's records. According to Plaintiffs, an attorney who previously represented a corporation may represent a corporate insider in a derivative lawsuit against the insider only "where it is shown that the nature of the relationship between the corporation and the insider is so intertwined that there is no possibility that confidential information of the corporation would be jeopardized." Plaintiffs misconstrue Forrest and the basis for its decision.
Although Forrest used the terminology "sole repositories of corporate information to which the attorney has had access" ( Forrest, supra ,
On appeal, Plaintiffs contend "the evidence does not establish that the operational functions of the [Company] have been so intertwined with [Defendants
None of this evidence, however, compels the conclusion that in overseeing and managing the Company's operations Defendants did not possess all of the confidential information to which Kohut had access as the Company's attorneys. That others may have carried out some tasks under Defendants' supervision fails to establish that Defendants did not possess confidential information about those
We therefore issue a writ of mandate directing the trial court to vacate its order disqualifying Kohut, to review the evidence regаrding Defendants' role in running the Company and the confidential information to which they were privy, and to determine whether Forrest and the cases applying it permit Kohut to continue representing Defendants in this derivative lawsuit despite the court's finding that representation is substantially related to Kohut's previous representation of the Company. The court also should determine whether Kohut's disqualification is required by the prohibition against concurrent representation of clients with conflicting interests and the potential need for attorneys with Kohut to testify at trial. Plaintiffs' motion raised both of these additional grounds for disqualifying Kohut, but the trial court did not reach these issues because of its decision to grant the disqualification motion on sucсessive representation grounds.
Plaintiffs contend we should uphold the trial court's disqualification order based on these alternative grounds, but they fail to brief either of these issues and therefore forfeited them on appeal. ( Keyes v. Bowen (2010)
DISPOSITION
The petition is granted. Let a writ of mandate issue directing the trial court to
WE CONCUR:
O'LEARY, P.J.
FYBEL, J.
Notes
Rule 3-310 of the Rules of Professional Conduct governs an attorney's representation of clients with interests that actually or potentially conflict. In pertinent part, the rule provides: "(C) A member shall not, without the informed written consent of each client: [¶] (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or [¶] (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or [¶] (3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter. [¶] ... [¶] (E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment."
Defendants contend the trial court erred in finding Kohut represented the Company on issues raised in this lawsuit. According to Defendants, we should review the court's finding on this issue de novo because undisputed evidence shows the court misinterpreted the two letters and the declaration it relied on to establish Kohut's representation of the Compаny on these matters. Appellate courts, however, independently review factual issues only when the facts are undisputed and no conflicting inferences can be drawn from the facts. (Nellie Gail Ranch Owners Assn. v. McMullin (2016)
In their brief, Plaintiffs use the term "Cavanaugh" to refer to both Cavanaugh and Management. This terminology is confusing because it suggests Plaintiffs strictly are referring to Cavanaugh as an individual rather than collectively to Cavanaugh as an individual and Management. To avoid confusion, we use the term Defendants to refer collectively to Cavanaugh and Management.
Plaintiffs' also cite a statement in Belshe's declaration that Cavanaugh is responsible for the overall and day-to-day creative side of the Company's business as evidence that he is not responsible for other aspects of the Company's business. The same declaration, however, also states that Cavanaugh oversees the management and operations of the Company's entire business, and therefore we do not view the foregoing statement as evidence supporting Plaintiffs' contention.
Plaintiffs also argue the Forrest line of cases does not apply because "the dispute here involves a quarrel between only three of six of the individual members [of the Company], so the interests of all of the members are not fully represented in this lawsuit." We fail to see how the existence of other members has any bearing on whether Kohut may continue to represent Defendants in this lawsuit, and Plaintiffs failed to explain this contention. As discussed above, whether the Forrest rule applies turns on the insiders' role in the company and the confidential information they possess. The existence of other members or shareholders who are not parties to the lawsuit has no bearing on that question.
Because we grant Defendants' petition and issue a writ of mandate directing the trial court to vacate its disqualification order, we do not reach Defendants' alternative request for a writ of mandate directing the court to vacate its order denying Defendants' reconsideration motion.