Judge: Robert B. Broadbelt, Case: 22STCV38301, Date: 2023-05-04 Tentative Ruling

Case Number: 22STCV38301    Hearing Date: May 4, 2023    Dept: 53

Superior Court of California

County of Los Angeles – Central District

Department 53

MOVING PARTY:                Plaintiff Forex Express Corp., d/b/a WireCash

RESPONDING PARTIES:    Defendants Eliran Grushkowsky and Fernando Fayzano

Motion to Disqualify Counsel

The court considered the moving, opposition, and reply papers filed in connection with this motion.

EVIDENTIARY OBJECTIONS

The court rules on defendants’ evidentiary objections to the affidavit of Jonathan Cooper as follows:

Objections Nos. 1-3, and 8 are sustained.

Objections Nos. 4-7 are overruled.

DISCUSSION

Plaintiff Forex Express Corp., d/b/a WireCash (“Plaintiff”) moves the court for an order disqualifying Michael Murphy (“Murphy”) and Murphy’s law firm, Ervin Cohen and Jessup LLC (“ECJ”) (collectively, “Counsel”), as counsel for defendants Eliran Grushkowsky (“Grushkowsky”) and Fernando Fayzano (“Fayzano”) (“Defendants”) in this action.

“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.’”  (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145 (“SpeeDee Oil”).)  “In evaluating alleged conflicts, a court first looks to whether the challenged representation is concurrent or successive.”  (Ontiveros v. Constable (2016) 245 Cal.App.4th 686, 695.)  “The ‘primary value’ at issue in concurrent ‘or dual representation is the attorney’s duty—and the client’s legitimate expectation—of loyalty….’”  (Ibid.)  The value jeopardized by the successive representation of clients with potentially adverse interests “is that of client confidentiality.”  (Ibid.)  “The paramount concern [when resolving disqualification motions] must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar.”  (SpeeDee Oil, supra, 20 Cal.4th at p. 1145.)

Here, the parties do not appear to dispute that Counsel previously represented Plaintiff, but instead dispute the scope of the representation.

Plaintiff contends that Counsel previously represented Plaintiff with respect to the subject matter that is at issue in this action (i.e., the allegedly illusory Pontual offer).  In support of this assertion, Plaintiff presents (1) ECJ invoices, billed to “[Plaintiff] [¶] Attn: Ran Grushkowsky,” which show that ECJ billed Plaintiff for fees incurred by, inter alia, performing research and review of documents for the potential Pontual acquisition, reviewing Plaintiff’s corporate documents for stockholder meetings, and preparing for and attending stockholder meetings, and (2) an email from Murphy, in which Murphy stated that “the matters for which [Counsel was] retained to represent [Plaintiff] involve: . . . (2) the potential deal with Pontual.”  (Cooper Decl., Exs. 3, 7.) 

Defendants contend that disqualification is not warranted because an exception to the successive representation rule (which prohibits an attorney from representing a successive client in current litigation adverse to a former client’s interest where there is a substantial relationship between the subjects of the former and current representations) applies, and because there is no substantial relationship between this action and Counsel’s previous representation of Plaintiff.  As to the scope of Counsel’s representation, Defendants present the declaration of Murphy, in which Murphy states that (1) on September 12, 2019, Counsel was retained to represent Grushkowsky and Plaintiff jointly with respect to accusations and demands for corporate records from, and in an action eventually filed by, Jonathan Cooper; (2) Murphy did read the letter of intent to acquire Plaintiff that was submitted by Pontual; (3) Murphy conducted an in person meeting at his office with two other law partners and Grushkowsky, during which they discussed tax consequences with respect to the Pontual offer and other issues; (4) Mr. Kermani, a corporate partner for ECJ, drafted a list of due diligence items he would recommend asking from Pontual as well as a redline of the Pontual letter of intent; and (5) Murphy attended the (i) November 18, 2019 shareholder meeting, during which Grushkowsky presented the Pontual deal to the shareholders, and (ii) November 25, 2019 Board Meeting, during which no agreement to proceed with the Pontual deal was reached.  (Murphy Decl., ¶¶ 8-10, 32, 34, 37, 39, 42.)  Counsel asserts that its representation of Plaintiff “was for a short period—September 2019 through December 2019.”  (Murphy Decl., ¶ 4.)

The court finds that (1) Plaintiff has standing to bring this motion since it had a past attorney-client relationship with Counsel; (2) an exception to the rule of successive representation applies as to Counsel’s representation of defendant Grushkowsky; (3) the rule of successive representation bars Counsel’s representation of defendant Faynazo; and (4) Plaintiff has not made a sufficient showing establishing that Counsel is likely to be called as a witness at trial in this action.

A.     Standing

The court finds that Plaintiff has shown that it had an attorney-client relationship with Counsel and therefore has standing to bring this motion.  (Great Lakes Construction, Inc. v. Burman (2010) 186 Cal.App.4th 1347, 1356 [“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”]; Cooper Decl., Exs. 3, 7 [December 31, 2019 email from Murphy acknowledging that Counsel represented Plaintiff regarding “the potential deal with Pontual”].)

B.    Exception to Successive Representation Rule

The court finds that the exception to the successive representation rule set forth in Forrest v. Baeza (1997) 58 Cal.App.4th 65 and its progeny applies to Counsel’s representation of Grushkowsky.

“Successive representation rules . . . generally do not prevent an attorney from continuing to represent insiders in a derivative lawsuit even though a substantial relationship exists between the attorney’s previous representation of the company and the attorney’s current representation of insiders in the company’s lawsuit against them.”  (Beachcomber Management Crystal Cove, LLC v. Superior Court (2017) 13 Cal.App.5th 1105, 1118 (“Beachcomber”).)  This is a separate rule that is based on “a recognition that insiders are the source of a closely held company’s confidential information.”  (Id. at pp. 1118-1119.)  Under those circumstances, a company’s insiders often are the source of all confidential information that an attorney may receive in representing the company, so “it would be meaningless to apply the successive representation rules to prevent an attorney who previously represented the company from representing the company’s insiders.”  (Id. at p. 1119.)  This rule has “supplanted the generally applicable successive representation rule and now governs in derivative lawsuits involving a closely held company in which a limited number of insiders are responsible for the company’s operations and possess or are privy to its confidential information.”  (Id. at p. 1121.)

First, although Plaintiff contends that the court should not apply this exception since this is not a shareholder derivative action, the court finds that this exception is applicable because (1) courts have applied this rule to actions in which the plaintiff has also alleged direct causes of action, and (2) the rationale behind this exception equally applies to the circumstances presented here.  (Ontiveros, supra, 245 Cal.App.4th at p. 690 [plaintiffs asserted direct and derivative claims].)

Second, the court finds that Defendants have presented evidence showing that Plaintiff is a small company, and that Grushkowsky was an “insider” responsible for Plaintiff’s operation. 

Grushkowsky states in his declaration that (1) Plaintiff is a non-public corporation formed in Nevada, and at the date of his resignation, it had fewer than 30 shareholders, with two-thirds of the shares held by three shareholders, including Grushkowsky; (2) from 2016 through 2019, Grushkowsky was the CEO of Plaintiff; (3) in his capacity as CEO, Grushkowsky “directed, supervised, and was responsible for all aspects of [Plaintiff’s] operations, fundraising, and development[;]” and (4) Jonathan Cooper had no role in the day-to-day operations, business, or development of Plaintiff during this time period and through December 13, 2019.  (Grushkowsky Decl., ¶¶ 9, 11-12.)  The court finds that this evidence shows that Grushkowsky was an “insider” for Plaintiff during the time in which Counsel represented Plaintiff.

Third, the court finds that Defendants have presented evidence showing that Counsel received confidential information about Plaintiff from Grushkowsky, and thus has shown that Grushkowsky had access to the same information as Counsel when representing Plaintiff.

In his declaration, Murphy states that, “throughout that entire three month period of [his] representation [of Plaintiff], the only person from whom [he] ever received confidential and privileged information related to [Plaintiff] was Mr. Grushkowsky[;]” that Grushkowsky “was the only person who ever had authority on behalf of [Plaintiff] to communicate with [Murphy;] and it was Mr. Grushkowsky who provided all [of Plaintiff’s] information related to [his] representation” of Plaintiff.  (Murphy Decl., ¶¶ 6 [emphasis in original], 18 [“no person other than Mr. Grushkowsky ever communicated confidential information about [Plaintiff] to” him].)

Further, Murphy states that his conversations with other officers and shareholders of Plaintiff occurred only when Grushkowsky was present.  (Murphy Decl., ¶¶ 19, 36, 58.)  John Gibbs Makoff, who manages an entity that is a shareholder of Plaintiff, supports this assertion by stating in his declaration that, although he spoke to Murphy, his communications with Murphy were “always with Mr. Grushkowsky present[.]”  (Makoff Decl., ¶ 18.)  Makoff further states that the four discussions he had with ECJ after Plaintiff’s December 26, 2019 shareholder meeting did not concern Plaintiff, other than (i) Murphy’s statements that he continued to represent Grushkowsky and was terminating his representation of or no longer represented Plaintiff, and (ii) Makoff’s statement that he had no authority to speak to Plaintiff’s counsel or accept Murphy’s resignation.  (Makoff Decl., ¶¶ 27-29, 31, 34-35.)

The court therefore finds that Defendants have submitted evidence establishing that (1) Plaintiff is a small or closely held company; (2) Grushkowsky, as Plaintiff’s CEO and officer responsible for handling all aspects of Plaintiff’s operations, was an “insider” that was “so intertwined [with Plaintiff] that any distinction between the two is entirely fictional[;]” and (3) Grushkowsky “had access to the same information as [Counsel] who represented” Plaintiff and Grushkowsky.  (Beachcomber, supra, 13 Cal.App.5th at pp. 1119, 1122.)  Thus, as the source of Plaintiff’s confidential information, Grushkowsky “could provide their new attorney with the same information” that Counsel had, such that disqualifying Counsel “would serve no purpose….”  (Ibid.)

Finally, the court notes that Plaintiff contends that this exception does not apply to Grushkowsky because he was not the “sole repositor[y]” of Plaintiff’s information.  However, “[i]t does not matter whether the insiders were the ‘sole repositories’ of confidential information or that other employees or representatives also had access or possessed confidential information. . . . .  [Instead,] [a]pplication of the Forrest rule turns on whether the insiders had access to the same information as the attorney who represented both the insiders and the company.”  (Beachcomber, supra, 13 Cal.App.5th at p. 1122.)  For the reasons set forth above, Defendants have presented evidence showing that Grushkowsky had access to or possessed the same confidential information that Counsel had when representing Grushkowsky and Plaintiff. 

The court therefore finds that the Forrest exception applies to Counsel’s representation of Grushkowsky and does not require or support disqualification of Counsel.

C.    Successive Representation Rule

The court finds that Plaintiff has established that Counsel may not represent Fayzano in this action pursuant to the successive representation rule.

“A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s* interests are materially adverse to the interests of the former client unless the former client gives informed written consent.*”  (Cal. Rules of Prof. Conduct, Rule 1.9, subd. (a).)  Courts use the “substantial relationship” test when considering whether to order the disqualification of an attorney from undertaking representation adverse to a former client.  (Adams v. Aerojet-General Corp. (2001) 86 Cal.App.4th 1324, 1331.)  “‘ “When a substantial relationship has been shown to exist between the former representation and the current representation, and when it appears by virtue of the nature of the former representation or the relationship of the attorney to his former client confidential information material to the current dispute would normally have been imparted to the attorney or to subordinates for whose legal work he was responsible, the attorney’s knowledge of confidential information is presumed.  [Citation.]” ’”  (Ibid.)  

First, the court notes that Defendants contend that disqualification of Counsel as to their representation of Fayzano is not warranted because Grushkowsky could share the same privileged information with Fayzano as co-defendants.  The court disagrees.  Defendants have not cited any authority establishing that Grushkowsky is permitted to share all of Plaintiff’s confidential information to his co-defendants.  Further, the Forrest exception does not apply to Fayzano because there is no evidence that Fayzano was an “insider” of Plaintiff.

Second, the court finds that Plaintiff has established the existence of “a substantial relationship between the subjects of the antecedent and current representations.”  (Ontiveros, supra, 245 Cal.App.4th at p. 695 [emphasis in original] [internal quotations omitted].)

The court considers three factors in applying the substantial relationship test: “(1) factual similarities between the two representations, (2) similarities in legal issues, and (3) the nature and extent of the attorney’s involvement with the case and whether he was in a position to learn of the client’s policy or strategy.”  (Adams, supra, 86 Cal.App.4th at p. 1332.)  This “test ‘is “intended to protect the confidences of former clients when an attorney has been in a position to learn them” ’[.]”  (Ibid.)

The court finds that there are factual and legal similarities between the two representations.

As set forth above, Counsel represented Plaintiff regarding “the potential deal with Pontual[,]” which included advising Plaintiff and Grushkowsky on various matters involving the offer, including tax consequences, due diligence items, a redline of the Pontual letter of intent, and Counsel’s attendance at shareholder and board meetings during which the Pontual deal was discussed.  (Cooper Decl., Ex. 7; Murphy Decl., ¶¶ 34, 37, 39, 42.)  The court notes that Counsel asserts that the due diligence items to ask Pontual and redline of the Pontual letter of intent drafted by Mr. Kermani was likely not sent to Pontual based on Plaintiff’s decision not to respond to the letter of intent formally.  (Murphy Decl., ¶ 37.)  However, Counsel still prepared these items in anticipation of negotiating the offer from Pontual, even if they were never sent to Pontual.  (Ibid.)

Here, Plaintiff has alleged in its First Amended Complaint filed in this action that (1) Grushkowsky conspired with Pontual and Fayzano to steal Plaintiff’s trade secrets; (2) in order to further that plan, Grushkowsky and Pontual “decided that they would make an illusory offer to purchase” Plaintiff, which they knew would be rejected; (3) Fayzano, on behalf of Pontual, provided Plaintiff with the written illusory offer;    (4) Grushkowsky refused to provide the information necessary to properly evaluate the offer because it would reveal, inter alia, that Grushkowsky would benefit more than other shareholders and that it was a bad deal for Plaintiff and its shareholders; and (5) Grushkowsky then resigned from Plaintiff and misappropriated its trade secrets.  (FAC ¶¶ 65, 69-70, 73-74, 80, 96.)

The court therefore finds that (1) the evidence establishes that Counsel was involved in advising Grushkowsky and Plaintiff regarding various details of the Pontual deal, including by advising them on tax consequences and providing them with due diligence items to ask Pontual in negotiations, and (2) Plaintiff’s action concerns the factual circumstances regarding the offer and negotiation of the Pontual deal, including as to whether (i) Grushkowsky and Fayzano made an illusory offer as part of a scheme to steal Plaintiff’s trade secrets, and (ii) Plaintiff’s rejection of the offer.  The court further finds that, given Counsel’s involvement in the case, it is likely that Counsel would have acquired confidential information relevant to the matters presented in this action.

Thus, the court finds that there is a substantial relationship based on Counsel’s “direct professional relationship with [Plaintiff] in which [Counsel] personally provided legal advice and services on a legal issue that is closely related to the legal issue in the present representation.”  (M’Guinness v. Johnson (2015) 243 Cal.App.4th 602, 614.)

The court therefore finds that disqualification of Counsel as counsel of record for defendant Fayzano is appropriate.

D.    Advocate-Witness Rule

“The ‘advocate-witness rule,’ which prohibits an attorney from acting both as an advocate and a witness in the same proceeding, has long been a tenet of ethics in the American legal system, and traces its roots back to Roman law.”  (Kennedy v. Eldridge (2011) 201 Cal.App.4th 1197, 1208.). “A lawyer shall not act as an advocate in a trial in which the lawyer is likely to be a witness” unless exceptions apply.  (Cal. Rules of Prof. Conduct, Rule 3.7, subd. (a).)

The court finds that Plaintiff has not met its burden to show that Counsel is “likely to be a witness” at the trial in this action.  (Cal. Rules of Prof. Conduct, Rule 3.7, subd. (a).)  The court therefore finds that disqualification of Counsel is not warranted on this ground.

ORDER

The court grants in part and denies in part plaintiff Forex Express Corp., d/b/a WireCash’s motion to disqualify counsel as follows.

The court denies plaintiff Forex Express Corp., d/b/a WireCash’s motion to disqualify counsel as to defendant Eliran Grushkowsky.

The court grants plaintiff Forex Express Corp., d/b/a WireCash’s  motion to disqualify counsel as to defendant Fernando Fayzano.

The court orders that Michael Murphy and Ervin Cohen & Jessup are disqualified from representing defendant Fernando Fayzano in this action.

The court orders plaintiff Forex Express Corp., d/b/a WireCash to give notice of this ruling.

IT IS SO ORDERED.

DATED:  May 4, 2023

_____________________________

Robert B. Broadbelt III

Judge of the Superior Court