Thursday, August 6, 2015
Lawyer for Both Law Firm, Partner Wrongly Disqualified, Court of Appeal Holds
Departing Partner With Half Interest in the Firm Did Not Have Standing to Challenge Selection by Managing Partner and Firm of Counsel in Pursuing Cross-Complaint, Court Holds
By a MetNews Staff Writer
A lawyer who has departed from his law firm but still has a 50 percent interest in it cannot veto the firm’s choice in hiring an attorney to cross-complain against him, the Fourth District Court of Appeal held in an opinion certified for publication yesterday.
The decision from the Santa Ana-based Div. Three reverses a decision by Orange Superior Court Judge Frederick P. Horn who disqualified the law firm of Grant, Genovese & Baratta LLP from representing Hart, King & Coldren, Inc. The departing partner, Robert Coldren—who is suing the law firm and its managing partner, William R. Hart, and is sued in their cross-complaint—persuaded Horn there was a conflict of interest for the same lawyer to represent both Hart and the firm.
(The decision refers to the Santa Ana law firm as “HKC.” It has changed its name to “Hart King.”)
“The Motion to Disqualify Grant, Genovese & Baratta, LLP as counsel for [HKC] is GRANTED. The court finds that there exists an actual conflict of interest in representing William R. Hart and [HKC]. Grant, Genovese & Baratta, LLP may continue to represent Defendant William R. Hart in this litigation. The court will select a neutral attorney to represent Defendant and Cross-Complainant [HKC]. Within the next ten days, the parties shall meet and confer regarding the selection of a neutral attorney. If a neutral attorney is not selected, the court will appoint one. [¶] Although Attorney Coldren apparently resigned as an officer and director of the law corporation, he is still a 50% owner of [HKC]. This litigation seeks to dissolve involuntarily the law corporation. In the Cross-Complaint, the law corporation sued Coldren on five of the seven causes of action.”
Justice Raymond J. Ikola wrote the opinion reversing Horn. It was filed as an unpublished opinion July 13, but the panel yesterday redesignated it.
“Coldren sued both Hart and HKC—directly, not derivatively—on essentially the same claims. He is seeking over $8,000,000 in damages against both. Hart’s interest is perfectly aligned with HKC’s interest in seeing Coldren’s claims defeated. Coldren’s position seems to be that he can sue his company and then, because he is a 50 percent shareholder, have a say in its defense. That is not the law. Moreover, Grant Genovese’s duty of loyalty, as counsel for HKC, runs to HKC, not its shareholders. HKC is free to defend itself and assert relevant counter claims to the detriment of Coldren. Since there is no conflict, we reverse.”
In determining that a conflict existed, Horn relied on Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209. In that case, a shareholder in a corporation sued the corporation and another shareholder, and the Court of Appeal held that both defendants could not be represented by the same lawyer.
Ikola found that case distinguishable, explaining:
“In our view, Gong should be read for the narrow proposition that where a plaintiff’s allegations are essentially derivative in nature, the failure to label them as such may still prohibit dual representation of the corporation and defendant shareholder. Here, Coldren’s lawsuit is not derivative in nature.”
Lack of Standing
Coldren argued that he had standing to move for the disqualification of Grant, Genovese & Baratta under the authority of Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal.App.4th 477.
There, a member of a limited liability company, who owned a half interest in the company, brought an action against a member who, he alleged, was stealing company assets. The company was a nominal defendant, and the same lawyer represented it and the defendant.
The Court of Appeal held that the plaintiff had “vicarious standing” because “any other rule would run the risk of rendering an organization defenseless when it is most vulnerable, i.e., when it is represented by an attorney who has a conflict because he also represents and is beholden to a company insider who injured the company.”
“We have no qualms with the exception announced in Blue Water as it flows naturally from the well-established rule that forbids dual representation of a company and company insiders in the context of a derivative action….
“Contrary to Coldren’s assertions, however, his complaint is not a derivative action. Coldren has made direct claims against HKC and seeks $8 million in damages from HKC. If he prevails, the damages will not go to the benefit of HKC; quite to the contrary, HKC will have to pay the damages to Coldren.”
The case is Coldren v. Hart, King & Coldren, G050202.
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