Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp.

• Decision Date: 25 July 1995
• Docket Number: METRO-GOLDWYN-MAYE,B077817,INC,Nos. B084939,s. B084939
• Citation: 43 Cal.Rptr.2d 327,36 Cal.App.4th 1832
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 5852, 95 Daily Journal D.A.R. 9940 , et al. Plaintiffs and Appellants, v. TRACINDA CORPORATION, et al., Defendants and Respondents.

Page 327

43 Cal.Rptr.2d 327

36 Cal.App.4th 1832, 95 Cal. Daily Op. Serv. 5852,

95 Daily Journal D.A.R. 9940

METRO-GOLDWYN-MAYER, INC., et al. Plaintiffs and Appellants, v. TRACINDA CORPORATION, et al., Defendants and Respondents.

Nos. B084939, B077817.

Court of Appeal, Second District, Division 4, California.

July 25, 1995.

As Modified on Denial of Rehearing Aug. 11, 1995.

White & Case, C. Randolph Fishburn, Gary L. Urwin and Susan J. DeWitt, Los Angeles, for plaintiffs and appellants

Christensen, White, Miller, Fink & Jacobs, James S. Schreier, Isaac H. Winer, Michael R. Hambly and Patricia L. Glaser, Los Angeles, for defendants and respondents.

HASTINGS, Associate Justice.

In these two related appeals, appellants Metro-Goldwyn-Mayer, Inc. and Credit Lyonnais Bank Nederland N.V., (CLBN) seek to overturn the trial court's denial of two motions to disqualify counsel for defendants, Christensen White, Miller Fink & Jacobs (hereafter referred to as Christensen White or the Christensen firm).

We reverse the judgment in case No. B084939. The appeal in case No. B077817 is thereby rendered moot and accordingly is dismissed.

FACTUAL AND PROCEDURAL BACKGROUND

The facts underlying these appeals are basically undisputed. ¹

MGM/UA Communications Co. (MGM/UA) was a motion picture production company with its principal executive offices located in Culver City. Since 1969, MGM/UA's primary outside counsel in both litigation and transactional matters was Christensen White (and its predecessor firms). Respondents Kerkorian, Barbakow and Silbert were shareholders and members of MGM/UA's Board of Directors. Respondent Tracinda Corporation, together with Kerkorian, owned approximately 70 percent of its shares. Christensen White also represented Kerkorian and Tracinda.

Respondent Silbert was a partner of the Christensen firm. One of his partners, Terry Christensen, was also on the MGM/UA Board of Directors, and was at one time president of Tracinda Corporation.

On November 1, 1990, MGM/UA merged with a subsidiary of Pathe Communications Co. (Pathe) and changed its name to MGM-Pathe Communications Co. (MGM-Pathe). Christensen White represented MGM in the merger and Silbert and Barbakow were the primary negotiators. Other attorneys at Christensen White actively participated in board meetings concerning the merger. ² Funding for the merger (nearly $1 billion) was provided by CLBN. Following the merger, MGM-Pathe changed its name to Metro-Goldwyn-Mayer, Inc. (MGM).

In connection with the merger, Kerkorian, Tracinda, Barbakow and Silbert (sometimes collectively referred to as respondents) sold their MGM stock to Pathe for millions of dollars (Kerkorian and Tracinda received $1 billion; Barbakow $33 million and Silbert $6 million.) Shortly thereafter, MGM was forced into a bankruptcy proceeding, which was subsequently dismissed after CLBN pledged additional funds for MGM's operations. Christensen White also represented MGM in the bankruptcy proceedings.

MGM then engaged the law firm of White & Case (hereafter referred to as the Case firm) and filed a lawsuit against respondents Tracinda, Kerkorian, Barbakow and Silbert, in December 1992 for (1) breach of fiduciary duty; (2) declaratory relief; (3) conspiracy to defraud; (4) fraud; and (5) negligent misrepresentation (the MGM action). ³ The complaint Tracinda, Kerkorian, Barbakow and Silbert hired the firm of Hufstedler, Kaus & Ettinger (Hufstedler) to represent them in the MGM action.

alleged that respondents made false representations about the financial condition of MGM/UA and the effect of the merger on the financial condition to the other directors, and that they engineered the merger by means of fraud and deception for their own financial benefit, leaving MGM financially unable to operate.

Shortly thereafter, CLBN, also represented by the Case firm, filed a lawsuit against Tracinda, Kerkorian, Barbakow and Silbert and others (Houlihan Lokey and Giancarlo Paretti, the controlling shareholder of Pathe). This lawsuit (the CLBN action) contained causes of action for (1) conspiracy to defraud, (2) fraud, (3) aiding and abetting fraud, (4) negligence and (5) negligent misrepresentation. Essentially, the lawsuit alleged that Kerkorian, Silbert, Barbakow and Tracinda made false representations to induce CLBN to lend them the funds necessary for the merger and then depleted the surviving corporation of funds. CLBN was then forced to lend additional amounts to keep the surviving corporation, MGM, alive after the merger.

In the CLBN action, Kerkorian, Silbert, Barbakow and Tracinda hired Christensen White to represent them.

During the course of litigation, several events occurred which prompted the Case firm to file three successive motions to disqualify Christensen White as counsel to respondents in the CLBN action. The first motion to disqualify was filed in January 1993, after CLBN filed a notice that the two actions were related. That motion was denied. Then, in the CLBN action, Houlihan Lokey filed a cross-complaint against MGM and others, prompting a second motion to disqualify (the second motion). ⁴ CLBN and MGM appealed the denial of this motion (case No. B077817, hereinafter referred to as the first appeal). While the matter was pending on appeal, the two lawsuits were consolidated for purposes of trial and CLBN and MGM brought a third motion to disqualify, which was also denied. ⁵ CLBN and MGM appealed that denial (case No. B084939, hereinafter referred to as the second appeal), and the two appeals were then consolidated.

Due to the subsequent change in events, the consolidated appeals only involve the propriety of the trial court's ruling on the third motion to disqualify, the issue presented in the second appeal.

DISCUSSION

1. Standard on review

"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 manner pertaining thereto.' (Code Civ.Proc., § 128, subd. (a)(5); [citations].)" (In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572, 585, 283 Cal.Rptr. 732.)

Denial of a motion to disqualify counsel is an appealable order (Meehan v. Hopps (1955) 45 Cal.2d 213, 215-217, 288 P.2d 267; Truck Ins. Exchange v. Fireman's Fund Ins. Co. (1992) 6 Cal.App.4th 1050, 1052, 8 Cal.Rptr.2d 228) with abuse of discretion as the standard. (In re Marriage of Zimmerman (1993) 16 Cal.App.4th 556, 561, 20 Cal.Rptr.2d 132; In re Lee G. (1991) 1 Cal.App.4th 17, 26, 1 Cal.Rptr.2d 375.) The trial court's exercise of discretion is limited by applicable legal principles and is subject to reversal when there is no reasonable basis for the action taken. (In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 585, 283 Cal.Rptr. 732; In re Marriage of Zimmerman, supra, 16 Cal.App.4th at p. 562, 20 Cal.Rptr.2d 132.) "[T]he importance of disqualification motions requires careful The issue of disqualification "ultimately involves a conflict between the clients' right to counsel of their choice and the need to maintain ethical standards of professional responsibility. The paramount concern, though, must be the preservation of public trust in the scrupulous administration of justice and the integrity of the bar. The recognized and important right to counsel of one's choosing must yield to considerations of ethics that run to the very integrity of our judicial process." (In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 586, 283 Cal.Rptr. 732, quoting Comden v. Superior Court (1978) 20 Cal.3d 906, 915, 145 Cal.Rptr. 9, 576 P.2d 971, italics added.)

review of the trial court's exercise of discretion. (River West, Inc. v. Nickel (1987) 188 Cal.App.3d 1297, 1302 [234 Cal.Rptr. 33].)" (In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 585, 283 Cal.Rptr. 732.)

Here, at the hearing on the third motion to dismiss, as well as in each of the previous motions, the trial court denied the motion without comment or specific findings.

2. The duty of loyalty

The applicable standards of professional responsibility are found in the Rules of Professional Conduct of the State Bar of California. Effective May 27, 1989, former rules 5-102 and 4-101 were superseded and replaced by rule 3-310, which provides in pertinent part: "(C) A member shall not, without the informed written consent of each client: [p] (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or [p] (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or [p] (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. [p] ... [p] (E) 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."

Different standards have evolved for conflicts arising out of simultaneous representation of clients with potentially adverse interests and for conflicts arising out of successive representation of clients with adverse interests. Where the representation is successive--that is when an attorney is engaged to represent the interests of a party that are adverse to a former client of the attorney's--"courts have recognized that the chief fiduciary value jeopardized is that of client confidentiality." (Flatt v. Superior Court (1994) 9 Cal.4th 275, 283, 36 Cal.Rptr.2d 537, 885 P.2d 950, italics in original.) The test used for disqualification in those instances is whether there is a ...