FREMONT INDEMNITY COMPANY v. FREMONT GENERAL CORPORATION

Filed 9/20/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEALS from orders of the Superior Court of Los Angeles County, Wendell Mortimer, Jr., Judge. Reversed.

Pachulski, Stang, Ziehl, Young, Jones & Weintraub, Iain A.W. Nasatir, James K.T. Hunter; Greines, Martin, Stein & Richland, Kent L. Richland, Marc J. Poster and Tillman J. Breckenridge for Defendants and Appellants.

Munger, Tolles & Olson, Mark Epstein and Marc T.G. Dworsky for Los Angeles County Bar Association as Amicus Curiae on behalf of Defendants and Appellants.

Bill Lockyer, Attorney General, W. Dean Freeman, Mark P. Richelson, Raymond B. Jue, Deputy Attorneys General; Orrick, Herrington & Sutcliffe, Thomas J. Welsh, James E. Houpt and Stacy E. Don for Plaintiffs and Respondents.

Fremont General Corporation (Fremont General), Fremont Compensation Insurance Group, Inc. (Insurance Group), and Fremont Indemnity Company (Indemnity) are related corporations each of which retained the law firm of Morgan, Lewis & Bockius (MLB) in the past. Indemnity, by and through the Insurance Commissioner as its liquidator, sued Fremont General and Insurance Group in two separate actions alleging the misappropriation of funds. MLB appeared as counsel for the defendants in both actions. The superior court granted Indemnity’s motions to disqualify MLB as counsel for the defendants. The defendants appeal the disqualification orders. The defendants contend the disqualification of counsel is not justified based on either the concurrent representation of parties with conflicting interests or the successive representation of adverse parties in substantially related matters. We agree and reverse the orders.

FACTUAL AND PROCEDURAL BACKGROUND

1. Factual Background

Indemnity is a wholly-owned subsidiary of Insurance Group, which is a wholly-owned subsidiary of Fremont General. MLB represented Fremont General and its subsidiaries for many years. MLB represented Indemnity in a legal malpractice action (Fremont Indemnity Company v. Seyfarth Shaw (Super. Ct. L.A. County, No. BC287943)) known as the Seyfarth action. In that action, Indemnity alleged that Seyfarth Shaw had failed to timely file a complaint for legal malpractice against another law firm arising from the latter law firm’s representation of Indemnity in connection with a workers’ compensation claim. MLB filed a complaint on behalf of Indemnity in December 2002. Fremont General was not a party to the Seyfarth action.

MLB also represented Fremont General in Gularte v. Fremont Life Insurance Company (Super Ct. L.A. County, No. BC193703), known as the Gularte action, beginning in late 2002. The subject matter of that action does not appear in the appellate record. Indemnity was not a party to the Gularte action.

The commissioner filed an application to be appointed conservator of Indemnity on June 3, 2003. The court appointed the commissioner as conservator on June 4, 2003, and appointed the commissioner as liquidator on July 2, 2003. Harry J. LeVine, as counsel for the commissioner, first spoke with Michael C. Lieb of MLB concerning the Seyfarth action in June 2003, and the two later discussed the possibility of MLB continuing to represent Indemnity in that action. Paul A. Richler of MLB provided a proposed retainer agreement to LeVine on November 10, 2003, including language stating that MLB could continue to represent existing clients and could represent new clients in any matter that was not substantially related to the Seyfarth action, “even if the interests of such clients in those matters are directly adverse to those of the [California Department of Insurance].” LeVine objected to that provision, and the parties were unable to reach a compromise. LeVine advised Richler in December 2003 that he had selected other counsel to represent Indemnity in the Seyfarth action. MLB executed a substitution of counsel form on January 12, 2004.

Meanwhile, the commissioner’s counsel met with counsel for Fremont General, including its general counsel and Iain Nasatir of Pachulski, Stang, Ziehl, Young, Jones & Weintraub (Pachulski firm), on November 21, 2003. At the meeting, the commissioner requested compensation for Fremont General’s use of certain net operating losses and threatened litigation. We will refer to the dispute concerning Fremont General’s use of net operating losses incurred by Indemnity as the NOL dispute.

2. Trial Court Proceedings in the NOL Action

Indemnity filed a complaint against Fremont General and Insurance Group on June 2, 2004 (No. BC316472) (NOL action). MLB appeared on behalf of the defendants. Indemnity’s first amended complaint filed on July 16, 2004, alleged that Fremont General had appropriated Indemnity’s net operating losses without adequate compensation. Indemnity alleged 12 counts against the defendants, including counts for declaratory and injunctive relief, breach of contract, breach of fiduciary duty, unjust enrichment, breach of the implied covenant of good faith and fair dealing, fraudulent concealment, avoidance of voidable preferences, avoidance of fraudulent transfers, and violation of the Insurance Holding Company System Regulatory Act (Ins. Code, § 1215 et seq.).

Indemnity moved to disqualify MLB as counsel for Fremont General and Insurance Group on August 13, 2004. Indemnity argued that, through MLB’s prior representation of Indemnity in the Seyfarth action, MLB had learned the strengths, weaknesses, and other confidences of Indemnity. Indemnity also argued that Fremont General “almost certainly” had consulted MLB before rejecting the possibility of a settlement with respect to the NOL dispute in November 2003. Indemnity argued that MLB had refused to disclose when it first agreed to represent Fremont General in connection with the NOL dispute and that MLB’s refusal to disclose that information compelled the conclusion that the representation began at a time when MLB continued to represent Indemnity in the Seyfarth action. Based on those purported facts, Indemnity argued that MLB had concurrently represented parties with conflicting interests without informed written consent in violation of rule 3-310(C)(3) of the State Bar Rules of Professional Conduct.[1]

Indemnity also argued that MLB’s representation of Fremont Indemnity in the present action was “substantially related“ to its representation of Indemnity in the Seyfarth action. Indemnity argued that despite the dissimilar facts and legal issues in the two actions, MLB had gained “insight into the tolerance of risk, and attitudes toward costs of pursuing litigation in light of the relative strength of the case for Fremont Indemnity” through its representation of Indemnity in the Seyfarth action and “became privy to the Commissioner’s litigation philosophy and practices.” Indemnity argued that MLB had accepted employment adverse to Indemnity as a former client in violation of rule 3-310(E).

Fremont General and Insurance Group argued in opposition that Indemnity’s claim that MLB had concurrently represented parties with conflicting interests was based on mere speculation that MLB had represented Fremont General and Insurance Group in connection with the NOL dispute before MLB was substituted out as counsel for Indemnity in January 2004. Fremont General and Insurance Group filed several declarations to show that such speculation was baseless. A declaration by Richler stated that he was the MLB attorney responsible for Fremont General matters, that Fremont General did not seek advice from MLB concerning the NOL dispute before rejecting the possibility of settlement in or about November 2003, and that no MLB attorney had advised Fremont General or Insurance Group “concerning any aspect of the subject matter of the NOL Action“ before June 2004.

A declaration by Alan Faigin, general counsel of Fremont General and Insurance Group, stated that he had made the decision on behalf of Fremont General and Insurance Group to hire the Pachulski firm to represent those two entities in connection with the conservatorship proceeding, that “MLB was not consulted on any matter pertaining to the November 21, 2003 meeting with the Insurance Commissioner, or the issues raised in that meeting,” that the Pachulski firm and Barger & Wolen were the only outside counsel who had advised Fremont General or Insurance Group with respect to that meeting, and that he first consulted with MLB on behalf of Fremont General and Insurance Group with respect to the NOL dispute on June 3, 2004. A declaration by David Brody, assistant general counsel of Fremont General and Insurance Group, also stated that MLB was not consulted on any matter pertaining to the meeting of November 21, 2003, and had provided no advice to Fremont General or Insurance Group with respect to the NOL dispute until after the NOL action was filed in June 2004.

Fremont General and Insurance Group also argued that a substantial relationship exists between a former representation and a current representation only if there is some similarity between the factual and legal issues involved in the two matters, and that an attorney’s mere familiarity with a client from a prior representation is not a sufficient basis to disqualify the attorney from representation of an adverse party in a later unrelated matter.

Indemnity argued in reply that MLB had withheld documents that would disclose “the extent of [MLB’s] conflicts” and had failed to answer Indemnity’s prior request for information as to “the dates and circumstances under which you were first contacted to provide representation to Fremont General adverse to Fremont Indemnity and/or the Commissioner.”[2] Indemnity noted that MLB’s representation of Fremont General in the Gularte action, which was referenced in a declaration filed in opposition to the disqualification motion, had occurred concurrently with MLB’s representation of Indemnity in the Seyfarth action, at a time when the two parties had conflicting interests with respect to the NOL dispute. Indemnity argued that MLB therefore had concurrently represented parties with conflicting interests in violation of rule 3-310(C).

The court granted the motion to disqualify in a minute order dated January 25, 2005, stating: “MLB’s simultaneous representation of Fremont Indemnity and Fremont General post-liquidation when they became adverse mandates this result. The Insurance Commissioner never consented in writing to waive the conflict. MLB have not shown when they were initially consulted regarding representation of Fremont General in matters adverse to the Insurance Commissioner.”[3] Fremont General and Insurance Group challenged the order by petitioning this court for a writ of mandate and also appealed the order. We denied the writ petition in April 2005 (case No. B181557).

3. Trial Court Proceedings in the Comstock Action

Indemnity commenced a second action against Fremont General and Insurance Group on August 27, 2004 (No. BC320766) (Comstock action). Indemnity alleged that it was the successor in interest to Comstock Insurance Company (Comstock) and that Fremont General had misappropriated assets of Indemnity and Comstock, including net operating losses and other assets. Indemnity alleged 12 counts against the defendants, including counts for declaratory and injunctive relief, breach of contract, breach of fiduciary duty, unjust enrichment, constructive trust, conversion, avoidance of fraudulent transfers, avoidance of voidable preferences, and violation of the Insurance Holding Company System Regulatory Act. MLB appeared on behalf of the defendants. Indemnity moved to disqualify MLB as counsel for Fremont General and Insurance Group on March 30, 2005, arguing that disqualification was required for the same reasons that disqualification was required in the NOL action. Fremont General and Insurance Group opposed the motion.

The court granted the disqualification motion in a minute order dated April 22, 2005, stating: “Consistent with this Court’s previous ruling in related case BC316472, the Motion to Disqualify is granted. MORGAN, LEWIS & BOCKIUS’ simultaneous representation of Fremont Indemnity and Fremont General post-liquidation when they became adverse mandates this result. The Insurance Commissioner never consented in writing to waive the conflict. MLB still have refused to reveal how and when they were initially consulted regarding representation of Fremont General in matters adverse to the Insurance Commissioner. Further, there is also prohibited successive representation. MLB had a substantial relationship with the client (see Levin’s first and second declarations) and this creates a presumption that confidential information was obtained and this [is] a conflict. See Jesson vs. Hartford (2003) 111 Cal.App.4th 698.”[4] Fremont General and Insurance Group appealed the order. We have consolidated the two appeals.

CONTENTIONS

Fremont General and Insurance Group contend (1) MLB’s concurrent representation of clients in two unrelated matters in which the clients’ interests did not conflict (Indemnity in the Seyfarth action and Fremont General in the Gularte action) at a time when a conflict of interest existed between those clients with respect to a third matter in which MLB did not represent either party (the NOL dispute) is not a proper basis for disqualification; and (2) MLB’s prior representation of Indemnity in the Seyfarth action is not substantially related to its representation of the defendants in these actions, and there is no reason to believe that in that prior representation MLB obtained confidential information material to the present dispute.

Indemnity contends disqualification is required because (1) MLB concurrently represented both Indemnity in the Seyfarth action and Fremont General in the Gularte action at a time when the interests of Indemnity in liquidation conflicted with those of Fremont General with respect to the NOL dispute and the alleged misappropriation of assets, without the informed written consent of both parties; (2) MLB’s representation of the defendants in the present actions is substantially related to its representation of Indemnity in the Seyfarth action, despite the dissimilarity of issues, because MLB attorneys in the Seyfarth action had a “direct” and “personal” relationship with LeVine as counsel for the commissioner and “became privy to the Commissioner’s litigation philosophy and practices”; and (3) MLB gained confidential information by interviewing Indemnity’s officers and employees in the course of its prior representation of Indemnity in numerous matters.

DISCUSSION

1. General Principles Governing the Disqualification of Counsel

“A trial court’s authority to disqualify an attorney derives from the power inherent in every court ‘[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.’ (Code Civ. Proc., § 128, subd. (a)(5); People ex rel. Clancy v. Superior Court (1985) 39 Cal.3d 740, 745 [218 Cal.Rptr. 24, 705 P.2d 347]; Comden v. Superior Court [1978] 20 Cal.3d [906,] 916, fn. 4; In re Complex Asbestos Litigation [1991] 232 Cal.App.3d [572,] 585.) Ultimately, disqualification motions involve a conflict between the clients’ right to counsel of their choice and the need to maintain ethical standards of professional responsibility. (Comden v. Superior Court, supra, 20 Cal.3d at p. 915.) 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.; In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 586; River West, Inc. v. Nickel [(1987)] 188 Cal.App.3d [1297,] 1306-1308; see 1 Hazard & Hodes, The Law of Lawyering [(2d ed. 1996)] § 1.7:101, pp. 223-225 [discussing the assumed function of automatic disqualification rules in maintaining public confidence in the legal system].)” (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145-1146 (SpeeDee).)

Other factors to consider in deciding a motion to disqualify counsel include the attorney’s interest in representing the client, the financial burden on the client to replace disqualified counsel, and the possibility that the disqualification motion is being used as a litigation tactic. (SpeeDee, supra, 20 Cal.4th at p. 1145; Gregori v. Bank of America (1989) 207 Cal.App.3d 291, 300-301.)

2. Standard of Review

We review the ruling on a motion to disqualify counsel generally for abuse of discretion. (SpeeDee, supra, 20 Cal.4th at p. 1143.) The scope of the trial court’s discretion is limited by the applicable principles of law. (Id. at p. 1144; City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297-1298.) We defer to the court’s express or implied factual findings if substantial evidence supports the findings and reverse the ruling only if it does not conform to the applicable legal principles or there is no reasonable basis for the ruling in light of the facts. (SpeeDee, supra, at p. 1144; Jackson v. Ingersoll-Rand Co. (1996) 42 Cal.App.4th 1163, 1166-1167; In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 585 [“if substantial evidence supports the trial court’s implied findings of fact, an appellate court reviews the conclusions based on the findings for abuse of discretion”].) “The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason. When two or more inferences can reasonably be deduced from the facts, the reviewing court has no authority to substitute its decision for that of the trial court. [Citations.]” (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478-479.) An appellate court must carefully review the trial court’s exercise of discretion on a motion to disqualify counsel due to the important interests at stake. (SpeeDee, supra, at p. 1144.)

To be continue as Part II ...

Publication courtesy of San Diego pro bono legal advice.

Analysis and review provided by Poway Property line Lawyers.

[1] All further rule references are to the State Bar Rules of Professional Conduct unless stated otherwise.

[2] The Attorney General on behalf of the Commissioner and Fremont Indemnity requested the information in a letter to MLB dated July 8, 2004. The letter stated that MLB’s prior representation of Fremont Indemnity created a conflict of interest and requested the information “so that Fremont Indemnity and the Commissioner as liquidator can assess any potential damage caused by this conflict of interest.” MLB responded by challenging the assertion of a conflict of interest and stated that the Attorney General had no right to the information requested. The Attorney General did not request leave of court to conduct limited discovery on the matter.

[3] In the same minute order, the court sustained without leave to amend the defendants’ demurrers to all causes of action alleged in the first amended complaint except the count for fraudulent concealment, as to which the court sustained a demurrer with leave to amend. The court later sustained demurrers to all counts alleged in Indemnity’s third amended complaint and entered a judgment of dismissal in January 2006. Indemnity’s appeal from the judgment is currently pending in this court (case No. B188900).

[4] In the same minute order, the court sustained without leave to amend the defendants’ demurrers to all causes of action alleged in the complaint. Indemnity’s appeal from the resulting judgment of dismissal is currently pending in this court (case No. B183974).