Thursday, February 3, 2011
Appeals Panel Broadens Rule on Attorney Disqualification
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal yesterday ruled that a plaintiff who was not a client of the Woodland Hills attorney representing the limited liability companies named as defendants in the plaintiff’s derivative suit had standing to seek his disqualification
Carving a narrow exception to the general rule that a complaining party may not seek disqualification of an attorney unless they have a fiduciary relationship, Div. Two concluded Blue Water Sunset LLC had vicarious standing to challenge Gary Kurtz’s representation of Philip Markowitz, Rail Prop LLC, First View LLC and the Markowitz Investment Group LLC.
Blue Water and Markowitz were each 50 percent owners of these limited liability companies. In 2004, Blue Water sued Markowitz, seeking dissolution of the companies and asserting causes of action for accounting, declaratory relief, fraud and fraudulent conveyance.
The claims were based on allegations Markowitz had misappropriated income and conveyed real estate assets of the companies to an entity Markowitz owned called Four Star Properties LLC, without consideration. To the degree that the causes of action asserted were derivative in nature, the companies were included as nominal defendants.
Four Star was initially represented by Steven Sandler, who shared an office with Kurtz. Sandler introduced Kurtz to Markowitz, who retained Kurtz as his attorney in 2005. Shortly thereafter, Kurtz replaced Sandler as Four Star’s attorney and Sandler became the attorney for the limited liability companies. Markowitz then filed a cross-complaint and sued derivatively and individually against Blue Water and the limited liability companies.
On behalf of Markowitz, Four Star and the limited liability companies, Kurtz prepared and filed demurrers to Blue Water’s causes of actions for fraud and fraudulent conveyance. Kurtz appeared at a hearing on the demurrer on behalf of Markowitz and Four Star, and made a special appearance on behalf of the limited liability companies.
After Los Angeles Superior Court Judge Rex Heeseman sustained the demurrers,.
Blue Water filed a motion in the trial court seeking to disqualify Kurtz, which Heeseman denied.
Writing for the appellate court, Justice Judith M. Ashmann-Gerst explained Blue Water had standing to seek disqualification of Kurtz because he had an attorney-client relationship with the limited liability companies and the companies’ standing could be imputed to Blue Water.
Citing California Rule of Professional Conduct 3-600—which requires an attorney representing an organization to obtain that organization’s consent before the attorney can represent any of its members—and Rule 3-310(E)—which requires an attorney with clients with conflicting interests obtain written consent to continued representation—Ashmann-Gerst reasoned Blue Water had the unilateral right to either waive or not waive any conflict of interest Kurtz might have with respect to the limited liability companies.
“A rule of vicarious standing permits Blue Water to enforce that unilateral right and insist upon the disqualification relief available to the limited liability companies,” she said.
The justice concluded Kurtz was subject to mandatory disqualification because he represented two clients with adverse interests at the demurrer hearing on the derivative causes of action.
“Kurtz’s preparation of the demurrer and special appearances on behalf of the limited liability companies at the demurrer hearing created an attorney-client relationship and he owed them a fiduciary duty, including a duty of utmost loyalty,” she said.
Since the companies would have expected “their attorney would do nothing to help Four Star and Markowitz, including assert demurrers and argue that the fraud and fraudulent conveyance causes of action were defective due to lack of standing, time bar or factual sufficiency,” but “Four Star and Markowitz had the exact opposite expectation,” Ashmann-Gerst posited Kurtz’s attempt to represent each of them at the demurer hearing “was per se rendered less effective because he was forced to pick one side over the other and could not meet his fiduciary obligations.”
She acknowledged that Kurtz’s representation of the limited liability companies was “fleeting,” but since the undisputed facts established that he knowingly agreed to represent conflicting interests at the demurrer hearing, he was subject to automatic disqualification.
If the limited liability companies elect to take an active role in the litigation, Ashmann-Gerst added, they must retain counsel with no past or present relationship with Blue Water or Markowitz.
Justices Kathryn Doi Todd and Victoria M. Chavez joined Ashmann-Gerst in her decision.
Blue Water was represented by the Law Offices of Yana Henriks and Stuart B. Esner and Andrew N. Chang of Esner & Chang. Kurtz, together with Gerald M. Serlin and Kelly R. Horwitz of Benedon & Serlin represented Markowitz.
The case is Blue Water Sunset, LLC v. Markowitz, 11 S.O.S. 700.
Copyright 2011, Metropolitan News Company