MOTION TO DISQUALIFY THOMAS A. PISTONE, ERIC J. MEDEL AND THE LAW FIRM OF PISTONE LAW GROUP, LLC AND MEDEL LAW GROUP, APC AND FOR OTHER SANCTIONS

Moving Party: Plaintiff/Cross-Defendant Azusa Pacific University

Respondents: Defendant and Cross-Complainant David Reid and Cross-Complainant Glenda L. Reid

POS: Moving OK; Opposing OK; Reply OK

Plaintiff Azusa Pacific University (“APU”) alleges that Defendant David Reid used his decade-long employment relationship with APU to exploit his position as its Director of Asset Management, to engage in improper self-dealing transactions to APU’s detriment and for his own unjust enrichment. The Complaint, filed on 8/1/13, asserts causes of action for:

1. Breach of Fiduciary Duty
2. Fraud
3. Constructive Fraud
4. Intentional Interference with Contract and/or Prospective Economic Advantage
5. Negligent Interference with Prospective Economic Advantage
6. Negligence
7. Breach of Express Contract
8. Breach of Implied Covenant of Good Faith and Fair Dealing
9. Promissory Estoppel
10. Conversion
11. Accounting
12. Violation of Bus & Prof C § 17200, et seq.

On 9/9/13, David Reid and Glenda L. Reid, individually and as Trustees of the Sun Country Campus Trust and the Erudite Trust dated July 10, 2012, filed a cross-complaint for:

1. Breach of Written Contract
2. Breach of Fiduciary Duty
3. Declaratory Relief
4. Accounting
5. Breach of Oral Contract
6. Fraud
7. Tortious Interference with Contract

The Case Management Conference is set for 2/27/14.

Plaintiff and Cross-Defendant Azusa Pacific University (“APU”) moves to disqualify attorneys Thomas A. Pistone (“Mr. Pistone”) and Eric J. Medel (“Mr. Medel”) in particular, and the entire law firms of Pistone Law Group LLP (“PLG”) and Medel Law Group, APC (“MLG”), more generally, from representing Defendants and Cross-Complainants David Reid (“Mr. Reid”) and Glenda Reid, individually and as Trustees of the Sun Country Campus Trust and the Erudite Trust dated July 10, 2012 (collectively the “Reid Defendants”), or otherwise participating in this action.

EVIDENTIARY OBJECTION OF PLAINTIFF/CROSS-DEFENDANT:

The objection to the Declaration of William Larson, ¶ 3, is sustained as to “and by other university personnel, including my prior supervisor Hank Bode.” The objection is otherwise overruled.

MOTION TO DISQUALIFY COUNSEL:

A court may disqualify an attorney on various grounds recognized by case law. (See Zador Corp. v. Kwan (1995) 31 Cal.App.4th 1285, 1292.) The court’s authority in this regard is not statutory per se, but stems from the court’s inherent power “to 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.” (CCP § 128(a)(5); City and County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 846.)

Ruling on the motion requires the court to weigh: (1) the party’s right to counsel of choice; (2) the attorney’s interest in representing a client; (3) the financial burden on a client of changing counsel; (4) any tactical abuse underlying a disqualification motion; and (5) the principle that the fair resolution of disputes requires vigorous representation of parties by independent counsel. (Mills Land & Water Co. v. Golden West Refining Co. (1986) 186 Cal.App.3d 116, 126.)

An attorney may be disqualified where an attorney inadvertently receives work product, attorney-client, or other confidential information and fails to conduct himself or herself in the appropriate manner, i.e., refraining from examining the materials any more than is essential to ascertain if the materials are privileged, and thereafter immediately notifying the sender that he or she possesses material that appears to be privileged. (Rico v. Mitsubishi Motors Corp. (2007) 42 Cal.4th 807, 817–818.) Disqualification of a party’s attorney also may be an appropriate remedy to prevent prejudice to the opposing party where the attorney reviews and uses numerous documents protected by the opposing party’s attorney-client privilege. (See Clark v. Sup.Ct. (Verisign, Inc.) (2011) 196 Cal.App.4th 37, 55.)

If counsel receives from his or her client or another person an opposing party’s privileged documents that the person obtained improperly, counsel’s ethical obligation is the same as where he or she inadvertently receives the other side’s privileged documents from opposing counsel—i.e., counsel may review the documents no more than is necessary to determine they are privileged and must make arrangements for their return. Failure to do so may lead to disqualification. (Clark v. Super.Ct. (Verisign, Inc.), supra, 196 Cal.App.4th at 52–54.)

ATTORNEY-CLIENT PRIVILEGE:

Communications between client and counsel are presumed to have been made in confidence and are broadly privileged against discovery. This promotes effective pretrial preparation by encouraging full disclosure between attorney and client. It makes no difference that the communications relate to “factual information” as opposed to “legal advice.” (Mitchell v. Sup.Ct. (Shell Oil Co.) (1984) 37 Cal.3d 591, 601.)

Attorney communications with agents and employees of a client (e.g., a corporate client) are also protected by the attorney-client privilege. The attorney is free both to give and receive information from the client’s agents. The agent need not be a member of the client’s “control group” (e.g., a managing officer or director) … because such limitation on the privilege “would largely destroy the ability of corporate counsel to freely communicate.” (See Upjohn Co. v. United States (1981) 449 US 383, 391–393.) The privilege extends to lower level persons who reasonably need to know of the communication in order to act for the organization, even if they had no direct contact with the lawyer. (Zurich American Ins. Co. v. Sup.Ct. (Watts Indus., Inc.) (2007) 155 Cal.App.4th 1485, 1499–1500.)

The burden is on the party claiming a privilege to establish whatever preliminary facts are essential to the claim. (See Ev.C. §§ 402, 405.) For example, if the attorney-client privilege is claimed, the client, or the attorney in the client’s absence, must prove (usually by declarations) the existence of the attorney-client relationship when the communication was made. Once this is shown, the communications between lawyer and client are presumed to have been made in confidence. (Alpha Beta Co. v. Sup.Ct. (Sundy) (1984) 157 Cal.App.3d 818, 824–825; Clark v. Sup.Ct. (Verisign, Inc.), supra, 196 Cal.App.4th at 51.) Upon such showing, the burden shifts to the party seeking discovery to disprove those facts or to prove some applicable statutory exception, e.g., that the privilege has been waived.

WAIVER OF PRIVILEGE:

A statutory privilege may be waived if the holder of the privilege has voluntarily disclosed a “significant” part of the communication to a third party or consented to such disclosure. Failure to timely claim the privilege (i.e., failure to object) constitutes “consent” to disclosure. (Ev.C. § 912(a); see People v. Hayes (1999) 21 Cal.4th 1211, 1265.)

There is no “joint defense” privilege as such under California law. However, disclosures made in confidence to third persons do not waive the attorney-client privilege if “reasonably necessary for accomplishment of the purposes for which the lawyer was consulted.” (Ev.C. § 912(d).)

An implied waiver of the privilege may occur where the party claiming the privilege has placed the privileged communication “directly at issue and… disclosure is essential for a fair adjudication of the action.” (Kaiser Found. Hosps. v. Sup.Ct. (Smee) (1998) 66 Cal.App.4th 1217, 1226.) If the communication goes to the heart of the claim in controversy, “fundamental fairness” may require that privileged matters be disclosed in order for the litigation to proceed. (See Mitchell v. Sup.Ct. (Shell Oil. Co.) (1984) 37 Cal.3d 591, 604—recognizing general proposition; Steiny & Co. v. California Elec. Supply Co. (2000) 79 Cal.App.4th 285, 292.)

ETHICAL OBLIGATIONS OF ATTORNEYS:

Attorneys are obligated not only to protect their client’s interests but also to respect the legitimate interests of fellow members of the bar, the judiciary, and the administration of justice. (Rico v. Mitsubishi Motors Corp. (2007) 42 Cal.4th 807, 818.) Therefore, upon receiving material that “obviously appears” to be confidential and privileged (or attorney work product) and not intentionally produced by the holder of the privilege, a lawyer should: refrain from examining the materials any more than is essential to ascertain if the materials are privileged; immediately notify the sender that he or she possesses material that appears to be privileged; proceed to resolve the situation by agreement with the sender or resort to the court for guidance with the benefit of protective orders and other judicial intervention as may be justified. (Id at 817–818; see also State Bar California Attorney Guidelines of Civility and Professionalism § 9.b.3; Clark v. Sup.Ct. (Verisign, Inc.) (2011) 196 Cal.App.4th 37, 51 — above-stated obligations extend to a situation where the lawyer obtains opposing party’s privileged documents from his or her own client.) Failure to comply with this ethical standard is ground for disqualification. (Rico v. Mitsubishi Motors Corp., supra, 42 Cal.4th at 819 — lawyers disqualified for using and disseminating opposing counsel’s inadvertently disclosed work product.)

PLAINTIFF’S CONTENTIONS:

Mr. Reid’s attorneys must be disqualified because they received from Mr. Reid, and used, documents illegally taken from APU, including at least 2,160 documents protected by the attorney-client and work product privileges. Even through APU repeatedly told Mr. Reid’s counsel of concerns that he had impermissibly taken documents from APU at the time of his termination, Mr. Reid’s attorneys received, reviewed, utilized and produced TO ALL PARTIES more than 2,100 clearly privileged documents belonging to APU, many of which concern transactions at the heart of this litigation. They have seriously invaded APU’s privilege, tainted themselves beyond repair and cast an irrevocable pall on the integrity of the judicial process in this case. The only appropriate remedy is disqualification, along with other sanctions to ensure that Mr. Reid and his subsequent counsel do not do this again.

As an APU employee, Mr. Reid expressly agreed to be bound by the APU Employee Handbook (“Handbook”). (Motion, Baugus Decl. ¶ 3, Exhs. A-B.) Pursuant to the Handbook, records obtained in the course of employment are deemed confidential and employees must return all APU property (including computer equipment and files) at termination. (See, e.g., Baugus Decl., Exh. A, §§ 8.8, 8.11, 9.11.)

Following Mr. Reid’s termination, APU examined his APU email account and discovered that emails prior to January 1, 2013 could not be found on the system. An outside computer forensic expert examined the laptop hard drive and concluded that on February 12, 2013, someone had run a program designed to delete all content and render it unrecoverable; and also, connected external hard drives that are often used to copy data from computer hard drives. (Motion, Cox Decl. ¶¶ 3-7.) These actions immediately preceded Reid surrendering his APU laptop at his 4:00 p.m. exit interview that same day. (Ibid.) On April 23, 2013, when APU’s outside counsel raised concerns about files and data missing since Mr. Reid’s departure, Mr. Reid indicated that he would provide copies of his email, along with other documents requested by APU. (Motion, Kamin Decl. ¶ 2.) However, the documents were not produced until December 24 and 26, 2013, in response to APU’s discovery requests. (Ibid.)

Mr. Reid’s counsel produced disks containing approximately 27,000 documents. (Tam Decl. ¶ 6, Exh. G.) The entire production was served on counsel for APU as well as upon counsel for Paul Newkirk and Dan Tate. (Ibid.) [Additional parties involved in transactions at issue in the Complaint were added by consolidation of this case with Paul Newkirk, et al. v. David Reid, et al., Case No. KC066326, as well as Mr. Reid’s Cross-Complaint.] On January 1, 2014, as soon as Mr. Reid’s production was processed for review, APU’s counsel began its review and immediately recognized many documents subject to the attorney-client and work product privileges. (Id. ¶ 7.)

On January 2, 2014, APU’s counsel sent a letter to all parties demanding that all parties cease review of Mr. Reid’s production, refrain from using any documents therein, and return the entire production. (Motion, Kamin Decl. ¶ 3, Exh. D.) On January 6, 2014, counsel for Paul Newkirk and Dan Tate returned their copies to APU’s attorney. (Id. ¶ 8, Exh. H.) However, despite multiple requests, Mr. Reid’s attorneys have refused to return the documents and would not agree to cease their review and use of the documents pending outcome of this motion. (Id., Tam Decl. ¶ 8, Exh. I; Kamin Decl., Exh. D.)

After reviewing the 27,000 documents in Mr. Reid’s production, APU identified 2,160 documents protected by a privilege held by APU and prepared a privilege log identifying the privileged documents. (Motion, Tam Decl. ¶ 10, Exh. J.) The documents include: approximately 1,100 documents reflecting communications between APU personnel and APU in-house counsel, approximately 500 documents reflecting communications between APU personnel and onside counsel, multiple documents reflecting APU’s communications with litigation counsel in other matters, numerous documents containing indicia of the privilege, highly sensitive privileged documents concerning APU internal policies and summaries of liens and litigation against APU, documents relating to Alosta Place and Leonard Reeves, and approximately 150 privileged documents concerning transactions with Paul Newkirk and Dan Tate. (Id. ¶ 11, Exh. J.)

DEFENDANT’S CONTENTIONS:

Given that Mr. Reid was often working on APU’s real estate transactions in a personal capacity as an independent real estate broker, it was necessary for Mr. Reid to personally rely on communications and advice that he received from APU’s legal departments, and he consistently did so.

In response to discovery propounded, Mr. Reid found an old damaged backup drive which he had intended to discard, but which had been sitting in his garage for a number of years, since approximately 2011. The hard drive had previously been used by his assistant to back up his email and correspondence. Therefore, Mr. Reid, worked diligently to attempt to recover data from that backup drive and produced its contents as responsive to APU’s demand. (Reid Decl. ¶¶ 13-14.) Prior to making such production, counsel for APU was notified that the Reid Defendants would be requiring a protective order as to matters involving their current projects and finances but were otherwise taking an “open book” approach to production. APU’s counsel was also notified that the production of historical documents dating back to Mr. Reid’s initial employment (which was not reviewed by their counsel prior to production) would likely raise confidentiality issues, particularly given that the action was being consolidated so as to include outside parties. Thereafter, the parties cooperated in the drafting of the protective order and the production of documents occurred in December of 2013. (Medel Decl. ¶ 7.)

On or about the evening of January 3, 2013, counsel for APU first raised concerned that documents which were privileged attorney-client communications had been produced by the Reid Defendants in this matter. Counsel for the Reid Defendants immediately attempted to ascertain from the counsel the identity of the particular documents and whether the communications involved issues pertinent to the present litigation. (Medel Decl. ¶ 8; Pistone Decl. ¶¶ 4-5.) Despite these requests for information, APU’s attorneys would not disclose any information sufficient to determine the legitimacy of the issue. (Id. ¶ 8, Exh. D; Pistone Decl. ¶ 5.)

No attorney-client privilege may be claimed as between APU and Mr. Reid. An attorney-client relationship existed at all times relevant as between APU’s counsel and David Reid, individually. (Larson Decl. ¶¶ 3-4; Reid Decl. ¶¶ 4-7.) When two or more clients have retained or consulted an attorney on a matter of common interest, none of them may claim the attorney-client privilege as to communications in the course of that relationship when such communications are offered in civil litigation between them. (Ev C § 962.)

Even if an attorney-client privilege existed, APU has waived such privilege by putting the subject matter directly at issue in its Complaint. For example, the Complaint alleges that Mr. Reid stole opportunities to participate in development projects as an owner, but APU is attempting to hide behind privilege to prevent a jury from seeing evidence that APU was prohibited from doing so under its bond covenants, and that APU’s attorneys had explicitly rejected such opportunities. (See Complaint ¶¶ 47, 50, 55, 58, 81 and 82; Reid Decl. ¶ 10.) Likewise, the Complaint alleges that a sale of certain desirable real property to Diamond Villa in 2010 was misconduct by Mr. Reid, but APU is attempting to hide the fact that APU was desperately low on cash reserves required by its bond covenants and actually commended Mr. Reid for his eleventh hour efforts to meet those cash reserves before the end of the fiscal year. (Complaint ¶ 20; Reid Decl. ¶ 11.)

APU has not produced sufficient evidence of privilege. All documents at issue come from Mr. Reid’s email and correspondences, and Mr. Reid’s work primarily involved negotiation and consummation of real estate transactions. It is impossible to determine the extent to which items included within APU’s privilege log relate to non-legal duties.

Further, no prejudice has resulted from the production at issue. APU fails to demonstrate that the documents produced would create an unfair advantage to the Reid Defendants.

THE COURT’S FINDINGS:

The evidence submitted by APU demonstrates that the documents produced by Mr. Reid include attorney-client privileged documents (Motion, Exh. J, Privilege Log); there is evidence that before Mr. Reid surrendered his APU laptop to APU someone had run a program designed to delete all content and render it unrecoverable, and also connected external hard drive(s) often used to copy data from computer hard drives (Cox Decl. ¶¶ 3-7); and that APU’s counsel sent a letter to all parties demanding that they cease review of Mr. Reid’s production, refrain from using any documents therein, and return the entire production, but that counsel for Mr. Reid have refused to return the documents and would not agree to cease their review and use of the documents pending the outcome of this motion (Id., Tam Decl. ¶ 8, Exh. I; Kamin Decl., Exh. D).

Defendants, in opposition, submit evidence that the documents were recovered from an old damaged backup drive Mr. Reid had in his garage. (Opposition, Reid Decl. ¶¶ 13-14.) However, even if the documents were obtained from the backup drive, it appears that the documents and the backup drive were the property of APU pursuant to the Handbook.

Defendants also submit evidence that counsel for Mr. Reid did not review all of the documents produced. (Opposition, Medel Decl. ¶¶ 6, 11; Pistone Decl. ¶ 3.) However, even if the documents were not thoroughly reviewed before the production, it appears that once counsel for Mr. Reid were notified of the privileged documents produced, they had an ethical obligation to review the documents to determine whether they received attorney-client privileged documents belonging to APU from their client.

Defendants also contend that an attorney-client relationship existed at all times relevant as between APU’s counsel and David Reid individually. (Larson Decl. ¶¶ 3-4; Reid Decl. ¶¶ 4-7.) However, it appears that Mr. Reid was acting in his capacity as an employee of or a broker for APU, i.e., an agent, and thus, he did not have an attorney-client relationship in his individual capacity with counsel for APU.

Defendants also contend that even if an attorney-client privilege existed, APU has waived such privilege by putting the subject matter directly at issue in this action. For example, the Complaint alleges that Mr. Reid stole opportunities to participate in development projects as an owner, but APU is attempting to hide behind privilege to prevent a jury from seeing evidence that APU was prohibited from doing so under its bond covenants, and that APU’s attorneys had explicitly rejected such opportunities. (See Complaint ¶¶ 47, 50, 55, 58, 81 and 82; Reid Decl. ¶ 10.) Likewise, the Complaint alleges that a sale of certain desirable real property to Diamond Villa in 2010 was misconduct by Mr. Reid, but APU is attempting to hide the fact that APU was desperately low on cash reserves required by its bond covenants and actually commended Mr. Reid for his eleventh hour efforts to meet those cash reserves before the end of the fiscal year. (Complaint ¶ 20; Reid Decl. ¶ 11.) While it appears that APU may have impliedly waived the attorney-client privilege to SOME of the documents at issue (since some of the privileged communications appear to go to the heart of the issues in controversy and disclosure may be necessary for a fair adjudication of the action), it appears that this cannot be said as to ALL of the documents produced.

Nevertheless, it appears that Mr. Reid, as the Director of Estate Planning for APU, and a broker for APU on certain APU-related transactions, had access to the documents and/or was a party to much of the correspondence at issue, and therefore, did not improperly obtain the documents, although at the time of his termination, he had the duty to return all of APU property. Moreover, it is unclear how the documents produced would create an unfair advantage to the Reid Defendants, i.e., if the Reid Defendants are using them as a defense to APU’s claims asserted in the Complaint, it appears that the privileged documents should be disclosed since there is an implied waiver as to those particular documents.

The court will hear from counsel on these issues. The court would also like to hear from counsel regarding the possible appointment of a special master to review the documents claimed to be privileged and to determine whether counsel for Mr. Reid have gained an unfair advantage by having them in their possession and disseminating them in this litigation.