Thursday, June 20, 2013
C.A. Overturns Firm’s Disqualification Based on Potential Conflict
By KENNETH OFGANG, Staff Writer
A potential conflict of interest wasn’t enough to disqualify a law firm from representing a limited liability company and its managing member in a suit against two minority members, the Fourth District Court of Appeal has ruled.
Div. Three yesterday certified for publication its May 28 opinion reversed Orange Superior Court Judge Thierry Patrick Colaw’s order barring Santa Ana’s Hart, King & Coldren from a lawsuit over a failed effort to develop a mobile home park in Lake Havasu, California.
The developers formed an LLC called Havasu Lakeshore Investments in 2004, with Capital Source Partners as managing member and J. Victor Construction, Inc.; Terry L. Fleming Sr.; and Terry L. Fleming Jr. as members.
Jean Victor Peloquin is general partner of Capital Source Partners and the principal of J. Victor. The Flemings each owned less than 10 percent of the LLC, which lost the property in foreclosure in 2009.
Terry Fleming Jr. sued Peloquin in 2011, claiming that Peloquin refused to recognize Fleming’s exercise of an option to have Peloquin buy out Fleming’s interest at an agreed-upon price, plus interest. The LLC and the Peloquin entities—represented by Hart, King & Coldren—cross-complained against both Flemings for bad faith and breach of contract.
Terry Fleming Sr. moved to disqualify the firm, contending that Hart King had previously represented the LLC, and that as a member of the LLC, he’d shared confidential information with it.
Hart King responded that it hadn’t represented the LLC when the option agreement was signed, and that the Flemings had never provided the firm with confidential information.
Trial Judge’s Ruling
Colaw last year granted the motion, finding that the interests of the company and “nonmember Peloquin” potentially conflicted. The judge cited rule 3-310(C) of the State Bar Rules of Professional Conduct and Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209, which deals with the duty of loyalty to simultaneously represented clients.
Justice Raymond Ikola, however, in his opinion for the Court of Appeal, said the trial judge erred as a matter of law by disqualifying the attorneys based on a purely hypothetical possibility of conflict.
“Because no actual conflict of interest existed between the company and the individual who managed the company’s managing member, and there was no reasonable likelihood such a conflict would arise, we reverse the court’s ruling,” the jurist said. “The LLC’s interests and Peloquin’s are clearly allied.”
Ikola drew a distinction between an attorney’s duty of loyalty and that of confidentiality. The trial judge, he noted, had based its ruling on the former, whereas the motion to disqualify was based on the former.
No Breach of Duty
Hart King breached no duty of loyalty, Ikola said, because all of its clients share goals that “are beneficial to every member of the LLC.” The court also noted that the LLC wasn’t a party to the underlying complaint or the option agreement.
“The LLC has no beneficial right or obligation under, or duty arising from, the option agreement,” the justice wrote. “It is a stranger to that transaction.”
In any event, he wrote, the Flemings “cannot show any legally cognizable interest” that was injured by the breach of a duty that Hart King owed to the Flemings’ adversaries.
Attorneys on appeal were Donald J. Hamman and Eve A. Brackmann of Stradling Yocca Carlson & Rauth for the LLC; Jeffrey T. Robbins of Watt Tieder Hoffar & Fitzgerald LLP for Peloquin and his companies; and Patrick M. Hartnett and Jessica L. Jasper of Hartnett Law Group for Terry L. Fleming Jr.
The case is Havasu Lakeshore Investments, LLC v. Fleming, 13 S.O.S. 3113.
Copyright 2013, Metropolitan News Company