2018-00226853-CU-BC

Vladyslav Rozumnyy vs. Roman Smolevskiy

Nature of Proceeding: Motion to Disqualify Gavrilov & Brooks and H. Vincent McLaughlin

Filed By: Cass, Paul L.

Plaintiffs Vladyslav Rozumnyy (“Vlad”) and Gamma Designs’ (“Gamma”) (collectively, “Plainitffs”) motion to disqualify H. Vincent McLaughlin (“Mr. McLaughlin”) and his law firm of Gavrilov & Brooks as counsel of record for defendants Roman Smolevskiy (“Roman”), A+ Construction Homes, Inc., A+ Construction Pro, Inc. (“ACP”) and Advanced Construction Pro (collectively, “Defendants”) is DENIED.

Plaintiffs’ request for judicial notice of documents filed in this action is granted. In taking judicial notice of these documents, however, the Court only accepts the fact of their existence, not the truth of their contents. (See Professional Engineers v. Dep’t of Transp. (1997) 15 Cal.4th 543, 590 [judicial notice of existence of findings of fact does not mean that those findings of fact are true]; Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120-121 [“[W]hile the existence of any document in a court file may be judicially noticed, the truth of the matters asserted in those documents, including the factual findings of the judge who was sitting as the trier of fact, is not entitled to notice.”]; Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1562-1570.)

This action involves a dispute between two equal shareholders in ACP, Vlad and Roman. Vlad is also the owner of Gamma, a cabinet making company. Roman is the owner of the other two named corporate defendants — A+ Construction Homes, Inc. and Advanced Construction Pro.

In June of 2016, Vlad and Roman agreed to incorporate ACP and be 50/50 partners in the home improvement contracting business. The parties each purportedly had a different understanding of the agreement and how ACP would operate, and both Vlad and Roman make allegations against the other as to purported fraud and bad dealings. The details of the specific allegations, however, are of little import to this instant motion. What is of import is that on February 8, 2018, Vlad and Gamma filed a complaint against Roman, ACP, and Roman’s other two companies alleging breach of contract, breach of fiduciary duty, constructive fraud, conversion, fraudulent transfer, accounting, and injunction and involuntary dissolution. Vlad and Gamma seek compensatory and punitive damages and injunctive relief. (ROA 1.) On March 26, 2018, Roman and ACP filed a cross-complaint against Vlad and Gamma alleging breach of fiduciary duty, fraud, and conversion and seek compensatory and punitive damages, declaratory relief, and involuntary dissolution. (ROA 26.)

Vlad now moves to disqualify Mr. McLaughlin and the law firm of Gavrilov & Brooks in this action on the grounds that Mr. McLaughlin may not represent both Roman and ACP due to purported derivative claims.

A trial court’s authority to disqualify an attorney derives from the power inherent in every court ‘[t]o 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. (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145.) However, a motion to disqualify counsel must be examined carefully, and may involve considerations such as a client’s right to chosen counsel, an attorney’s interest in representing a client, and the possibility that tactical abuse underlies the disqualification motion. (Kirk v. First American Title Ins. Co. (2010) 183 Cal.App.4th 776, 792.) Only rarely will a court disqualify an opposing counsel, and then upon a showing that there is a “convincing demonstration of detriment to the opposing party or injury to the integrity of the judicial process.” (Lyle v. Superior Court (1981) 122 Cal. App. 3d 470, 482.) Parenthetically, joint representation alone simply does not trigger an ethical violation requiring automatic disqualification. (See SpeeDee Oil Change, supra, 20 Cal.4th at p. 1145.) .) Disqualification motions involve “a conflict between the clients’ right to counsel of their choice and the need to maintain ethical standards of professional responsibility. 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.” (Id. at p. 1145; see also Kirk, supra, at p. 791.)

By way of preface to the Court’s analysis, it bears noting that while these standards are oft-repeated and express the general considerations that bear on a motion to disqualify counsel, their application necessarily turns on the specific facts of each case. It is rarely productive to generalize, because the rules pertaining to attorney disqualification differ depending on the unique factual circumstances in each dispute.

Generally, before the disqualification of opposing counsel is proper, the complaining party must have or must have had an attorney-client relationship with that attorney. ( Strasbourger Pearson Tulcin Wolff Inc. v. Wiz Technology, Inc. (1999) 69 Cal.App.4th 1399, 1404.) There are limited circumstances in which courts have found that nonclients may disqualify an attorney who did not represent them. Generally, absent an attorney-client relationship, standing can arise “from a breach of the duty of confidentiality owed to the complaining party, regardless of whether a lawyer-client relationship existed.” (DCH Health Services Corp. v. Waite (2002) 95 Cal.App.4th 829, 832.) Plaintiffs do not even attempt to argue they ever had an attorney-client relationship with Mr. McLaughlin or his law firm, and there is no evidence or argument that Plaintiffs have an expectation of confidentiality. Plaintiffs instead contend they have vicarious standing to disqualify Mr. McLauglin under the holdings of Blue Water Sunset LLC v. Markowitz (2011) 192 Cal.App.4th 477, Gong v. RFG Oil, Inc. (2008) 166 Cal. App.4th 209, Forrest v. Baeza (1997) 58 Cal. App.4th 65, and/or La Jolla Cove Motel & Hotel Apartments, Inc. v. Superior Court (2004) 121 Cal. App.4th 773. The Court is not persuaded.

First, the Court notes Plaintiffs have misstated the holdings in Blue Water and Forrest. Plaintiffs argue these cases stand for the proposition that “to have standing, it is not required than an actual derivative lawsuit be filed or that Gavrilov & Brooks at some time in the past acted as counsel for Vlad.” (Memorandum at 13:10-11.) This is

incorrect.

There is, of course, a heightened level of complexity in cases where a plaintiff who asserts a derivative claim seeks to disqualify counsel who simultaneously represents both the corporate (nominal) defendants and the target individual shareholders. In such a setting, the analysis in Blue Water Sunset v. Markowitz (2011) 192 Cal.App.4th 477) sets forth the analytic basis of the disqualification as follows:

First, it is asserted that in the derivative setting the corporate entity is “actually the plaintiff,” at least in the sense that it stands to benefit should the derivative plaintiff prevail (Blue Water Sunset, supra at 489);

Second, based on the first premise above, it is asserted that the interests of the corporate entity and that of the individual defendants “actually conflict;” (Blue Water Sunset, supra at 489);

Third, as in all cases where the interests of joint clients conflict, the attorney must then obtain the informed written consent of each client under California Rules of Professional Conduct Rule 3-310 (c) (2); (Blue Water Sunset, supra at 486);

Fourth, although this consent is required, the consent may not be given by a constituent of the corporation that is a person “to be represented . . .” i.e., an “interested person” under California Rules of Professional Conduct Rule 3-600 (e); and

Fifth, where consent cannot be obtained because those empowered to give consent are also the target constituent defendants and are hence interested, the rule of automatic disqualification applicable to concurrent representation applies for the simple reason that no consent can be obtained. (See, e.g.,Flatt v. Superior Court (1994) 9 Cal. 4th 275, 284-285; Kirk v. First American Title Insurance Co. (2010), 183 Cal App 4th 776, 797).

In Blue Water, a member of a LLC who owned 50% filed a derivative action against the other 50% owner. Plaintiff brought a motion to disqualify the defendant’s counsel on the ground he represented both the LLC and defendant member whose interests were adverse. The Court found plaintiff did not have standing to move to disqualify under the usual rule because the plaintiff never had an attorney-client relationship with the defendant’s attorney. However, the Court made an exception, finding the plaintiff had “vicarious standing.” The Court framed the exception as follows: “If an attorney simultaneously represents a limited liability company and a member with conflicting interests in a derivative action filed by the second and only other member, and if the limited liability company’s consent to concurrent representation is required by State Bar Rules of Professional Conduct, rule 3-310, the second member has vicarious standing to move to disqualify.” (Blue Water, supra, 192 Cal.App.4th at 481.) Forrest v. Baeza also involved the situation where the disqualified attorney simultaneously represented corporations and directors in a derivative suit where a cross-complaint alleged that the directors embezzled from the corporation. (Forrest v. Baeza (1997) 58 Cal.App.4th 65, 74.)

Plaintiffs’ counsel also advance the following citation from Forrest: “Current case law

clearly forbids dual representation of a corporation and [company insiders such as

directors], at least where, as here, the directors are alleged to have committed
fraud.” (Memorandum at 13:12-15. The actual quotation from Forrest reads as follows:

“Current case law clearly forbids dual representation of a corporation and directors in a shareholder derivative suit, at least where, as here, directors are alleged to have committed fraud.” (Forrest, supra, 58 Cal.App.4th at 74-75.)

As to Plaintiffs’ additional citations, in Gong the Court of Appeal reversed the trial court’s denial of a motion to disqualify and disqualified a law firm from representing both the corporation and its majority shareholder in an action by the plaintiff (49% shareholder) alleging involuntary dissolution, wrongful discharge, and breach of fiduciary duty. (Gong, supra, 166 Cal.App.4th at 216.) The Court in Gong reasoned that “Although [the plaintiff] has not yet filed a derivative claim seeking damages on behalf of the corporation (which [the defendants] admit would require [the firm’s] disqualification), [the plaintiff’s] complaint alleges damage to [the corporation] through [the defendant shareholder’s] personal use of corporate funds, and the dissolution claim threatens its corporate existence.” (Ibid.) Essentially, the plaintiff’s claims were derivative in nature.

Defendants, however, contend this case is more analgous to Coldren v. Hart, King & Coldren, Inc. (2015) 239 Cal.App.4th 237. In this, the Court agrees. In Coldren, a dispute arose between two equal shareholders, Hart and Coldren. Coldren initiated a lawsuit for involuntary dissolution and other direct claims against the corporation and Hart. The corporation filed a motion under section 2000 to stay the dissolution and appoint appraisers in the event it elected to buy out Coldren’s shares. Coldren subsequently brought a motion to disqualify the law firm that represented the law firm and Hart. The trial court granted the motion and the Court of Appeal reversed. The Court of Appeal analyzed whether Coldren had standing under Blue Water and determined plaintiff lacked standing because the lawsuit was not derivative in nature.

Here, as in Coldren, Plaintiffs have initiated a lawsuit for involuntary dissolution and other direct claims against Roman and the corporation. Further, Roman and Gamma are not seeking damages on behalf of the corporation. Rather, Roman and Gamma seek to recover monetary damages directly from ACP for alleged damages to himself and his separate company Gamma. Thus, in a true derivative action, the action proceeds in that format because and only because the corporation has already determined that the pursuit of the lawsuit is not in its best interests. This point was explicitly recognized in Patrick v. Alacer Corp., (2008) 167 Cal. App. 4th 995,1008, the only case relied upon in Blue Water Sunset for the proposition that in derivative litigation, the corporation is “actually the plaintiff.” (Blue Water Sunset, supra 192 Cal App 4th 477,489.) Indeed, an action is derivative when the complaint brought by a shareholder alleges an injury to the corporation. (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) A shareholder may bring a derivative suit on behalf of a corporation for breach of a duty owed to the corporation when the corporation fails to bring the action. (See Id.; Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312; Vega v. Jones. Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 297.) In such derivative actions, the shareholder is a nominal plaintiff and the corporation, the real party in interest, is the nominal defendant to whom the damages subject to recovery belongs. (Id.) A “corporation is an indispensable party to a representative action brought on its behalf; its rights, not those of the nominal plaintiff, are to be litigated, and the court has no jurisdiction to adjudicate its rights in its absence as a party.’ (Beyerbach v. Juno Oil Co

., 42 Cal.2d 11, 27-28.)” (Keeler v. Schulte (1957) 47 Cal.2d 801, 803.)

Based on the foregoing, the Court finds this instant suit is not a derivative action and Plaintiffs lack standing to bring this motion. (See, e.g. Great Lakes Construction, Inc. v.

Burman (2010) 186 Cal.App.4th 1347, 1357.) A non-client without “an invasion of a legally protected interest” lacks standing to seek

disqualification. Id. The Court also notes there appears to be no dispute that Gamma has never been a shareholder of ACP and, therefore, also could not bring a shareholder derivative action on behalf of ACP.

Even assuming Vlad or Gamma did establish they had vicarious standing to disqualify Roman and ACP’s counsel, they have not provided any evidence that Roman and ACP’s interests conflict in this action. As discussed in Coldren,

“Absent a factual scenario suggesting a conflict exists, an involuntary dissolution action does not necessarily pit the corporation against the defendant owner in the manner of a derivative action. To the extent the corporation has any interest at all in the outcome of the dissolution action, its interest is in its continued existence. If the defendant owner also wants the corporation to continue, then there is no conflict. Illustrating this point, Corp. Code, § 2000, subd. (a), permits the corporation to elect to buy out the plaintiff owner’s shares and specifically provides that this election may be made by the approval of the outstanding shares (the defendant owner), excluding shares held by the moving parties (the plaintiff owner). In other words, at that stage, the plaintiff owner’s interests are irrelevant and the corporation’s interests are whatever the defendant owner chooses to do – there can be no conflict. If, on the other hand, the defendant owner does not want the corporation to continue by declining the purchase of the plaintiff owner’s shares at the appraised price under § 2000, then the shareholders unanimously agree the corporation should be dissolved and the corporation’s interests fall by the wayside. Thus a dissolution cause of action does not, by its nature, create the sort of conflict a derivative action creates.” (Coldren, supra, 239 Cal.App.4th at 246.)

The Court rejects Plaintiffs arguments that a conflict of interest exists because the allegations in their complaint show Roman engaged in self-dealing and other bad acts against ACT. Plaintiffs treat these allegations as undisputed facts that Defendants must refute at this time. Throughout the bulk of Plaintiffs’ reply, they argue that disqualification is warranted because Defendants ignored many of the allegations regarding Roman’s purported bad dealings. However, at this moment, and for purposes of this motion, these are nothing more than Plaintiffs’ allegations (not “facts” as stated in Plaintiffs’ papers) and not a basis warranting disqualification. Plaintiffs’ allegations that Gavrilov & Brooks’ actions indicate they are only advancing the interests of Roman and only loyal to him (as opposed to also being loyal to ACP) are also rejected. This is nothing more than Plaintiffs’ speculation.

Roman and ACP have, on the other hand, provided evidence that their interests in this action are, in fact, aligned. (Declaration of Ognian Gavrilov at ¶¶ 3, 4; Declaration of H. Vincent McLaughlin at ¶¶ 3, 4.) Plaintiffs’ evidentiary objections to these portions of the declarations of Mr. Gavrilov and Mr. McLaughlin are overruled. Plaintiffs’ remaining evidentiary objections need not be addressed as the evidence objected to was not a basis upon which this Court bases its ruling. In any event, the Court notes that even if the Court did not take into consideration the foregoing statements in Mr. Gavrilov’s and Mr. McLaughlin’s declarations, the ultimate outcome of this motion would be the same.

Based on the foregoing, Plaintiffs’ motion to disqualify is DENIED.