HALLER, J.
Guadalupe A. Ontiveros, as the minority shareholder in Omega Electric, Inc. (Omega), sued majority shareholder Kent C. Constable,
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.
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 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
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 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.
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.
On January 30 and 31, Counsel took Ontiveros's deposition on Kent's behalf.
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)
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.
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
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 [93 Cal.Rptr.2d 619] [a third 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.
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 [122 Cal.Rptr.3d 641] (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
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.
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 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...."
Rule 3-310 of the Rules of Professional Conduct
"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.)
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.
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.)
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,
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)' 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." (Ibid.) The opinion is unpersuasive because the drafters expressly acknowledge that it
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.
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.
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 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 pp. 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
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.
The trial court did not abuse its discretion in finding Ontiveros's delay in bringing his disqualification motion was not "extreme." Although defendants
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.
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.
Benke, Acting P. J., and O'Rourke, J., concurred.