Judge: Stephen P. Pfahler, Case: 23STCV22369, Date: 2024-09-26 Tentative Ruling

Case Number: 23STCV22369    Hearing Date: September 26, 2024    Dept: 68

Dept. 68

Date: 9-26-24 a/f 1-14-25

Case #: 23STCV22369

Trial Date: 1-27-25

DISQUALIFY COUNSEL

MOVING PARTY: Defendants, Sang Han, et al.

RESPONDING PARTY: Plaintiff, Young Shim, et al.

RELIEF REQUESTED

Motion to Disqualify Counsel

SUMMARY OF ACTION

Beginning in an unspecified period of time, Defendants San Han and In Ran Kim aka Lulu Kim engaged Plaintiffs Young Shim and Jung Kim for investment into a joint restaurant venture. Plaintiffs provided $60,000, and allowed Defendants to charge another $5,000 on a provided credit card. Plaintiffs demanded an accounting of the funds, then a refund. Neither occurred.

On September 15, 2023, Plaintiffs filed a complaint for (1) Breach Of Oral Contract (2) Fraud (3) Breach Of Implied Covenant Of Good Faith And Fair Dealings (4) Intentional Misrepresentation (5) Concealment (6) Negligent Misrepresentation (7) Conspiracy To Defraud (8) Breach Of Fiduciary Duty and (9) Constructive Fraud. On October 16, 2023, Defendants answered and filed a cross-complaint against Shim and Kim for 1) Breach Of Oral Contract; 2) Failure To Pay Earned Wages; and 3) Failure To Pay Minimum Wages And Liquidated Damages For Willful Failure To Pay.

On January 3, 2024, the clerk entered defaults as to Defendants Lululala Organic Juice & Salad Co. and Pho Lululala 1, Inc.

RULING: Denied.

Evidentiary Objections

·         Numbers 1: Overruled/Not Relied Upon

·         Numbers 2-5: Overruled.

Defendants Sang Han and In Kim (Lulu) move to disqualify counsel for Plaintiffs Young Shim and Jung Kim, attorney Jay Hong. Defendants contend the motion was prompted upon the realization that Defendants consulted with Hong on business matters involving the formation of the business partnership now in litigation with Plaintiffs. Attorney Hong subsequently filed the subject lawsuit on behalf of Plaintiffs Shim and Kim against moving Defendants.

Defendants in opposition deny any evidentiary basis in support of the motion, including proof of any attorney client relationship through proof of a retainer agreement or any payments. Attorney Hong denies ever representing or consulting with Defendants in any identified business entity associated with the subject case, but concedes to representing an entity named Lululala USA Ventures, which was the only named defendant in the lawsuit, and neither individual were parties to the sanction. Plaintiffs maintain the motion being brought one year after filing only serves to delay, harass, and force a more favorable settlement.

The court electronic filing system shows no reply on file at the time of the tentative ruling publication cutoff.

(a) 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.

(b) A lawyer shall not, without informed written consent from each affected client and compliance with paragraph (d), represent a client if there is a significant risk the lawyer's representation of the client will be materially limited by the lawyer's responsibilities to or relationships with another client, a former client or a third person, or by the lawyer's own interests.

(c) Even when a significant risk requiring a lawyer to comply with paragraph (b) is not present, a lawyer shall not represent a client without written disclosure of the relationship to the client and compliance with paragraph (d) where:

(1) the lawyer has, or knows that another lawyer in the lawyer's firm has, a legal, business, financial, professional, or personal relationship with or responsibility to a party or witness in the same matter; or

(2) the lawyer knows or reasonably should know that another party's lawyer is a spouse, parent, child, or sibling of the lawyer, lives with the lawyer, is a client of the lawyer or another lawyer in the lawyer's firm, or has an intimate personal relationship with the lawyer.

(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.

(e) For purposes of this rule, “matter” includes any judicial or other proceeding, application, request for a ruling or other determination, contract, transaction, claim, controversy, investigation, charge, accusation, arrest, or other deliberation, decision, or action that is focused on the interests of specific persons, or a discrete and identifiable class of persons.

(Cal. Rules Professional Conduct, rule 1.7.)

(a) 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.

(b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client (1) whose interests are materially adverse to that person; and (2) about whom the lawyer had acquired information protected by Business and Professions Code section 6068, subdivision (e) and rules 1.6 and 1.9(c) that is material to the matter; unless the former client gives informed written consent.

(c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter: (1) use information protected by Business and Professions Code section 6068, subdivision (e) and rule 1.6 acquired by virtue of the representation of the former client to the disadvantage of the former client except as these rules or the State Bar Act would permit with respect to a current client, or when the information has become generally known; or (2) reveal information protected by Business and Professions Code section 6068, subdivision (e) and rule 1.6 acquired by virtue of the representation of the former client except as these rules or the State Bar Act permit with respect to a current client.

Cal. Rules of Professional Conduct, rule 1.9

“Motions to disqualify counsel present competing policy considerations. On the one hand, a court must not hesitate to disqualify an attorney when it is satisfactorily established that he or she wrongfully acquired an unfair advantage that undermines the integrity of the judicial process and will have a continuing effect on the proceedings before the court. On the other hand, it must be kept in mind that disqualification usually imposes a substantial hardship on the disqualified attorney's innocent client, who must bear the monetary and other costs of finding a replacement…” (Gregori v. Bank of America (1989) 207 Cal.App.3d 291, 300.)

“‘[D]isqualification is proper as a prophylactic measure to prevent future prejudice to the opposing party from information the attorney should not have possessed’; an affirmative showing of existing injury from the misuse of privileged information is not required. (Citation.) A trial court, however, may not order disqualification ‘“simply to punish a dereliction that will likely have no substantial continuing effect on future judicial proceedings.”’” (McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal.App.5th 1083, 1120.)

“Where the potential conflict is one that arises from the successive representation of clients with potentially adverse interests, the courts have recognized that the chief fiduciary value jeopardized is that of client confidentiality. Thus, where a former client seeks to have a previous attorney disqualified from serving as counsel to a successive client in litigation adverse to the interests of the first client, the governing test requires that the client demonstrate a “substantial relationship” between the subjects of the antecedent and current representations.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 283.)

In ruling on a motion for disqualification, the court must first determine the existence of any (former) attorney client relationship or even the transmission of confidential information thereby prejudicing the now adverse party. (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [“An attorney represents a client—for purposes of a conflict of interest analysis—when the attorney knowingly obtains material confidential information from the client and renders legal advice or services as a result”]; Jessen v. Hartford Casualty Ins. Co., supra, 111 Cal.App.4th at pp. 707-709 [“We agree that the question whether an attorney should be disqualified in a successive representation case turns on two variables: (1) the relationship between the legal problem involved in the former representation and the legal problem involved in the current representation, and (2) the relationship between the attorney and the former client with respect to the legal problem involved in the former representation”].)

“The ‘substantial relationship’ test mediates between two interests that are in tension in such a context—the freedom of the subsequent client to counsel of choice, on the one hand, and the interest of the former client in ensuring the permanent confidentiality of matters disclosed to the attorney in the course of the prior representation, on the other. Where the requisite substantial relationship between the subjects of the prior and the current representations can be demonstrated, access to confidential information by the attorney in the course of the first representation (relevant, by definition, to the second representation) is presumed and disqualification of the attorney's representation of the second client is mandatory.” (Ibid.)

The admitted existence of a former attorney client relationship and consultations allows for a finding of a substantial relationship and therefore a presumption of confidential information possessed by former counsel. Still, the confidential information must actually be material to the instant dispute in order to reflect the policy against abusive use through this tactic. (H. F. Ahmanson & Co. v. Salomon Brothers, Inc. (1991) 229 Cal.App.3d 1445, 1452-1454; Jessen v. Hartford Casualty Ins. Co. (2003) 111 Cal.App.4th 698, 708-709.)

In assessing whether there is a “substantial relationship” between two matters, courts “should ‘focus on the similarities between the two factual situations, the legal questions posed, and the nature and extent of the attorney's involvement with the cases.’” (H.F. Ahmanson & Co. v. Salomon Brothers, Inc., supra, 229 Cal.App.3d at p. 1455.) “The current matter is substantially related to the earlier matter if: [¶] (1) the current matter involves the work the lawyer performed for the former client; or [¶] (2) there is a substantial risk that representation of the present client will involve the use of information acquired in the course of representing the former client, unless that information has become generally known.” (Rest.3d Law Governing Lawyers, § 132.) (Acacia Patent Acquisition, LLC v. Superior Court (2015) 234 Cal.App.4th 1091, 1097–1098.)

Defendants first represent retaining Hong as “general counsel” on business matters, but only identifies an unrelated business entity identified as Sushi Eyaki. Defendants later consulted Hong on (defaulted Defendant) Lululala Organic Juice, but Defendants elected not retain Hong in any business matters regarding the partnership or operations. Defendants met with Hong professionally a third time to address potential issues regarding non-party Lulune Restaurant, but no representation of any retainer agreement appears. Finally, Defendants retained Hong (a second time) for defense in an unrelated employment case involving Lululala Ventures, Inc. Defendants instead maintain disclosing their personal financial information in the process of both the retained work on the unrelated entity, and discussions regarding Lulune Restaurant and Lululala Organic Juice rendered Hong privy to Defendants’ personal financial information. There is no indication of concurrent representation by Hong thereby supporting the automatic disqualification standard presented in the motion. (See Flatt v. Superior Court, supra, 9 Cal.4th at p. 286.)

The declaration of Lulu Kim in support of the represented interactions includes three different, undated and unexecuted retainer agreements. [Declaration of Lulu Kim, Ex. B-D.] The first one lists “general counsel” services. The second for representation regards Lululala USA Ventures and third parties Robert Daniel and Christina Kim. The third addresses a partnership agreement for Lululala Organic Juice & Sale Co., though Lulu admits that no such agreement was ever executed. The remainder of the declaration consists of SMS communications in a foreign language with translation of the sections. [Id., Ex. E.] The messages lack specific reference to any case, and no relationship between the parties appears other than Hong apparently assisting Defendants in some form of collection action/activities brought against Defendants. [Ibid.]

Hong denies representing or providing consultations to any named defendant or entity involved in the subject action. An offer of services was made on the subject items presented in the Lulu Kim declaration, but no agreements were ever executed, and Hong never received any retainer payment as required under the terms of each and every agreement. Hong only admits to representing Lululala USA Ventures. [Declaration of Jay Hong, Ex. 5.] The opposition also contains witness declarations purportedly describing the actual meetings with Lulu Kim and Hong, whereby no confidential information was disclosed in contradiction to the Lulu Kim declaration. [Declarations of Cheol Kim & Je Lee.] Plaintiffs Young Shim and Jung Kim deny any involvement with investing in the Organic Juice & Salad Co. entity in any way. Shim was only involved with Lulune, Inc. [Declarations of Young Shim and Jung Kim.]

The parties present conflicting accounts regarding the scope of any consultation and representation. Defendants even admit to the lack of retention on at least certain items, and submit no proof of payment on any agreement. Hong maintains no provision of services without payment upfront. The court finds no establishment of any attorney client relationship via retainer agreement from the unexecuted, undated documents, with the exception of the mutually agreed upon Lululala USA Ventures activities (see below).

The declarations of third party witnesses Cheol Kim and Je Lee, regarding their presence and circumstances of the alleged meeting regarding formation of the partnership agreement also undermines any proof of the exchange of material information within the confidential confines of the attorney client privilege bubble. In other words, any information conveyed with third parties present in no way supports the reliance on the transmission of confidential, material information. Plaintiffs otherwise establish a lack of familiarity with any related entities thereby disassociating themselves from any basis of conflict arising from a material advantage on prior representation. [See Declarations of Youn Shim and Jung Kim.]

Defendants implicitly acknowledge their lack of evidence regarding the retainer agreements, and instead alternatively rely on nebulous circumstances regarding established contact and “consultation” with Hong, thereby leading to the drafting of a retainer agreement. Defendants’ disclosure of personal financial problems constitutes the material basis for material advantage to Plaintiffs. The circumstances regarding Lululala USA Ventures supports consideration of this position.

Hong agrees on the claim of representation as to defense of the Lululala USA Ventures. It’s not clear whether this action was also the one referenced in the SMS text message exchange (e.g. the collection matter). Defense in a collection matter presumably included consideration of the Defendants’ financial circumstances. The court finds Hong therefore became privy to at least some of Defendants’ financial information, which supports consideration of the substantial relationship test for purposes of considering unfair advantage.

On “substantial risk that representation of the present client will involve the use of information acquired in the course of representing the former client, unless that information has become generally known,” Defendants present limited discussion on the actual impact of Hong’s imputed awareness of Defendants’ financial condition presumably acquired during said representation. (Acacia Patent Acquisition, LLC v. Superior Court, supra, 234 Cal.App.4th at pp. 1097–1098.) The most substantive factual address of the standard comes from the Declaration of Lulu Kim, whereby it is represented that Hong’s knowledge of Defendants’ financial situation provides advantage in that Hong would be more readily available to determine how to personally collect on a potential judgment against Defendants. [Lulu Kim Decl., ¶ 11.]

Plaintiff/Cross-Defendants present certain responses to Special Interrogatories regarding the cross-complaint allegations. The responses to the majority of the 35 items consist of objections without further facts. A small number of responses provide limited description of the terms of the agreement, basis of certain costs and operations, and additional statement that bad credit by all parties except for Defendant Han led to entrustment of CEO to Han. [Responses to Special Interrogatory numbers 3, 7, 10, 11.] Lulu Kim also offers responses to the wage and hour claim. [Id., numbers 25, 27.] Objections constitute all responses to the requests for production of documents.

The subject action clearly and specifically alleges Defendants’ mishandling of funds for a joint investment. In identifying Han as the CEO on the basis of personal good credit, an argument can be made that Defendants/Cross-Complainants voluntarily introduced the potential for piercing any potential corporate veil. Use of personal credit as opposed to an established, separate business entity suggests personal business operations thereby rendering an individual subject to judgment.

Even without the subject response, however, should Plaintiffs prevail, the court assumes Plaintiffs will seek valid means for recovery of their damages from the missing investment funds. Plaintiffs, if necessary, will become entitled to conduct discovery into the assets and financial position of Defendants. It’s entirely possible the proposed depositions of Defendants, which Plaintiffs maintain prompted the subject motion to disqualify would delve into business operations beyond the parties’ transactions.

Given the extensive fraud and breach of fiduciary based causes of action, Plaintiffs’ can rightfully examine potential uses of the funds for outside, unrelated activities. Barring an absolute ability to prevent disclosure under a potential personal financial privilege objection, an argument can be made that any later discovered financial information within the confines of the instant action will render the subject personal information part of the “generally known” universe of facts. In other words, the information becomes generally known, and any confidential, material advantage dissipates.

The court however cannot ex post facto certify no prejudice on later discovered information. Retrospective dismissal of potential advantage (e.g. denial of the motion and allowing the deposition to proceed) undermines the purpose of the disqualification rules. The court must consider the impact before allowing such discovery.

The circumstances of the subject action lead to a conclusion of no apparent material advantage in conducting basic, general personal and business entity financial discovery for potential judgment collection efforts. Barring a complex and elaborate set of financial transactions, which is nowhere supported in the motion, future potential judgment collection in this action in no way presents concern of unfair advantage simply based on previously disclosed information in defense of a prior collection action. Plaintiffs are entitled to conduct discovery. Nothing in any defense to a collection action indicates precise, exact and compromising knowledge of the current state of Defendants/Cross-Complainants financial activities following said prior representation. The court therefore finds no support for the element of the substantial factor test regarding “work the lawyer performed for the former client” materially impacting the subject case in any way.

The motion appearing on the eve of potential discovery into such matters and with the trial date approximately four months away from this hearing, the court finds the motion was potentially prompted by collateral purpose rather than material support for unfair advantage. The motion is therefore DENIED in its entirety.

The order denying the motion is directly appealable. (Apple Computer, Inc. v. Superior Court (2005) 126 Cal.App.4th 1253, 1263-1264.) The court can stay the action for a limited period of time, if Defendant wishes to appeal. “A petition for extraordinary relief on the merits accompanied by a request for an immediate stay is preferable, because generally extraordinary writs are determined more speedily than appeals. The specter of disqualification of counsel should not be allowed to hover over the proceedings for an extended period of time for an appeal.” (Reed v. Superior Court (2001) 92 Cal.App.4th 448, 455.)

Trial remains set for January 27, 2025, pending any stay and review of the writ.

Defendants to give notice.