Cagno v. Soukoulis

Filed 4/19/06 Cagno v. Soukoulis CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

JOSEPH CAGNO,

Plaintiff, H028805

(Santa Clara County

v. Super.Ct.No. CV007793)

RICHARD SOUKOULIS, et al.,

Defendants.

_______________________________/

AMERICA'S FUNDING SOURCE,

INC.,

Plaintiff and Appellant, (Santa Clara County

Super.Ct.No. CV014834)

v.

JOSEPH CAGNO,

Defendant and Respondent.

_______________________________/

JOSEPH CAGNO,

Plaintiff (Santa Clara County

Super.Ct.No. CV027818)

v.

KEYPOINT CREDIT UNION, et al.,

Defendants.

________________________________/

America's Funding Source, Inc. (AFS) appeals from an order denying its motion to disqualify counsel for respondent Joseph Cagno in a pair of lawsuits involving a mortgage business. AFS contends that allowing Cagno's attorney to continue representing him was improper because the duties of loyalty and confidentiality prohibit the concurrent and successive representation of opposing parties. Cagno has moved to dismiss the appeal as moot in light of pending arbitration proceedings. We will address the merits but affirm the order denying the disqualification motion.

Procedural History of the Appeal

In 2002 Cagno was a vice president of retail sales for Loan City, a wholesale mortgage company. Cagno believed he was owed more than $500,000 in commissions by Loan City's retail lending division, AFS. In May 2002 Cagno agreed to buy AFS, and he became the sole stockholder, director, and president of AFS. At the same time, Cagno agreed that defendant Blackberry Capital, Inc. (Blackberry), which was owned by defendants Richard Soukoulis and Amber Johnson, would manage AFS and retain an option to acquire a controlling interest in AFS stock. Cagno and Soukoulis signed a "Management Agreement" setting forth the details of their arrangement on June 1, 2002.

In October 2003 the Trepel Law Offices (Trepel) represented Cagno and AFS in a lawsuit against Blackberry, Soukoulis, and Johnson, which subsequently became known as AFS I. In that action the plaintiffs asserted that in April 2003 the defendants began to wrongfully divert income, to the detriment of AFS and Cagno, whose "bargained-for consideration" was "in practical effect negated." The AFS I plaintiffs alleged that the defendants had sold AFS to Cagno as part of a "scheme" to convey control of AFS to Soukoulis and to induce Cagno to release his claims against AFS and Loan City. Cagno further alleged that he had been defrauded by Soukoulis, and the plaintiffs sought a declaration that the Management Agreement was void.

In November 2003, having learned of the AFS I lawsuit, and believing the suit was unauthorized under the Management Agreement, Soukoulis exercised the option on behalf of Blackberry to acquire two-thirds of the AFS stock. Blackberry's counsel demanded that Trepel withdraw from the case, as Blackberry now controlled AFS. Trepel withdrew as AFS's counsel in early December 2003 and filed a First Amended Complaint on behalf of Cagno alone. At the same time AFS dismissed its claims with prejudice.

On February 3, 2004, the Blackberry defendants moved to disqualify Trepel as plaintiff's counsel in AFS I, "based on an incurable conflict of interest, in that the Trepel Firm concurrently represented [AFS] in this action and the interests of Cagno and AFS are adverse." Cagno opposed the motion on the grounds of untimeliness, lack of standing, and absence of any conflict of interest. The trial court agreed with Cagno's standing argument and denied the motion on that basis. The court then added, citing Forrest v. Baeza (1997) 58 Cal.App.4th 65, 82, that if it were to address the merits, it would still deny the motion.

In the meantime, a few weeks after filing the disqualification motion, AFS filed a separate lawsuit against Cagno, which the parties have referred to as AFS II. In that case AFS alleged that Cagno had (1) misappropriated the assets and opportunities of AFS while secretly establishing a competing business, (2) received excessive compensation and other undeserved monetary distributions, and (3) engaged in other conduct that constituted fraud, bad faith, or a violation of his fiduciary duty toward AFS. In this action Cagno was represented by Tenenbaum, Crowley, and Brereton (Tenenbaum), which "consulted with and cooperated with" Trepel.

In July 2004, after receiving the order declining to disqualify his attorney, Cagno (represented by Trepel) filed his Second Amended Complaint in AFS I, alleging breach of fiduciary duty, intentional and negligent interference with existing economic advantage, unfair business practices, intentional and negligent misrepresentation, invasion of privacy, conversion, slander of title, and slander. In October 2004 Cagno filed a cross-complaint in AFS II against Blackberry, Soukoulis, and Johnson for breach of fiduciary duty and breach of contract, followed a few days later by his third amended complaint in AFS I.[1]

On December 14, 2004, over the opposition of AFS, the court granted a motion by Cagno to consolidate AFS I and AFS II, along with a third case.[2] In January 2005, AFS moved to disqualify both Trepel and Tenenbaum from the consolidated litigation. AFS pointed out that Trepel had previously represented AFS in AFS I and that "the interests of AFS and Cagno [were] directly adverse." In addition, AFS asserted, Tenenbaum should be disqualified because it had "knowingly received and accepted from the Trepel Firm assistance and information, presumed by law to be AFS's confidential information, that it has used and is using for Cagno's benefit to the detriment of AFS in developing and implementing Cagno's defense to AFS's claims against him." The motion was denied on March 11, 2005, and this appeal by AFS followed.

The Arbitration Order

On July 6, 2005, while this appeal was in the briefing stage, the trial court granted the Blackberry defendants' petition to compel arbitration, and it stayed the consolidated actions pending the outcome. In so ruling, the court disagreed with Cagno's argument that the defendants had waived their right to arbitrate. The court noted that AFS had stipulated that if the court ordered the litigation to arbitration, AFS would not "raise again the same disqualification issue with the arbitrator."[3] The court also acknowledged that in entering into this stipulation, AFS had stated that it was "willing to accept any resulting consequences [of an order compelling arbitration] that might affect its appeal." Accordingly, the court found that "Cagno would suffer no prejudice by such an order. . . . Whether in this forum or at arbitration, the time and money spent in defending a request to disqualify his attorney is the unfortunate cost of litigation. What is prejudicial is having to spend that time and money in a second forum after AFS lost that battle in the first forum. The potential for this prejudice has been removed by AFS's stipulation."

Discussion

1. Mootness

AFS's contention on appeal is that the trial court erred by denying its motion to disqualify Trepel and Tenenbaum from representing Cagno in the consolidated actions. However, we must first address the threshold issue raised by Cagno: whether this appeal should be dismissed as moot. Cagno argues that AFS's stipulation makes any relief we might grant useless, because AFS cannot raise the disqualification issue in the arbitration proceeding. Cagno cites the rule that a question becomes moot "when the appellate court is unable to grant any effectual relief or render an opinion that affects the matter at issue." (City of Lodi v. Randtron (2004) 118 Cal.App.4th 337, 363; see also Woodward Park Homeowners Assn. v. Garreks, Inc. (2000) 77 Cal.App.4th 880, 888 [case is moot when reviewing court's decision "can have no practical impact or provide the parties effectual relief"]; accord, MHC Operating Limited Partnership v. City of San Jose (2003) 106 Cal.App.4th 204, 214.)

AFS responds that if this court reverses the order denying disqualification, then "equity as well as law would all but require disqualification of Cagno's counsel by the arbitrator." AFS envisions two scenarios resulting from reversal: Either the arbitrator would sua sponte disqualify Cagno's attorneys, or they would themselves withdraw voluntarily in accordance with "their ethical obligations as attorneys." Alternatively, AFS argues, this is an issue of continuing public importance, involving an attorney's "fundamental" duty of loyalty, an issue that has been arising with increasing frequency.

The argument in opposition is unconvincing. As AFS implicitly concedes, our opinion will not compel any particular act by the arbitrator in the arbitration forum. AFS stipulated that it would not raise the issue during the arbitration; it was on that condition that the court permitted the arbitration to go forward. Thus, AFS may not litigate the issue in that forum. Whether the arbitrator disqualifies Trepel does not turn on the result we reach, but on his or her own evaluation of the case, whether the conflict issue is raised there or not. We further see no justification for proceeding with the appeal on the ground of a continuing issue of broad public importance, as the resolution of this case depends on practical, fact-specific considerations in the context of the litigation. (Cf. MHC Operating Limited Partnership v. City of San Jose, supra, 106 Cal.App.4th at p. 215.)

Although AFS's reasons for denying Cagno's motion fail to persuade us, it is Cagno's burden as the moving party to show that the appeal is moot. He has not done so. While the disqualification issue may be suspended during the arbitration, the underlying action has been only stayed, not dismissed. If the case returns to superior court on a petition to confirm or vacate the arbitrator's decision, Cagno must be represented by counsel who is free of a disqualifying conflict of interest. We therefore conclude that the appeal is not moot and should be addressed on the merits.

2. The Disqualification Motion

A trial court's decision on a motion to disqualify counsel is generally reviewed for abuse of discretion. (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1143-1144 (SpeeDee Oil).) If the trial court resolved factual disputes, the reviewing court tests the court's exercise of discretion in accordance with the substantial evidence rule. If the facts are undisputed and the decision is based solely on a legal conclusion, then deference to the trial court's ruling is unnecessary and we review its exercise of discretion "as a question of law in light of the pertinent legal principles." (Id. at p. 1144; see Cal West Nurseries, Inc. v. Superior Court (2005) 129 Cal.App.4th 1170, 1174.)

As the Supreme Court has observed, there may be multiple interests involved in deciding whether to disqualify an attorney. "Depending on the circumstances, a disqualification motion may involve such considerations as a client's right to chosen counsel, an attorney's interest in representing a client, the financial burden on a client to replace disqualified counsel, and the possibility that tactical abuse underlies the disqualification motion." (SpeeDee Oil, supra, 20 Cal.4th at p. 1145.) "The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar. The important right to counsel of one's choice must yield to ethical considerations that affect the fundamental principles of our judicial process." (Ibid.)

Thus, "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. [Citations.] 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. A client deprived of the attorney of his choice suffers a particularly heavy penalty where, as appears to be the case here, his attorney is highly skilled in the relevant area of the law. [¶] Additionally, as courts are increasingly aware, motions to disqualify counsel often pose the very threat to the integrity of the judicial process that they purport to prevent. [Citation.] Such motions can be misused to harass opposing counsel . . . , to delay the litigation . . . , or to intimidate an adversary into accepting settlement on terms that would not otherwise be acceptable." (Gregori v. Bank of America (1989) 207 Cal.App.3d 291, 300-301; accord, La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court (2004) 121 Cal.App.4th 773, 791.)

The measure of protection of these societal and client interests depends on whether the circumstances involve successive or simultaneous representation. "[W]here 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, former italics added.) The focus of concern in such a case is client confidentiality. (Ibid.) But where the attorney is representing different clients simultaneously, "the primary value at stake . . . is the attorney's duty--and the client's legitimate expectation--of loyalty, rather than confidentiality." (Id. at p. 284.) In such cases the test is more stringent: Even where the subjects of the representations and the confidential information revealed are wholly unrelated, "in all but a few instances, the rule of disqualification in simultaneous representation cases is a per se or 'automatic' one." (Id. at p. 284; Speedee Oil, supra, 20 Cal.4th at p. 1147.)

At issue in the present case is Trepel's representation of Cagno in the consolidated actions pitting Cagno against Blackberry and its officers. AFS, which Trepel briefly represented in AFS I, was dismissed from that case six weeks after the complaint was filed, the same day Trepel withdrew as AFS's counsel. Thus, the current litigation involves AFS as a plaintiff suing Cagno (in AFS II) and Cagno as a plaintiff proceeding against Blackberry and the individuals associated with that company (in AFS I and his cross-complaint in AFS II). We view this procedural posture as one involving successive representation rather than dual or simultaneous representation.[4] Accordingly, we must determine whether the value of client confidentiality has been jeopardized by Trepel's representation of Cagno in AFS I and its cooperation with Tenenbaum in AFS II.

"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 . . . ." (Flatt, supra, 9 Cal.4th at p. 283.)

"The fact of a prior representation itself does not preclude an attorney from accepting a subsequent representation adverse to the former client if the matter is not substantially related to the previous employment. . . . Therefore, even where the two representations involve the same general subject, disqualification is not required if the nature of the factual and legal questions posed are not similar." (Santa Teresa Citizen Action Group v. City of San Jose (2003) 114 Cal.App.4th 689, 711.)

Another important consideration is the relationship between the attorney and the former client. If that relationship "is shown to have been direct--that is, where the lawyer was personally involved in providing legal advice and services to the former client--then it must be presumed that confidential information has passed to the attorney and there cannot be any delving into the specifics of the communications between the attorney and the former client in an effort to show that the attorney did or did not receive confidential information during the course of that relationship." (Jessen v. Hartford Cas. Ins. Co. (2003) 111 Cal.App.4th 698, 709.) "However, if the court determines the former attorney was not placed in a direct, personal relationship with the former client, the court must assess whether the attorney was positioned during the first representation so as to make it likely the attorney acquired confidential information relevant to the current representation, given the similarities or lack of similarities between the two." (Id. at p. 711.)

The motion to disqualify Trepel from representing Cagno after consolidation was heard by the Honorable Jamie Jacobs-May. In her ruling Judge Jacobs-May observed that the Honorable Socrates P. Manoukian had already decided the issue in denying the first disqualification motion, and that he had made his decision knowing that AFS II had been filed.[5] At the hearing Judge Jacobs-May reasoned, "We don't relitigate things with a new judge . . . Judge Manoukian decided the issue. He decided the issue on the same exact information that exists today. Nothing is new; nothing is different." Judge Jacobs-May further concluded, as had Judge Manoukian, that this case was "substantially similar" to Forrest v. Baeza, supra, 58 Cal.App.4th 65. On appeal, the parties continue to debate the applicability and soundness of the holding in Forrest.

In Forrest, an attorney simultaneously represented two closely held, family-run corporations along with two of their three shareholders in a shareholder's derivative suit. The First District, Division Two, upheld the trial court's disqualification of the attorney from representing the corporations on the ground of an actual conflict of interest. (58 Cal.App.4th at pp. 75-76.) The appellate court further found correct the trial court's refusal to disqualify the attorney from continuing to represent the two individual shareholder clients in their dispute with the third shareholder. The court rejected the moving party's argument that State Bar Rules of Professional Conduct, rule 3-310(E) [6] had been violated: "Technically, this rule may not even apply as McKim [the attorney] is not accepting employment but continuing his preexisting representation of the Forrests. Moreover, in the factual circumstances of this case, where McKim has been representing a corporation comprised [sic] of three shareholders solely by virtue of his relationship with the Forrests, acting as the majority directors/shareholders, it is impossible to conceive of confidential information McKim could have received from the 'corporation' that is different from information he received from the Forrests." (Id. at p. 82.) Nor was disqualification compelled by the "substantial relationship" test, as the overarching policy--"to protect scrupulously against the improper use of confidential information"--provided no guidance in these circumstances. (Ibid.) "Where, as here, the functioning of the corporation has been so intertwined with the individual defendants that any distinction between them is entirely fictional, and the sole repositories of corporate information to which the attorney has had access are the individual clients, application of the 'former client' rule would be meaningless." (Ibid.)

We agree with the reasoning of the Forrest court and believe that its holding is applicable in the circumstances before us. AFS was an entity owned and controlled entirely by Cagno when AFS I was initiated against Blackberry, Soukoulis, and Johnson. The superior court could reasonably have found that Cagno and AFS had then been so intertwined that any distinction between them was "entirely fictional." (Forrest, supra, 158 Cal.App.4th at p. 82.) Given this posture, the court could further have found, as did the Forrest court, that it was "impossible to conceive of confidential information [Trepel] could have received from the 'corporation' that is different from information he received from [Cagno]." (Ibid.) Furthermore, the court could have agreed with Cagno that by the time AFS II was filed, AFS had become a different entity, Blackberry having taken a controlling ownership interest in the company. AFS does not contend that no substantial evidence supports these implied findings; it asks us instead to reject the Forrest analysis in this case. We decline to do so. As the superior court's ruling was supported by the facts and the applicable law, we find no abuse of discretion.

We further find no error in the court's decision not to disqualify Tenenbaum, whose disloyalty was, according to AFS, predicated on the assistance of Trepel in AFS II. The trial court properly engaged in the required fact finding before reaching the conclusion that Tenenbaum had not acted inconsistently with its duty of loyalty toward its client-- who was at all times Cagno, not AFS. The trial court's ruling was not inconsistent with either Flatt, supra, or Speedee Oil, supra, cited by AFS, which were based on entirely different facts.[7] Having rationally exercised its discretion, the trial court correctly denied the motion.

Disposition

The order is affirmed. Costs on appeal, except for those pertaining to the motion to dismiss, are awarded to Cagno.

_____________________________

ELIA, J.

WE CONCUR:

_____________________________

PREMO, Acting P. J.

_____________________________

MIHARA, J.

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[1] The third amended complaint added a new defendant, Stacy Tunnicliff, to the defamation cause of action. Neither Tunnicliff nor the allegations against her are at issue in this appeal.

[2] Cagno v. Keypoint Credit Union, et. al. (CV-027812) concerns unrelated claims that are not before us.

[3] AFS had not requested arbitration of AFS II, but it did agree to go to arbitration if the court granted the Blackberry defendants' petition in AFS I.

[4] To the extent that AFS is complaining of Trepel's "conflicted concurrent representation of AFS and Cagno in AFS I," its claim of error is untimely. Any concurrent representation would have been the subject of the first disqualification motion, which was denied in May 2004. No party appealed from that order.

[5] AFS II was filed on February 23, 2004, the day before the hearing on the first disqualification motion. Judge Manoukian's order denying that motion was filed on May 20, 2004.

[6] This rule provides: "A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment."

[7] Also distinguishable is the recent case of Pound v. Demera Demera Cameron (2005) 135 Cal.App.4th 70. In that case, the Fifth District held that the plaintiffs' attorney should have been disqualified because another attorney who had recently been associated as counsel had received confidential information about the opposing party three years earlier. The appellate court compared this situation to that of an attorney changing to the opposing side's law firm, which required disqualification of not only the attorney, but the entire firm he had joined. The case before us, however, presents different facts, involving an entity originally identified primarily by its shareholder owner, Cagno, before its takeover by Blackberry. The contentions related to Tenenbaum's representation of Cagno fall with its premise, that Trepel's continued representation of Cagno was inappropriate.