Judge: Monica Bachner, Case: 21STCV18722, Date: 2022-10-03 Tentative Ruling

Department 71: Attorneys who elect to submit on these published tentative rulings, without making an appearance at the hearing, may so notify the Court by communicating this to the Department's staff at (213) 830-0771 before the set hearing time.  See, e.g., CRC Rule 324(b).   All parties are otherwise encouraged to appear by Court Call for all matters.

Case Number: 21STCV18722    Hearing Date: October 3, 2022    Dept: 71

Superior Court of California

County of Los Angeles

DEPARTMENT 71

TENTATIVE RULING 

Defendants/Cross-Defendants Victor Wang’s, Raymond Wang’s, and SRS Infrastructure, LLC’s motion to disqualify Defense Counsel, Plotkin, Marutani & Kaufman, LLP and each of its attorneys, including Jay J. Plotkin, is granted.

          Defendants/Cross-Defendants Victor Wang (“Victor”), Raymond Wang (“Raymond”), and SRS Infrastructure, LLC (“SRS Infrastructure”) (collectively, “Wang Defendants”) move for an order to disqualifying Plotkin, Marutani & Kaufman, LLP (“PMK”) and each of its attorneys, including Jay J. Plotkin (“Plotkin”), (collectively, “Defense Counsel”), defense counsel for Defendants/Cross-Complainants WWC Corp. (“WWC Corp.”), Jonathan Clark (“Clark”), Adam Blanke (“Blanke”), William Wilmarth (“Wilmarth”) (collectively, “WWC Defendants”), and WWC Holdings LLC (“WWC LLC”). The Wang Defendants move for disqualification on the basis PMK and Plotkin are currently improperly representing WWC Corp. while concurrently representing Clark, Blanke, and Wilmarth (collectively, “Principals”), whose have directly adverse interests to WWC Corp. (Notice of Motion, pg. 3.)  Further, the Wang Defendants move for disqualification of Defense Counsel because they have improperly represented WWC LLC, which is an entity owned and controlled exclusively by the Wang Defendants.  (Notice of Motion, pg. 3.)

          Background

          This suit was initiated by Plaintiffs Carroll H. Caswell, Jr. (“Carroll”), Patricia A. Caswell (“Patricia”), and their family trust (collectively, “Caswells”) (collectively, “Plaintiffs”), who alleged Clark (erroneously sued as “Jonathon Cole”) “hoodwinked” the Caswells, an elderly couple, into entering “a dubious foreclosure defense strategy” to “protect their home from foreclosure, which was to be carried out through a joint venture that required the Caswells to convey by deed an interest in their home to [Clark]’s company.” (Complaint ¶¶1-2.)  On May 18, 2021, Plaintiffs filed their complaint alleging eleven causes of action against WWC LLC, WWC Corp., Clark, Raymond, and Victor for (1) financial elder abuse; (2) breach of fiduciary duty; (3) aiding and abetting a breach of fiduciary duty; (4) breach of joint venture agreement; (5) dissolution of joint venture; (6) declaratory relief; (7) slander of title; (8) cancellation of deed; (9) quiet title; (10) fraudulent transfer; and (11) partition.  Plaintiffs settled and dismissed their complaint on August 23, 2021.

          WWC LLC, WWC Corp., and Clark filed a cross-complaint (“WWC Cross-Complaint”) against the Wang Defendants on June 1, 2021, and a First Amended Cross-Complaint (“FACC”) on June 3, 2021, alleging eleven causes of action.  On April 14, 2022, this Court sustained the Wang Defendants’ demurrer to the FACC without leave to amend and dismissed WWC LLC and Clark from WWC’s crossclaim. This Court granted WWC Corp. leave to amend the FACC on its remaining claims against the Wang Defendants.  On April 25, 2022, WWC Corp. filed its Second Amended Cross-Complaint (“SACC”) alleging six causes of action for (1) concealment of material facts; (2) conversion; (3) breach of fiduciary duty; (4) intentional interference with contractual relations; (5) intentional interference with prospective economic relations; and (6) accounting.

The Wang Defendants, along with Cub Capital, LLC (“Cub Capital”), and Optimal Property, LLC (“Optimal”), filed their cross-complaint (“Wang Cross-Complaint”) against WWC Defendants on February 16, 2022, arising from an alleged dispute between real estate lender/investor Raymond, his son Victor, and WWC Defendants.  (Wang Cross-Complaint ¶14.)  The Wang Cross-Complaint alleges WWC Defendants operated a consumer-direct foreclosure defense business and Raymond was a lender/investor to WWC Corp., lending approximately $7 million in funds to WWC Corp. through Raymond’s entities Cub Capital and/or Optimal to pay off delinquent mortgages, rehabilitate properties, and then be repaid. (Wang Cross-Complaint ¶¶15-16.)  The Wang Cross-Complaint alleges Victor was formerly employed by WWC Corp.  (Wang Cross-Complaint ¶16.)  As part of the alleged business arrangement, Raymond and his entities were to become the owners of special purpose limited liability companies and receive a security interest in the real properties that were identified by the WWC Defendants, as well as receive monthly interest payments on any loans made to WWC Corp., and WWC Corp. would receive a real estate commission upon selling a rehabilitated distressed property, and occasionally a portion of the profits from the sale. (Wang Cross-Complaint ¶16.) The Wang Cross-Complaint alleges the WWC Defendants wrecked the WWC Corp. and stole Raymond’s money by falsifying documents and records, entering into illegal loan agreements, breaching contracts with consumers, self-dealing, denying access to records, and diverting WWC Corp. funds for their own unauthorized bonuses and salaries. (Wang Cross-Complaint ¶17.) The Wang Cross-Complaint alleges eleven causes of action: (1) breach of series seed preferred stock purchase agreement (Raymond against WWC Corp.); (2) breach of investor rights agreement (Raymond against WWC Defendants); (3) breach of credit agreement by Raymond, Cub Capital, and Optimal against WWC Corp.); (4) breach of fiduciary duty (Raymond against Principals); (5) breach of oral contract (Raymond and Victor against WWC Defendants); (6) slander of title (Wang Defendants against WWC Defendants); (7) promissory estoppel (Raymond and Victor against WWC Defendants); (8) intentional misrepresentation [fraud] (Raymond, Victor, Cup Capital, and Optimal against WWC Defendants); (9) negligent misrepresentation [fraud] (Raymond, Victor, Cub Capital, and Optimal against WWC Defendants); (10) declaratory relief (Wang Defendants against WWC Defendants); and (11) accounting (Wang Defendants, Cub Capital, and Optimal against WWC Defendants).

On June 3, 2022, the Wang Defendants filed the instant motion to disqualify Defense Counsel, arguing there is a conflict in the concurrent representation of the WWC Defendants.  (Motion, pg. 5.)  On September 19, 2022, the WWC Defendants filed their opposition.  On September 26, 2022, the Wang Defendants filed their reply.

Legal Standard

Rule 1.7 of the California State Bar’s Rules of Professional Conduct provides:

1. A lawyer shall not, without informed written consent from each client and compliance with paragraph (d), represent a client if the representation is directly adverse to another client in the same or a separate matter.

    

   …

    

(d)   Representation is permitted under this rule only if the lawyer complies with paragraphs (a), (b), and (c), and:

1. the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

    

(2)      the representation is not prohibited by law; and

(3)     the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.

(Cal. R.P.C. Rule 1.7(a), (d).)

“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.’ [Citation.]” (People ex rel. Department of Corporations v. Speedee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145 [Speedee].)

“A motion to disqualify a party’s counsel may implicate several important interests, such as a client’s right to chosen counsel, an attorney’s interest in representing a client, the financial burden on a client to replace disqualified counsel, and the possibility that tactical abuse underlies the disqualification motion. [Citations.]”  (Speedee, supra, 20 Cal.4th at pgs. 1144-1145.) Ultimately, disqualification motions involve a conflict between the clients’ right to counsel of their choice and the need to maintain ethical standards of professional responsibility. (Comden v. Superior Court (1978) 20 Cal.3d 906, 915.)  “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. [Citations.]” (Speedee, supra, 20 Cal.4th at pg. 1145.)

The primary attorney duty at stake is that of loyalty, and generally disqualification in concurrent representation cases is “automatic.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284; Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209, 216; M’Guinness v. Johnson (2015) 243 Cal.App.4th 602, 614.)

Analysis

Conflict between WWC Corp. and the Principals

The Wang Defendants allege the Principals have harmed WWC Corp. and Raymond because the Principals breached their fiduciary duty of utmost care owed to Raymond as owner by mismanaging WWC Corp., commingling funds, falsifying corporate records, and usurping corporate assets for their own personal gain.  (Wang Cross-Complaint ¶¶67-68.)  Raymond declares that he has an ownership interest in WWC Corp., supported by a January 4, 2019 email Clark sent to Raymond that states, “[h]ere are the documents for your seed investment. This includes the Form D that was filed with the SEC.”  (Decl. of Wang ¶2, Exh. E.)  The Wang Defendants argue the documents attached to the email clearly establish that Raymond owned no less than 750,000 shares of preferred stock at that time, which later increased.  (Decl. of Wang ¶2.)  The documents attached to the email include a fully executed Series Seed Preferred Stock Purchase Agreement, Investor Rights Agreement, and a Form D that Clark filed with the SEC showing the stock purchase.  (Decl. of Wang ¶2, Exh. E.)  Further, the Wang Defendants allege the Principals harmed Raymond because the Principals breached an oral contract with Raymond by falsifying documents and mismanaging WWC Corp.  (Wang Cross-Complaint ¶75.) 

Here, as in Forrest v. Baeza, where a lawyer was simultaneously representing both several corporations and their corporate directors accused of embezzling from, and subjecting the corporations to, penalties for tax fraud, WWC Corp. is nominally a cross-defendant and the cross-complainant because WWC Corp. stands to benefit from recovery in the event the Wang Defendants’ allegations are proven.  (Forrest v. Baeza (1997) 58 Cal.App.4th 65, 74.)  In disqualifying counsel, the Forrest Court stated that “[c]urrent 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.” (Ibid.)  The Forrest Court further held that “[i]n all but a few instances, the rule of disqualification in simultaneous representation cases is a per se or ‘automatic’ one.” (Ibid.)

The court in La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court similarly held that “where a shareholder has filed an action questioning [company] management or the actions of individual officers or directors, such as in a shareholder derivative action, corporate counsel cannot represent both the corporation and the officers, directors or shareholders with which the corporation has a conflict of interest.”  (La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court (2004) 121 Cal.App.4th 773, 785-786; see also, Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal.App.4th 477, 489 [automatically disqualifying law firm based on its concurrent representation of an LLC and one of two members, where member-client was accused of breaches of fiduciary duty and had conflicting interest with the LLC].)

Indeed, there is a conflict even where there is no derivative action plead, as was the case in Gong v. RFG Oil, Inc. (Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209, 216 [Gong].)  In Gong, the plaintiff owned 49 percent of a corporation and the defendant stockholder 51 percent. (Id. at pg. 212.)  After the plaintiff and defendant had a falling out, the corporation terminated the plaintiff’s employment and forced his resignation from the board. (Ibid.) The plaintiff sued the defendant shareholder and the corporation, and a single firm concurrently represented defendants. (Ibid.)  The plaintiff moved to disqualify the firm from representing the corporation and the court of appeal reversed the trial court’s denial of the motion because the plaintiff had alleged that the defendant shareholder had wrongfully conducted the affairs of the corporation to further his own interests by, for example, using corporate funds to pay down loans in the defendant shareholder’s own name.  (Id. at pg. 216.)

Further, Defense Counsel did not obtain a conflict waiver from Raymond in his capacity as director prior to representing WWC Defendants.  (See Decl. of Wang ¶2, Exh. E; Supp. Decl. of Wang ¶¶3, 5, 8, Exhs. H, I, J, K.)  WWC Corp.’s bylaws state, “the business affairs of [WWC Corp.] shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors.”  (Supp. Decl. of Wang ¶8, Exh. K §3.1.)  Per WWC Corp.’s Restated Certificate of Incorporation, the holder of Series Seed Preferred Stock has the express right to appoint one board member.  (Supp. Decl. of Wang ¶5, Exh. H §2.2.)  Raymond declares that he designated himself director of WWC Corp. after he became a Series Seed Preferred stockholder and attended board meetings and signed corporate resolutions on behalf of WWC Corp. in his capacity as director.  (Supp. Decl. of Wang ¶5; Decl. of Wang, Exh. E.)  The Principals dispute Raymond’s assertion that he has ever been a director, and claim the that Clark, Blanke, and Wilmarth have been the only directors of WWC Corp. since its inception. (Decl. of Clark ¶¶2-3.)

Rule 1.13 of the Rules of Professional Conduct of the California State Bar expressly provides that “[i]f the organization’s consent to the dual representation is required by any of these rules, the consent shall be given by an appropriate official, constituent, or body of the organization other than the individual who is to be represented, or by the shareholders.”  (See also Forrest, supra, 58 Cal.App.4th at pg. 76 [“[I]t would be meaningless in derivative litigation to allow the consent of the parties defendant to exculpate the practice of dual representation, for most often it would be the defendant directors and officers who would force the corporation’s consent.”]); Pringle v. La Chapelle (1999) 73 Cal.App.4th 1000, 1006 [determining CEO of corporation who was sued for sexual harassment along with corporation did not have power to consent to waive conflict on behalf of corporation.]; California Bar Formal Ethics Opinion No. 1994-137 [addressing situation where a lawyer representing a partnership is given conflicting direction from two partners as to whether or not to file a particular action, the California Bar stated “where the lawyer cannot reasonably determine which partner’s instruction the lawyer may follow, the lawyer cannot take any action for the partnership in connection with the matters in dispute”].)  In opposition, the WWC Defendants argue the Principals have signed waivers of any conflict of interest, so no R.P.C. Rule 1.3 issue exists.  (Decl. of Clark ¶14, Exh. A.)  However, the Principals’ waiver to allow Defense Counsel to concurrently represent their interests does not cure the conflict between the Principals and WWC Corp., which the Wang Defendants allege has been harmed by the Principals.  (Wang Cross Complaint ¶¶67-68, 75.)

Further, Clark’s former counsel, Salvin, admitted there was a dispute over the ownership of WWC Corp., stating that his clients “dispute the ownership of WWC Corp. We claim we own it, not your client. We claim your client is not a shareholder of WWC Corp. The very issue of shareholder status is at issue.”  (Decl. of Weinstein ¶3, Exh. B.)  Courts directly warn corporate counsel to avoid involvement in corporate control disputes between shareholders, which is also at issue in this case: “Corporate counsel should of course, refrain from taking part in any controversies or factional differences among shareholders as to control of the corporation, so that he or she can advise the corporation without bias or prejudice.” Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995) 36 Cal.App.4th 1832, 1842, as modified on denial of reh’g (Aug. 11, 1995); see also Goldstein v. Lees (1975) 46 Cal.App.3d 614, 622 [“In acting as the corporation’s legal adviser he must refrain from taking part in any controversies or factional differences which may exist among shareholders as to its control.”].)

The conflicts between WWC Corp. and the Principals cannot be waived because the pleadings allege a dispute between the corporation and an officer, director, or shareholder. (Gong, supra, 166 Cal.App.4th at pg. 216.)  Defense Counsel must withdraw from the entire matter under California’s automatic disqualification rule applicable to concurrent representation. (Truck Insurance Exchange v. Fireman’s Fund Insurance Co. (1992) 6 Cal.App.4th 1050, 1060, reh’g denied and opinion modified (June 10, 1992); Flatt, supra, 9 Cal.4th at pg. 288 [“So inviolate is the duty of loyalty to an existing client that not even by withdrawing from the relationship can an attorney evade it.”].). Accordingly, Defense Counsel is disqualified from representing WWC Corp. and the Principals.

Based on the foregoing, Defendants’/Cross-Defendants’ motion to disqualify Defense Counsel is granted.

Dated:  October _____, 2022

Hon. Monica Bachner

Judge of the Superior Court