ORDER GRANTING RESPONDENT’S MOTION TO DISQUALIFY (Docket No. 27)
This matter came on for hearing on April 10, 2003. Peter Whalen of Hancock, Rothert & Bunshoft appeared on behalf of the Petitioners and Mitchell Orpett of Tribler Orpett & Meyer appeared on behalf of Respondent. Having considered the arguments in support of and in opposition to Argonaut Insurance Company’s motion to disqualify Hancock, Rothert & Bunshoft as counsel for Certain Underwriters at Lloyd’s, London, and the argument of counsel, and good cause appearing there *917 for, the Court hereby GRANTS the motion.
I. FACTUAL BACKGROUND
In the underlying motion in this case, Petitioners Certain Underwriters at Lloyd’s, London, Highlands Insurance Comрany, Ltd. and London & Edinburgh General Insurance Company, Ltd. (“Certain Underwriters”) seek to disqualify George Gottheimer, Jr., the neutral umpire (“Umpire”) of a pending arbitration proceeding between Certain Underwriters and Argonaut Insurance Company (“Argonaut”) and to vacate certain orders issued by the Umpire. Respondent Argonaut moves to dismiss, pursuant to Rule 12(b)(6), or to stay, until after the arbitration hearing, both of Certain Underwriters’ motions.
The parties entered into certain reinsurance agreements (“Reinsurance Agreements”) in favor of Argonaut. Certain Underwriters’ Mot. to Disqualify at 3-4. The pending arbitration arose from а dispute regarding coverage under these reinsurance contracts. Argonaut had submitted claims to Certain Underwriters in the approximate amount of $2.5 million for legal expenses from an underlying coverage action between Argonaut and an alleged insured. Id. at 4-5. Certain Underwriters denied coverage and initiated arbitration proceedings against Argonaut on December 14, 2001. Id. at 5. Each party appointed a party arbitrator, and these party arbitrators nominated two candidates for the umpire position. Id. Mr. Gottheimer was selected as the umpire. Id.
At issue in this suit are two Interim Orders issued by the Umpire. Interim Order # 2 required Certain Underwriters to make an interim cash payment or post an irrevocable letter of credit in the amount of $2,535,491.32 by December 31, 2002. Interim Order #3 imposed sanctions on Certain Underwriters of $10,000 a day, dating back to January 17, 2003, for each day in which Certain Underwriters are not in compliance with Interim Order # 2. In the underlying on-going arbitration proceedings, Certain Underwriters are.represented by the law firm of Lord Bissell & Brook.
Certain Underwriters filed an action in San Francisco Superior Court styled as a petition to disqualify the arbitration Umpire and to vacate Interim Orders # 2 and #3. That action was removed to this Court on March 13, 2003. The law firm of Hancock, Rothert & Bunshoft (“Hancock”) represents Certain Underwriters in this petition. On March 14, 2003, counsel for Argonaut wrote to Hancock, demanding that it withdraw as counsel because of conflict of interest, since Hancock previously represented and currently represents a subsidiary of Argonaut, Argonaut Northwest Insurance Company (“Argonaut NW”), in other matters. Argonaut’s MPA to Disqualify; Exh. B. On March 21, 2003, Hancock responded in a letter indicating its belief that it did not believe that Argonaut was a client of Hancock because Argonaut and Argonaut NW are separate entities. Id. at Exh. D. Hancock also took the position that it was not treating Argonaut as a present client because neither Argonaut nor Argonaut NW were the lead underwriters in the London Market Insurers cases in which Hancock represents participating insurers. Id.
On April 2, 2003, Argonaut moved to disqualify Hancock as counsel for Certain Underwriters, arguing that such representation is adverse to Hancock’s current representation of an Argonaut subsidiary, Argonaut NW, which should be treated as a single entity with Argonaut for conflict purposes. Argonaut’s MPA to Disqualify, at 4-7. Argonaut also argues that Hancock should be disqualified based upon its *918 former representation of Argonaut in matters substantially related to the present litigation, which involves contract interpretation and reinsurance industry custom and practice related to asbestos bodily injury claims. Id. at 7-10. The Court scheduled a hearing on shortened time for April 10, 2003.
II. LEGAL ANALYSIS
A. Disqualification Generally
The right to disqualify counsel is a discretionary exercise of the trial court’s inherent powers.
Visa U.S.A., Inc. v. First Data Corp.,
Disqualification “ultimately involves a conflict between a Ghent’s right to chosen counsel and the need to maintain ethical standards of professional responsibility.”
State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co.,
[T]he court must weigh the combined effect of a party’s right to counsel of choice, an attorney’s interest in representing a client, the financial burden on a client of replacing disqualified counsel and any tactical abuse underlying a disqualification proceeding against thе fundamental principle that the fair resolution of disputes within our adversary system requires vigorous representation of parties by independent counsel unencumbered by conflicts of interest.
Allen v. Academic Games Leagues of America,
B. Concurrent Representation
The starting point for analyzing this issue is Rule 3-310 of the Rules of Professional Conduct, which states:
(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.
Rules of Professional Conduсt of the State Bar of California, Rule 3-310(C).
Rule 3-310 prohibits, in the absence of each client’s informed consent, concurrent representation of clients whose interests are adverse.
Flatt v. Superior Court,
The prohibition against concurrent representation of adverse parties is broader than the prohibition against successive representation of adverse parties, the latter applying only if there is a “substantial relationship” between the successive matters.
Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft,
Argonaut argues that Hancock’s current representation of Argonaut NW in pending litigation and its current representation of Certain Underwriters in the matter against its corporate parent Argonaut falls within the prohibition of Rule 3-310(C). Murrаy Dec. ¶¶ 6-9; Exh. A. Hancock makes two arguments in response. First, it contends that its current representation of Argonaut NW is not representation in a meaningful sense since Hancock is representing Argonaut NW only in the sense that it is representing London Market Insurers as the lead underwriter in twelve matters in which Argonaut NW is a “following market insurer” on the policies issued by London Market. Petitioners’ Opposition to Motion to Disqualify, at 5-7; Whalen Dec., ¶ 4. According to Hancock, Argonaut NW is a minor and passive participant in the London Market, where the lead underwriter assumes the lion’s share of responsibility for the mаnagement of claims. Petitioners’ Opposition to Motion to Disqualify, at 6-7; Whalen Dec., ¶4; *920 Wilson Dec., ¶ 7; O’Neill Dec., ¶ 5; Salter Dec., ¶¶ 5-8. Second, Hancock contends Argonaut and Argonaut NW are separate corporate entities and should not be treated as a single entity for purposes of conflicts analysis. Petitioners’ Opposition to Motion to Disqualify, at 9-13.
As to the first argument, Certain Underwriters’ effort to portray Argonaut NW as a insignificant participant in the London Market is unavailing. While the lead underwriter may take primary responsibility for managing a claim, counsel jointly represents all of the participants in the London Market, and not just the lead underwriter. Orpett Additional Decl. ¶¶ 2-3. Pursuant to a January 2003 agreement, the participants in the London Market clarified their “collective use of counsel” in order to “maintain Market unity and the efficiencies joint representation delivers.” Orpett Additional Decl., Exh. A, at 2-4. There is no indication that the London Market in which Argonaut NW is a participant is a separate legal entity (such as a corporation) such that the attorney-client duty would flow only to the entity and not its constituents.
Cf. Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP,
Thus, the critical issue centers on Hancock’s second argument that Argonaut and Argonaut NW are separate entities and should be treated as such. Determining whether Hanсock should be disqualified for representing a party “whose interest in the first matter is adverse to the client in the first matter” (Rule 3-310(0) requires analysis of whether the parent corporation (Argonaut) and its subsidiary (Argonaut NW) should be considered a single entity for conflict of interest purposes. There are only a handful of cases applying California law to this question.
See Morrison Knudsen,
California law recognizes that a parent corporation and its subsidiary, even if wholly owned, are generally regarded as separate entities for conflicts purposes, unless an exception applies — where the rеlationship between the entities are such they
*921
have a “unity of interests” so as to deserve being treated as one.
Morrison Knudsen,
The parties acknowledge that the most extensive treatment of parent-subsidiary issues currently is found in
Morrison
Knudsen.
3
In
Morrison Knudsen,
the issue was whether the Hancock firm should be barred from representing the Contra Costa Water District in any dispute with the Morrison Knudsen Corporation or its wholly owned subsidiary, Centenniаl Engineering, Inc.
The court in
Morrison Knudsen
then had to determine whether there was a sufficient unity of interest between Morrison and its subsidiary, Centennial, because Hancock had never represented Centennial or monitored any claim against it on behalf of the underwriters.
Id.
at 238,
Were the four factors of
Morrison Knudsen
to be mechanically applied to the instant case, the Court would be inclined to find against Argonaut on this motion. As noted at the hearing herein, Argonaut has not demonstrated to the Court’s satisfaction that Hancock has gained any “significant practical advantage” in its representation of Certain Underwriters as a result of its representation of Argonaut NW. However, the Court is not convinced that
Morrison Knudsen
is dispositive to the case at bar. There is a fundamental difference between the two cases. As noted above, the “unity of interest” analysis in
Morrison Knudsen
was undertaken in the context of the conflict of interest claim based on the successive representation model — the focus was on the acquisition of confidential information from the parent which could be used against the subsidiary. In the instant case, the issue is whether there is a “unity of interest” in the context of a claim of concurrent representation of adverse interests. The concern in this context is not confidential information or other practical litigation advantage obtained against an affiliate, but the “duty of undivided loyalty” owed to the affiliate.
Morrison Knudsen,
The unity of interest analysis must be undertaken in view of the policy concerns that underlie the particular claim of conflict.
Cf. Palumbo v. Tele-Communications, Inc.,
The Court finds that there are two factors that militate in favor of finding a reasonable basis for a diminution of such trust and confidence.
First, the financial impact of the instant litigation upon Argonaut NW is more direct than in the usual parent-subsidiary relationship. To be sure, various authorities have drawn a distinction between direct and indirect adverse consequences upon an existing client.
See
State Bar Opinion,
Unlike the indirect stock devaluation example typical of parent-subsidiary relationships cited in the State Bar Opinion as well as the ABA Opinion (1001:265), the financial prospects of Argonaut and Argonaut NW are much more closely linked. Argonaut entered into a pooled reinsurance agreement in 1977 with Argonaut NW as well as several other regional Argonaut subsidiaries. Ijams Dec., Exh. A. Under the аgreement, Argonaut and its subsidiaries pool their policies and share premiums and liabilities. Among other provisions, in addition to Argonaut reinsuring all liabilities under participating subsidiaries’ policies, each subsidiary reinsures Argonaut’s net liabilities in excess of reinsurance ceded to other companies. Id. at ¶¶ 2-3. The mutual reinsurance agreement assigns fixed percentages for the sharing of financial risks, including 87.0% for Argonaut, and 0.6% for Argonaut NW. Id. at ¶¶ 1, 6. The pooling agreement applies retroactively to pre-existing policies including those in which Hancock is representing the London Insurers and in which Argonaut NW is participating. Ijams Dec., ¶ 4; Murray Dec., ¶ 12. The 2002 financial statements indicate that Argonaut NW continues to participate in the inter-company pooling arrangement. Ijams Dec., Exh. B. Since Argonaut and Argonaut NW directly share profits and losses, it follows that both could be directly affected by an adverse or favorable judgment in the underlying arbitration with Certain Underwriters. 'While Certain Underwriters speculate that the financial position of participants in the pooling agreement will not be affected by the matter being challenged in the instant petition (Interim Orders #’s 2 & 3), clearly if Certain Underwriters succeed in vacating the orders and/or disqualifying the Umpire, it is likely to have a substantial impact upon the course and quite possibly the outcome of the arbitration. Thus, the fact that Hancock is handling only a portion of the matter is not determinative — the petition it is prosecuting on behalf of Certain Underwriters is significant and could well have a material effect upon the underlying arbitration. 4
Second, both of the claims — Argonaut NW’s policies represented by Hancock on behalf of the London Market as well as those of Argonaut in its dispute with Certain underwriters — are managed by the same persоns on behalf of both Argonaut and Argonaut NW. The operations of Argonaut and Argonaut NW are thoroughly imbricated. There is but a single claims staff, and this staff does not separately handle the liability of an Argonaut subsidiary from other Argonaut companies. Murray Dec., ¶ 14. Under the mutual reinsurance agreement, Argonaut collects all premiums and adjusts all losses on behalf of all the pooled policies. Ijams Dec., Exh. A Paragraph 4. Moreover, in addition to the centralized claims management under
*924
the pooling agreement, there is nearly complete overlap in the management of thе two corporate entities. The three officers of each of the Argonaut companies are common to all of the Argonaut companies. Ijams Dec., Exh. C (listing corporate masthead for each subsidiary); Murray Dec., ¶ 14. Each of the vice presidents in Argonaut NW are also Argonaut vice presidents. Ijams Dec., Exh. C. Argonaut has four directors or trustees, and they comprise four of the five directors or trustees for Argonaut NW.
Id.
The control group is thus common to both Argonaut affiliates. Accordingly, both the management operations and the legal affairs in the handling of claims arе essentially identical for both Argonaut and Argonaut NW. This is significant because from the standpoint of the law’s concern for client’s “confidence and trust in counsel”
(State Farm Mut.,
In
Teradyne,
which involved a claim of concurrent representation, the court held that HP and its subsidiary should be treated as a single entity for conflicts purposes because HP controlled and supervised the legal affairs of the subsidiary, including the retention and supervision of the outside counsel. Thus, there was “a significant identity of legal interest between Apollo and its parent HP.”
The substantial overlap in management in general and the fact that the legal affairs with respect to the claims at issue in the two cases are managed by the same group for both Argonaut and Argonaut NW, strongly suggest that treating the two as a single entity for conflicts purposes is appropriate.
See Teradyne,
The resolution of the instant motion is not by any means self evident; this case constitutes another of the proverbial “square peg which does not fit into the round holes of the rules most commonly applied in attorney disqualification cases.”
William H. Raley Co. v. Superior Court,
C. Prior Representation
Having found that Hancock is disqualified based upon concurrent representation, the Court need not reach the issue of whether Hancock’s prior representation of Argonaut is substantially related to this case.
*925 D. Delay and Disruption
As noted above, in ruling on a motion to disqualify counsel, the Court must be mindful of numerous factors including the party’s right to counsel of choice, an attorney’s interest in representing a client, the financial burden on a client of replacing disqualified counsel and any tactical abuse underlying a disqualification proceeding along with the preservation of public trust in the scrupulous administration of justice and in the integrity of the bar inherent in the rules of ethics.
Certain Underwriters argues that Argonaut brings this motion to disquаlify Hancock for tactical rather than substantive reasons. Petitioners’ Opposition to Motion to Disqualify, at 17. For the reasons stated above, however, the Court finds Argonaut’s motion to be meritorious. In addition, Argonaut was not dilatory in challenging Hancock’s representation of Certain Underwriters, since Argonaut brought this motion a few weeks after Hancock took the case, and only after unsuccessfully requesting that Hancock withdraw. Argonaut’s MPA to Disqualify; Exh. B.
Nor does Certain Underwriters face unfair financial and tactical burdens as a result of this disqualification order.
See Allen v. Academic Games,
Second, not only was Hancock’s representation of Certain Underwriters limited to the petition to disqualify the arbitration Umpire and to vacate Interim Orders # 2 and # 3 (Hancock does not represent Certain Underwriters in the underlying arbitration proceedings), but substitute counsel designated to step in if Hancock is disqualified — the law firm of Bоwles & Verna — previously stepped in to represent Certain Underwriters when Hancock withdrew from the related case of Argonaut v. Equitas Reinsurance Ltd. (San Francisco Superior Court Case No. 317805) in December 2001. 5 Argonaut’s MPA to Disqualify, at 2-3; Exh. A. Certain Underwriters is a major client with the resources to command top-notch representation. The Court has every confidence that substitute counsel can “hit the ground running” in the present matter.
Finally, all of the supplemental briefing for the hearing on Certain Underwriters’ motions have been filed. The Court issued an interim order on April 17, 2003 disqualifying Hancock (upon which this Order elaborates) after the writtеn briefs were filed. Thus, for the April 22 hearing, replacement counsel from Bowles & Verna need only make oral argument. In summary, the Court anticipates that there will be minimal, if any, prejudice to the parties or disruption to the Court as a result of the disqualification order.
Cf. William H. Raley Co.,
III. CONCLUSION
For the reasons stated above, Hancock is disqualified from representing Petition *926 ers in this matter because, under the unity of interest test, the Petitioners interests are directly adverse to those of Argonaut, Hancock’s current client in unrelated mattеrs.
IT IS SO ORDERED.
Notes
. Where there is an express agreement for representation, the duly flows to all parties to the agreement.- Here, Argonaut has provided the London Market document which indicates an express contract for joint representation.
See
Orpett Additional Deck, Exh. A, at 2-4.
See also Responsible Citizens v. Superior Court,
. Even though California has not adopted the American Bar Association's Model Rules of Professional Conduct ("MRPC”) in its entirety, the ABA Opinion discussed in this order is germainе because the relevant State Bar Opinion relies upon the MRPC as persuasive authority, as does Rule 3-600. See State Bar Opinion,
.
Morrison Knudsen
rejected the traditional alter ego test in favor of the "unity of interest” because the alter ego test is imported from the general law of corporations with the purpose of protecting creditors against fraud and diversion of assets and thus involved numerous factors such as undercapitalization and financial misrepresentation that have little or nothing to do with the ethical concerns that animate conflicts analysis in attorney representation.
See Morrison Knudsen,
. The mere fact that Argonaut NW's share of the pool is relatively small is not by itself sufficient to negate the direct consequence of the instant proceedings. There is no
de mini-mus
exception to the duty to loyalty given that this duty safeguards "public confidence in the legal profession and the judicial process ...”
Truck Ins. Exchange,
. At the April 10th hearing, Peter Whalen of the Hancock firm informed the Court that substitute counsel was standing by. In response to this Court's interim order, on April 18, 2003, Mr. Whalen informed the Court by telephone that Robert Westerfíeld of Bowles & Verna (Walnut Creek, CA) would be arguing on behalf of Certain Underwriters at the April 22, 2003 hearing. Westerfíeld was the designated substitute counsel in Equitas. Argonaut's MPA to Disqualify, Exh. A.