Opinion
Blue Water Sunset, LLC (Blue Water), filed a motion to disqualify Attorney Gary Kurtz (Kurtz) from a derivative action during which he briefly represented certain defendants as well as limited liability company plaintiffs
Background; initiation of this action
Blue Water and Philip Markowitz (Markowitz) are each 50 percent members of Rail Prop LLC (Rail Prop), First View LLC (First View) and Markowitz Investment Group LLC (Markowitz Investment) (collectively the limited liability companies). Separately, Markowitz owns an entity called Four Star Properties, LLC (Four Star). In 2004, Blue Water sued Markowitz and asserted, inter alia, causes of action for dissolution of the limited liability companies, breach of contract, breach of fiduciary duty, accounting, declaratоry relief, fraud and fraudulent conveyance. Allegedly, Markowitz misappropriated income and conveyed real estate assets of the limited liability companies to others, including Four Star, without consideration. Blue Water maintained that in order to accomplish the fraudulent transfer of assets, Markowitz conspired with a codefendant by the name of Douglas Kramer (Kramer). To the degree that the causes of action asserted were derivative in nature, the limited liability companies were named as nominal defendants
The receivership estate
The trial court аppointed a receiver for real property owned by the limited liability companies that consisted primarily of a truck parking facility. In October 2005, the trial court issued an amended order transferring property owned by Four Star into the receivership estate. The order was based on evidence that Markowitz caused Rail Prop to deed property to Four Star, he was operating both the receivership property and the Four Star property as a parking lot, and he was not turning over the rental income from the propеrties to the receiver.
Kurtz and Sandler
Kurtz and Steven Sandler (Sandler) shared an office, a secretary and amenities. Sandler was Four Star’s attorney of record. He eventually introduced Kurtz to Markowitz and, in November 2005, Kurtz substituted in as
The demurrer; the appeal
On behalf of Markowitz, Kramer, Four Star and the limited liability cоmpanies, Kurtz prepared and filed demurrers to the 12th and 13th causes of actions for fraud and fraudulent conveyance. The papers argued each of the challenged claims was derivative and Blue Water lacked standing because it did not satisfy the pleading requirements imposed on it by Corporations Code section 800, subdivision (b).
The motion to disqualify
On December 16, 2008, Blue Water filed a motion arguing that Kurtz was subject to automatic disqualification becausе he concurrently represented clients with adverse interests and did not obtain the conflict waivers required by rule 3-310 and rule 3-600. Markowitz opposed the motion on various grounds, including that Blue Water lacked standing.
The motion was denied. In its written order, the trial court concluded that the rule of mandatory disqualification did not apply because Kurtz did not concurrently represent the limited liability companies and Markowitz at the time of the hearing. The trial court found that disqualification was inappropriate because Kurtz did not breach a duty of confidentiality tо the limited liability companies, and also because Blue Water delayed too long in seeking relief.
This timely appeal followed.
I. Standard of review.
We ordinarily review an order denying a motion to disqualify under the deferential abuse of discretion standard. (Truck Ins. Exchange v. Fireman’s Fund Ins. Co. (1992)
II. Blue Water has standing.
Markowitz contends that Blue Water lacks standing to seek the disqualification of Kurtz. As discussed below, we disagree.
A complaining party who files a motion to disqualify is required to have standing. (Dino v. Pelayo (2006)
Blue Water did not have an attorney-client relationship with Kurtz, nor can it claim that it was owed a duty of confidentiality by Kurtz and that he breached that duty. But as we discuss in part ffl.B. of the Discussion, Kurtz had an attorney-client relationship with the limited liability companies. As a policy matter, their standing must be imputed vicariously to Blue Water.
III. Kurtz must be disqualified.
This appeal requires us to determine whether Kurtz represented the limited liability companies as well as Markowitz, whether Kurtz had an actual conflict of interest, whether the representations were successive or concurrent, and whether the trial court properly denied the motion tо disqualify. As discussed below, our analysis dictates that disqualification is mandatory.
A. Disqualification principles.
When confronted with a motion to disqualify an attorney based on representation of clients with conflicting interests, there are two standards. If an attorney represents a current client against a former client, the attorney will be subject to disqualification if there is a substantial relationship between the two representations. (Flatt v. Superior Court (1994)
(4) The “primary value at stake in cases of simultaneous or dual representation is the attorney’s duty” of loyalty and “the client’s legitimate expectation” that the duty will be met. (Flatt, supra, 9 Cal.4th at p. 284.) According to Flatt, the reason for the automatic disqualification rule is evident based on the following: “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 retained, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship. All legal technicalities aside, few if any clients would be willing to suffer the prospect of their attorney continuing to represent them under such circumstances.” (Id. at p. 285.) The wisdom of the rule is reinforced by the recognition that we can hardly imagine any scenario in which an attorney can represent two adverse clients and refrain from breaching the duty of loyalty. As explained by State Farm, “it is a violation of the duty of loyalty for the attorney to assume a рosition adverse or antagonistic to his or her client without the client’s free and intelligent consent given after full knowledge of all the facts and circumstances. [Citation.]” (State Farm, supra,
B. Kurtz represented the limited liability companies.
The trial court relied on Streit v. Covington & Crowe (2000)
In Streit, the court explained that an attorney making a special appearance is associated with the attorney of record. “That the association is limited to a single appearance is a distinction only of degree, not of kind.” (Streit, supra,
In urging a different conclusion, Markowitz contends that Streit is distinguishable and SpeeDee, supra, 20 CalAth at page 1148 is controlling. Streit arose in the context of a legal malpractice claim. (Streit, supra,
This brings us to SpeeDee. In that case, a company was sued and unknowingly consulted an attorney of counsel to the law firm that was representing the plaintiffs. (SpeeDee, supra,
C. Kurtz had an actual conflict of interest.
The parties dispute whether Kurtz had an actual conflict of interest. Upon scrutiny of the record, we conclude that he did.
An actual “[c]onfiict of interest between jointly represented clients occurs whenever their common lawyer’s representation of the one is rendered
Four Star and Markowitz (individually and by virtue of his control of Four Star) have interests adverse to the limited liability companies with respect to certain real estate and rental income, because each side claims rights to ownership to the exclusion of the other. Once Blue Water sued Four Star and Markowitz derivatively on behalf of the limited liability companies for fraud and fraudulent conveyance, the limited liability companies stood to benefit if Blue Water prevailed. Though nominally named as defendants, the limited liability companies were actually plaintiffs in the eyes of the law. (Patrick v. Alacer Corp. (2008)
The limited liability companies had an expectation that their attorney would do nothing to help Four Star and Markowitz, including assert demurrers and argue that the fraud and fraudulent conveyance causes of action were defective due to lack of standing, time bar or factual sufficiency.
Blue Water argues that Kurtz is subject to automatic disqualification because he concurrently represented Markowitz and the limited liability companies. In contrast, Markowitz argues that Kurtz’s representation was successive and the motion to disqualify was properly denied based on delay.
We agree with Blue Water.
It is true that Kurtz’s representation of the limited liability companies was flеeting, and that there was no evidence that he was continuing to represent them at the time of the hearing on the motion to disqualify. But according to Flatt, “[s]o inviolate is the duty of loyalty to an existing client that not even by withdrawing from the relationship can an attorney evade it.” (Flatt, supra, 9 Cal.4th at p. 288.) Thus, “a law firm that knowingly undertakes adverse concurrent representation may not avoid [automatic] disqualification by withdrawing from the representation of the less favored client before [the] hearing. [Citations.]” (Truck, supra,
There is authority for the proposition that “prior to an adjudication that the corporation is entitled to relief against its officers, or directors, the same attorney may represent both. [Citation.]” (Jacuzzi v. Jacuzzi Bros., Inc. (1966)
The next issue is whether Kurtz must be disqualified from the entire case or only from representing the limited liability companies. The court in Forrest held that even in instances where an attorney must be disqualified from jointly representing several corporations and insiders who allegedly defrauded the corporations, the attorney could continue to represent the
The complaining party in Forrest argued that the trial court’s order allowing the attorney to represent the insiders essentially converted the corporations to former clients and, as a logical consequence, authorized a violation of rule 3-310(E) because the order allowed the representation without a conflict waiver. The court disagreed. It pointed out that the rule requiring disqualification if there is a substantial relationship between successive representations of clients “is based on the need to protect scrupulously against the improper use of confidential information.” (Forrest, supra,
IV. Future representation of the limited liability companies.
The limited liability companies may wish to take an active role in the litigation. If so, the weight of authority indicates that the limited liability companies must obtain independent counsel. Forrest, for example, cited Messing v. FDI, Inc. (D.N.J. 1977)
We conclude that neither side can be trusted to make decisions on behаlf of the limited liability companies. Therefore, if the limited liability companies elect to take an active role in the litigation, they must retain counsel with no past or present relationship with Blue Water or Markowitz.
The order is reversed in part and affirmed in part. Kurtz is ordered disqualified from representing the limited liability companies in this matter but may continue to represent Markowitz.
The parties shall bear their own costs on appeal.
Doi Todd, Acting P. J., and Chavez, J., concurred.
The petition for a rehearing was denied February 25, 2011.
Notes
As we explain, some of Kurtz’s clients were nominal defendants in derivative causes of action, which means that they were really plaintiffs. Whether he claims ignorance of this fаct is immaterial. Every member of the bar is obligated to know that when a limited liability company in a derivative action is named as a defendant, it is done so pursuant to Code of Civil Procedure section 382, which provides in relevant part that “[i]f the consent of any one who should have been joined as plaintiff cannot be obtained, he may be made a defendant . . . .”
All further references to rules are to the State Bar Rules of Professional Conduct unless otherwise specified.
In stating the material facts, we have relied in part on the statement of facts in our prior opinion involving the same action, Blue Water Sunset, LLC v. First View, LLC (Dec. 9, 2008, B204012) (nonpub. opn.).
At some point Four Star was joined as a defendant.
Blue Water did not include the relevant orders or transcripts in the appellate record. However, Blue Water did include a tentative ruling on a motion by Four Star to exclude property from the receivership estate. That tentative ruling provides a procedural background. In addition, the declaration of Yana Henriks (Henriks), a member and manager of Blue Water, fills in some details. Markowitz does not dispute references to the receivership in Blue Water’s briefs.
The cross-complaint is not in the appellate record. In the appellant’s appendix, Blue Water provided us with a copy of an unsigned and unfiled fourth amended cross-complaint in which Markowitz sued Blue Water derivatively and individually for (1) capital contribution to limited liability company, (2) rescission for failure of consideration, (3) fraud, (4) restitution, (5) avoidance of deed and quiet title, and (6) fraudulent conveyance. We are also provided with requests by Markowitz for entry of default against the limited liability companies. They are signed by Kurtz but are not file-stamped.
Corporations Code section 800, subdivision (b)(2) provides that no action may be instituted or maintained on behalf of any corporation by the holder of shares or voting trust certificates unless the “plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.” The court in PacLink Communications Internat., Inc. v. Superior Court (2001)
Generally, Kurtz averred that “[o]n certain matters where the interests of all defendants were aligned, and particularly with certain motions or oppositions in which I was the main lawyer preparing the paperwork, I have specially appeared for [Sandler].” He added: “The October 1, 2007, demurrer hearing followed a frequent protocol. I рrepared papers and allowed [Sandler] to participate in the motion because their interests were the same. I attended the hearing, appearing for Four Star and [Markowitz] and specially appearing for [Sandler].” Kurtz did not explain why Sandler did not appear. According to Kurtz, he “never appeared as counsel for any of the” limited liability companies. His declaration, however, established that he did just that on October 1, 2007. Moreover, on May 17, 2006, Kurtz filed an ex parte application that stated: “Defendant and Cross-Cоmplainant [(Markowitz)], for himself and for all other defendants, applies ex-parte ... for an order to take Plaintiff’s Summary Judgment Motion,
The motion alsо requested the disqualification of Sandler. That portion of the motion was granted on the grounds that Sandler was representing Markowitz in another proceeding at the same time he was representing the limited liability companies in Blue Water’s action. Because the trial court concluded that the representation was concurrent, disqualification was mandatory.
Our standing rule is consistent with Gong v. RFG Oil, Inc. (2008)
At oral argument, counsel for Markowitz suggested that Kurtz simply prepared a demurrer for his clients and Sandler made the decision for the limited liability companies to join. But the record does not contain a joinder filed by Sandler. The language in Kurtz’s declaration establishes that he was the one who prepared papers filed on behalf of the limited liability companies.
As nominal defendants, the limited liability companies were permitted to argue that Blue Water lacked standing to file a derivative action. But they were prohibited from defending that action on the merits; i.e., it was improрer for them to assert the statute of limitations or to argue that any of the claims were factually deficient. (Patrick, supra,
We focus our conflict analysis solely on the demurrer hearing. Though there is evidence that Kurtz may have jointly represented Markowitz and the limited liability companies at a