Judge: Mark H. Epstein, Case: 23SMCV03541, Date: 2024-02-07 Tentative Ruling

Case Number: 23SMCV03541    Hearing Date: March 6, 2024    Dept: I

This is a motion to disqualify defense counsel.  It is DENIED AS NOT RIPE. 

This is an action against various members of an HOA board and those who performed work on the condominiums.  A demurrer to an earlier version of the complaint was sustained because (in part) it was unclear which causes of action were direct and which were derivative.  Leave to amend was granted and the newest version of the complaint has not yet been filed.  Plaintiffs also note that there is another action where they have sued the contractors directly, suggesting that the new version might be derivative only.

A derivative complaint is one where members of an entity sue the entity and also the alleged wrongdoers.  The entity, however, is only a “nominal defendant.”  It is being sued because it is controlled by others who have chosen not to bring the suit that the plaintiff wants to prosecute.  The key, though, is that any recovery will go to the entity, not the named plaintiff.  To take a common example, a shareholder might sue a corporation, its executives, and its directors for paying excessive compensation to its executives.  If the suit is successful, the executives will have to return the excessive compensation (and the directors may have to pony up), but the money will go back to the corporation; the shareholders will receive no recovery directly, although the value of the stock might increase.  In that case, the corporation (or here, the HOA) is really more of a plaintiff than a defendant.  It will not have to pay any judgment; rather it will receive the benefits of the judgment.  For that reason, there is a potential conflict where the entity and the alleged wrongdoers are represented by the same counsel.  In essence, counsel is representing the true plaintiff and the defense in the same litigation, and that is a conflict of interest.  In some jurisdictions, in order to prevent abuse, the named plaintiff must survive any pleading motions to claim this problem, or at least demonstrate some likelihood of success.  In California, though, the rule is different.  Here, the entity and the alleged wrongdoers cannot be represented by the same attorney and the conflict must be resolved before a merits hearing.  (Forrest v. Baeza (1997) 58 Cal.App.4th 65.)  Thus, upon the filing of the new amended complaint, if the case is derivative then plaintiffs’ motion would appear to have “legs.”  Defense counsel can choose whether to represent the entity or the alleged wrongdoers, but not both.  The court does not believe that plaintiffs have made a showing that defense counsel must be removed from the case entirely.  Presumably, at least to the extent that counsel represents the alleged wrongdoers, it would have received whatever information it has from those whom it represents.  Absent some actual showing of prejudice to the HOA, it would be appropriate for the HOA to retain separate, independent counsel going forward but for current counsel to continue to represent the individuals being sued.

That said, the matter is not yet ripe.  Currently, there is no operative complaint on file.  It could well be that the next iteration is not derivative at all.  If that is the case, then the court is not sure that there is a conflict.  But lest there be some misunderstanding, if the next version of the complaint is in fact derivative in nature, the court would expect the HOA to retain new counsel; no demurrer ought to be filed while defense counsel has this conflict, nor would the court expect to see even a demand motion until new counsel comes on board.