Dеfendant Glenn Adams appeals from the trial court’s order disqualifying his counsel, Jeffrey L. Davidson and Davidson’s law firm, from further participation in this action based on Davidson’s previous representation of plaintiff City National Bank (CNB). We hold that, absent the informed written consent of both the former client and the present client, a lawyer may not represent a party whose interests are adverse to his or her former client when the two representations are in the same matter or the current representation involves the work performed by the lawyer for the former client. Accordingly, we affirm.
Factual and Procedural Background
1. The Loan, the Collateral and the Davidson Opinion Letter.
On April 30, 1998 CNB loaned $150,000 to Adams; and Adams executed and delivered to CNB a promissory note (the note) agreeing to repay the principal sum plus interest. The purpose of the loan was to enable Adams to exercise options to purchase stock in U.S. Digital Communications, Inc. (U.S. Digital). The loan was to be secured by the shares purchased with the loan proceeds (the stock).
Pursuant to his agreement with CNB, Adams was required to maintain collateral equal to at least 50 percent of the outstanding balance on his loan. The stock began to decline in value in early 1999 and soon became insufficient as collateral. Adams advised CNB he cоuld not repay the loan or pledge additional collateral and asked CNB to sell the stock to satisfy his obligation.
CNB told Adams it appeared it could not sell the stock because it bore a restrictive legend. At Adams’s suggestion, CNB retained Davidson in June 1999 to provide a legal opinion that the restrictive legend could be removed and the stock sold. Davidson provided the opinion letter on August 3, 1999. In June 2000 U.S. Digital went out of business, and the stock became worthless.
2. The CNB v. Adams Lawsuit.
CNB filed suit against Adams for breach of contract, money had and received and
3. The Motion to Disqualify Davidson as Adams’s Counsel.
At the time he filed his answer and cross-complaint, Adams was represented by Daniel Gunning. The trial court granted Mr. Gunning’s motion to withdraw as Adams’s counsel on February 6, 2001. CNB moved for summary judgment on March 29, 2001. Adams retained Davidson as his counsel on March 15, 2001. After its motion for summary judgment was denied, CNB filed a motion to disqualify Davidson on the ground he had previously represented CNB in the same matter.
a. The Craig Declaration.
In support of its motion to disqualify, CNB submitted the declaration of David Craig, the CNB vice-president responsible for managing CNB’s relationship with Adams. Craig testified in his declaration as follows:
In April 1999 Craig contacted Adams and told him that the U.S. Digital stock was insufficient to maintain the required balance of collateral to the outstanding loan. Adams told Craig he could not pay the loan or pledge additional collateral, but was going to sell his business and either pay off the loan or provide аdditional collateral out of the sale proceeds.
During his conversations with Craig, Adams asked if CNB could sell the U.S. Digital stock it held as collateral. Craig informed Adams that CNB could not sell the stock until the restrictive legend was removed and that the legend could not be removed without an opinion letter from legal counsel. Adams suggested Craig contact Davidson to obtain the opinion letter. Because CNB did not have any in-house attorneys who could write such an opinion letter, Craig and CNB regional vice-president Bob Patterson decided to retain Davidson as counsel on behalf of CNB to write the necessary letter.
Crаig spoke to Davidson on June 22, 1999: “I advised him that CNB would like to engage his services to write an outside attorney’s opinion letter. The opinion letter was to address whether City National Bank could now liquidate the 150,000 shares of U.S. Digital stock under the Rule 144 restrictions. Previously, Debra Bernstein of Southwest Securities, (the company that handled stock transactions on behalf of CNB) informed me that the USDI stock could not be sold until the restrictive legend had been removed. I discussed with Mr. Davidson CNB’s concerns that CNB’s borrower was asking CNB to liquidate the collateral, but that we could not liquidate the collateral because any sale would violate the Rule 144 restrictions. Therefore, I was relying on Mr. Davidson to issue the necessary opinion letter to enable CNB to sell the stock without violating any rules or regulations. Mr. Davidson quoted me a fee of $750.00 to prepare the opinion letter.”
Craig confirmed his conversation in a letter to Adams, dated June 22, 1999: “Per our conversation today, City National Bank would like to engage your services with respect to an outside attorney’s opinion.
Craig believed he had hired Davidson to act as CNB’s counsel in the matter: “By agreeing to pay Mr. Davidson’s $750.00 fee, I understood that Mr. Davidson was now working for CNB to write the necessary opinion letter. I presumed that Mr. Davidson was now working as CNB’s attorney and my communications with him were privileged. Although I understood that Mr. Davidson and Mr. Adams had worked together in the past in connection with other companies, Mr. Davidson never told me that he was in the past, or was currently Mr. Adams’[s] personаl attorney. Mr. Davidson never provided me a retainer agreement, conflict of interest waiver, or similar document advising me that Mr. Davidson was working for Mr. Adams. . . . [¶] • • • [¶]During the period that I dealt with Mr. Davidson, I always understood and assumed that I was hiring him to act as attorney for CNB and not Mr. Adams. I understood that Mr. Adams knew Mr. Davidson, but that Davidson was not his personal attorney. I always assumed that my communications with Mr. Davidson were confidential pursuant to the attorney-client privilege and that Mr. Davidson would act on behalf of CNB to ensure that CNB did not violate any rules and regulations if it sold Mr. Adams’[s] collateral.”
Davidson did not provide the requested opinion letter until August 1999. At that рoint “the stock had already substantially declined in value and was not sufficient to pay off Mr. Adamsf’s] debt. By this time, Mr. Adams was in the middle of selling his business and he hoped to provide other collateral to CNB that would enable him to retain his USDI stock. Mr. Adams was hoping the USDI stock would recover some of its previous value.”
b. The Davidson Declaration.
In opposition to the motion to disqualify, Adams filed a declaration from Davidson himself. Davidson’s declaration discussed his background in securities law and described generally the effect of rule 144, promulgated by the Securities and Exchange Commission (17 C.F.R. § 230.144 (2001)), on the sale of securities that have not been registered under the Securities Aсt of 1933.
Davidson declared he was outside counsel for U.S. Digital and that by 1999 he “had represented Mr. Adams in various matters for a couple of years.” He had “rendered forty to fifty opinions to U.S. Stock Transfer concerning the transferability of U.S. Digital shares bearing restrictive legends,” and this was “a usual and customary engagement for a public company’s outside counsel.” U.S. Digital declined to pay for any further opinion letters in March 1999, however, and “referred its shareholders to me for opinions on its stock.”
Davidson maintained he drafted the opinion letter for the benefit of Adams, not CNB. He stated he did not recall ever having spoken with Craig or receiving a letter from him. He also stated “During my conversation with the CNB representative concerning the opinion letter, I did not receive any confidential communications. I simply ascertained the same information that I need from any person who decided to sell restricted stock: (1) Holding
period, (2) Share certificate number, and (3) broker-dealer representation as to manner of sale. There was no need for me
4. The Trial Court’s Ruling.
At the hearing on thе motion to disqualify, the trial court stated: “The court finds you [Davidson] have been retained by City National Bank before in this case in connection with the same matter that is involved in this litigation and that your representing the defendant in this case constitutes a conflict of interest and your continued representation would constitute a breach of confidentiality.” The motion was granted on April 12, 2001.
Adams filed a timely notice of appeal.
Discussion
1. The Standard of Review.
We review a trial court’s decision on a disqualification motion for abuse of discretion, accepting as correct all of its express or implied findings supported by substantial evidence.
(People ex rel. Dept. of Corporаtions v. SpeeDee Oil Change Systems, Inc.
(1999)
“In viewing the evidence, we look only to the evidence supporting the prevailing party. [Citation.] We discard evidence unfavorable to the prevailing party as not having sufficient verity to be accepted by the trier of fact. [Citation.] Where the trial court has drawn reasonable inferences from the evidence, we have no power to draw different inferences, even though different inferences may also be reasonable.”
(Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co.
(1998)
We will reverse the trial court’s ruling only where there is no reasonable basis for its аction.
(In re Complex Asbestos Litigation
(1991)
2. The Rules Governing Disqualification of an Attorney Who Is Improperly Proceeding Against a Former Client.
“It has long been established in civil cases that the court has the power, on motion of a party, to disqualify an opposing attorney from participating in a trial when, for example, the attorney improperly seeks to proceed against a former client.
The prohibition against representation of a new client whose interests are adverse to those of a former client is grounded in both the California State Bar Rules of Professional Conduct and governing case law. 1 Rule 3-310(E) provides: “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.”
More broadly, our Supreme Court has explained “an attorney is forbidden to do either of two things after severing his relationship with a former client. He may not do anything which will injuriously affect his
former client in any matter in which he formerly represented him nor may he at any time use against his former client knowledge or information acquired by virtue of the previous relationship.”
(Wutchumna Water Co. v. Bailey
(1932)
A lawyer who accepts employment in violation of these rules is subject to disqualification upon motion of the former client.
(Henriksen v. Great American Savings & Loan
(1992)
“[Determining whether a conflict of interest requires disqualification involves more than just the interests of the parties. [¶]... The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar. The important right to counsel of one’s choice must yield to ethical considerations that affect the fundamental principles of our judicial process. [Citations.]”
(SpeeDee Oil, supra,
3. The “Substantial Relationship” Test.
Application of the rule against representations adverse to a former client has focused on whether there is a “substantial relationship” between the former and current representation. The substantial relationship test was first articulated in
T.C. & Theatre Corp. v. Warner Bros. Pictures
(S.D.N.Y. 1953)
The substantial relationship test was adopted by California courts in a line of cases beginning with
Global Van Lines, Inc. v. Superior Court
(1983)
The substantial relationship test as announced in
Global Van Lines
found wide acceptance among California courts. (See, e.g.,
Civil Service Com. v. Superior Court
(1984)
In
H. F. Ahmanson & Co. v. Salomon Brothers, Inc.
(1991)
Ahmanson, supra,
Several years after the
Ahmanson
decision, the Supreme Court adopted the substantial relationship test in
Flatt
v.
Superior Court
(1994)
In
SpeeDee Oil
the Supreme Court reaffirmed
Flatt, supra,
Our analysis of the case law involving successive representation of clients leads us to three conclusions that guide resolution of this case. First, if the nature of the representation is such that confidences
could have
been exchanged between the lawyer and the client, courts will conclusively presume they
were
exchanged, and disqualification will be required.
(Adams
v.
Aerojet-General Corp.
(2001)
Second, there is a limited exception to this conclusive presumption in the rare instance where the lawyer can show that there was no
opportunity
for
confidential information to be divulged.
(Ahmanson, supra,
Third, the limited exception is
not
available when the lawyer’s former and current employment are on opposite sides of the very same matter or the current matter involves the work the lawyer performed for the former client. When the lawyer switches sides in an ongoing dispute
Such cases imрlicate the lawyer’s duty of loyalty as well as confidentiality. As the Supreme Court stated in
People ex rel. Deukmejian
v.
Brown, supra,
4. The Trial Court Did Not Abuse Its Discretion in Granting CNB’s Motion to Disqualify Davidson.
Based on these principles, we conclude the trial court’s findings were supported by substantial evidence and its legal reasoning was sound. 4
Davidson contends he was not CNB’s attorney “for conflict of interest purposes.” However, the trial court found that Davidson was retained by CNB to act as its counsel. That finding is supported by substantial evidence in the form of the Craig declaration and the letter from Craig to Davidson.
b. Davidson Switched Sides In the Adams/CNB Matter.
Davidson contends that his representation of CNB for the purpose of writing an opinion letter regarding the transferability of Adams’s U.S. Digital stock is not substantially related to his representation of Adams in the present lawsuit. The trial court rejected this argument, finding that the prior representation was in the “same matter” as the current representation. We agree with the trial court. Adam’s affirmative defenses and cross-complaint in the present lawsuit are based on his contention that CNB should have sold the stock in order to satisfy Adams’s liability on the note. Davidson was retained to provide an opinion letter directed to the same issue. The conditions under which the stock could be sold to satisfy the debt are at the very heart of the current litigation. The two representations are both factually and legally intertwined.
c. We Conclusively Presume That Davidson Received Confidential Information from CNB Relating to the Matter in Which He Now Represents Adams Against CNB.
Adams argues Davidsоn need not be disqualified because his representation of CNB falls within the limited exception to the substantial relationship test for situations in which the attorney was not in a position to receive confidential information from the former client. Indeed, Adams devotes much of his brief on appeal to arguing the evidence presented in connection with the motion to disqualify. For example, he challenges the credibility of Craig’s declaration and argues the trial court’s ruling “fails to acknowledge” certain facts he contends are established by his own evidence. We decline Adams’s invitation to substitute our view of the evidеnce for that of the trial court.
(SpeeDee Oil, supra,
We also reject Adams’s argument for the reason explained above: When the prior and current representations are in exactly the same matter or involve the work performed by the lawyer for the former client, there is no exception to the conclusive presumption of the exchange of confidential information. Absent the former client’s informed written consent, an attorney may never switch sides in an ongoing legal matter.
Moreover, the trial court found that Adams did receive confidential information, and this finding is supported by substantial evidence in the form of the Craig declaration. Craig’s declaration establishes that, at the very least, Davidson had the opportunity to receive confidential information in connection with CNB’s relationship with Adams and its dispute about the note. Therefore, evеn if the presumption of the exchange of confidential information were rebuttable rather than conclusive in this case, Davidson has not rebutted the presumption.
Disposition
The order of the trial court is affirmed. CNB is to recover its costs on appeal.
Lillie, P. J., and Johnson, J., concurred.
Notes
Rule 1-100 of the California State Bar Rules of Professional Conduct provides that “[t]he prohibition of certain conduct in these rules is not exclusive. Members are also bound by applicable law including . . . opinions of California courts.” All further rule references are to the California State Bar Rules of Professional Conduct.
The standard for evaluating whether representation adverse to the interests of a former client is prohibited, absent informed written consent by all affected present and former clients, articulated 70 years ago in
Wutchumna Water Co.
v.
Bailey, supra,
We are aware that the court in
In re Marriage of Zimmerman, supra,
Adams argues that the trial court improperly based its ruling, in part, “not only [on] actual disclosure, but the appearance of disclosure.” However, the trial court’s remarks, read in context, are entirely consistent with our conclusion that a lawyer who switches sides in the same case violates principles of both confidentiality and loyalty. (See
SpeeDee Oil, supra,