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

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3. Disqualification Is Not Justified Based on the Concurrent Representation of Parties with Conflicting Interests

An attorney’s concurrent representation of parties with conflicting interests implicates the duty of loyalty. “Attorneys have a duty to maintain undivided loyalty to their clients to avoid undermining public confidence in the legal profession and the judicial process. (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 547-548, fn. 6 [28 Cal.Rptr.2d 617, 869 P.2d 1142] and accompanying text.) The effective functioning of the fiduciary relationship between attorney and client depends on the client’s trust and confidence in counsel. (Flatt [v. Superior Court (1999)] 9 Cal.4th [275,] 282, 285.) The courts will protect clients’ legitimate expectations of loyalty to preserve this essential basis for trust and security in the attorney-client relationship. (Ibid.)” (SpeeDee, supra, 20 Cal.4th at pp. 1146-1147.)

Rule 3-310(C) prohibits the concurrent representation of clients in certain circumstances without the informed written consent of each client. The rule states: “A member shall not, without the informed written consent of each client:

(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or

(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or

(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”

The most egregious conflict of interest occurs when an attorney represents more than one client in a matter in which their interests are directly adverse. (SpeeDee, supra, 20 Cal.4th at p. 1147; Flatt v. Superior Court, supra, 9 Cal.4th at p. 284, fn. 3.) “Such patently improper dual representation suggests to the clients--and to the public at large--that the attorney is completely indifferent to the duty of loyalty and the duty to preserve confidences. However, the attorney’s actual intention and motives are immaterial, and the rule of automatic disqualification applies. ‘The rule is designed not alone to prevent the dishonest practitioner from fraudulent conduct,’ but also to keep honest attorneys from having to choose between conflicting duties, or being tempted to reconcile conflicting interests, rather than fully pursuing their clients’ rights. (Anderson v. Eaton (1930) 211 Cal. 113, 116 [293 P. 788].) The loyalty the attorney owes one client cannot be allowed to compromise the duty owed another. (Ishmael v. Millington (1966) 241 Cal.App.2d 520, 526-527 [50 Cal.Rptr. 592].)” (SpeeDee, supra, at p. 1147.)

A conflict of interest also arises when an attorney represents a client in a matter in which the client’s interests are adverse to those of another party and concurrently represents the other party in another matter. This is the situation described in rule 3-310(C)(3). An attorney’s dual representation of parties in those circumstances presents a conflict of interest even if the two matters are completely unrelated and there is no risk that confidences obtained in one matter could be used in the other. (SpeeDee, supra, 20 Cal.4th at p. 1147; Flatt v. Superior Court, supra, 9 Cal.4th at pp. 284-285.) Flatt explained why the rule of automatic disqualification applies in those circumstances:

“A client who learns that his or her lawyer is also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel was retained, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship. All legal technicalities aside, few if any clients would be willing to suffer the prospect of their attorney continuing to represent them under such circumstances. As one commentator on modern legal ethics has put it: ‘Something seems radically out of place if a lawyer sues one of the lawyer’s own present clients in behalf of another client. Even if the representations have nothing to do with each other, so that no confidential information is apparently jeopardized, the client who is sued can obviously claim that the lawyer’s sense of loyalty is askew.’ (Wolfram, Modern Legal Ethics (1986 ed.) § 7.3.2, p. 350, italics added.) It is for that reason, and not out of concerns rooted in the obligation of client confidentiality, that courts and ethical codes alike prohibit an attorney from simultaneously representing two client adversaries, even where the substance of the representations are unrelated.” (Flatt v. Superior Court, supra, 9 Cal.4th at p. 285.)

These concerns about maintaining the trust and confidence of clients, and of the public in general, and preventing a situation where an attorney may be forced to choose between conflicting duties or be tempted to reconcile the clients’ conflicting interests are limited to circumstances where an attorney represents one or both of the clients in a matter in which the clients’ interests are adverse. This is reflected in rule 3-310(C)(1), (2), and (3), which prohibit the representation of clients with conflicting interests without informed written consent only in circumstances where an attorney concurrently represents one or both clients in a matter in which the clients’ interests are adverse. Rule 3-310(C)(1) and (2), which are not directly at issue here, expressly are limited to situations where an attorney concurrently represents more than one client in a matter in which the clients’ interests potentially or actually conflict. Rule 3-310(C)(3), which is directly at issue here, states that an attorney may not “[r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.” The “client in the first matter” is the client who is represented by the attorney in that matter, as referenced at the beginning of the quoted language. Thus, rule 3-310(C)(3) expressly is limited to situations where an attorney represents a client in a matter while concurrently representing in another matter a second client whose interests in the first matter are adverse to those of the first client. Rule 3-310(C)(3) prohibits the concurrent representation of clients without informed written consent only if the attorney represents one of the clients in a matter in which the clients’ interests are adverse; it does not prohibit the concurrent representation of clients whose interests are adverse only in a matter in which the attorney does not represent either client.[1]

MLB’s concurrent representation of Indemnity in the Seyfarth action and Fremont General in the Gularte action is not a proper basis for disqualification under rule 3-310(C)(3) because the clients’ interests in those matters were not adverse. The fact that the clients’ interests were adverse in a third matter, the NOL dispute, in which MLB did not represent either client does not implicate the duty of loyalty or justify disqualification. Moreover, despite the statements in the challenged orders that “MLB have not shown when they were initially consulted regarding the representation of Fremont General in matters adverse to the Insurance Commissioner” and “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,” there is no evidence that Fremont General or Insurance Group consulted with MLB in connection with the NOL dispute before June 2004, and the uncontroverted declarations discussed ante show that the defendants first consulted with MLB in connection with the NOL dispute in June 2004. We therefore conclude that disqualification of counsel based on the concurrent representation of parties with conflicting interests is not warranted.

4. Disqualification Is Not Justified Based on the Prior Representation of a Party in a Substantially Unrelated Matter

An attorney’s representation of a client in a matter against a former client implicates the duty of confidentiality. “Protecting the confidentiality of communications between attorney and client is fundamental to our legal system. The attorney-client privilege is a hallmark of our jurisprudence that furthers the public policy of ensuring ‘ “the right of every person to freely and fully confer and confide in one having knowledge of the law, and skilled in its practice, in order that the former may have adequate advice and a proper defense.” [Citation.]’ [Citation.] To this end, a basic obligation of every attorney is ‘[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.’ (Bus. & Prof. Code, § 6068, subd. (e).)” (SpeeDee, supra, 20 Cal.4th at p. 1146.)

Rule 3-310(E) prohibits the successive representation of clients in certain circumstances without the informed written consent of the client and former client. The rule states: “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.” If there is a substantial relationship between the subject of the current representation and the subject of the former representation, the attorney’s access to privileged and confidential information in the former representation is presumed and disqualification of the attorney from the current representation is mandatory in order to preserve the former client’s confidences. (SpeeDee, supra, 20 Cal.4th at p. 1146; Flatt v. Superior Court, supra, 9 Cal.4th at p. 283; H. F. Ahmanson & Co. v. Salomon Brothers, Inc. (1991) 229 Cal.App.3d 1445, 1452.)

The subject of a current representation is substantially related to the subject of a prior representation only if the issues are sufficiently similar to support a reasonable inference that the attorney in the course of the prior representation was likely to have obtained confidential information material to the current representation. (City and County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 847; Farris v. Fireman’s Fund Ins. Co. (2004) 119 Cal.App.4th 671, 679-680; Santa Teresa Citizen Action Group v. City of San Jose (2003) 114 Cal.App.4th 689, 711.) A presumption that an attorney possesses confidential information ordinarily is imputed to the attorney’s entire firm “on the rationale ‘that attorneys, working together and practicing law in a professional association, share each other’s, and their clients’[,] confidential information.’ (SpeeDee, supra, 20 Cal.4th at pp. 1153-1154, fn. omitted.)” (Cobra Solutions, supra, at p. 848.)

Indemnity cites Jessen v. Hartford Casualty Ins. Co. (2003) 111 Cal.App.4th 698, 709 for the proposition that an attorney’s direct and personal relationship with a former client can establish a “substantial relationship” so as to justify disqualification even if there is no similarity between the issues involved in the current representation and those involved in the former representation. Jessen does not support that proposition. Jessen stated: “whether an attorney should be disqualified in a successive representation case turns on two variables: (1) the relationship between the legal problem involved in the former representation and the legal problem involved in the current representation, and (2) the relationship between the attorney and the former client with respect to the legal problem involved in the former representation.” (Id. at p. 709.) Jessen stated that if an attorney was personally involved in providing legal advice and services to a former client, the attorney is presumed to possess confidential information and “disqualification will depend upon the strength of the similarities between the legal problem involved in the former representation and the legal problem involved in the current representation.” (Ibid.) Jessen stated further that if “the former attorney-client relationship [was] peripheral or attenuated instead of direct,” the attorney is not presumed to possess confidential information absent “an adequate showing that the attorney was in a position vis-a-vis the client to likely have acquired confidential information material to the current representation.”[2] (Id. at p. 710.) Jessen held, “successive representations will be ‘substantially related’ when the evidence before the trial court supports a rational conclusion that information material to the evaluation, prosecution, settlement or accomplishment of the former representation given its factual and legal issues is also material to the evaluation, prosecution, settlement or accomplishment of the current representation given its factual and legal issues. [Citations.]” (Id. at p. 713.)

Jessen v. Hartford Casualty Ins. Co., supra, 111 Cal.App.4th 698 did not dispense with the requirement that the issues involved in the current and prior representations must be sufficiently similar to support a reasonable inference that the attorney obtained confidential information material to the current representation. Rather, the language cited by Indemnity concerning “two variables” (id. at p. 709) underscores that even if the issues are similar, there must be some basis to conclude that an attorney who had no direct, personal involvement in the prior representation was privy to confidential information. As the court that decided Jessen later explained: “Jessen does not focus solely upon the nature and extent of the attorney’s involvement in the compared representations by detaching from the necessary analysis the factual and legal issues involved in the representations. To the contrary, when the attorney’s contact with the client in the first representation was direct, the Jessen evaluation of whether the two representations are substantially related centers precisely upon the factual and legal similarities of the two representations. (Jessen, supra, 111 Cal.App.4th at pp. 709-710.) When the attorney’s contact with the client in the first representation was not direct, the Jessen evaluation of whether the two representations are substantially related involves consideration of the factual and legal similarities of the representations as well as the nature of the attorney’s past relationship with the former client. (Id. at pp. 710-711, Ahmanson, supra, 229 Cal.App.3d at p. 1454; Rest.3d., Law Governing Lawyers, § 132, com. h.; see Wolfram, Former Client Conflicts, (1998) 10 Geo. J. Legal Ethics 677, 733-735 [peripheral representation] (Wolfram).)” (Farris v. Fireman’s Fund Ins. Co., supra, 119 Cal.App.4th at pp. 679-680.)

“Second, Jessen did not adopt the so-called playbook approach. (See Rest.3d., Law Governing Lawyers, § 132, com. d(iii), pp. 379-380; Wolfram, supra, at p. 723.) To create a conflict requiring disqualification, Jessen mandates that the information acquired during the first representation be ‘material’ to the second; that is, it must be found to be directly at issue in, or have some critical importance to, the second representation. (Jessen, supra, 111 Cal.App.4th at pp. 712-713; Wolfram, supra, at p. 724 [only ‘when such information will be directly in issue or of unusual value in the subsequent matter will it be independently relevant in assessing a substantial relationship’].) Thus, for example, the attorney’s acquisition during the first representation of general information about the first client’s ‘overall structure and practices’ would not of itself require disqualification unless it were found to be ‘material’--i.e., directly in issue or of critical importance--in the second representation. (See SLC Ltd. v. Bradford Group West (10th Cir.1993) 999 F.2d 464, 467-468 [financial information].) The same is true about information such as the first client’s ‘litigation philosophy’ or ‘key decision makers.’ Our reference to these and other factors in Jessen did not establish any one of them, singly or in any particular combination, as a litmus test; we simply identified some of the categories of information that might be found to be ‘material’ and therefore relevant to a determination whether the attorney ought to be disqualified.” (Farris v. Fireman’s Fund Ins. Co., supra, 119 Cal.App.4th at p. 680.)

The Seyfarth action was a legal malpractice action arising from circumstances and involving issues totally unrelated to the NOL dispute. Indemnity does not argue otherwise. Because the issues are totally unrelated, Indemnity has not established a reasonable probability that MLB through its contacts with LeVine, as counsel for the commissioner acting on behalf of Indemnity in liquidation, obtained confidential information material to the present actions. In particular, Indemnity has not shown that purported information concerning “the Commissioner’s litigation philosophy and practices” is material to any issue in these actions. Indemnity also presented no evidence that MLB obtained confidential information material to these actions through contacts with Indemnity’s officer’s and employees in prior representations.

We therefore conclude that disqualification based on the prior representation of a party in a substantially related matter is not warranted. The record before us establishes that the required substantial relationship simply was not present.

DISPOSITION

The orders of January 25, 2005, and April 22, 2005, disqualifying MLB as counsel for Fremont General and Insurance Group in the NOL action and the Comstock action are reversed. Fremont General and Insurance Group are entitled to recover their costs on appeal.

CERTIFIED FOR PUBLICATION

CROSKEY, Acting P. J.

We Concur:

KITCHING, J.

ALDRICH, J.

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[1] As amicus curiae Los Angeles County Bar Association points out, to regard an attorney’s concurrent representation of clients whose interests are not adverse in any of the matters in which the attorney represents those clients as a conflict of interest due to the clients’ adversity in a third matter in which the attorney does not represent either client would impose a tremendous burden on attorneys to discover all matters in which a client’s interests might conflict with those of another client and could result in much more frequent disqualification of counsel.

[2] A common example of circumstances that would justify disqualification of an attorney despite the absence of direct, personal involvement by the attorney in the prior representation is where another attorney in the same law firm had a direct professional relationship with the former client in the prior representation. (See City and County of San Francisco v. Cobra Solutions, supra, 38 Cal.4th at p. 847 [citing Jessen v. Hartford Casualty Ins. Co., supra, 111 Cal.App.4th 698 in the context of a discussion of vicarious disqualification].)