Rancho Las Cruces, LLC, et al. v. Robert Ramirez, et al.
Case No: 19CV00717
Hearing Date: Mon Aug 05, 2019 9:30

Nature of Proceedings: Motion Disqualify Counsel

# 19CV00717 Rancho Las Cruces, LLC vs Robert Ramirez

Hearing Date: 8/5/19

HEARING: Motion by defendant John Mogens Henning to disqualify Charles M. Oxton, Georgia L. Staab, and Eric B. Gans as counsel for plaintiffs

ATTORNEYS:

Charles M. Oxton / Eric B. Gans / Georgia L. Staab for plaintiffs

James F. Scafide / Tyler Sprague of Scafide Law Firm, PC for defendant

John Mogens Henning, individually and as personal representative of the Estate of Carolyn Jane Winther

David J. Tappeiner of Fell, Marking, Abkin, Montgomery, Granet & Raney, LLP for defendant Robert Ramirez.

TENTATIVE RULING: The motion to disqualify plaintiffs’ attorneys is denied, without prejudice.

Background: In the Complaint in this action, plaintiffs allege that Walter C. Henning and Caroline Henning were married, and had three children, Walter J. Henning (Walter), James Henning (James), and Carolyn Jane Winther (Carolyn). [Note: The Court refers to the parties by their first names as a matter of clarity and convenience; no disrespect is intended.] Walter C. Henning acquired eight parcels (Parcels 3, 7, 8, 9, 11, 21, 25, and 26), as his separate property, and that Walter C. Henning and Caroline Henning acquired nine parcels (Parcels 4, 5, 10, 43, 52, 54, 56, 57, and 58), which they held as tenants in common. Walter C. Henning’s interests in the various parcels were placed in his trust, and Caroline Henning’s interests in the various parcels were placed in her trust. Upon the death of Walter C. Henning, his entire estate, including the properties in the trust, were left to Walter J. Henning and James Henning; Carolyn Jane Winther was omitted from his estate. Upon the death of Caroline Henning, here interests in the properties, held in her trust, were left to each of her three children, in equal shares.

In 2009, Walter, James, and Carolyn formed Rancho Las Cruces, LLC. Pursuant to the LLC’s operating agreement, each of the siblings conveyed to Rancho Las Cruces his or her interests in the parcels inherited from their parents. Carolyn lived overseas, and is alleged to have consented to Walter and James retaining management and control of the LLC and its properties.

In 2016, Carolyn died intestate, and a probate proceeding is proceeding in Santa Barbara Superior Court (Case No. 18PR00001). The probate is being administered by John Mogens Henning (John), Carolyn’s son. In 2017, another of Carolyn’s sons, Robert Ramirez (Robert) , moved onto Parcel 21. He did so at the direction and with the assistance of John, but without the consent of Walter or James. It is alleged that Robert demolished an existing historic adobe structure, and moved a trailer and other items onto the parcel.

The LLC served a Notice to Quit upon Robert, and initiated an unlawful detainer action in late 2017, but that action was dismissed in early 2018 without a hearing on the merits.

The current action was filed by the LLC, by Walter (both individually, and as Trustee of the Walter C. Henning Trust and as Trustee of the Caroline Henning Trust), and by James. The complaint named as defendants Robert and John (the latter both as an individual, and as the Personal Representative of Carolyn’s estate). The complaint alleged causes of action for (1) declaratory and injunctive relief, (2) ejectment, (3) trespass, and (4) waste. The complaint prayed for: (a) a finding that Plaintiffs, together, own Parcel 21 free and clear of any ownership or possessory interest of the Defendants; (b) a finding that Defendants’ continued occupancy of Parcel 21 is unlawful; (c) restitution of Parcel 21 to Plaintiffs; (d) a finding that RLC manages and controls all of the real properties described in the complaint, and that, upon dissolution, said real properties must be distributed to the parties in the percentage interests to which they were entitled at the time of the settlors’ deaths; (e) a finding that Defendants unlawfully trespassed on Plaintiffs’ real property; (f) a finding that Defendants committed waste on Plaintiffs’ real property; (g) an accounting of all cash income to RLC and a declaration of entitlement of the parties to a percentage interest in income and expenses proportionate to their interests in said real properties upon which income was generated; (h) general and special damages in an amount to be determined at trial, including interest; and (i) reasonable attorneys’ fees and costs of the suit as may be properly recoverable.

The trial court overruled John’s demurrer to the complaint as a whole and to the first cause of action, but sustained it without leave to amend, as to the second, third, and fourth causes of action, to the extent those claims were being prosecuted by Walter and James. In opposing the demurrer, plaintiffs had agreed that, at present, only the LLC, as record owner of Parcel 21, was entitled to maintain those causes of action. As a result, the declaratory relief cause of action continues to be maintained against defendants by all three plaintiffs (the LLC, Walter, and James), and the ejectment, trespass, and waste causes of action are maintained against defendants solely by the LLC. Each defendant then answered the complaint.

Cross-complaint At the time he answered the complaint, John filed a sixteen cause of action “verified derivative cross complaint” back against Walter and James, both individually and in their capacities as members and managers of the LLC. The cross-complaint alleges that at the time of Winther’s death, ownership of the LLC was held by Winther, Walter, and James, with each having a 1/3 interest, and was managed by the brothers. It alleges further all of the parcels had been the community property of both Walter C. Henning and Caroline Henning, and each parcel was transferred by the successor trustees of each trust to the three siblings, with each having a 1/3 interest, as tenants in common. All of the siblings then expressly conveyed their interests in the properties to the LLC, in which each also had a 1/3 interest, and the LLC now holds title to all property at issue.

Upon Winther’s death, her interest in the LLC passed to her estate, for which John was appointed as administrator. Following that appointment, he claimed the Estate’s membership right to the LLC, but the brothers have denied that there is any such interest. The cross-complaint asserts that the brothers, as members and managers of the LLC, have breached their fiduciary duties to the Estate as a member of the LLC, as well as to the LLC, and should be removed as managers, enjoined from taking any further actions as managers, and required to return to the LLC the funds, property and other things of value which each has misappropriated and misspent. The cross-complaint is therefore also brought as a derivative action on behalf of the LLC.

The cross-complaint notes that plaintiffs’ complaint seeks declaratory relief that the brothers are the record owners of the real property comprising the LLC, although the LLC holds title to the property, and that this action is in direct contradiction of the best interest of the members of the LLC (including the Estate), and the LLC itself. The brothers have informed the Estate that they intend to dissolve the LLC, and deny that the Estate is entitled to any more than a token share of the proceeds or real property that would be distributed upon dissolution. However, based on the language of the grant deeds conveying the property to the LLC, as well as the LLC’s operating agreement and applicable law, the cross-complaint asserts that the Estate is entitled to 1/3 ownership of the LLC and its assets, and a 1/3 ownership of the real property, as a tenant in common.

Based on these allegations, the cross-complaint asserts claims for declaratory relief (that the LLC operating agreement is valid and enforceable, that the LLC managers have acted outside their authority derived from the Operating Agreement, and that the managers have breached their fiduciary duty to all members of the LLC and to the LLC by improperly taking for their own funds, property, and other things of value owned by the LLC, and spending LLC funds for personal use or gain), injunctive relief (precluding managers from acting as managers, expending any LLC funds, from sharing any profits resulting from the return of funds they wrongfully took, from dissolving the LLC and distributing its assets in any manner other than granting the Estate 1/3 undivided interest in the assets, and for appointment of an acting manager), breach of fiduciary duty, fraud, negligent misrepresentation, concealment, trespass, conversion, accounting, quiet title, and slander of title.

A verified answer to the cross-complaint was filed on behalf of all three plaintiffs on July 19, 2019.

Motion for disqualification John has brought a motion to disqualify plaintiffs’ attorneys, Charles M. Oxton, Georgia L. Staab, and Eric B. Gans, based upon his claim that the attorneys have a conflict of interest in representing both the LLC, on the one hand, and James and Walter, on the other.

John contends that he has standing to pursue the derivative action and disqualification motion, since Carolyn was, at the time of her death, a 1/3 member of the LLC, and the standing of an entity is imputed to its members in order to protect the interest of the company. Since John and Walter have a personal interest in the matter, the only way to defend the interests of the LLC in the face of the conflict is to bring the derivative action.

The motion contends that an attorney-client relationship exists both between the attorneys and the LLC, and between the attorneys and Walter and James. It contends that disqualification is automatic when an attorney simultaneously represents two clients with adverse interests. An actual conflict of interest between jointly represented parties occurs whenever their common lawyer’s representation of one is rendered less effective by reason of his representation of the other. John contends that a conflict exists, because plaintiffs filed an action for declaratory relief asking the Court to determine that the LLC never acquired title to and never owned any of the properties. If Walter and James are successful, the property will be removed from the LLC and put in their sole possession. John contends that the interests of Walter and James on the one hand, and the LLC on the other, are therefore in direct conflict, since the success of Walter and James will deprive the LLC of real property. John further asserts that consent to the conflict cannot be obtained, since such consent would only ensure that James and Walter prevail.

Plaintiffs opposed the motion. Dismissive in its tone, the opposition contends that there is no conflict of interest based upon the allegations of their complaint, and that John’s filing of the cross-complaint cannot create one.

Specifically, plaintiffs contend there is no conflict of interest because the complaint seeks relief based upon the dual roles of Walter and James Henning, i.e., their possessory-related relief sought in their capacities as co-managers of the LLC, against defendants John and Robert, who do not have the consent of the LLC to occupy LLC property, and the declaration of rights in their individual capacities related to defendants’ competing claim to a legal interest in the underlying properties owned by the LLC, but which is subject to distribution to LLC members upon dissolution. The LLC has the present possessory interest in the properties, not Walter and James individually. They therefore conclude that there is no conflict of interest between Walter and James as individuals, and the LLC which they manage, because they do not bring the possessory causes of action as individuals. Plaintiffs further contend that the LLC has no separate and distinct legal interest in the ownership shares of its members, Walter, James, and the heirs of Carolyn Jane Winther, given that the ownership interests would only be exercised upon dissolution of the LLC. Because the LLC has no interest in the outcome of the declaratory relief cause of action, there can be no adverse interest or conflict of interest between Walter and James and the LLC itself, with respect to their individual claims as to the ownership shares upon the LLC’s dissolution.

Plaintiffs further contend that John could not create a conflict of interest by his filing of a derivative cross-complaint because he has no legal authority to act on behalf of the LLC, and Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co. (1998) 68 Cal.App.4th 856, 858, precludes him from creating a conflict of interest by the filing a cross-complaint, since any other rule would give a party the power to reject his opponent’s choice of counsel.

In his reply, John reiterates that a present conflict exists between the LLC and Walter and James. He contends that plaintiffs’ assertion that the LLC had no separate and distinct legal interest in the ownership shares of its members, and therefore no interest in the declaratory relief action, does not comport with California law. Plaintiffs’ complaint alleges that the LLC never acquired title to the real property. It is not reasonable to conclude that the LLC, as record owner of the property, will assert that it did not acquire title to the real property. The LLC is only making that contention because Walter and James are acting as its managers, and have a personal interest in the outcome of the action.

The reply contends that the conflict existed prior to the filing of John’s derivative cross-complaint, and asserts that the derivative cross-complaint is not at issue in the disqualification motion.

Other matters There is currently pending in the related action, Case No. 18PR00001, entitled Estate of Carolyn Jane Winther, a petition to establish claim of ownership to property, involving the parcels to which the LLC holds title, which are the subject of this action. The petition is set for hearing on August 22, 2019.

ANALYSIS: As it currently is presented, the Court denies the motion to disqualify plaintiffs’ counsel, without prejudice.

A trial court’s authority to disqualify an attorney derives from its 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.” (Code Civ. Proc., § 128, subd. (a)(5); Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209, 214.) The issue of disqualification centers on the conflict between a client’s right to counsel of their own choosing, and the need to maintain ethical standards of the legal profession. (City and County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 846.)

In evaluating alleged conflicts of interest, a court first looks to whether the representation at issue is simultaneous or successive. Where an attorney successively represents one client following the prior representation of another client, the concern is to enforce the duty of confidentiality owed to the former client. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 282-284.) It is for that reason that the test for disqualification under such circumstances requires that the client demonstrate a substantial relationship between the subjects of the former and current representations. (Id. at p. 283.)

On the other hand, when the same attorney simultaneously represents potentially conflicting parties, the primary interest at stake is the attorney’s duty of loyalty. (Id. at p. 284.) When the duty of loyalty applies, courts have found the conflict to require “per se, or automatic disqualification, in all but a few instances” (Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995) 36 Cal.App.4th 1832, 1840), even though the simultaneous representations may have nothing in common, and there is no risk that confidences may be disclosed. (Flatt v. Superior Court, supra, 9 Cal.4th at p. 284.) So inviolate is the duty of loyalty to an existing client that not even by withdrawing from the relationship can an attorney evade it. (Flatt v. Superior Court, supra.)

Pursuant to California Rules of Professional Conduct, rule 1.13(g), a lawyer representing an organization may also represent any of its constituents, subject to the provisions of rules 1.7, 1.8.2, 1.8.6, and 1.8.7. Rule 1.7 relates to the simultaneous representation of clients with adverse interests, and prohibits a lawyer, without informed written consent from each client and compliance with other requirements (i.e., a reasonable belief that the lawyer can provide competent and diligent representation to each, the representation is not prohibited by law, and the representation does not involve the assertion of a claim by one client against another in the same litigation), from representing a client if the representation is directly adverse to another client in the same or a separate matter.

When determining whether there is an actual or potential conflict of interest, the court reviews the pleadings. (See Gong v. RFG Oil, Inc., supra, 166 Cal.App.4th at p. 215.) An actual conflict of interest between jointly represented clients occurs whenever their common lawyer’s representation of the one is rendered less effective by reason of his representation of the other. (Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal.App.4th 477, 488-489.)

John contends that there is an actual conflict of interest between the LLC, on one hand, and Walter and James, on the other, based upon the fact that if Walter and James are successful, parcels for which title is currently held in the name of the LLC will be removed from the LLC. He concludes that this means that if Walter and James win, the LLC loses. However, John fails to articulate what interest the LLC has in retaining title to the parcels, or why the removal of the parcels from that owned by the LLC necessarily causes harm to the LLC. The Court simply cannot find that the property issues articulated by John as the basis for his motion create a conflict of interest between the attorneys’ representation of the LLC, and their representation of Walter and James. As a result, the property issues—as currently framed for the court—do not require disqualification of the attorneys from their joint representation of these plaintiffs.

Certainly, John has filed a cross-complaint that includes derivative claims, contending that Walter and James have breached their fiduciary duties as managing members of the LLC, both in disavowing any interest by Carolyn or her estate in the parcels held by the LLC, and by their misappropriation and misspending of LLC funds and other LLC items of value. While an individual member of an LLC is automatically dissociated from the LLC upon his or her death (Corp. Code, § 17706.02, subd. (f)(1)), the deceased member’s legal representative may exercise all of the member’s rights, for the purpose of settling the member’s estate or administering the member’s property. (Corp. Code, § 17706.03, subd. (c).) While plaintiffs’ opposition papers summarily stated that John has no authority to act on behalf of the LLC, they cited no authority that would cause this Court to conclude that he has no ability, as the personal representative of his mother’s estate, to file a derivative action in order to determine, administer, and settle the estate’s interests in the LLC.

Further, case law forbids dual representation of an organization and its principals in a derivative action, because the principals and the organization have adverse, conflicting interests. (Forrest v. Baeza (1997) 58 Cal.App.4th 65, 74.) In an apparent attempt to avoid this bar, plaintiffs’ opposition to the disqualification motion cited Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co. (1998) 68 Cal.App.4th 856, for the proposition that in the absence of an actual conflict between an opposing attorney’s clients, a party should not be able to create one through the filing of a cross-complaint, because to do so would give a party the power to reject its choice of counsel. Rather than pressing the issue or making any attempt to distinguish the La Conchita Ranch case, John backed off of the issue in his reply papers, contending that the derivative cross-complaint was irrelevant to his disqualification motion, and that the conflict of interest existed independent of his derivative cross-complaint.

As a result, the Court’s inquiry into disqualification must necessarily end, since the conflict identified and relied upon by John in seeking the attorneys’ disqualification does not, in the opinion of this Court, constitute an actual conflict of interest requiring disqualification.

However, the Court notes further that the same court which issued the La Conchita Ranch opinion clearly distinguished it 20 years later in Bridgepoint Construction Services, Inc. v. Newton (2018) 26 Cal.App.5th 966, 971, making clear that the bold statement made in their earlier decision was never meant to have so broad a preclusive effect.

After the disqualified attorney had relied upon the La Conchita Ranch case to argue that he could not be disqualified based upon the filing of a cross-complaint, the Bridgepoint court explained:

“Klein’s reliance on Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co. (1998) 68 Cal.App.4th 856, 80 Cal.Rptr.2d 634 is misplaced. There homeowners alleged a ranch, due to irrigation practices, caused a landslide that destroyed or damaged their homes. The ranch settled with the homeowners. The settlement agreement expressly provided that the settlement did not include damages claimed by the homeowners’ mortgagees for impairment of security. The mortgagees wanted the same law firm that represented the homeowners to represent them in their action against the ranch. The law firm obtained waivers from its clients acknowledging and waiving any conflict of interest. The law firm then represented the mortgagees in an action against the ranch for impairment of security. The ranch cross-complained against the homeowners, alleging that the damages sought by the mortgagees had already been paid to the homeowners in the settlement.

“The ranch moved to disqualify the law firm for a conflict of interest. The trial court denied the motion. We affirmed. The mortgagees were making no claim on the proceeds of the homeowners’ settlement; the cross-complaint was an obvious sham because it was directly contradicted by the settlement agreement; and the only conflict the ranch could suggest, that dual representation might impair settlement options, was hypothetical. (Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co., supra, 68 Cal.App.4th at p. 862, 80 Cal.Rptr.2d 634.)

“Here, unlike La Conchita Ranch, Klein did not obtain waivers from Bridgepoint; Bridgepoint’s cross-complaint was not determined to be a sham; the mortgagees were not seeking to recover from the same pool of money as the homeowners; and the conflict here is real, not hypothetical.” (Bridgepoint Construction Services, Inc. v. Newton, supra.)

Here, too, there has been no determination that the cross-complaint is a sham, nor is this Court aware of any evidence or authority upon which such a determination could be made. The derivative nature of the cross-complaint creates a conflict of interest between the LLC and Walter and James, given that it claims that they have breached their fiduciary duties to the LLC and to Carolyn (and her Estate) by disclaiming her interest in the properties owned by the LLC and by their misappropriation of LLC property. No evidence has been presented to the Court that the attorneys obtained informed waivers of the conflict, nor has any argument been provided or authority been cited to support the conclusion that waivers could have any legal effect in removing the conflict arising from the derivative cross-complaint. Under these circumstances, it would appear to the Court that the allegations of the cross-complaint could permissibly be considered in determining whether the attorneys’ representation of both the LLC and Walter and James was the subject of an actual conflict of interest which might subject them to disqualification in this action, and that such allegations may very well create an actual conflict of interest in the attorneys’ continued representation of both the LLC and Walter and James in defending the claims asserted by Carolyn’s estate.

Given the posture and claims made by John’s motion, and his reply’s disavowal of any notion that the disqualification motion was in any way based upon or arose from the allegations of the cross-complaint, however, the existence of a conflict created by the filing of the derivative cross-complaint is a question for another day, if at all. As it is currently framed, the motion for disqualification must be denied.