Ontiveros v. Constable CA4/1 (2016) · DecisionDepot
Ontiveros v. Constable CA4/1
California Court of Appeal Feb 18, 2016 No. D066412Unpublished
Before: Haller, Benke, O'Rourke
Filed 2/18/16 Ontiveros v. Constable CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
GUADALUPE A. ONTIVEROS, D066412
Plaintiff and Respondent,
v. (Super. Ct. No. ECU07414)
KENT C. CONSTABLE et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Imperial County, Christopher W.
Yeager, Judge. Affirmed in part, reversed in part.
Moskowitz Law Group and Karen Moskowitz; Law Offices of Thomas M. Regele
and Thomas M. Regele for Defendants and Appellants.
Law Office of Charles L. Murray III and Charles L. Murray III for Plaintiff and
Respondent.
Guadalupe Ontiveros, as the minority shareholder in Omega Electric, Inc.
(Omega), sued majority shareholder Kent Constable, his wife (Karen Constable), and
Omega,1 asserting direct and derivative claims arising from a dispute over management
of Omega and its assets. Karen Moskowitz and Thomas Regele (together, Counsel)
represented all the defendants in the litigation. Ontiveros moved to disqualify Counsel on
the basis they could not simultaneously represent all the defendants because his
derivative claims against Omega rendered Omega and the Constables adverse to each
other. The trial court granted Ontiveros's motion and disqualified Counsel from
representing any of the defendants.
On appeal, defendants contend the trial court erred by disqualifying Counsel
altogether. Alternatively, defendants contend the court should have allowed Counsel to
continue representing only the Constables. Apart from the merits of Ontiveros's motion,
defendants also contend the trial court should have denied it on the basis Ontiveros did
not file it until 16 months after he became aware of Counsel's alleged conflict.
For reasons we will explain, we affirm the order disqualifying Counsel as to
Omega, but reverse as to the Constables.
FACTUAL AND PROCEDURAL BACKGROUND
The Underlying Disputes
Ontiveros, Kent, and nonparty Ray Leckband worked together as electricians at
Cal Energy Generation during the 1990's. By 2001, Leckband had retired, Ontiveros had
taken a new job at the Imperial Irrigation District (District), and Kent was trying to start
1 We will refer to Kent and Karen Constable individually by their first names, and collectively as "the Constables." We will refer to the Constables and Omega collectively as "defendants." 2
his own electrical company. The three agreed to invest in and form an electrical
contracting venture that eventually became known as Omega. Leckband, Kent, and
Ontiveros were Omega's shareholders, directors, and officers.
Omega initially operated under Leckband's electrical contractor's license. In
exchange, Leckband received a 20 percent share of Omega's original stock and other
benefits. Kent received a 40 percent share of Omega's original stock and served as its
president and CEO, overseeing its day-to-day operations. Kent worked exclusively for
Omega. Ontiveros also received a 40 percent share of Omega's original stock.
In 2009, Kent and Ontiveros discussed the possibility of purchasing certain real
property as equal owners, with the expectation that they would improve the property and
lease it to Omega. Ontiveros contends he and Kent agreed to the deal and that he made a
25 percent down payment of $15,000. Kent contends he and Ontiveros never agreed to
the deal, so he purchased the property himself and took title in his and Karen's names.
The Constables then leased the property to Omega, which paid for certain improvements
to the property.
Kent appointed his son (then a full-time college student at the University of
Arizona) corporate secretary of Omega. Omega paid the son approximately $12,000
between May 2011 and August 2012. Omega also paid the Constables' daughter
approximately $14,000 between December 2009 and June 2011. Ontiveros contends the
Constables' children did no work to earn these payments.
Kent understood that when Omega became a viable business, Ontiveros would
leave his job at the District, obtain his electrical engineering license, and work full-time
3
at Omega. That never happened. Kent considered Ontiveros's contributions to Omega
over the years to be inadequate in light of Ontiveros's $100,000 annual salary from
Omega. When Ontiveros did not accede to Kent's ultimatum that he leave his District job
and join Omega full-time, Kent purchased Leckband's 20 percent share of Omega and
became a licensed electrical contractor.
In late October 2012, Kent caused Omega to pay a $10,000 retainer to Counsel
ostensibly to fund Counsel's representation of Kent in his developing dispute with
Ontiveros. According to Kent, he did not intend to retain Counsel on Omega's behalf;
Omega already had corporate counsel who continue to represent it on matters unrelated to
this litigation. Counsel had not previously represented Omega, the Constables, or
Ontiveros.
In November 2012, Kent—now a 60 percent shareholder of Omega—caused
Omega to stop paying Ontiveros and to terminate his employment.
The Lawsuit
In December 2012, Ontiveros filed a verified complaint against Kent and Omega.
The complaint asserted a variety of contract and tort claims against Kent. It also asserted
a claim against Kent and Omega for involuntary dissolution of Omega. The complaint
did not assert any claims against Karen or any derivative claims against Omega.
Within days of receiving the complaint, Kent propounded written discovery to
Ontiveros and noticed his deposition.
In late January 2013, Omega retained Counsel to represent it in this lawsuit.
On January 30 and 31, Counsel took Ontiveros's deposition on Kent's behalf.
4
In February, Omega first appeared in the lawsuit by moving (together with Kent)
to strike portions of the complaint. The motion became moot when Ontiveros filed a first
amended verified complaint the same day.
Ontiveros's first amended complaint asserted derivative causes of action against
Kent and Omega (as a nominal defendant)2 to confirm Omega's (as opposed to the
Constables') ownership interest in the property and to "have Omega get . . . back from
[Kent]'s fraud" (among other things) the money spent acquiring Leckband's 20 percent
interest in Omega and rent Omega paid to the Constables for the property. The amended
complaint also substituted Karen as a Doe defendant and asserted equitable causes of
action against her.
In March, Karen retained Counsel to represent her in this lawsuit.
Omega and Karen noticed Ontiveros's deposition. After Ontiveros did not appear,
Omega and Karen successfully moved to compel Ontiveros to appear and were awarded
sanctions.
2 "Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation's rights and redress its injuries when the board of directors fails or refuses to do so. When a derivative suit is brought to litigate the rights of the corporation, the corporation is an indispensable party and must be joined as a nominal defendant." (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) " '[A]lthough the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff . . . .' " (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1004.)
5
Because Ontiveros was claiming damages for emotional distress and lost income,
defendants subpoenaed his medical and employment records. Ontiveros objected to both
subpoenas and moved to quash them; defendants opposed. The court denied Ontiveros's
motion to quash the employee records subpoena, but granted the motion to quash the
medical records because the court's concurrent ruling striking Ontiveros's allegations of
emotional distress rendered those documents irrelevant.
In May 2013, Ontiveros filed a second amended verified complaint. Defendants
successfully moved to strike and demurred to certain portions of it. Defendants answered
the second amended complaint, and Kent and Omega filed a cross-complaint for breach
of fiduciary duty, breach of duty of undivided loyalty, conversion, claim and delivery (of
corporate property entrusted to Ontiveros), and rescission of any agreement between Kent
and Ontiveros regarding the property.
In December 2013, Ontiveros subpoenaed business records from Omega's bank
and accountant; both objected to the subpoenas. Defendants also objected that the
subpoenas sought confidential records and the parties had not yet entered into a
protective order. While the parties were negotiating the terms of a protective order,
Ontiveros moved to compel production under the subpoenas and to recover sanctions
from defendants. Defendants opposed, but clarified they were amenable to the third
parties' production of documents subject to narrowing of certain categories and entry of a
protective order. Defendants argued sanctions were inappropriate because Ontiveros's
motion was necessitated by the third parties' objections to the subpoenas, not defendants'.
(See Monarch Healthcare v. Superior Court (2000) 78 Cal.App.4th 1282, 1290 [a third
6
party " 'simply objecting . . . shifts the burden of going to court to the [propounding]
party' "].) The court ordered the third parties to produce documents and sanctioned Kent
and Omega. The court later entered the parties' stipulated protective order.
In January 2014, Ontiveros demurred to and moved to strike portions of Kent and
Omega's cross-complaint. Kent and Omega responded by filing a first amended cross-
complaint, which asserted similar causes of action as the original pleading.
In April 2014, Ontiveros demurred to and moved to strike portions of the first
amended cross-complaint.
The Disqualification Motion
On April 17, 2014, Ontiveros moved to disqualify Counsel from representing any
of the defendants. Ontiveros argued that despite his lack of an attorney-client
relationship with Counsel, he nonetheless had standing to bring the motion as a minority
shareholder asserting derivative claims. (See Blue Water Sunset, LLC v. Markowitz
(2011) 192 Cal.App.4th 477, 485-486 (Blue Water).) He further argued disqualification
was automatic because Counsel were concurrently representing Omega and the
Constables—whose interests were adverse by virtue of the derivative claims—in the
same litigation. Ontiveros asserted Counsel could not withdraw from representing
Omega and continue representing the Constables because Counsel undoubtedly "derived
sensitive confidential information" regarding Omega's position vis-à-vis the corporation's
claims against the Constables. Finally, Ontiveros argued his delay in bringing the motion
is not a factor the court should consider in an automatic-disqualification case, and, in any
7
event, defendants could not establish they would suffer " 'extreme' prejudice" if the court
disqualified Counsel.
Defendants disputed Ontiveros's legal standing, and argued Omega and the
Constables had expressly consented to Counsel's representation of the other after being
fully informed of potential conflicts arising from joint representation. Defendants also
argued Ontiveros's delay in bringing the motion was inexcusable, prejudicial, and
warranted denial of the motion. Ontiveros filed a reply, defendants filed a surreply, and
Ontiveros filed an opposition to the surreply.3 The trial court then granted Ontiveros's
motion.
Without expressly addressing Ontiveros's standing, the court ruled Counsel's
concurrent representation of defendants required automatic disqualification. The court
rejected defendants' consent argument, reasoning Omega could not validly consent to the
joint representation without Ontiveros's consent, which he refused. The court found that
because Omega paid Counsel's fees even when Counsel purported to represent only Kent,
Counsel truly represented and owed "a primary duty of loyalty to Omega," and owed
only a secondary duty to the Constables. As a result of this primary and continuing duty
of loyalty to Omega, the court concluded it would be improper to allow Counsel to
continue representing the Constables. Finally, the court concluded Ontiveros had not
unreasonably delayed in bringing his motion because it was triggered by recent discovery
3 The trial court vacated the hearing on Ontiveros's demurrer and motion to strike portions of the first amended cross-complaint pending a final resolution of the disqualification issue.
8
disputes, such as the dispute over Ontiveros's subpoenas to Omega's bank and accountant,
and an apparent dispute involving Counsel's representation of Leckband "and apparently
caus[ing] him to disobey a deposition subpoena . . . ."4
DISCUSSION
I. Disqualification Principles
"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
§ 128, subd. (a)(5).) "[D]isqualification motions involve a conflict between the clients'
right to counsel of their choice and the need to maintain ethical standards of professional
responsibility." (Ibid.) "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." (Ibid.)
Rule 3-310 of the Rules of Professional Conduct5 provides in pertinent part: "(C)
A member shall not, without the informed written consent of each client: [¶] (2) Accept
4 The trial court overruled defendants' evidentiary objections to Ontiveros's trial counsel's declarations regarding the deposition dispute.
5 All further rule references are to the Rules of Professional Conduct of the State Bar of California. 9
or continue representation of more than one client in a matter in which the interests of the
clients actually conflict . . . . [¶] (E) A member shall not, without the informed written
consent of the client or former client, accept employment adverse to the client or former
client where, by reason of the representation of the client or former client, the member
has obtained confidential information material to the employment." As we discuss in part
II below, rule 3-600 governs the manner in which an organizational client may give its
consent.
In evaluating alleged conflicts, a court first looks to whether the challenged
representation is concurrent or successive. (See Gong v. RFG Oil, Inc. (2008) 166
Cal.App.4th 209, 214 (Gong).) The "primary value" at issue in concurrent "or dual
representation is the attorney's duty—and the client's legitimate expectation—of
loyalty . . . ." (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284 (Flatt).) "The most
egregious conflict of interest is representation of clients whose interests are directly
adverse in the same litigation. [Citation.] Such patently improper dual representation
suggests to the clients—and to the public at large—that the attorney is completely
indifferent to the duty of loyalty and the duty to preserve confidences. However, the
attorney's actual intention and motives are immaterial, and the rule of automatic
disqualification applies." (SpeeDee, supra, 20 Cal.4th at p. 1147; see Flatt, supra, 9
Cal.4th at p. 284 ["in all but a few instances, the rule of disqualification in simultaneous
representation cases is a per se or 'automatic' one"].)
"Where the potential conflict is one that arises from the successive representation
of clients with potentially adverse interests, the courts have recognized that the chief
10
fiduciary value jeopardized is that of client confidentiality. Thus, where a former client
seeks to have a previous attorney disqualified from serving as counsel to a successive
client in litigation adverse to the interests of the first client, the governing test requires
that the client demonstrate a 'substantial relationship' between the subjects of the
antecedent and current representations." (Flatt, supra, 9 Cal.4th at p. 283.) "Where the
requisite substantial relationship between the subjects of the prior and the current
representations can be demonstrated, access to confidential information by the attorney in
the course of the first representation (relevant, by definition, to the second representation)
is presumed and disqualification of the attorney's representation of the second client is
mandatory . . . ." (Ibid.)
"Generally, a trial court's decision on a disqualification motion is reviewed for
abuse of discretion. [Citations.] If the trial court resolved disputed factual issues, the
reviewing court should not substitute its judgment for the trial court's express or implied
findings supported by substantial evidence. [Citations.] When substantial evidence
supports the trial court's factual findings, the appellate court reviews the conclusions
based on those findings for abuse of discretion. [Citation.] However, the trial court's
discretion is limited by the applicable legal principles. [Citation.] Thus, where there are
no material disputed factual issues, the appellate court reviews the trial court's
determination as a question of law. [Citation.] In any event, a disqualification motion
involves concerns that justify careful review of the trial court's exercise of discretion."
(SpeeDee, supra, 20 Cal.4th at pp. 1143-1144.)
11
II. Disqualification as to Omega
Defendants contend the trial court erred by disqualifying Counsel as to Omega.
We disagree because Counsel concurrently represented defendants in the same action
where an actual conflict existed between them, and Kent alone did not have authority to
consent to the conflicting representation on Omega's behalf.
Omega's and the Constables' respective interests were clearly adverse to one
another. Although Ontiveros's complaint nominally named Omega a defendant, Omega
"is the real plaintiff" on those claims against the Constables. (Patrick v. Alacer Corp.,
supra, 167 Cal.App.4th at p. 1004; Blue Water, supra, 192 Cal.App.4th at p. 489; Forrest
v. Baeza (1997) 58 Cal.App.4th 65, 74 (Forrest).) "Current case law clearly forbids dual
representation of a corporation and directors in a shareholder derivative suit, at least
where, as here, the directors are alleged to have committed fraud." (Forrest, supra, 58
Cal.App.4th at p. 74; see La Jolla Cove Motel & Hotel Apartments, Inc. v. Superior
Court (2004) 121 Cal.App.4th 773, 785-786 (La Jolla Cove); Blue Water, supra, 192
Cal.App.4th at p. 489.)6
6 Defendants cite Jacuzzi v. Jacuzzi Bros., Inc. (1966) 243 Cal.App.2d 1 to support the proposition that "prior to an adjudication that the corporation is entitled to relief against its officers, or directors, the same attorney may represent both." (Id. at p. 36, citing Otis & Co. v. Pennsylvania R. Co. (E.D.Pa. 1944) 57 F.Supp. 680, 684.) However, Jacuzzi "has been criticized as 'illogical and against the weight of authority' (Forrest . . . , supra, 58 Cal.App.4th at p. 75), and later cases bar dual representation in all cases involving actual conflicts (In re Oracle Securities Litigation (N.D.Cal. 1993) 829 F.Supp. 1176, 1186, 1188, fn. 8; 1 Witkin, Cal. Procedure [5th ed. 2008] Attorneys, § 139, pp. [198-199]; Patton, Disqualification of Corporate Counsel in Derivative Actions: Jacuzzi and the Inadequacy of Dual Representation (1979) 31 Hastings L.J. 347.)" (La Jolla Cove, supra, 121 Cal.App.4th at p. 786, fn. 5; see Blue Water, supra, 12
The nature of Ontiveros's derivative claims, which sound in fraud, demonstrates
that an actual conflict of interest existed. Omega's interests were adverse to the
Constables' with regard to, at a minimum, ownership of the property and Omega's
payment of rent to the Constables. (See, e.g., Gong, supra, 166 Cal.App.4th at p. 216
[majority shareholder and corporation were adverse where derivative claims alleged he
"purchased real property in [his] own name, but used corporate funds to discharge the
promissory note . . . ."]; Blue Water, supra, 192 Cal.App.4th at p. 489 [members "have
interests adverse to the limited liability companies with respect to certain real estate and
rental income"].)
Defendants contend the trial court erred because rule 3-600 allows an attorney to
concurrently represent an organization and its shareholders, provided they all knowingly
consent to the joint representation. Rule 3-600(E) provides, "A member representing an
organization may also represent any of its directors, officers, employees, members,
shareholders, or other constituents, subject to the provisions of rule 3-310. If the
organization's consent to the dual representation is required by rule 3-310, the consent
shall be given [1] by an appropriate constituent of the organization other than the
individual or constituent who is to be represented, or [2] by the shareholder(s) or
organization members." (Italics added.)
192 Cal.App.4th at p. 490 ["Like the Forrest court, we decline to follow the lead of Jacuzzi because it purports to permit an attorney with an actual conflict to jointly represent a corporation and its insiders even absent a conflict waiver. Such a result is directly contrary to rule 3-310 and rule 3-600."].)
13
Defendants assert the Constables consented to any conflicts on their own behalves,
and Kent (as majority shareholder) consented on Omega's behalf. While defendants
acknowledge Kent was ineligible to consent on Omega's behalf under rule 3-600(E)'s first
provision because he was "the individual or constituent who is to be represented" (ibid.),
they argue there is no similar limitation on his ability to exercise the second consent
provision. The Forrest court considered and rejected this argument. (See Forrest, supra,
58 Cal.App.4th at p. 76.)
In Forrest, one shareholder of two closely held corporations moved to disqualify
the attorney who was concurrently representing the corporations and their two other
shareholders in a case in which the moving party asserted derivative claims for fraud and
breach of fiduciary duty. (See Forrest, supra, 58 Cal.App.4th at pp. 68, 72.) In affirming
the trial court's disqualification of the attorney as to the corporations, the appellate court
explained why the shareholders' attempt to consent to the concurrent representation on
the corporations' behalf was ineffective: "Clearly, under rule 3-600, the [jointly
represented shareholders] could not consent to the representation on behalf of the
corporations in their capacity as directors of the corporations. In the circumstances here,
where the only shareholders of the corporations are also the directors involved in the
controversy, to allow the shareholders to consent on behalf of the corporation would
render rule 3-600 meaningless." (Forrest, at p. 76; see Gong, supra, 166 Cal.App.4th at
p. 216 ["Because an actual conflict exists between [majority shareholder] and [the
corporation], [majority shareholder's] purported waiver of the conflict is ineffective."].)
The Forrest court supported its conclusion with citation to "commentators and case law
14
alike [that] have concluded that reliance on consent is ill founded in the context of
derivative litigation." (Forrest, at p. 76.)
The Blue Water court reached a similar conclusion in the context of standing to
seek disqualification. (Blue Water, supra, 192 Cal.App.4th at p. 486.) There, one 50-
percent member in certain limited liability companies asserted derivative claims for
(among other things) fraud and breach of fiduciary duty involving the other 50-percent
member. (Id. at p. 482.) The plaintiff-member moved to disqualify the attorney who was
concurrently representing the other member and the companies. (Id. at p. 484.) In
concluding the plaintiff-member had "vicarious standing" to seek disqualification, despite
his lack of a direct attorney-client relationship with the attorney, the court reasoned,
"[a]ny other rule would run the risk of rendering an organization defenseless when it is
most vulnerable, i.e., when it is represented by an attorney who has a conflict because he
also represents and is beholden to a company insider who injured the company." (Id. at
p. 486.)
Applying Forrest and Blue Water, we conclude that because Ontiveros's derivative
claims render the Constables' and Omega's interests adverse, Kent's attempt to consent to
Counsel's concurrent representation of Omega over Ontiveros's objection was ineffective.
Therefore, the trial court did not err in disqualifying Counsel as to Omega.
Defendants mistakenly rely on California State Bar Ethics Formal Opinion No.
1999-153 (State Bar Opinion) to support the proposition that "[a]lthough the 'appropriate
constituent' [to consent on the organization's behalf] must be someone other than the
constituent being jointly represented, there is no such limitation on 'the shareholder(s)'
15
who may consent under the rule. Thus, under rule 3-600(E) the consent by the
shareholder or shareholders may include constituents who are part of the joint
representation." (State Bar Opinion, supra.) The opinion is unpersuasive because the
drafters expressly acknowledge that it "does not involve a derivative action," and "joint
representation of a corporation and one or more constituents in derivative actions
involves different policy considerations which are beyond the scope of th[e] opinion."
(Id. at fn. 14.)
Nor are we persuaded by defendants' argument that "there exists a split in
authorities regarding joint representation in derivative actions." (Capitalization omitted.)
The argument relies entirely on foreign authority. The California authorities we have
discussed clearly and uniformly address the issue and support the trial court's ruling as to
Omega.
III. Disqualification as to the Constables
The Constables argue that even if the trial court properly disqualified Counsel as
to Omega, the court erred by also disqualifying Counsel as to them. We agree.
We first dispose of the Constables' argument that Ontiveros did not have standing
to challenge Counsel's continued representation of them. As noted, Blue Water held that
a shareholder in a derivative lawsuit has vicarious standing to seek disqualification of
counsel in the concurrent representation context. (Blue Water, supra, 192 Cal.App.4th at
p. 486.) We see no reason why the rule should be any different when a shareholder who
may have legitimate concerns about counsel's duty of confidentiality to the former
corporate client seeks disqualification in what has essentially been converted (by
16
disqualification of counsel as to the corporation) into a successive representation case.
(See Forrest, supra, 58 Cal.App.4th at p. 82.) Accordingly, we conclude Ontiveros had
vicarious standing to challenge Counsel's continued representation of the Constables in
this case.
Turning to the merits, we find the trial court erred by disqualifying Counsel as to
the Constables. Forrest and Blue Water are, again, on point and persuasive. In Forrest,
the trial court allowed the attorney to continue representing the jointly represented
shareholders after the court disqualified counsel as to the corporation. (Forrest, supra, 58
Cal.App.4th at p. 72.) In affirming this ruling, the appellate court analyzed the
continuing representation as akin to a successive representation scenario in which the
shareholders were the current clients and the corporation was the former. (Id. at p. 81-
82.) The court acknowledged "the rule that '[w]here the requisite substantial relationship
between the subjects of the prior and the current representations can be demonstrated,
access to confidential information by the attorney in the course of the first
representation . . . is presumed and disqualification of the attorney's representation of the
second client is mandatory.' " (Id. at p. 82, quoting Flatt, supra, 9 Cal.4th at p. 283.) The
Forrest court explained this "rule . . . is based on the need to protect scrupulously against
the improper use of confidential information." (Id. at p. 82.) However, the court
concluded this concern was not relevant on the facts before it because the counsel's
relationship with the corporation was based solely on his interactions with the jointly
represented shareholders such that it was "impossible to conceive of confidential
information [counsel] could have received from the 'corporation' that is different from
17
information he received from the [jointly represented shareholders]." (Ibid.) Under these
circumstances, the court held that where "the functioning of the corporation has been so
intertwined with the individual defendants that any distinction between them is entirely
fictional, and the sole repositories of corporate information to which the attorney has had
access are the individual clients, application of the 'former client' rule would be
meaningless." (Ibid.)
Similarly, the Blue Water court, discussing and applying Forrest, affirmed the trial
court's order allowing an attorney to continue representing one 50-percent member in
certain limited liability companies after the attorney briefly represented both the member
and the companies in connection with a demurrer in a derivative lawsuit. (Blue Water,
supra, 192 Cal.App.4th at pp. 482, 483, 490-491.)
The Forrest rationale applies here. Kent and Ontiveros are Omega's only two
shareholders. Kent is Omega's president and CEO and is solely in charge of its day-to-
day affairs, including selecting and working with counsel. He asserts he and Omega are
so intertwined "that there is no confidential information [Counsel] could have received
from Omega that is different from the information [Counsel] received from Kent
Constable." Ontiveros does not cite any record evidence to the contrary, and the trial
court observed during the disqualification hearing that Forrest's "intertwined" scenario
"seems to describe what we have here." On this record, Counsel's continued
representation of the Constables poses no threat to Counsel's continuing duty of
confidentiality to Omega.
18
The trial court erred in focusing on Counsel's duty of loyalty, not their continuing
duty of confidentiality. As noted, the duty of loyalty is the proper focus in concurrent
representation cases; the duty of confidentiality is the proper focus in successive
representation cases (as became the case here). (Flatt, supra, 9 Cal.4th at p. 283-284.)
The trial court's efforts to distinguish Forrest and Blue Water reflect this
misunderstanding. The court distinguished Forrest on the basis that Kent's use of
Omega's funds to pay Counsel's retainer created a primary duty to Omega rather than the
Constables. And the court distinguished Blue Water on the basis that the attorney's
representation of the organizational clients "was relatively brief" in comparison to the
ongoing representation of the individual clients. Neither of these distinctions has any
bearing on whether Counsel's continued representation of the Constables jeopardizes
Omega's confidential information, when Kent was undeniably the "sole repositor[y]" of
that information.7 (See Forrest, supra, 58 Cal.App.4th at p. 82.) Therefore, the trial
court erred by disqualifying Counsel as to the Constables.
IV. Delay
Defendants contend the trial court erred by finding Ontiveros did not waive his
right to seek disqualification of Counsel by waiting 16 months to do so.8 Ontiveros
7 Therefore, we need not address the parties' arguments regarding the significance of the sequence in which the attorney-client relationships were formed or whether Kent was entitled to use Omega's funds to indemnify himself for legal fees incurred in connection with the dispute.
8 It was actually 14 months. Ontiveros first asserted derivative claims in February 2013 (thereby creating the conflict) and filed his disqualification motion in April 2014. 19
counters that delay is irrelevant in automatic disqualification cases.9 Alternatively, he
argues his delay was not unreasonable and did not create the requisite level of prejudice.
We conclude the trial court did not abuse its discretion in finding Ontiveros did not
unreasonably delay bringing his motion. Therefore, we need not decide whether delay
can ever result in a waiver in automatic disqualification cases.
"[A]ttorney disqualification can be impliedly waived by failing to bring the motion
in a timely manner." (Liberty Nat. Enterprises, L.P. v. Chicago Title Ins. Co. (2011) 194
Cal.App.4th 839, 844 (Liberty).) However, to result in a waiver, the "delay [and] . . . the
prejudice to the opponent must be extreme." (Id. at p. 845.) Factors relevant to the
reasonableness of a delay include the "stage of litigation at which the disqualification
motion is made" and the complexity of the case. (Id. at p. 846.) Delay can also be "an
indication that the alleged breach of confidentiality was not seen as serious or substantial
by the moving party," and can suggest "the possibility that the 'party brought the motion
as a tactical device to delay litigation.' " (Id. at p. 847.) "If the opposing party makes a
prima facie showing of extreme delay and prejudice, the burden then shifts to the moving
party to justify the delay." (Fiduciary Trust Internat. of California v. Superior Court
(2013) 218 Cal.App.4th 465, 490.)
9 Blue Water and Forrest appear to conflict in this regard. (See Blue Water, supra, 192 Cal.App.4th at p. 490 ["[counsel] knowingly agreed to represent conflicting interests at the demurrer hearing. He therefore cannot avoid the rule of automatic disqualification. Consequently, we need not reach the issue of delay."]; Forrest, supra, 58 Cal.App.4th at pp. 77-78 [considering delay after finding disqualification was automatic].) 20
The trial court did not abuse its discretion in finding Ontiveros's delay in bringing
his disqualification motion was not "extreme." Although defendants focus on the age of
the litigation when Ontiveros brought his motion, the proper focus is on the stage of the
litigation. (Liberty, supra, 194 Cal.App.4th at p. 846.) The pleadings were not yet final,
as Ontiveros's demurrer to the first amended cross-complaint was still pending; discovery
was still in progress; and no trial date was set. By contrast, in Liberty—the only
California case defendants cite as an example of extreme delay—an entire phase of the
trial had been conducted before the disqualification motion was filed. (Ibid.)
Even if Ontiveros's delay was extreme, we are not convinced any prejudice to
defendants was also extreme. Defendants complain primarily of the time and money they
had spent educating Counsel. Our ruling allowing Counsel to continue representing the
Constables mitigates this prejudice, a point Counsel acknowledged at the disqualification
hearing. (See, e.g., Gong, supra, 166 Cal.App.4th at p. 217 [even after one phase of trial,
"any prejudice in terms of attorney fees expended for trial preparation can be ameliorated
by disqualifying [attorney] only as to [corporation]."].)
The trial court did not err by concluding defendants did not meet their burden of
showing Ontiveros waived his right to seek to disqualify Counsel.10
10 Defendants contend the trial court erred by denying their objections to Ontiveros's evidence regarding the discovery disputes. We need not address this contention because we have not considered the discovery disputes in reaching our decision. 21
DISPOSITION
The order disqualifying Counsel as to Omega is affirmed. The order disqualifying
Counsel as to the Constables is reversed. The Constables are entitled to their costs on
appeal.
HALLER, J. WE CONCUR:
BENKE, Acting P. J.
O'ROURKE, J.
22
AI Brief
AI-generated · verify before citing
Holding. The court held that while an attorney may not concurrently represent a corporation and its directors in a derivative suit due to an actual conflict of interest, the attorney may continue to represent the individual directors after being disqualified from representing the corporation.
Issues
Whether an attorney may concurrently represent a corporation and its directors in a derivative suit where the interests are adverse.
Whether a majority shareholder can consent to joint representation on behalf of a corporation in a derivative action.
Whether an attorney disqualified from representing a corporation in a derivative suit must also be disqualified from representing the individual directors.
Disposition. Affirmed in part, reversed in part.
Quotations verified verbatim against the opinion
“Current case law clearly forbids dual representation of a corporation and directors in a shareholder derivative suit, at least where, as here, the directors are alleged to have committed fraud.”
“The trial court did not err in disqualifying Counsel as to Omega.”
“We find the trial court erred by disqualifying Counsel as to the Constables.”