Judge: Peter Wilson, Case: 30-2019-01050162, Date: 2023-05-11 Tentative Ruling
Motions to Disqualify
Intervening Plaintiffs seek to disqualify Zaal Aresh, Esq., counsel for Plaintiff Salvation Investments, LLC, and Garcia Rainey Blank & Bowerbank (GRBB), counsel for Plaintiffs West Coast Lending, Inc., Trenton Rhodes, California Anchor Consulting, Inc. (collectively, West Coast Plaintiffs), from representing Nominal Defendant MO Murrayfield, LLC with respect to the derivative claims in this lawsuit.
For the reasons which follow, the motions are DENIED.
The basis for the motions to disqualify Aresh and GRBB are essentially the same. Intervenors contend that Aresh and GRBB have an actual conflict of interest because they represent Murrayfield with respect to Salvation and West Coast Plaintiffs’ derivative claims, yet they also represent Salvation and West Coast Plaintiffs in direct claims Murrayfield. As such, Intervenors argue that Aresh and GRBB are subject to a per se rule requiring disqualification. Intervenors further contend that Aresh and GRBB have conflicts of interest because Salvation and West Coast Plaintiff have brought significantly more direct claims than derivative claims. As such, Intervenors contend Aresh and GRBB will spend more time on direct clams than the derivative claims. Intervenors also point to the Global Settlement that the Court did not approve as evidence of Aresh and GRBB’s bias in favor of their clients’ direct claims. Further, Intervenors point to Aresh’s familial connections with Salvation as additional proof of his bias and conflict of interests.
As held in Shen v. Miller (2012) 212 Cal.App.4th 48, 55–56:
“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.’ [Citations.]” (SpeeDee Oil, supra, 20 Cal.4th at p. 1145, 86 Cal.Rptr.2d 816, 980 P.2d 371.)
California courts have developed distinct tests for representations involving conflicting interests on the part of an attorney. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 283, 36 Cal.Rptr.2d 537, 885 P.2d 950 (Flatt).) Where an attorney's potentially conflicting representations are simultaneous, “[t]he primary value at stake ... is the attorney's duty—and the client's legitimate expectation—of loyalty.” (Id. at p. 284, 36 Cal.Rptr.2d 537, 885 P.2d 950.) In such cases, the rule of disqualification is a “per se or ‘automatic’ one.” (Ibid.)
Further, “Disqualification is not proper unless an attorney-client relationship exists between [plaintiff’s counsel] and [the company].” (Shen, supra, 212 Cal. App. 4th at 56, citing Koo v. Rubio’s Restaurants, Inc. (2003) 109 Cal.App.4th 719, 729.) The burden of proving the existence of the attorney-client relationship is on the party seeking disqualification. (Id. at 56-57.) Whether an attorney-client relationship exists is a fact-based inquiry that requires consideration of the intent and conduct of the parties and whether any legal advice was sought and provided. (Id. at 57.) “An attorney-client relationship can only be created by contract, express or implied.” (Id.)
In Shen, the defendant made similar arguments as Intervenors make here. Specifically, the defendant argued plaintiff’s counsel should be disqualified from representing plaintiff because plaintiff’s counsel represented the company in a derivative action while simultaneously prosecuting claims against the company in a separate, winding up proceeding and a separate declaratory action. (212 Cal. App. 4th at 53-54.) The Shen court affirmed the trial court’s determination that no attorney-client relationship existed between plaintiff’s counsel and the company because plaintiff’s counsel did not represent the company in the derivative action. (Id. at 58.) Since no attorney-client relationship existed between plaintiff’s counsel and the company, plaintiff’s counsel did not owe any duty of loyalty or confidentiality to the company that required disqualification.
The Shen court rejected defendant’s arguments that an attorney client relationship existed between plaintiff’s counsel and the company merely because a derivative action was brought on behalf of the company. (Id. at 57-58.) Similarly, the Shen court rejected defendant’s argument that because a shareholder bringing a derivative action acts as a guardian ad litem for the corporation, the shareholder’s attorney is automatically deemed counsel for the corporation. The Shen court noted plaintiff, not his counsel, acted as guardian ad litem for the corporation and defendant provided no case law that held a lawyer for a guardian ad litem automatically has an attorney-client relationship with the guardian. (Id. at 61.)
Moreover, the Shen court found there was no basis for disqualification based on any alleged duty of fidelity or confidentiality because, again, there was no attorney-client relationship between plaintiff’s counsel and the company and no evidence that plaintiff’s counsel obtained any confidential information from the company. (212 Cal. App. 4th at 66-68.)
Intervenors do not discuss Shen despite Salvation and West Coast Plaintiffs’ reliance on Shen. Intervenors also do not attempt to demonstrate any attorney-client relationship between Aresh / GRBB and Murrayfield. Significantly, neither Aresh nor GRBB have appeared as counsel for Murrayfield. Murrayfield has been represented by separate counsel in this lawsuit. Accordingly, there is no attorney-client relationship between Aresh or GRBB and Murrayfield that requires disqualification of Aresh or GRBB.
Despite the non-existence of an attorney-client relationship, Intervenors appear to argue that Aresh and GRBB should be disqualified because they have violated some duty of loyalty to Murrayfield by virtue of Salvation and West Coast Plaintiffs’ derivative claims. But Shen rejected this argument. The duty of loyalty arises based on the attorney-client relationship, which Intervenors have not shown exists.
Additionally, Intervenors have not cited to any authority that limits the direct claims a shareholder may bring when also bringing derivative claims. Intervenors point to Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 for the proposition that the direct claims may only be brought against other stockholders or officers and not the company. But this was not an issue raised in Jones because the plaintiff did not sue the corporation. (Id. at 101.)
Although Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211 involved successive lawsuits with the first bringing derivative claims and the second bringing direct claims, the Denevi court considered the argument that plaintiff could not bring a suit on behalf of the company and personally sue it at the same time for the same claims. The Denevi court found there was no authority for that principle but even if true, the claims are not the same. Although there was single course of conduct, the facts giving rise to the derivative claims and direct claim were different. (Id. at 1223.)
Regarding the disqualification of Aresh as counsel for Salvation and bringing derivative claims on behalf of Murrayfield, those arguments seem to go to Salvation’s qualification as a representative, not Aresh’s ability to act as counsel. (See e.g. Gordon v. Caribbean Cruise Line, Inc. (N.D. Ill. 2019) 2019 WL 498937, *8 [majority of courts prohibit class attorneys and their relatives from acting as class representatives].) If Aresh is disqualified based on his relationship with Salvation, the same argument would appear to apply to Intervenors and their counsel.
Intervenors are ordered to give notice.
Motion to Appoint Lead Party/Counsel
Intervening Plaintiffs Norman Rockmaker, as Trustee of the Norbrite, Inc. Retirement Trust, Alice Noble, as Trustee of the Noble Family Trust dated 11/21/83, Mike Rozenblatt, as Trustee of the Manhattan Revocable Trust Dated 4/16/2013, and Eric Swindeman (collectively, Intervenors) seek to be appointed lead plaintiffs and to appoint their counsel, EDGE, A Professional Law Corporation, as lead counsel.
For the reasons which follow, the motion is DENIED.
The Court has the authority to appoint lead plaintiff and lead counsel pursuant to its CCP §§ 128 and 187, and CRC Rule 3.750(b)(7). But there is no standard to determine when appointing lead plaintiffs is necessary or appropriate in a case such as this.
Appointment of Lead Plaintiffs. Intervenors contend their appointment as lead plaintiffs is necessary because Salvation and West Coast Plaintiffs have conflicts of interests due to their direct actions and cannot adequately represent Murrayfield and the unrepresented shareholders. Intervenors point to the unapproved settlements as evidence of the adverse interests of Salvation ad West Coast Plaintiffs. These arguments are similar to what Intervenors argued in their disqualification motions. However, these arguments are more persuasive in this context because as explained in greater detail in the disqualification motions, by bringing derivative claims on behalf of Murrayfield, Salvation and West Coast Plaintiffs act as guardians ad litem to Murrayfield. (Shen v. Miller (2012) 212 Cal.App.4th 48, 61.) The positions Salvation and West Coast Plaintiffs took in connection with the unapproved settlements were not in the best interests of Murrayfield or the unrepresented shareholders.
In contrast to Salvation and West Coast Plaintiffs, Intervenors do not have direct claims against Murrayfield. Intervenors’ derivative claims are also broader than Salvation’s and West Coast Plaintiffs’ because they include claims that arose after the filing of Salvation’s and West Coast Plaintiffs’ operative complaints. Thus, Intervenors’ FAC encompasses all the derivative claims brought by Salvation and West Coast Plaintiffs while asserting additional derivative claims.
Although Intervenors do not have direct claims against Murrayfield, they have been accused of acting in their own interests, secretly engaging in settlement discussions with TwinRock Defendants for their own benefit and to the detriment of the Murrayfield, violating the mediation privilege and confidentiality, of killing the momentum towards settlement in this action, and delaying the Missouri Action. See ROA 2188, Bowersbank Decl., ¶¶3-6; ROA 2184, TwinRock Defendants’ Opp., pp. 7-8; ROA 2182, Salvation’ Opp., p. 6. These allegations appear overstated.
Intervenors did not seek payment to Murrayfield in their demand in December 2022, but they made a settlement demand on behalf of all shareholders. ROA 2196, Unredacted Rozenblatt Decl., Ex. 4. As such, Intervenors did seek to protect the interest of all shareholders.
Additionally, Intervenors objected to the unapproved settlements, and their objections had merit since there was no compensation to Murrayfield and the unrepresented shareholders and would have resolved the derivative claims with prejudice. Intervenors appeared to raise valid concerns about who was representing Murrayfield’s interests in this action and the Missouri Action. So while it is true that Intervenors stopped the “momentum” in this case and delayed the Missouri Action, the Court cannot conclude Intervenors’ actions were unjustified, unnecessary, or for their benefit only.
TwinRock Defendants and West Coast Plaintiffs also argue that Intervenors should not be lead plaintiffs because of the relationships between their counsel, Daniel Rozenblatt, and certain Intervenors, particularly his father. This was discussed in the disqualification motions and applies to Salvation and Attorney Aresh as well. Attorney Aresh also has a personal relationship with Phillips. ROA 2071, Ex. 4.
Moreover, each of the plaintiff groups suffer from the same issue of having been allegedly expelled as members of Murrayfield. As such, whether any of them has standing to bring derivative claims is undetermined.
Finally, Salvation raises a valid point about how the intervening action is subordinate to the main actions, and the derivative claims are only a small portion of the action.
Appointment of Lead Counsel. As West Coast Plaintiffs point out, California courts have generally considered various factors, including but not limited to: (i) who will best serve the interest of the plaintiffs, (ii) experience and prior success, (iii) the quality of the pleadings, (iii) the vigorousness of the prosecution, and (iv) whether plaintiffs are represented by capable counsel. ROA 2176, West Coast Plaintiffs’ Opp., p. 5.
Taking all these factors into account, it does not presently appear to be necessary or appropriate to designate any party as a lead party, or any counsel as lead counsel.
Salvation and West Coast Plaintiffs’ counsel have been involved in this matter from the beginning and are more familiar with the history of the case, the evidence, and the respective positions of the parties. It also appears that counsel for Salvation and West Coast Plaintiffs have a more cordial relationship with counsel for the other parties. All parties will at all times be given an opportunity to be heard on all issues, and it is entirely unclear how an appointment as lead party or lead counsel will work in practice in a case such as this.
What is very clear is that all parties need to maintain professional civility to each other, and that the plaintiff groups need to properly coordinate and cooperate with respect to the derivative claims.
The Motion is DENIED.
Intervenors are ordered to give notice.