JANIS L. SAMMARTINO, District Judge.
Presently before the Court is Defendants' Motion to Disqualify Counsel. ("MTN," ECF No. 19.) Also before the Court are Plaintiff Ultimate Fitness Center, LLC's response in opposition to ("Opp'n," ECF No. 22) and Defendants' reply in support of ("Reply," ECF No. 23) Defendants' Motion to Disqualify Counsel. The Court vacated the hearing previously set for August 11, 2016 and took the matter under submission pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 24.) After considering the parties' arguments and the law, the Court
In 2015, Ray Wilson ("Wilson"), Robert Yenor, Sr. ("Yenor Sr."), and Robert Yenor, Jr. ("Yenor Jr."), among others, owned and operated a fitness center called Emerald City Athletic Club-Billings LLC ("Emerald", previously known as Family Gym). (MTN 4,
In March 2015, the Yenors and Hueso met to discuss the possibility of merging Emerald and Ultimate, but did not conclude with any agreement or intent to come to an agreement. (Id. at 5.) The parties met a few months later, but the Yenors made clear that no deal would be considered without it being reduced to writing. (Id.)
During the negotiations, Hueso became aware that Emerald had received a demand letter from its landlord in connection with a lease for which Emerald was a guarantor. (Id.; Opp'n 4, ECF No. 22). Hueso suggested that Emerald engage Matthew Faust ("Faust"), an attorney from the law firm Sharif Faust Lawyers, LTD. ("Sharif-Faust") representing Ultimate on other matters, to assist with the landlord issue. (Id.) Emerald contacted Faust and they entered into an attorney-client agreement on September 15, 2015. (Id.) Both parties agree that the scope of Faust's representation under this agreement was to respond to the landlord's demand letter and resolve the dispute. (MTN 5-6, ECF No. 19-1; Opp'n 4, ECF No. 22.)
On September 25, 2015, Emerald entered into another attorney-client agreement with Faust, wherein Yenor Sr., but not Yenor Jr., signed on behalf of Emerald. (MTN 6, ECF No. 19-1; Opp'n 6, ECF No. 22.) The scope of this agreement was limited to "reorganize the company's structure and negotiate the transfer of leases from various other entities into the resultant company's name." (MTN 6, ECF No. 19-1 (citing Declaration of Robert Yenor, Sr. ("Yenor Sr. Decl.") ¶ 9).) According to Defendants, neither of the attorney-client agreements provided for a scope of work related to the deal between Ultimate and Emerald or the new legal entity, which was to be called National City Gym, LLC. (Id.) Nevertheless, Faust prepared drafts of a "NewCo Founders' Agreement," a "Memorandum of Understanding" ("MOU"), "Articles of Organization," an "Operating Agreement," and formation minutes for the contemplated entity. (MTN 6, ECF No. 19-1; Opp'n 6, ECF No. 22.)
On September 25, 2015, Faust emailed Hueso and the Yenors a copy of the proposed MOU. (MTN 6, ECF No. 19-1.) Yenor Jr., as the managing member of Emerald, rejected the MOU because he objected to its terms. (Id.) Despite no agreement, by early October 2015 Hueso convinced Yenor Sr. to change the name of the gym from "Family Gym" to "Ultimate Fitness Center" and begin operating the fitness club. (Id. at 7.) The parties attempted to resolve their disputes throughout October and November. (Id.) Defendants allege that, between September 15, 2015 and December 29, 2015, Faust had numerous phone calls with the Yenors, and met with the Yenors at least three times. (Id. at 8.) Plaintiff claims that Emerald became nonresponsive around the end of October, but Sharif-Faust continued to inform Emerald about communications between it and Ultimate. (Opp'n 9, ECF No. 22.) This resulted in two meetings, one in November and one in December, but these meetings produced no joint instructions for Sharif-Faust to follow. (Id.; MTN 7, ECF No. 19-1.)
Sharif-Faust sent correspondence formally terminating its representation of Emerald on or about January 9, 2016. (Opp'n 9, ECF No. 22.) On January 22, 2016, Faust sent the Yenors and Emerald a letter on behalf of Ultimate demanding money for alleged damages suffered by Ultimate relating to the termination of Ultimate's "business relationship" with the Yenors. (MTN 8, ECF No. 19-1.) On February 17, 2016, Faust, on behalf of Ultimate, filed a Complaint against Defendants in the present case. (ECF No. 1.)
In deciding disqualification motions, California federal courts apply California state law. See In re Cnty. of L.A., 223 F.3d 990, 995 (9th Cir. 2000).
A court's authority to disqualify counsel "derives from the power inherent in every court 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." People ex rel. Dept. of Corps. v. SpeeDee Oil Change Sys., Inc., 20 Cal.4th 1135, 1145 (1999) (citations, internal quotation marks, and alteration omitted). "The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar." Id. Accordingly, "[t]he important right to counsel of one's choice must yield to ethical considerations that affect the fundamental principles of our judicial process." Collins v. State, 121 Cal.App.4th 1112, 1124 (2004) (citing id.).
Because disqualification motions can be misused for tactical purposes, they "`should be subjected to particularly strict judicial scrutiny.'" Shurance v. Planning Cont. Int'l, Inc., 839 F.2d 1347, 1349 (9th Cir. 1988) (quoting Optyl Eyewear Fashion Int'l Corp. v. Style Cos., 760 F.2d 1045, 1050 (9th Cir. 1985)).
Defendants argue that Faust should be disqualified because his representation of Plaintiff violates three rules of professional conduct: (1) Rule 3-310(C), which prohibits representation adverse to a current client; (2) Rule 3-310(E), which prohibits representation adverse to a former client; and (3) Rule 5-210, which prohibits a lawyer from testifying before a jury in a matter in which he represents one of the parties, unless an exception applies. (See MTN 5, 7-8, ECF No. 19-1; Reply 6, ECF No. 23.) The Court considers each argument in turn, beginning with Rule 3-310(E).
California Rule of Professional Conduct 3-310(E) provides that "[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." In the case of successive representation, when there is a substantial relationship between the former and current representation, and when the nature of the prior representation or the relationship between the attorney and his former client is such that "confidential information material to the current dispute would normally be imparted to the attorney or to subordinates for whose legal work he was responsible, the attorney's knowledge of confidential information is presumed." Kennedy v. Eldridge, 201 Cal.App.4th 1197, 1208 (Cal. App. 3d Dist. 2011) (internal quotations and citations omitted) (emphasis in original). When the potential conflict "arises from the successive representation of clients with potentially adverse interests, the courts have recognized that the chief fiduciary value jeopardized is that of client confidentiality." Flatt v. Super. Ct., 9 Cal.4th 275, 283 (1994) (en banc) (emphasis omitted).
Defendants argue that Faust violated this rule because Faust represented the Yenors in their individual capacity. (MTN 9, ECF No. 19-1.) Additionally, Defendants argue that a substantial relationship exists between the former matters and the present action. (Id. at 11.) Next, Defendants argue that a conflict of interests exists, and any alleged waiver of conflicts of interest is void. (Id. at 13-16.)
Plaintiff argues that Faust has not violated this rule for three reasons. First, Plaintiff argues that Faust is not, and has never been, Defendants' attorney. (Reply 11, ECF No. 22.) Second, Plaintiff argues that Defendants waived any right to confidentiality they had by emailing allegedly confidential information to other persons. (Id. at 13.) Third, Plaintiff argues that Emerald waived any conflicts of interest in this case because Sharif-Faust obtained Emerald's written, informed consent prior to filing this lawsuit. (Id. at 15.)
Because the Court concludes that neither Faust nor his law firm represented the Yenors in their individual capacity, the Court does not consider Defendants' further contentions under Rules 3-310 (e.g., whether a substantial relationship existed between the prior representation and current case), which require an attorney-client relationship.
"An attorney-client relationship is formed when an attorney renders advice directly to a client who has consulted him seeking legal counsel." Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F.2d 1501, 1505 (9th Cir. 1993) (citing Beery v. State Bar, 43 Cal.3d 802, 811-12 (1987)). "A formal contract is not necessary to show that an attorney-client relationship has been formed." Id. (citing Bernstein v. State Bar, 50 Cal.3d 221, 229-30 (1990)). "The court may look to the intent and conduct of the parties to determine whether the relationship was actually formed." Id. (citing Hecth v. Super. Ct., 192 Cal.App.3d 560, 565 (1987)).
As an initial matter, the Court concludes that, if anything, the two agreements at issue in this case created an attorney-client relationship between Sharif-Faust and Emerald, not between Sharif-Faust and the Yenors.
(Yenor Sr. Decl. 13, 21, ECF No. 19-2.) Moreover, Sharif-Faust never invoiced either Yenor Sr. or Jr. individually for any of its work, but instead sent invoices to Emerald. (Declaration of Matthew Faust ("Faust Decl.") ¶ 10, ECF No. 22-2.)
Furthermore, while both Yenors contend that they considered Faust to represent them in their individual capacity, (Yenor Sr. Decl. ¶ 10; Declaration of Yenor, Jr. ("Yenor Jr. Decl.") ¶ 8, ECF No. 19-3), they do not explain why they thought so. Indeed, Defendants fail to put forth any evidence demonstrating, for instance, that Faust ever held himself out to be their attorney, or that they ever communicated to Faust or his firm their belief that they were represented by Faust. In contrast, Faust contends that he "did not hold [himself] out as an attorney for the Yenors, and instead [Sharif-Faust] identified its client as Emerald City on the representation agreement, conflict waiver, and billings." (Faust Decl. ¶ 16, ECF No. 22-2.) Additionally, Faust claims that he never received "communications with either of the Yenors indicating" that they believed he was their personal attorney. (Id.) Indeed, Faust characterized his relationship with Ultimate and Emerald as akin to a "scrivener," wherein he would receive joint instructions from both parties to work toward their mutual benefit with regard to the proposed merger. (Id. at ¶ 8.) Without any evidence to the contrary provided by Defendants, the Court concludes that the two agreements that purportedly established an attorney-client relationship between Shariff-Faust and Emerald do not extend to the Yenors as individuals.
Aside from the two agreements between Sharif-Faust and Emerald, Defendants argue that Faust separately established an attorney-client relationship with the Yenors on three grounds. First, Defendants argue that Faust represented the Yenors because Faust's work related to the formation of National City Gym and/or the proposed deal between Ultimate and Emerald was not within the scope of the two agreements between Sharif-Faust and Emerald. (MTN 10, ECF No. 19-1.) Second, Defendants argue that Faust represented Yenor Sr. because the documents he prepared regarding the formation of National City Gym "had signature lines for Yenor, Sr. to sign in his individual capacity . . . [and] Faust and Yenor, Sr. had numerous attorney-client communications relating to" the new gym. (Id. at 10.) Finally, Defendants argue that Faust represented Yenor Sr. because "Faust prepared multiple versions of the MOU between the parties on which Yenor, Sr., not Yenor, Jr., was to sign as the `Managing Member' even though Faust's own retainer agreement lists Yenor, Jr. as the managing member of Emerald." (Id. at 11.)
The Court is not convinced that Faust established an attorney-client relationship with the Yenors in their individual capacity under any of Defendants' arguments. As to their first argument, Defendants do not explain how the September 25, 2015 agreement, under which Sharif-Faust was to "reorganize the company's structure and negotiate the transfer of leases from various other entities into the resultant company's name," does not encompass drafting documents related to the formation of the new entity.
The Court finds Defendants' second and third arguments—that Faust represented Yenor Sr. because the new gym's founding documents listed him, not Emerald or Yenor Jr., as the signatory—similarly unavailing. Essentially, Defendants argue that Faust represented the Yenors because "if it was true that Faust did not represent the Yenors, then why did Faust name the Yenors as a party to the merger[?]" (Reply 3, ECF No. 23.) Notably, in their Reply, Defendants state that "Faust's declaration is oddly silent as to" the issue of Yenor Sr.'s signature on the formation documents, where a signature on behalf of Emerald should apparently appear. (Id. at 2-3.)
Defendants' argument assumes that because Faust included Yenor Sr.—and not Emerald—on the new company's documents, he was not working on behalf of Emerald, his client.
California Rule of Professional Conduct 5-210 states, in relevant part, that "[a] member shall not act as an advocate before a jury which will hear testimony from the member unless: (A) [t]he testimony relates to an uncontested matter; . . . or (C) [t]he member has the informed, written consent of the client." Although Rule 5-210 is limited to jury trials, California Rule of Professional Conduct 1-100 "states that the prohibitions [included in the rules] are `not exclusive,' and it expressly permits consideration of ethical rules of other jurisdictions and bar associations," including the American Bar Association's Model Rules, whose Advocate-Witness Rule (Rule 3.7) is not limited to jury trials. Eldridge, 201 Cal. App. 4th at 1210. Accordingly, Rule 5-210 may apply beyond jury trials. See id. at 1210-11.
In their Reply, Defendants argue that "Faust was a witness to the proposed merger and will likely be called as a witness at trial relating to his knowledge of the impasse reached by the parties." (Reply 6, ECF No. 23.) In particular, Defendants claim that, in Plaintiff's Opposition, Faust acknowledged that he tried to "facilitate the merger" and obtain joint instructions in furtherance of the merger, but that the parties "were at an impasse." (Id. at 3 (citing Opp'n 9, ECF No. 22).) Defendants further argue that Faust never obtained written consent from either Emerald or the Yenors to act as a witness in this case. (Id. at 3, 6.)
The Court concludes that, at this juncture, Rule 5-210 does not disqualify Faust. To begin, it is not clear to the Court that, based on the evidence presented, Faust is likely to be called as a witness in this case.
For the foregoing reasons, Defendants' Motion to Disqualify Counsel is
