No Conflict in Successive Representation of a Closely-Held Company and Its Insiders Where Insiders Already Possess Company’s Confidential Information

by Haight Brown & Bonesteel LLP
Contact

In Beachcomber Management Crystal Cove, LLC v. Superior Court (Salisbury) (No. G054078, filed June 28, 2017; pub. and mod. order July 28, 2017), the Fourth Appellate District granted a writ of mandate vacating a trial court’s order disqualifying defendants’ counsel.

In Beachcomber, plaintiffs filed a shareholder derivative action against defendants Beachcomber Management and Douglas Cavanaugh (collectively, “defendants”) alleging defendants abused their position and mismanaged nominal defendant and similarly named Beachcomber at Crystal Cove (“Beachcomber”). Between 2009 and 2011, defendants and Beachcomber had each hired Kohut & Kohut LLP (“Kohut”) to represent them on at least four different occasions. In the underlying action, defendants hired Kohut again to represent them, while Beachcomber hired another law firm to represent it.

Plaintiffs filed a motion to disqualify Kohut from participating in the case alleging conflicts of interest existed as to (1) Kohut’s concurrent representation of Beachcomber and defendants; (2) Kohut’s successive representation of Beachcomber and defendants in other matters; and (3) the need for Kohut to testify in the lawsuit about the services provided to Beachcomber and defendants. The trial court granted the motion to disqualify Kohut and defendants petitioned for a writ of mandate to challenge the order.

Conflicts of interest arise in the successive representations of different clients where an attorney owes a duty of confidentiality to the former client. The duty of confidentiality generally prevents an attorney from continuing to represent the second client if the representation conflicts with the representation of a previous client in a related matter if the prior client establishes a substantial relationship between the successive representations and that the attorney acquired confidential information material to the new matter from the former client. A court must disqualify the attorney from continuing to represent the second client because the law presumes the attorney received confidential information during the first representation that is relevant to the second.

An exception to the general rule exists, however, in the context of a small or closely-held company. Generally, a corporate shareholder or member in a limited liability company may bring a derivative lawsuit on the company’s behalf when insiders who control the company allegedly breach their duties and injure the company. In that instance, an attorney cannot represent both the company and its insiders concurrently in the derivative lawsuit. In a small or closely-held company, however, its operations and insiders are typically so intertwined there is no distinction between the two. In such a situation, the company’s insiders could provide a new attorney with all the information their previous attorney had, rendering disqualification of the prior attorney unnecessary. Unlike ordinary successive representation cases, an attorney’s representation in this specific instance does not threaten the attorney’s duty of confidentiality to the company because the insiders are already privy to the company’s confidential information.

In Beachcomber, seven of plaintiffs’ eight cases of action were derivative claims brought on Beachcomber’s behalf against the insider defendants. Although Kohut had previously represented Beachcomber in other matters, given the closely-held nature of Beachcomber, defendants had knowledge of confidential information relating to Beachcomber they could have provided to either Kohut or any other attorney representing them. Further, it was undisputed Beachcomber hired independent counsel in the new lawsuit. Accordingly, an exception to the general rule regarding successive representation applied as to Kohut’s representation of defendants in the action.

In its holding, the court concluded the trial court erred in granting plaintiff’s motion to disqualify and issued a writ of mandate directing the trial court to vacate its order disqualifying Kohut from representing defendants and determine whether Kohut could continue representing defendants in the lawsuit in accordance with the rules described in the opinion.

While an attorney’s duty of confidentiality is generally inviolate, Beachcomber further upholds the tenet that the duty of confidentiality does not prevent attorneys from representing insiders in a closely-held company who are already privy to confidential information they could provide to any other attorney they might retain about that company in a derivative lawsuit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Haight Brown & Bonesteel LLP | Attorney Advertising

Written by:

Haight Brown & Bonesteel LLP
Contact
more
less

Haight Brown & Bonesteel LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.