Joseph F Drum Jr vs Williston Holdings LLC
Case No: 18CV02268
Hearing Date: Wed Mar 20, 2019 9:30

Nature of Proceedings: Disqualify Counsel

TENTATIVE RULING: The motion of plaintiffs Joseph F. Drum, Jr. and William Moody to disqualify Kirkland & Ellis, LLP from further legal representation of the Golden Gate defendants is denied.

BACKGROUND:

In this action, plaintiffs Joseph F. Drum, Jr. and William Moody seek damages for breach of contract and related claims in connection with the ownership and management of Williston Financial Group, LLC, a nationwide title and escrow company established in 2009. Three of the defendants are Williston Financial Group, LLC, Williston Holdings, LLC, the parent company and sole owner of Williston Financial, and Patrick F. Stone, the CEO of Williston Financial and Williston Holdings. The other defendants are GGC Opportunity Fund Management, L.P., GGC Opportunity Fund Management GP, Ltd., and GGC Co-Invest Management, L.P., all investors in, and controlling members of, Williston Holdings. All of the “GGC” entities named as defendants are referred to collectively as the “Golden Gate” defendants.

As alleged in plaintiffs’ first amended complaint, Drum is a former executive with First American Title Company. Moody is a former executive with Equifax, Inc., a major lending service. In 2008, Stone approached Drum and Moody and encouraged them to leave their current positions and work full-time in the formation and operation of Williston Holdings. Stone told Drum and Moody that they would each make $5 million over the next five years from their ownership in the company. Drum and Moody thereafter joined the Williston Holdings venture and were key executives in the new startup company. Drum and Moody contend that Williston Holdings would not have launched successfully but for their hard work, reputation, contacts, and experience in the title and escrow business.

In addition to their annual salaries, Drum and Moody were issued Management Incentive Units (MIUs), a form of equity interest in Williston Holdings made up of Class A and Class B stock that was to vest over time. Drum and Moody were each issued 100,000 MIUs in May 2010 and an additional 100,000 MIUs in September 2012. The 400,000 MIUs represented a 4% ownership interest in the company. Between 2009 and 2014, Williston Financial grew from a startup to the seventh largest and fastest growing title insurance company in the country and during that time the value of plaintiffs’ ownership interest in the company grew significantly as well.

On May 11, 2015, Drum resigned from Williston Holdings and on August 1, 2016, Moody resigned. Following their resignations, plaintiffs were each sent a “Repurchase Notice,” stating that, due to their resignations, Williston Holdings was entitled to buy back all of plaintiffs’ MIUs at a nominal sum, pursuant to the Management Incentive Unit Subscription Agreement, dated September 26, 2012, and the Third Amended and Restated Limited Liability Company Agreement. Plaintiffs claim that they were never given notice of the buy-back provision and have sued defendants for (1) declaratory relief, (2) breach of contract, (3) breach of fiduciary duty, (4) fraud, and (5) violation of Business & Professions Code Section 17200.

The Golden Gate defendants are represented by the firm of Kirkland & Ellis, LLP (“K&E”). Plaintiffs now move to disqualify K&E from further representation of the Golden Gate defendants on the ground that K&E acted as counsel to the owners and managers of Williston Holdings when it was first established and during that time plaintiffs shared their personal and financial information and their business plan with the law firm. K&E also prepared all of the original agreements for Williston Holdings, including the September 26, 2012 Management Incentive Unit Subscription Agreement currently in dispute. K&E opposes the motion.

ANALYSIS:

The present motion turns upon the application of California Rules of Professional Conduct, Rule 1.7, which prohibits an attorney from representing a client in a matter that is adverse to a former client without the written consent of both clients. Rule 1.7 provides, in relevant part:

“(a) A lawyer shall not, without informed written consent from each client . . . represent a client if the representation is directly adverse to another client in the same or a separate matter.

“(b) A lawyer shall not, without informed written consent from each affected client . . . represent a client if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client, a former client or a third person, or by the lawyer’s own interests.”

Under Rule 1.7, disqualification of counsel is mandatory when the attorney attempts to represent a client against a former client on the same matter or on a matter that is “substantially related” to the prior representation. Henricksen v. Great American Savings & Loan (1992) 11 Cal.App.4th 109, 113-114. In such cases, the attorney’s knowledge of material confidential information is conclusively presumed and disqualification is required absent the former client’s informed written consent. Flatt v. Superior Court (1994) 9 Cal.4th 275, 283; City & County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 846-847. Successive representations will be considered “substantially related” where the factual and legal issues of the prior and current representations, as well as the attorney’s involvement in the two matters, are substantially similar. Morrison Knudsen Corporation v. Hancock, Rothert & Bunshoft, LLP (1999) 69 Cal.App.4th 223, 234.

Drum and Moody assert that they were “founders” of Williston Holdings and because K&E represented the Golden Gate defendants in their due diligence investigation of the company and because K&E also assisted in the formation of the Williston entities and the acquisition of two existing title insurance companies an attorney-client relationship existed between K&E and plaintiffs. The evidence, however, does not support plaintiffs’ contention. What the evidence shows is that plaintiffs were employees, not founders, of Williston Holdings. The company’s November 13, 2009 Founders Agreement specifically defines “Founders” as the signatories to the document, Stone and Marshall Haines. (Stone Dec., ¶5, Ex. A, §1.) Drum’s employment background was in the title insurance industry and he was hired to manage the title insurance part of the business, while Moody’s background was in finance and he was hired to manage the company’s lender services. (Drum Dec., ¶¶ 3, 6.) Plaintiffs were not issued an equity interest in the company until 2010, more than a year later, along with dozens of other employees. (Stone Dec., ¶7.)

Plaintiffs argue that their relationship with Williston Holdings was equivalent to the relationship between partners and a partnership and that K&E’s representation of the Williston entities implied an agreement to represent plaintiffs as individuals. Again, however, the evidence does not support plaintiffs’ contention. Williston Holdings is a limited liability company, not a partnership. (Stone Dec., ¶2.) More importantly, plaintiffs have not proffered any evidence to show that they entered into an express contract for legal services with K&E, that they ever asked K&E for legal advice or that K&E provided legal advice to them, that they paid legal fees to K&E, or that they met, spoke to, or had substantive communications with any K&E attorney. Plaintiffs point to the fact that in 2009 they provided “personal financial information” to K&E, but as plaintiffs acknowledge, this information was provided to K&E as part of its due diligence investigation on behalf of the Golden Gate defendants. (Drum Dec., ¶9.) The Golden Gate defendants had hired K&E to advise them in connection with the potential formation and financing of Williston Holdings. (Veit Dec., ¶3.) In gathering financial information from plaintiffs (and others), K&E was acting as counsel to the Golden Gate defendants, not plaintiffs.

Plaintiffs next argue that by preparing numerous documents on behalf of Williston Holdings, including the LLC Agreement and the MIU Subscription Agreement, K&E owed a duty of care to the owners and managers of the company. K&E’s preparation of documents, however, does not mean that they was acting as plaintiffs’ lawyers. As a general rule, before the disqualification of an attorney is proper, the complaining party must show that it has, or had, an attorney-client relationship with the attorney. As stated in Koo v. Rubio’s Restaurants, Inc. (2003) 109 Cal.App.4th 719, 729:

“Before an attorney may be disqualified from representing a party in litigation because his representation of that party is adverse to the interest of a current or former client, it must first be established that the party seeking the attorney’s disqualification was or is ‘represented’ by the attorney in a manner giving rise to an attorney-client relationship.”

An attorney-client relationship is not created by the unilateral declaration of one party to the relationship. Fox v. Pollack (1986) 181 Cal.App.3d 954, 959 (individuals cannot unilaterally create an attorney-client relationship without the agreement of the attorney). Here, K&E’s representation of the Golden Gate defendants, and later Williston Holdings, did not create an attorney-client relationship with plaintiffs, either express or implied, because the drafting of agreements (in this case, the Williston Holdings LLC Agreement and the MIU Subscription Agreement governing Williston Holdings’ issuance of MIUs) for one party does not create an attorney-client relationship with the counter-parties. K&E drafted the LLC agreements for the benefit of their client, Williston Holdings, and not for plaintiffs’ benefit.

Lastly, plaintiffs argue that K&E should be disqualified from further legal representation of the Golden Gate defendants because several of its lawyers may be witnesses at trial. K&E lawyers drafted the MIU Subscription Agreement, which plaintiffs contend was false and misleading. Plaintiffs allegedly did not know that under the Subscription Agreement their resignations from Williston Financial would cause them to forfeit virtually all of the value of their vested MIUs. (Drum Dec., ¶21.) Under Rule 3.7 of the California Rules of Professional Conduct, an attorney is prohibited from acting as an advocate in a matter where the lawyer will also testify as a witness. Rule 3.7 provides, in pertinent part:

“(a) A lawyer shall not act as an advocate in a trial in which the lawyer is likely to be a witness unless:

“(1) the lawyer’s testimony relates to an uncontested issue or matter;

“(2) the lawyer’s testimony relates to the nature and value of legal services rendered in the case; or

“(3) the lawyer has obtained informed written consent from the client . . . .”

The court does not find at this preliminary stage of the proceedings that Rule 3.7 provides a basis for disqualifying K&E from further legal representation in this matter. There are no allegations concerning K&E in the first amended complaint. Plaintiffs have also not established that K&E attorneys are likely to be witnesses at trial since the drafting of the LLC agreements is probably privileged.

It is the obligation of every attorney, of course, “[t]o maintain inviolate the confidence . . . of his or her client.” Bus. & Prof. Code §6068, subd. (e)(1). “[T]he fundamental purpose behind the [attorney-client privilege] is to safeguard the confidential relationship between clients and their attorneys so as to promote the full and open discussion of the facts and tactics surrounding legal matters.” Mitchell v. Superior Court (1984) 37 Cal.3d 591, 599, citing People v. Flores (1977) 71 Cal.App.3d 559, 563. At the same time, however, it must be kept in mind that disqualification imposes a substantial hardship on the disqualified attorney’s client, who must bear the cost of finding a replacement. A client deprived of the attorney of its choice also suffers a particularly heavy penalty where the attorney is highly skilled in the relevant area of the law. Thus, the courts “must examine [disqualification] motions carefully to ensure that literalism does not deny the parties substantial justice.” People ex rel. Department of Corporation v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1144.

Based on the foregoing, plaintiffs’ motion to disqualify K&E from further legal representation of the Golden Gate defendants will be denied.