130422 motion to disqualify

7/30/2019 130422 Motion to Disqualify

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LAW OFFICES OF DAVID ALDEN ERIKSONDavid Alden Erikson (SBN 189838)

[email protected]. Ryan Patterson (SBN 279474)

[email protected] North Larchmont Boulevard

Los Angeles, California 90004Telephone: 323.465.3100Facsimile: 323.465.3177

Attorneys for Plaintiff TARA SMITH,LLC

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA, WESTERN DIVISION

TARA SMITH, LLC, a Ca orn alimited liability company,

Plaintiffs,

v.

ARCH STANTON COMPANY, aCalifornia corporation; ELIZABETHLAHEY, an individual; ANTHONYHIRSCH, an individual,

Defendants.

Case No. 2:13-cv-01078-JAK-DTB

Hon. John A. Kronstadt

PLAINTIFFS NOTICE OFMOTION AND MOTION TODISQUALIFY THE LAW OFFICESOF GREEN & GREEN, LLP;MEMORANDUM OF POINTS ANDAUTHORITES

Hearing Date: May 20, 2013

Place: Courtroom 750-7th Floor

Time: 8:30 a.m.

[Filed Concurrently with theDeclarations Of Tara Smith and DavidAlden Erikson]

TO THE COURT, ALL PARTIES AND TO THEIR COUNSEL OF RECORD:

PLEASE TAKE NOTICE that on May 20, 2012, at 8:30 am in Courtroom

750 of the above-referenced Court, located on the seventh floor of the Roybal

Building, 255 East Temple Street, Los Angeles, California 90012, Plaintiff, by and

through its attorney of record, will and hereby does move this Court for an order

disqualifying the Law Offices of Green & Green, LLP, and Geri Green, as counsel


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282 PLAINTIFFS NOTICE OF MOTION AND

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for Defendants Arch Stanton Company (ASC), Elizabeth Lahey (Lahey) and

Anthony Hirsch (Hirsch), collectively referred to herein as Defendants. This

motion is made on the ground that Mark Green formerly represented Plaintiff in a

matter substantially related to this litigation.

This motion is made following the conference of counsel pursuant to Local

Rule 7-3, which took place on March 14, 2013.

This motion is based on this Notice, the accompanying Memorandum of

Points and Authorities, the Declarations of Tara Smith and David Alden Erikson, the

pleadings and records on file in this action and upon such other evidence and

argument as the Court may consider.

DATED: April 22, 2013 LAW OFFICES OF DAVID ALDEN ERIKSON

By: ____/dae/___________________________David Alden Erikson

Attorneys for Plaintiff TARA SMITH, LLC


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MEMORANDUM OF POINTS AND AUTHORITIES

I. INTRODUCTION

Green & Green should be disqualified from representing Defendants because

Mark Green formerly represented Plaintiff. For several months in 2012, as the

Companys only counsel, Mr. Green negotiated and drafted several key agreements

and documents for the Company, including the version of its Operating Agreement

still in use today. In doing so, he worked directly with the Companys founderas

well as with the Companys senior management team, who are the Defendants in

this case. After the falling out between the Company and Defendants that

precipitated this lawsuit, the Greens chose to represent the latter against the former.Such shifting loyalty is not permitted. But what makes Mr. Greens actions

particularly audacious is that he handled one of the key transactions at issue in this

lawsuit. Plaintiff alleges that Defendants (in their capacity as Company officers)

accepted a terrible deal with an investor in order to personally dip into those funds

once they were in the Company bank account.Mr. Green handled this very

transaction. He did the negotiating with the investors counsel, at the Defendants

behest, and conferred with Company founder Tara Smith (Tara) in the process.

In other words, Mr. Greens prior representation was intimately related to this

oneeasily meeting the substantially related standard for disqualification.

Defendants will argue in this case that Tara herself was aware that the investor deal

was a bad one, but that she accepted anyway out of desperation; and that it was

understood by all that Defendants would take a chunk of the investment proceeds

for themselves as contractual compensation. Mr. Green was right in the middle of

these issues.

Disqualification does not depend on Mr. Greens receipt of confidential

information or foreknowledge of evidence and positions. Rather, where current

representation is substantially related to prior one, no inquiry into actual


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transmission of confidential information is required, because it is conclusively

presumed. And where the current litigation involves the very transaction handled in

the prior representation, disqualification is virtually automatic, as explained below.

And it gets worse. Defendants argue Mr. Green was actually representing

them in the investor deal. If true, this would not change the fact that he also

represented the Company (and such latter representation can be demonstrated with

emails and testimony). But it would make the case for disqualification all the more

overwhelming. As explained at the end of this brief, where the prior representation

was joint (or even just arguably joint), disqualification is once again automatic.

II. FACTUAL BACKGROUND

A. The Companys Allegations

Plaintiff, a hair care company founded by high-profile hair stylist Tara Smith,

alleges that Defendants insinuated themselves into Plaintiffs top managementand

proceeded to use their positions to siphon off investor funds. [First Amended

Complaint (FAC), 3.] Rather than pursue the Companys interests, Defendants

promoted the false sense that they were successfully rebuilding the company. [Id.]

They did this in order to remain in a position where they could milk the company.

[Id.] During their eighteen-month tenure, about a half million dollars was invested in

the Company by third parties. [Id.] And almost always, as soon as money came in

the door from an investor, a good portion went immediately out the door to

Defendants. [Id.]

Plaintiff brings this action to rescind Defendants contract on grounds of fraud

unconscionability and lack of true assent by Tara on behalf of the Company. [Id. at

4.] That purported contractto provide part-time, non-exclusive virtual

management services to a small business with no goods at marketwas shockingly

favorable to Defendants. [Id.] It provided for a monthly fee of between $15,000 and

$50,000. [Id.] Even more incredibly, Defendants would be given 15% of the


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Company, a stake worth $750,000 in accordance with the deals Defendants were

striking with investors. [Id.]

B. Mark Green Negotiated A Key Investor Deal For The Company,

And Even Drafted The Companys Operating Agreement

In July of 2011, an investor agreed to provide the Company with $250,000.

[Declaration of Tara Smith, 3.] Half was to be invested immediately, and half when

certain conditions were satisfied. [Id.] In January of 2012, the investor agreed to

accelerate the second tranche. [Id.] She drove a hard bargain however, securing

certain valuable concessions. [Id.] Because the Company needed the funds on an

emergency basis, the parties signed a quick written agreement on February 1, 2012,leaving the details and definitive agreements for later. [Id.]

The Company engaged Mr. Green to handle the negotiations, including

drafting the operative documents, which included an agreement with the investor as

well as amending the Companys Operating Agreement. [Id., 4-6.] By mid-April,

after extensive conferring with the Company (Tara, as well Defendants in their

capacity as corporate officers), Mr. Green produced drafts of the investor agreement

the Companys Operating Agreement, and a disclosure letter for investors. [Id.,

7-9.]. He subsequently engaged in a back-and-forth with the investors counsel to

wrap up the deal. [Id., 10-12.]

In the course of doing so, Mr. Green:

Met and conferred personally with Tara (as sole principal of the Company),as well as conferred with her by phone and email. Some of these

communications involved only Tara and Green, while some included Lahey

and Hirsch, and managers of the Company. [Id., 4-12.]

Made legal judgments and recommendations to the Company (to Tara, aswell as to Lahey and Hirsch), with respect to matters that had been left

undecided beforehand. [Id.] This is demonstrated by emails. For example,


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Mr. Green opined that the investor should not be granted unlimited favored

nations status as requested, because it would harm the Companys later

efforts to court investors. [Id. 8, Exh. B.]

Communicated proposals to, and engaged in a back-and-forth with, opposingCounsel (at one point indicating that certain final proposed changes by the

investors counsel were fine with Tara). [Id., 10-12, Exh. C.] These

matters are demonstrated by emails.

Drafted the first drafts of the definitive documents (between the Companyand the investor) and transmitted them to opposing counsel, and worked

through several drafts to arrive at the final executed agreements. [Id., 4-12.] These matters are demonstrated by emails.

All the while, he communicated the process to the Company (to Taraindividually, as well as to Lahey and Hirsch). He also sought and received

Taras approval and consent on matters that required it. [Id., 4-12, Exh A.]

These matters are demonstrated by emails.

C. The Investor Deal Is As A Key Issue In This Litigation.

Defendants involvement in the investor deal described above is a key issue in

this litigation. Plaintiffs Complaint alleges generally that after using fraud to secure

their positions [FAC, 17-18], Defendants pursued courses of action that looked

good, but were indeed bad for the Companyso that they could tap angel investor

funds as they came in. [FAC, 28.]

The investor deal described above was the most prominent example (it was

and remains the Companys largest investment), as duly emphasized in the

Complaint:

In several instances, Defendants negotiated deals with investors thatwere by any measure far too generous to the investor and converselydetrimental to the Company itself. Again, this was not merely the resultof poor business judgment on the Defendants part. Rather, it was partof a calculated effort to bring money into the company, whichDefendants could tap for themselves, without regard to the Companys


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interests. With regard to one investor (whose identity is known toDefendants), each of the Defendants specifically misrepresented thatthe deal was advantageous when in fact it was not. Defendants madesuch misrepresentations during a meeting in January or February 2012,

between Lahey, Hirsch and Mark Green (an attorney brought in byHirsch to negotiate the deal with this investor, on behalf of the

Company), which took place at Mr. Greens house (and at whichmeeting Tara gave Green a haircut). [FAC, 29.]1

III. GREEN & GREEN SHOULD BE DISQUALIFIED

A. Disqualification Turns On Whether There Was A Substantial

Relationship Between The Former and Current Representation

Attorney conduct before this Court is governed by the California Rules of

Professional Conduct. See L.R. 83-3.1.2. Under these rules, an attorney is prohibited

from accepting employment adverse to the interests of a former client without firstobtaining that clients informed written consent waiving the conflict. Cal. Rules

Professional Conduct, Rule 3-310(E). An attorneys former client who does not

consent to the attorneys representation of an adversary may disqualify the attorney

by showing a substantial relationship between the subjects of the prior and the

current representations.Flatt v. Superior Court, 9 Cal.4th 275, 282 (1994).2

It is not necessary to prove confidential information was actually obtained

through the former representation: If (i) a substantial relationship exists between

the former and present matters and (ii) the nature of the employment was such that

confidential information material to the case would normally be imparted to the

attorney, then (iii) the attorney's knowledge of material confidential information is

conclusively presumedand (iv) disqualification is mandatory absent the former

client's informed written consent. Cal. Prac. Guide: Professional Responsibility, Ch.

4-C (The Rutter Group, 2012);Flatt,supra, at 283 (citingRosenfeld Const. Co. v.

1 As Defendants know, the investor referred to in this paragraph of the Complaint is the very onewho Green negotiated with.

2This disqualification is not limited to the individual attorney, but is imputed to that attorneys

entire law firm. See Henriksen v. Great Am. Sav. & Loan, 11 Cal.App.4th 109, 117 (1992)


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Superior Court, 235 Cal.App.3d 566, 575 (1991)) (If a substantial relationship is

established, the discussion should ordinarily end. The rights and interest of the

former client will prevail. Conflict would be presumed; disqualification will be

ordered.)

A substantial relationship exists whenever the subject matters of the prior

and current representations are linked in some rational manner. Flatt,supra,, at 283.

In determining whether the same subject matter is involved, courts consider (i)

similarities between the two factual situations, (ii) similarities between the legal

questions posed; and (ii) the nature and extent of the attorney's involvement in the

two cases.Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP, 69Cal.App.4th 223, 234 (1999);Jessen v. Hartford Cas. Ins. Co., 111 Cal.App. 4th

698, 709 (2003). And the word subject matter is construed very broadly in this

context.Jessen, supra, at711. TheJessen court analogized this use of the term

subject matter to the familiar test for discoverability (relevance to subject

matter): In the lexicon of the law, the words subject and subject matter mean

more than the strict facts, claims, and issues involved in a particular action.Id.

B. A Substantial Relationship Exists Here

Here, the was certainly a substantial relationship between Mark Greens

involvement in the investor negotiations/drafting and this litigationbecause the

fact and legal issues are in part identical in that this lawsuit is largely aboutthe very

investor deal Green handled. There is no question the representations are linked in

some rational manner. The nature and extent of Mr. Greens involvement also

requires disqualification because he was intimately involved in the interplay

between the Company and Defendants, which again is exactly the issue here.

Indeed, a line of cases treats disqualification as virtually automatic where the

later litigation concerns or includes the very transaction at issue in the prior

representation. SeeZador Corp., N.V. v. Kwan, 31 Cal.App 4th 1285, 1294 (1995);


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Knight v. Ferguson, 149 Cal.App. 4th 1207 (2007). A substantial relationship is

inherentin such situations, where the attorney was involved with (or even formerly

represented) the parties with respect to the subject matter of the subsequent

litigation. SeeZador Corp., supra, at 1294. Disqualification in such cases depends

not on confidential information or the substantial relationship test, but rather on

the scope of each client's consent.Id.

C. Defendants Position That Mark Green Could Not Have

Represented Plaintiff Because Formalities Were Not Observed

Ignores The Law Regarding Formation Of An Attorney-Client

Relationship

During the meet and confer process, Defendants argued that Mr. Green did

not directly provide services to Tara Smith LLC and that despite appearances, he

was actually representing Defendants when providing the services described above.

Defendants acknowledge that Mr. Greens legal work provided a substantial

benefit to the Companybut they minimize the significance of this by claiming

that benefit was conferred as part of his representation of Defendants:

Mr. Green as ASCs general counsel since its inception did providevaluable services to ASC in aid of its performance of duties under itsservices agreement with Tara Smith, LLC, which services undoubtedlywere of substantial benefit to Tara Smith, LLC. [Exh. A to Declarationof David Erikson.]

Further, Defendants argue, Mr. Green could not have been representing the

Company because Tara did not respond when Lahey (not Green) advised her that a

representation agreement was required. Geri Green argues in her letter:

At one time the ASC principals asked [Mr. Green] whether he wouldconsider undertaking representation of Tara Smith, LLC. He pointedout that to do so since he represented ASC would require a writtencontract of representation with an appropriate waiver of conflict ofinterest . . . . []. Elizabeth Lahey, one of the ASC principals, soinformed Tara Smith and in an April 9, 2012 email to Tara confirmedthat she, Tara, needed to Sign a representation agreement with MarkGreen if she wished to have him represent Tara Smith, LLC. [] Ms.Smith never responded to this notice.


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Both of these arguments rely on far too formal a view of the attorney-client

relationship, which can obviously exist in the absence of an explicit agreement or

when existing relationships would make a waiver advisable. Even accepting

Defendants tortured logicthat an attorney could be representing company

managers in negotiating and drafting documents where the company is the party

there is no question that the Company itself was also a client. An attorney-client

relationship (and the attorney's corresponding duties to the client) can arise by

inference from the conduct of the parties; and neither a fee payment nor a formal

agreement is required.Lister v. State Bar, 51 Cal .3d 1117, 1126 (1990).

The cases describe a multi-factor analysis, which perhaps Defendants willwalk us through when they offer evidence. But prior representation of the Company

is clear here in light of the communications between Mr. Green and Tara, and

between Mr. Green and the investors attorneys. (O)ne of the most important facts

involved in finding an attorney-client relationship is the expectation of the client

based on how the situation appears to a reasonable person in the client's position.

Responsible Citizens v. Sup.Ct. (Askins), 16 Cal.App.4th 1717, 1733 (1993);Flatt,

supra, at 281, fn. 1 (1994).

C. Indeed, Mark Greens Representation Of Defendants During The

Investor Deal Would Make The Current Representation All The

More Problematic

The fact that Mark Green represented the Company does not, of course, mean

that he didnt also represent Defendants at the same time. But if he did, or if the

question is even close (as it most certainly is given Defendants long relationship

with Mr. Green and their personal interests in the deal he was negotiating), then the

propriety of disqualification is beyond question.

InKnight v. Ferguson, 149 Cal.App. 4th 1207 (2007), an attorney was

disqualified in a extremely similar situation. Attorney was introduced to New Client


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by Attorneys Old Client, and (briefly) represented New Client in partnership

negotiations with a third party. Old Client attended some of the meetings and later

claimed he was actually a client at the time (although the court seems not to have

bothered addressing that question). When the third party dropped out, Old Client

stepped in and became New Clients partner.

Even though Attorney did not represent Old Client and New Client in their

own partnership negotiations, Attorney was properly disqualified when he tried to

represent Old Client in a subsequent partnership dissolution action against New

Client. The court found something unseemly in Attorneys representation of Old

Client despite the fact that he had conferred with New Client about that verypartnership early on (before Old Clients involvement). The problem was that

Attorney had previously represented the plaintiff, New Client, with regard to the

formation of the very partnership that was issue in the action.Id. at p. 1211. The

Court of Appeal affirmed, concluding that although the legal issues and strategies

discussed during the two representations were different, a substantial relationship

existed because the two matters involved the same partnership and the prior

representation occurred at a critical stage, when [New Client] was creating the

business entity [that] is at the heart of this action.Id. at p. 1213. Even in the

absence of any question regarding privilege or confidentiality, the attorney simply

had a duty not to represent conflicting interests.Id. New Client had the right to

repose confidence in Attorney and to expect Attorney's loyalty to her with respect to

the partnership would not be compromised. Id. Indeed, the paramount concern was

not confidential information, but rather preservation of public trust in the

scrupulous administration of justice and the integrity of the bar:Id. (citingJessen).

The legal theories and issues that an attorney discusses with a formerclient may be different than those involved in the subsequent lawsuitagainst that client. But the substantial relationship test is broad and notlimited to the strict facts, claims, and issues involved in a particularaction. (Jessen, supra, 111 Cal.App.4th at p. 711, 3 Cal.Rptr.3d 877.)[A] substantial relationship exists whenever the subjects' of the


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prior and the current representations are linked in some rationalmanner. [Citation.] (Ibid.) That is the case here. Knight retainedWideman to discuss a lease and partnership relating to the creation ofthe restaurant which is the subject of this action.

IV. CONCLUSION

Plaintiff is mindful that a partys choice of counsel deserves respect, and that

motions to disqualify are often more about gaining a strategic advantage than

preventing harm. But because of the profoundly intimate relation between Mark

Greens prior work for the Company and this litigation, and pursuant to established

case authority, this is a case for disqualification if ever there was one. Defendants

would certainly gain an advantage in using a lawyer who previously represented the

Company with respect to the very subject matter of this lawsuit. But moreimportant, the prior representation was of a type that was so related to the current

litigation that courts have eschewed an actual inquiry into whether confidential

information was transmitted and relied instead on the presumption of such

transmission.

Defendants believe that their only way to avoid this conclusion is to argue

that Mr. Green was representing them in the prior dealings. This is unlikely, as

demonstrated by Taras declaration and the emails. But worse, prior representation

of the Defendants mandates disqualification all the more. It does not change the fact

that Mr. Green also represented Plaintiff. And a prior joint representation would be

extremely problematic.

DATED: April 22, 2013 LAW OFFICES OF DAVID ALDEN ERIKSON

By: _____/dae/__________________________David Alden Erikson

Attorneys for Plaintiff TARA SMITH, LLC

130422 motion to disqualify

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