Judge: Mark A. Young, Case: 21SMCV00789, Date: 2023-03-10 Tentative Ruling
Case Number: 21SMCV00789 Hearing Date: March 10, 2023 Dept: M
CASE NAME: Militello,
et al., v. VFARM1509 Inc., et al.
CASE NO.: 21SMCV00789
MOTION: Motion
to Disqualify Zweiback, Fiset & Zalduendo LLP;
Motion to Compel Further Responses to
Request for Production, Set One
HEARING DATE: 3/10/2023
DISQUALIFICATION
Disqualification
Legal Standard
Disqualification is a drastic
measure that is only justified where the misconduct will have a continuing
effect on judicial proceedings. (Sheller
v. Superior Court (2008) 158 Cal.App.4th 1697, 1711; Baugh v. Garl (2006) 137
Cal.App.4th 737, 744.) The State Bar Rules of Professional Conduct govern
attorney discipline not standards for attorney disqualification in courts;
however, courts may look to the Rules of Professional Conduct for guidance
regarding attorney disqualification. (Great
Lakes Const., Inc. v. Burma (2010) 186 Cal.App.4th 1347; see also Khani v. Ford Motor Company
(2013) 215 Cal.App.4th 916, 920 [in the successive representation context, “the
trial court must balance the current client's right to the counsel of its
choosing against the former client's right to ensure that its confidential
information will not be divulged or used by its former counsel”].)
California
Rules of Professional Conduct, rule 1.7 provides that without the informed
written consent of the client or former client, the attorney must not “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.” If the attorney cannot
obtain the informed written consent of each client, then the attorney must
withdraw from representation of the new client. In successive representation
cases, “the trial court must balance the current client's right to the counsel
of its choosing against the former client's right to ensure that its
confidential information will not be divulged or used by its former counsel.” (Khani v. Ford Motor Company
(2013) 215 Cal.App.4th 916, 920.)
“In concurrent or joint representation cases, we are
concerned with the attorney's duty of loyalty to each client. ‘An attorney's
duty of loyalty to a client is not one that is capable of being divided....’
Joint representation of parties with conflicting interests impairs each
client's legitimate expectation of loyalty that his or her attorneys will
devote their ‘entire energies to [their] client's interests.’ ” (Great Lakes, supra 186 Cal.App.4th at
1355–1356 [citing Flatt v. Superior Court¿(1994) 9 Cal.4th 275, 282;
footnotes omitted].) 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.) “The strict proscription
against dual representation of clients with adverse interests thus derives from
a concern with protecting the integrity of the attorney-client relationship
rather than from concerns with the risk of specific acts of disloyalty or
diminution of the quality of the attorney's representation.” (Forrest v.
Baeza (1997) 58 Cal.App.4th 65, 74, 67 Cal.Rptr.2d 857.)
To bring a motion to disqualify counsel, the moving party
must demonstrate a “an invasion of a legally cognizable interest” that is “(a) concrete and particularized, and (b)
actual or imminent, not conjectural or hypothetical.” (Great Lakes,
supra, 186 Cal.App.4th at 1356, 1358.) “A ‘standing’ requirement is
implicit in disqualification motions. Generally, before the disqualification of
an attorney is proper, the complaining party must have or must have had an
attorney-client relationship with that attorney. . . .” (Id. at 1356; see Meehan v. Hopps (1956) 144 Cal.App.2d 284, 290 [“no
attorney-client relationship automatically exists between counsel for a
business organization and its officers, directors, shareholders, etc.”]; see also
Lister v. State Bar (1990) 51 Cal.3d 1117, 1126 [In certain
circumstances, an implied attorney-client relationship can arise between
counsel and individual corporate employees or officers].)
Analysis
Plaintiff Shauneen Militello seeks an
order: (1) disqualifying Zweiback, Fiset & Zalduendo LLP (“ZFZ”) as
counsel for Lankershim Marine Properties LLC (“Lankershim” or “LMP”—not to be
confused with Lankershim Management Properties Inc.), Cannaco Research
Corporation (“Cannaco” or “CRC”), Ann Lawrence Athey (“Lawrence”), Rajesh
Surendrakant Manek (“Manek”), and all other defendant entities controlled or
owned by Lawrence and Manek; (2) for disgorgement of all fees received from LMP
or Cannaco; and (3) to strike LMP’s Answer and affirmative defenses.
In her Third Amended Complaint
(TAC), Militello alleges she is a shareholder (and former President, CEO and
director) of Cannaco. (TAC, ¶¶ 51, 203.) Lawrence and Manek are also
shareholders of Cannaco and are Cannaco’s sole officers and directors since
March 25, 2021. (¶¶ 54, 203.) Militello, Lawrence and Manek are also members of
LMP. LMP’s sole asset is the Subject Property, which is the facility that
Cannaco operates from under a lease with LMP. (TAC, ¶¶ 76, 83.) Militello seeks
judicial dissolution of LMP based on allegations of self-dealing, diversion of
corporate assets, diversion of corporate opportunities, mismanagement and
fraud. (¶¶ 1, 205-211, 220.) Plaintiff alleges derivative claims on behalf of
Cannaco and GBC. Cannaco and GBC are nominal defendants.
On August 22, 2022, ZFZ substituted
in as counsel for Lawrence, Manek, Rose, VFarm, WFarm, Quantum, and Sunnyside. On October 12, 2022, ZFZ filed
a notice of appearance as LMP’s counsel. The next day, ZFZ filed a demurrer on
behalf of all their clients, except LMP. LMP filed an answer, which asserted
various affirmative defenses.
Disqualification as to Cannaco
The Court is unpersuaded that it may disqualify ZFZ as
counsel for Cannaco as they are not counsel of record for Cannaco. It is
undisputed that Cohen Williams LLP is counsel of record for Cannaco. The motion
is functionally moot as to Cannaco, since it already has separate counsel.
Plaintiff cites a separate action, which has been deemed-unrelated:
Cannaco Research Corporation v. Shauneen Militello (21STCV13314 – “the Stanley Mosk
case”), alleging that Militello breached her fiduciary duty to the company and
violated Penal Code § 502. To
the extent that it would be improper for ZFZ to represent Cannaco in the
Stanley Mosk Action, the department assigned to that matter would rule on any
disqualification, not this department. Moreover, there is currently a stay on
that matter. This department will not usurp the other department’s judgment on
such an issue, especially considering the stay on that case. The issue is
simply not properly brought before this Court.
Disqualification as to LMP
As a general proposition, a corporation’s attorney’s
first duty is to the corporate entity. (M'Guinness v. Johnson (2015) 243
Cal.App.4th 602, 622.) “As such, there are instances in which corporate counsel
may not also represent officers, directors or shareholders with whom the
corporation has a conflict of interest. Examples of such instances include
where a shareholder has filed an action questioning [the corporation's]
management or the actions of individual officers or directors, such as in a
shareholder derivative or ... dissolution action.” (Id., citing Havasu
Lakeshore Investments, LLC v. Fleming (2013) 217 Cal.App.4th 770, 778.) In
a derivative suit, the organization named as a defendant is actually a
plaintiff and case law forbids dual representation in a derivative suit
alleging fraud by the principals, because the principals and the organization
have adverse, conflicting interests. (Forrest, supra, 58 Cal.App.4th at
74.) Likewise, a corporate attorney “ ‘must refrain from taking part in any
controversies or factional differences which may exist among shareholders as to
its control.’ ” (Goldstein v. Lees (1975) 46 Cal.App.3d 614, 622.)
As an initial matter, Militello has brought a dissolution
against as to LMP. (TAC ¶¶
219-223.) In addition, Militello has
vicarious standing to challenge LMP’s choice of counsel, even though she does
not assert any derivative action on behalf of LMP. In Blue Water Sunset, LLC v.
Markowitz (2011) 192 Cal.App.4th 477, the Second District announced “a limited exception to the rule that a
complaining party lacks standing to seek disqualification of an attorney unless
the party and attorney have some sort of attorney-client or fiduciary
relationship. If an attorney simultaneously represents a limited
liability company and a member with conflicting interests in a derivative
action filed by the second and only other member, and if the limited liability
company's consent to concurrent representation is required by [CRPC], the
second member has vicarious standing to move to disqualify. Vicarious standing
is based on the limited liability company's standing under existing case law
and the second member's unilateral right under [the CRPC] to decide for the
limited liability company whether to waive the conflict of interest.” (Blue Water Sunset, 192
Cal.App.4th at 486.)
In Blue Water, the court found that
even though the plaintiff, Blue Water, did not have any confidential or attorney-client
relationship with the corporate counsel, Kurtz, standing was imputed
vicariously to Blue Water. (Id., at 485.) The court concluded that disqualification
was mandatory because the LLCs had adverse interest with the defendants Four
Star and Markowitz with “respect to certain real estate and rental income,
because each side claims rights to ownership to the exclusion of the other. Once
Blue Water sued Four Star and Markowitz derivatively on behalf of the limited
liability companies for fraud and fraudulent conveyance, the limited liability
companies stood to benefit if Blue Water prevailed… [the LLCs] had an
expectation that their attorney would do nothing to help Four Star and
Markowitz, including assert demurrers and argue that the fraud and fraudulent
conveyance causes of action were defective due to lack of standing, time bar or
factual sufficiency.” (Id. at 489.)
The case Gong v. RFG Oil, Inc., (2008) 166
Cal.App.4th 209, implicitly accepted the Blue Water exception discussed,
by addressing the merits of the motion without discussing the issue of
standing. (See Blue Water, supra, fn. 10.) In Gong, a minority
shareholder (Jeffrey) alleged that the majority shareholder (David) wrongfully
conducted the affairs of the corporation (RFG) to further David's interests at
his expense. (Gong, 166 Cal.App.4th at 214.) Jeffrey brought an action
for involuntary dissolution of RFG, declaratory relief, breach of fiduciary
duty, and wrongful discharge. (Id.) A single law firm represented both David
and RFG. (Id.) Jeffrey challenged the concurrent representations. (Id.) Gong held that “case law
forbids dual representation in a derivative suit alleging fraud by the principals,
because the principals and the organization have adverse, conflicting
interests.” (Id. at 215.) The Gong court found that an
actual conflict existed where the complaint, although not pursuing a derivative
claim, alleged that David
purchased real property in David's own name using corporate funds, and directed
Jeffrey to prepare tax returns for RFG containing misinformation. Such an abuse
of authority and waste of corporate property by a corporate director or officer
would justify the dissolution that Jeffrey sought. (Id. at 216, citing Corp.
Code, § 1800(b)(4).)
Here, the Court must review the pleadings to determine
whether the interests of the majority shareholders and the corporation potentially
or actually conflict. (Gong, supra, 166 Cal.App.4th at 215.) An actual
“[c]onflict 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.” (Spindle v. Chubb/Pacific
Indemnity Group (1979) 89 Cal.App.3d 706, 713.)
Militello has vicarious standing as
a minority member of LMP. LMP is a California member-managed limited liability
company for the sole purpose of purchasing, owning and managing LMP Property,
which it leases to CRC. (TAC ¶¶ 82-83.) Militello, Lawrence and Manek each own
a one-third membership interest in Lankershim. (Id.)
Militello brings direct claims against LMP on her own
behalf as a shareholder. Militello alleges that LMP is an alter ego of the
other defendants (exposing LMP to liability as to Manek and Lawrence’s torts).
(TAC ¶ 32.) Militello sues for an accounting and dissolution of LMP. (¶¶
219, 321.) The TAC alleges that dissolution is warranted because Lawrence and
Manek are guilty of or have knowingly countenanced, persistent and pervasive
fraud, mismanagement, and/or abuse of authority and it is reasonably necessary
to protect Militello’s interest. (¶ 220.) Militello is entitled to an
accounting from Lankershim because Lankershim owes money (through the JV
agreements) to Militello, which cannot be ascertained without an accounting. (¶¶
321-322.)
The TAC alleges various actions by
Lawrence and Manek which put them adverse to LMP’s interests, including waste, self
-dealing, commingling assets, and exposing LMP to additional liability. The TAC
alleges that Lawrence and Manek commingled personal funds with the corporate funds
of the Dispensaries, CRC, and Lankershim. (TAC ¶ 40.) In May 2021, Lawrence and
Manek, using their controlling power, secretly structured the sale of
Lankershim’s sole asset—the LMP Property—so as to bypass Militello’s right-of-first-refusal
under the Operating Agreement and divert her interests in the LMP Property to
themselves without actually paying any sale proceeds for it. From around May
2021 and continuing through June 2021, Lawrence and Manek, using joint venture
funds, formed a real estate holding company to take title to the Property,
hired legal counsel to construct a transaction vehicle that attempted to avoid
triggering the transfer restrictions in the Operating Agreement, hired an
appraisal company to manufacture a purchase price far below market value,
and secured a lender, title company, and escrow agent. (¶ 205.) Lawrence signed
the Property Sale Agreement on behalf of Lankershim as the “seller” of the
Property and Manek executed the Property Sale Agreement on behalf of RGC
Coastal as the “buyer.” (¶ 206.) Lawrence gave false information to the
appraisal company to drive a low purchase price. (¶ 207.) Following Militello
notifying the appraiser of significant items which would have increased the LMP
property’s value, Lawrence would not allow him to evaluate the LMP Property
again. (Id.) Moreover, the true nature and terms of the transaction was a “loan
financing” to refinance the existing loan on the LMP Property as a backdoor to
remove Militello from title without payment. (Id.) Defendants passed corporate
resolutions that directed Lankershim to continue existing as an entity despite
the disposal of its sole asset, so that the transfer would not trigger
automatic dissolution and winding up of the company as otherwise required under
the Operating Agreement and the Corp. Code. (¶ 208.) Defendants included an
indemnity provision in the sale agreement that purported to insulate them for
any “unlawful” acts in connection with the transaction. (Id.) Lawrence and
Manek allowed LMP’s property loan to default in order to pressure Militello
into accepting the sale. (¶ 209.) Lawrence and Manek only gave permission to
extend the loan after the extension had ballooned to $253,463. (Id.) Lawrence
and Manek manufactured a fake obligation wherein their lender required an
additional principal down payment of $800,000 (on top of the $253,463). (¶
210.) Further, Lawrence and Manek backdated the December 6, 2021 loan renewal
agreement to August 30, 2021. (Id.) Finally, Lawrence and Manek belatedly filed
Lankershim’s 2020 tax returns, causing substantial penalties and interests to
accrue. (¶ 211.) Additionally, Lawrence also provided the accounting firm with
false reports and financial information to file Lankershim’s returns. (Id.)
Militello requests that the action
against LMP be treated as a derivative action and that Lawrence and Manek be
expelled as members. (TAC ¶ 223.) As
such, LMP’s interests do not entirely align with Manek and Lawrence’s individual
interests. Furthermore, the line of
cases allowing joint representation prior to an actual adjudication that the
corporation is entitled to relief against its officers or directors, recently
have been heavily criticized. (See
Forrest supra, 58 Cal. App. 4th at 75.)
Thus, the Court believes that an
actual conflict of interest exists. If so, disqualification would be required
since ZFZ represents both LMP and Manek/Lawrence in this action.
Disqualification as to Lawrence and Manek
Manek and Lawrence are
Directors/Members accused of harming Cannaco. Militello reasons that dual
representation of LMP/Cannaco and their majority members is improper because
the parties’ interests are adverse. The Court is not persuaded that Militello has standing to assert this
motion against ZFZ as to Lawrence and Manek.
Caselaw makes clear that even when
there is a conflict between corporate counsel and majority shareholders that
requires disqualification of corporate counsel, trial courts properly allow counsel
to continue their representation of the majority shareholders. (See, e.g., Forrest
v. Baeza (1997) 58 Cal.App.4th 65, 81-82 [where disqualified corporate
counsel represented a corporation comprised of three shareholders solely by
virtue of his relationship with the majority directors/shareholders, there is
no risk of improper use of confidential information and the application of the
“former client” rule would therefore be meaningless].) Therefore, as to Lawrence and Manek, the
motion would be denied.
Disqualification as to “Other” Corporations
Militello does not attempt to
establish her standing to challenge the other, unspecified corporate entities’
choice of counsel. Thus, the Court denies this disqualification request.
Conclusion
Accordingly, Plaintiff’s motion is tentatively
GRANTED as to ZFZ’s representation of LMP only.
Militello does not give sufficient
basis to strike LMP’s answer and affirmative defenses. Independent counsel will
be able to assess and correct any issues with the answer.
The Court also does not find a
sufficient basis to order disgorgement of ZFZ’s fees incurred by LMP. LMP has
not yet made such a request (despite Plaintiff’s vicarious standing to
disqualify), and ZFZ has not sought an order from this court to obtain any
fees. Plaintiff’s cited authority regard challenged attorneys’ fees motions, or
extreme misconduct (surreptitiously contacting an opposing party, offering to
dismiss the client's action in return for payment of fees directly to the
attorney) and is therefore inapplicable. (See Goldstein v. Lees (1975)
46 Cal.App.3d 614 [in action to recover money due for reasonable value of legal
services rendered, former counsel to corporation could not properly render nor
recover for legal services on behalf of minority shareholder director in proxy
fight designed to gain control of the same corporation where former counsel
held corporate confidences and secrets which were relevant to proxy fight]; Cal
Pak Delivery, Inc. v. United Parcel Service, Inc. (1997) 52 Cal. App. 4th
1, 14-16 [court properly prohibited a disqualified class counsel from receiving
some fees in connection with the action, but such an order was premature with
respect to services rendered before attorney's breach of duties to his client
and to putative class; notably, attorney offered to sell out his client and
class client was seeking to represent for payment to himself personally]; Rodriguez
v. Disner (9th Cir. 2012) 688 F.3d 645, 654 [in determining what fees are
reasonable, a court may consider a lawyer's misconduct which affects the value
of the lawyer's services under its equitable power to require an attorney to
disgorge fees already received, when an attorney represents clients with
conflicting interests]; see also Gregori v. Bank of America (1989) 207
Cal.App.3d 291 [the purpose of a disqualification order must be prophylactic,
not punitive].)
COMPEL
FURTHER RESPONSES AND COMPLIANCE
Compel Further Responses Legal Standard
In the absence of contrary court
order, a civil litigant’s right to discovery is broad. “[A]ny party may obtain
discovery regarding any matter, not privileged, that is relevant to the subject
matter involved in the pending action . . . if the matter either is itself
admissible in evidence or appears reasonably calculated to lead to the
discovery of admissible evidence.” (CCP § 2017.010; see Davies v. Superior Court (1984)
36 Cal.3d 291, 301.)
A motion to compel further responses
to a demand for inspection or production of documents may be brought based on:
(1) incomplete statements of compliance; (2) inadequate, evasive or incomplete
claims of inability to comply; or (3) unmerited or overly generalized
objections. (CCP, § 2031.310(c).) A motion for order compelling
further responses “shall set forth specific facts showing good cause justifying
the discovery sought by the demand.” (CCP § 2031.310(b)(1).) Absent a claim of
privilege or attorney work product, the moving party meets its burden of
showing good cause by a fact-specific showing of relevance. (Kirkland v. Superior Court (2002)
95 Cal.App.4th 92, 98.) The motion must set forth specific facts showing
“good cause” justifying the discovery sought by the demand and must be
accompanied by a declaration showing a “reasonable and good faith attempt” to
resolve the issues outside of court. (CCP §§ 2016.040, 2031.310(b)(2).) If
the moving party has shown good cause for the RPDs, the burden is on the
objecting party to justify the objections. (Kirkland, supra, 95
Cal.App.4th at 98.)
Compel Compliance Legal Standard
Code of Civil Procedure section
2031.320 sets forth the conditions to make a motion to compel compliance with
an inspection demand. That section provides, “If a party filing a response to a
demand for inspection, copying, testing, or sampling … thereafter fails to
permit the inspection, copying, testing, or sampling in accordance with that
party’s statement of compliance, the demanding party may move for an order
compelling compliance.” (CCP § 2031.320(a).) The Civil Discovery Act places no
time limit on such motions. (Standon Co. v. Superior Court (1990) 225
Cal.App.3d 898, 903.) The Court shall impose a monetary sanction against any
party, person, or attorney who unsuccessfully makes or opposes a motion to
compel compliance with a demand, unless it finds that the one subject to the
sanction acted with substantial justification or that other circumstances make
the imposition of the sanction unjust. (CCP § 2031.320(b).)
Discussion
Militello seeks an order: (1)
compelling Lawrence to serve complete, code-compliant, verified responses to
Militello’s RFP Nos. 1 through 69; (2) produce the documents responsive to
these requests for production (RFPs) (or provide a privilege log for the
documents being withheld) without further delay; and (3) for sanctions against
Lawrence and her counsel for costs incurred.
First, the Court finds that the
motion was not properly noticed. Statutory notice for a March 10, 2023, hearing
date being served by email must have been served no later than February 10,
2023, i.e. three (3) days before the noticed service. Second, the separate statement is technically
insufficient. Militello mislabels most of the issues. Third, on February 22,
2023, Lawrence served Further Responses, rendering the motion substantively
moot. (Heller Decl., ¶ 16, Ex. 7.)
Finally, as to the compel
compliance, Lawrence also made a production. Plaintiff does not demonstrate
whether further production is still required. Any outstanding discovery may be
addressed at the scheduled IDC.
Accordingly, Militello’s motion is
DENIED. Here, sanctions are mandatory. Lawrence’s counsel notified Militello about the
procedural defects with the motion, which Militello acknowledged. While counsel requests $10,045 in sanctions,
that amount is grossly unreasonable. The
Court will impose a reasonable sanction of $1,000 against Militello, payable
within 30 days.