Forrest v. Baeza

• Decision Date: 02 October 1997
• Docket Number: No. A075264,A075264
• Parties: , 97 Cal. Daily Op. Serv. 7806, 97 Daily Journal D.A.R. 12,541 Michael W. FORREST et al., Plaintiffs and Appellants, v. John M. BAEZA et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

Page 857

67 Cal.Rptr.2d 857

58 Cal.App.4th 65, 97 Cal. Daily Op. Serv. 7806,

97 Daily Journal D.A.R. 12,541

Michael W. FORREST et al., Plaintiffs and Appellants, v. John M. BAEZA et al., Defendants and Appellants.

No. A075264.

Court of Appeal, First District, Division 2, California.

Oct. 2, 1997.

Dario de Ghetaldi, Corey, Luzaich, Gemello, Manos & Pliska, L.L.P., Millbrae, for Defendants and Appellants.

David M. McKim, San Mateo, for Plaintiffs and Appellants.

KLINE, Presiding Justice.

This case raises issues pertaining to a motion to disqualify the attorney simultaneously representing two closely held, family-run corporations, and two of the corporations' three shareholders. The trial court granted the motion to disqualify the attorney from representation of the corporate parties, but allowed him to continue his representation of the individuals. The minority director/shareholder appeals, contending the court erred in failing to grant the disqualification motion in full. The corporations, on cross-appeal, urge the trial court erred in granting the motion at all.

STATEMENT OF THE CASE AND FACTS

This case involves a dispute between the three shareholders of Ba-Cel, Inc. (a corporation primarily engaged in the business of automobile towing and now known as Michael W. Forrest, Inc.), and Elgin Auto Body, Inc., (a corporation primarily engaged in the business of automobile body repair and now known as Forrest Auto Body, Inc.). The corporations are each owned in equal measure by Michael Forrest, his wife Sandra Forrest, and Sandra Forrest's brother, Ritch Ricetti. The three shareholders were each officers and directors of the corporations until September 22, 1994, when the Forrests purportedly removed Ricetti from office.

On January 26, 1994, Michael W. Forrest and Ba-Cel, Inc. filed a complaint (No. 386666) for damages and declaratory relief against John M. Baeza, a former officer and 50 percent shareholder of Ba-Cel, Inc., and various insurance companies and brokers. The complaint alleged Baeza had procured inadequate liability insurance for the corporation before selling his interest. The plaintiffs were represented by David M. McKim.

On June 14, 1994, Baeza filed a cross-complaint for indemnity against Michael Forrest, Sandra Forrest, Ritch Ricetti and the insurance defendants. McKim filed an answer to the cross complaint on behalf of Michael and Sandra Forrest ("the Forrests") and Ricetti.

On November 23, 1994, a new attorney was substituted as counsel for Ricetti.

On November 28, 1994, McKim filed on behalf of the Forrests and Elgin Auto Body, Inc. a complaint (No. 390289) for damages, contribution and equitable subrogation against Ricetti and Baeza. ¹ The complaint alleged malfeasance against Elgin by Ricetti, and a conspiracy between Ricetti and Baeza to drive the Forrests out of the business and enable Baeza to repurchase stock at a discounted price. The plaintiffs sought contribution for amounts owed by Ricetti on the promissory notes by which the corporation's stock had been purchased, alleging Ricetti had failed to pay these amounts and the Forrests had done so in order to avoid foreclosure upon their home, which secured the notes. They further sought equitable subrogation to the secured obligations held by Baeza and Celestre.

On December 9, 1994, Ricetti filed notice of a motion for appointment of a receiver to manage the affairs of Elgin and Ba-Cel. He also filed the first of his motions to disqualify McKim as counsel for the Forrests and the corporations in the two pending cases, alleging a conflict of interest due to McKim's prior representation of the Forrests, the corporations and Ricetti in the litigation.

On January 23, 1995, the trial court denied Ricetti's motions to disqualify McKim and to appoint a receiver, and granted his motions for leave to file a cross-complaint and to consolidate the two cases. Ricetti filed a cross-complaint against the Forrests, the corporations, and the insurance parties. Ricetti alleged the corporations were alter-egos of the Forrests; the Forrests made personal use of assets and funds of the corporations, transferred assets and funds of the corporations to themselves without adequate consideration, and operated the corporations to Ricetti's detriment. He further alleged that the Forrests improperly removed Ricetti as a director and officer of the corporations at a meeting on September 22, 1994. Among other things, Ricetti sought damages, removal of the Forrests as directors, and winding up and dissolution of the corporations (for the protection of Ricetti as the minority shareholder).

In April 1995, Sandra Forrest's deposition was taken. As evidenced by the excerpts included in the record, she testified that cash brought into Ba-Cel was recorded on deposit slips, except that before Ricetti left, the Forrests and Ricetti each received $500 a week that was not recorded. After Ricetti's departure, everything was recorded except cash overtime payments to four employees. Forrest also stated that prior to Ricetti's departure she would "skim" from lien sales, with Ricetti receiving one-third of the money. Forrest kept a record of the income not recorded on the deposit slips, so that the corporation's total income could be ascertained by consulting this record plus the deposit slips. The income reflected in this separate record, however, was not reported on the corporation's income tax returns or on the Forrests' or Ricetti's returns. The cash payments Forrest made to employees were not reported to federal or state authorities or to the corporation's accountant. Forrest denied using undeposited cash for personal purposes. Forrest testified that a check from Julio Ricetti, for the purchase of an engine through Elgin, was at Ritch Ricetti's direction cashed and split three ways between Ricetti and the Forrests.

On January 19, 1996, Ricetti filed a second motion to disqualify McKim. In his accompanying declaration, Ricetti alleged that his inspection of the corporate records revealed embezzlement by the Forrests from the corporations. Ricetti submitted excerpts from Sandra Forrest's deposition and took the position that Sandra Forrest had admitted embezzlement, tax fraud and other crimes, creating an actual conflict of interest between the Forrests and the corporations that could not be waived.

On February 22, 1996, the parties stipulated to have the disqualification motion determined by retired Justice Robert Kane, a referee.

In opposition to the motion to disqualify, the Forrests submitted a joint declaration affirming their wish, as individuals and as shareholders of the corporations, to have McKim continue his representation. The Forrests stated they had taken no cash distribution from either corporation for which Ricetti did not get a corresponding proportionate share; no creditor of either corporation ever went unpaid because of cash distributions to the shareholders; and two accountants had been retained and had begun to redo the corporate tax returns to account for the cash withdrawals. They further stated that throughout McKim's representation, the corporations had had separate general counsel. The Forrests felt Ricetti's disqualification motion had been brought, on the eve of trial, for purposes of harassment. In their brief opposing the disqualification motion, the Forrests noted that if Ricetti was permitted to amend his cross-complaint to allege a derivative action against the Forrests and the corporations regarding the purported embezzlement and tax related liabilities, McKim "arguably" would be prohibited from joint representation as to those issues.

The Forrests also submitted the declaration of Ron Ferretti, a retired San Mateo County sheriff, who stated that he had on several occasions observed Sandra Forrest hand Ricetti "a thick wad of currency" saying "here's your money" or "here's your share," creating the impression Forrest was giving Ricetti his share of the businesses' profits. Ferretti also declared he had been present at the Forrests' home when Ricetti asked Sandra Forrest to keep his $6,000 share of cash in the wall safe until he could obtain his own safe. The declaration of Hattie Ferretti related the same incident.

McKim's declaration in opposition to the motion to disqualify stated that a subpoena of Ricetti's bank records showed his use of his checking account dropped dramatically after he became a shareholder and rose again after the Forrests stopped making cash distributions in the summer of 1994, and that Ricetti wrote checks to "cash" before becoming a shareholder and after being terminated as an officer, but not in between.

Ricetti in turn, submitted deposition testimony, in which he denied ever receiving cash distributions from the corporations or the Forrests, or knowing the Forrests or corporation employees were receiving cash distributions or payments. With respect to his bank records, Ricetti did not remember why the number of checks written dropped, but explained it rose again after he was terminated from the corporations because he was at home all the time and took responsibility for paying more bills. Ricetti denied ever asking Sandra Forrest to keep cash for him in her safe. Ricetti also submitted the declaration of his father stating he had overheard Michael Forrest and Ron Ferretti agreeing to falsely represent that Ferretti was an employee of Ba-Cel on Ferretti's application for a mortgage. Ricetti's own declaration made further accusations against the Forrests, the Ferrettis and McKim. ²

At the hearing before Justice Kane on March 11, 1996, McKim argued there was no actual conflict between the Forrests and the corporations due to the cash distributions and improper tax reporting because the Forrests had hired two accountants who were straightening out the situation. McKim urged that Ricetti's claims that the Forrests took money for their own use were personal, not derivative claims of the...