Case Number: BC543936    Hearing Date: September 12, 2014    Dept: 34

Moving Party: Plaintiffs Kevin Keenan and Thanh Thuy Ho (“plaintiffs”)

Resp. Party: None

Plaintiffs’ unopposed motion to disqualify defense counsel is GRANTED.

PRELIMINARY COMMENTS:

The Court finds it surprising that this motion to disqualify defendants’ counsel is unopposed. In an exchange of letters between counsel, Defense counsel took the firm position that there was no conflict of interest in its representing Souza and the corporate defendants, and, in somewhat of a brush-off, told plaintiffs’ counsel, “[i]t is not my intention to engage in a drawn out [sic] letter writing campaign with you. If you feel that strongly in your position then I would suggest bringing whatever motion you deem appropriate.” (Motion, Exh. D, p. 1.)

Plaintiff has brought the motion. Defendants’ counsel has not responded, thus apparently conceding merits of Plaintiffs’ motion. The Court also notes that defense counsel has not filed its required Case Management Statement for today’s CMC. It is therefore not clear to the Court whether defense counsel has voluntarily removed itself from this case, has abandoned its client, or otherwise has decided not to continue representation of the defendants. If the latter is the case, defense counsel has failed to file a substitution of attorney form with the Court.

BACKGROUND:

Plaintiffs commenced this action on 4/29/14 against defendants for: (1) breach of joint venture agreement; (2) breach of joint venture fiduciary duty; (3) dissolution and accounting; (4) breach of manager fiduciary duty; (5) LLC accounting; (6) inspection of records; and (7) tenancy in common accounting. Plaintiffs allege that they entered into a joint venture agreement with the Souza defendants to manage certain properties in Riverside County. (Compl., ¶¶ 7-8.) Plaintiffs allege that the Souza defendants breached their fiduciary duties under this agreement by failing to distribute profits to which plaintiffs were entitled, ousting plaintiff Keenan from his management role in the properties, changing the locks on one of the properties and transferring utilities into a different name, diverting joint venture assets and other money to defendants’ own use, failing to properly account concerning the receipt and expenses in the business, improperly charging expenses to the business, denying plaintiffs access to the books and records, and interfering with plaintiffs’ rights to receive the benefits of the agreement. (Id., ¶ 18.)

Plaintiffs also allege that they are owners of management interests in Skybm LLC, Skym LLC, Simpson Estates LLC, and Generation Development LLC. (See Compl., ¶¶ 29-32.) Defendant Anthony Souza is the manager of these LLCs. (Id., ¶ 33.) Plaintiffs allege that Souza breached his managerial fiduciary duties as to these LLCs in the same way that such duties were breached with regard to the joint venture. (Id., ¶ 35.)

On 8/11/14, the Court denied defendant’s motion to strike portions of the complaint.

ANALYSIS:

Plaintiffs argue that the Law Office of Johnston & Hutchinson LLP (“LOJH”) and all of its attorneys should be disqualified from representing the defendants in this action because it has an inherent conflict of interest in representing the individual defendant Anthony P. Souza and the entity defendants in this action.

A party may move to disqualify counsel for the opposing party on grounds recognized by law, including mandatory disqualification for conflict of interest. (Weil & Brown, Cal. Prac. Guide: Civ. Pro. Before Trial (The Rutter Group 2014) ¶ 9:406.5.) A court has 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 manner pertaining thereto.” (Code Civ. Proc. § 128(a)(5).) This includes the power to disqualify counsel in appropriate cases. (Weil & Brown, ¶ 9:406.5 [citing In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572, 575].)

In ruling on a motion to disqualify, the Court must 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.)

In California, “[j]oint representation of parties with conflicting interests impairs each client’s legitimate expectation of loyalty that his or her attorneys will devote their ‘entire energies to [their] client’s interests.’” (Great Lakes Const., Inc. v. Burman (2010) 186 Cal.App.4th 1347, 1355 [quoting Flatt v. Superior Court (1994) 9 Cal.4th 275, 289].)

The principle of “undivided loyalty” is embraced in the rules of professional conduct governing potential and actual conflicts in joint representation cases. Rules 3–310(C)(1) and (2) of the State Bar Rules of Professional Conduct provide that an attorney “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….”[Fn. omitted.] Unless there is informed written consent, an attorney cannot represent two or more clients at the same time whose interests’ conflict. In cases where an attorney concurrently represents two clients with conflicting interests, the automatic-disqualification rule applies. [Citation.]

(Id. at pp. 1355-1356.)

Plaintiffs’ allegations suggest that defense counsel’s representation of Anthony P. Souza and the LLCs constitutes an ethical breach. Plaintiffs have alleged that Anthony P. Souza, the manager of the LLCs, diverted assets and income of the LLCs for his own use, failed to properly account for the LLCs, and improperly charged expenses to the LLCs. (See Compl., ¶¶ 35, 41.)

“[O]nce a conflict has arisen between a corporation and one or more of its officers, directors or shareholders, corporate counsel may not simultaneously represent the corporation and the adverse officer, director or shareholder. In this regard, rule 3–310(c) provides as follows:

“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.”

“Thus, where a shareholder has filed an action questioning its management or the actions of individual officers or directors, such as in a shareholder derivative or the instant dissolution action, corporate counsel cannot represent both the corporation and the officers, directors or shareholders with which the corporation has a conflict of interest.” (La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court (2004) 121 Cal.App.4th 773, 785-786.)

Plaintiffs are alleging that Souza caused injuries to the LLCs, and joint representation of Souza and LLCs on these claims, in violation of rule 3-310(C), could undermine the integrity of the judicial process.

The claims in the fourth and fifth causes of action suggest an actual conflict between Anthony Souza and the LLCs. Rule 3-310(C) provides that, in such situation, counsel must obtain informed written consent of each client. Further, rule 3-600(E) provides that, where such written consent is required under rule 3-310(C), “the consent shall be given by an appropriate constituent of the organization other than the individual or constituent who is to be represented, or by the shareholder(s) or organization members.”

During counsel’s meet and confer, defense counsel stated that it had obtained such consent, but adamantly refused to show plaintiffs’ counsel a copy of the letter providing such written consent. (Motion, Exh. D.)

Plaintiffs declare that they did not consent to defense counsel’s representation and that they have never received notice of a regular or special meeting of the LLCs for the purposes of the representation issues. (See Keenan Decl., ¶¶ 8-11; Ho Decl., ¶¶ 8-11.)

As indicated above, defendants have not filed an opposition, and hence they have failed to provide any evidence that they complied with rules 3-310(C) or 3-600(E).

Plaintiffs’ motion to disqualify defense counsel is GRANTED.