Oaks Management Corp. v. Superior Court

• Decision Date: 30 November 2006
• Docket Number: No. D047857.,D047857.
• Citation: 51 Cal.Rptr.3d 561,145 Cal.App.4th 453
• Court: California Court of Appeals Court of Appeals
• Parties: The OAKS MANAGEMENT CORPORATION, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent; William Ayyad et al., Real Parties in Interest.

51 Cal.Rptr.3d 561

145 Cal.App.4th 453

The OAKS MANAGEMENT CORPORATION, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent William Ayyad et al., Real Parties in Interest.

No. D047857.

Court of Appeal, Fourth District, Division 1.

November 30, 2006.

Thorsnes Bartolotta McGuire, Daral B. Mazzarella, Vincent J. Bartolotta, Jr.;

Dawson & Ozanne, Brendan E. Ozanne, San Diego; Veljovich Law Group, David A. Veljovich; Neil, Dymott, Frank, Harrison & McFall, Michael I. Neil and Hugh A. McCabe, San Diego, for Petitioner.

No appearance for Respondent.

English & Gloven, Donald A. English, San Diego, and Christy I. Yee, for Real Parties in interest.

McCONNELL, P.J.

The issue in this appeal is whether the trial court erred by disqualifying a law firm from representing the plaintiffs at trial, based on lender-borrower relationships between two of the firm's attorneys and a defendant that ended several years before this litigation commenced. The defendant argued the attorneys received his confidential financial information in conjunction with making loans, and the plaintiffs could use it against him here, e.g., in making settlement demands.

We find error and grant the petition. Even if the attorneys did receive the defendant's; financial information in making loans, he did not meet his burden of showing the information could give the plaintiffs a i unfair advantage or affect the outcome of this litigation. (Gregori v. Bank of America (1989) 207 Cal.App.3d 291, 300, 308, 254 Cal.Rptr. 853 (Gregori).) Through no fault of the attorneys, the defendant produced to the plaintiffs in this action updated financial information showing substantial income and wealth, and although the court found the production was inadvertent we cannot ignore its practical impact on the disqualification issue. Under the circumstances, disqualification would serve no legitimate purpose and unfairly deprive the plaintiffs of trial counsel of their choice.¹

FACTUAL AND PROCEDURAL BACKGROUND

In May 2004 Oaks Management Corporation and numerous individual condominium owners (collectively Oaks Management) filed a second amended complaint against William Ayyad and William G. Ayyad, Inc. (together Ayyad), and other defendants not involved here, for negligence, fraud, conspiracy, breach of contract, breach of fiduciary duty, breach of implied warranty and related causes of action. The complaint alleges Oaks Management is the governing board of the Oaks Condominiums, a condominium conversion project located in Fallbrook, California; Ayyad and other defendants were involved in the development and sale of the project; the defendants ignored grading, water intrusion, structural, landscaping and other problems with the project, and performed cosmetic repairs and marketed the condominium units "as new"; and as a result, purchasers "live in units that have no functioning heat, mold, water intrusion, dry rot, termites, and other significant structural problems."

Oaks Management's attorneys of record were originally Brian Dawson and Brendan Ozanne, of Dawson & Ozanne, and David A. Veljovich, of the Veljovich Law Group (collectively original counsel). Trial was scheduled for January 2006, and in September 2005 original counsel filed a notice of association of Daral B. Mazzarella and Vincent J. Bartolotta, Jr., of the law firm of Thorsnes Bartolotta McGuire (TBM), as lead trial counsel.

Ayyad moved to disqualify TBM on the ground its attorneys have knowledge of his personal finances and Oaks Management can use the information to his disadvantage, for instance in settlement negotiations. Ayyad submitted a declaration that stated in 1995 he began obtaining loans for the acquisition and development of real property through Pacific West Realty Group (Pacific West), a broker that facilitates loans through private investors. The private investors who funded Ayyad's loans included MTT Partners, LP (MTT Partners), of which Michael T. Thorsnes is the general partner, and VJB Partners, LP (VJB Partners), of which Bartolotta is the general partner. Bartolotta is a partner in the TBM firm, and Thorsnes was previously a partner and has now retired to "of counsel" status. Between 1995 and 1998 Ayyad acquired five loans through Pacific West, of which MTT Partners contributed a total of $901,000, and in 1999 he borrowed $600,000 through Pacific West, of which MTT Partners contributed $100,000, and VJB Partners contributed $50,000. Ayyad satisfied the last of the loans in 2001.

Ayyad's declaration also stated he was required to present information to Pacific West on the properties he sought to purchase, pro formas, rent rolls and financial statements. Ayyad understood Pacific West provided the information to individual investors so they could determine whether to make a loan and he provided the information with the expectation of confidentiality. Ayyad submitted copies of his 1999 loan application and supporting documents, which reveal his real estate holdings, assets, liabilities and net worth.²

Further, Ayyad's declaration stated that in 2005 Thorsnes, on behalf of a third party, sought investment capital from Ayyad. According to the declaration, during a meeting Ayyad attended Thorsnes told the third party Ayyad "was a good `borrower,'" and made other "general comments" about Ayyad, his financial history and his businesses.

Ayyad also submitted a declaration by Harry Bigham, a certified financial planner and vice-president of Pacific West. The declaration stated he customarily provided investors with information pertaining to the borrower's financial ability to repay the loan. In October 1999 Bigham held separate meetings with Thorsnes and Bartolotta to discuss underwriting the Ayyad loan, and he brought loan files for each of them that summarized Ayyad's qualifications and included a copy of his financial statement. On conclusion of the meetings, Thorsnes and Bartolotta instructed Big ham to maintain the loan files at Pacific West with other documents of theirs, to which they had access during business hours.

Bigham's supplemental declaration stated he die not recall revealing any of Ayyad's specific financial information to Thorsnes or Bartolotta or whether either of them ever accessed their files at Pacific West, and they had now instructed him to dispose of my information in the files pertaining to Ayyad. A third declaration by Bigham stated: "Although I may not have `specific present recollections' about the specific information provided or the exact words used during my meetings with ... Thorsnes ... and ... Bartolotta ... relating to ... Ayyad's ... loan in 1999, my recollection is that I did convey general financial information regarding ... Ayyad to [them] to allow them to decide whether to invest in this loan."

In its of position, Oaks Management argued Ayyad waived any right of confidentiality by, in 2004, voluntarily producing in this action a 2001 loan application for the property involved here, which contained more current financial information and showed he had substantial monthly income and net worth. Oaks Management also argued Thorsnes and Bartolotta did not actually receive any of Ayyad's financial information from Pacific West. Bartolotta submitted a declaration that stated when making loans through Pacific West he relied on its evaluation and expertise, and he did not review any financial information of borrowers. Thorsnes submitted a declaration that stated he had no recollection of receiving or reviewing any of Ayyad's financial information.

In reply, Ayyad submitted a supplemental declaration that stated he did not authorize or consent to the production of his 2001 loan application and was shocked to learn of it.

After hearings on November 10 and 30, 2005, the court granted Ayyad's motion to disqualify the TBM firm, pursuant to State Bar Rules of Professional Conduct, rule 1-100³ and this court's opinion in Raley, supra, 149 Cal.App.3d 1042, 197 Cal.Rptr. 232, among other cases. Based on Bigham's declarations, the court presumed Thorsnes and Bartolotta learned of Ayyad's 1999 financial information. The court explained: "An attorney, while acting in a role other than as an attorney, owes a duty of confidentiality to a nonclient, who later becomes his adversary. The mere possibility that the confidential financial information acquired by Attorneys Thorsnes and Bartolotta while they acted as lenders to Mr. Ayyad could be useful in this litigation, either for settlement offer purposes or in negotiation tactics, is sufficient to establish a conflict of interest necessitating disqualification.... The key factor is the attorney's receipt of confidential information while acting in his dual status and the risk of using that information to gain an advantage of his adversary." The court rejected the argument that Ayyad waived his right of confidentiality by inadvertently producing the 2001 financial information in this case.

This writ proceeding followed, and we initially denied the petition summarily. Oaks Management successfully sought review, and the Supreme Court transferred the matter to us to issue an order to the superior court to show cause why the relief sought in the petition should not be granted. Trial had been rescheduled for June 2006, and on our own motion we stayed trial pending resolution of this proceeding.

DISCUSSION⁴

I Standard of Review

"Generally, a trial court's decision on a disqualification motion is reviewed for abuse of discretion. [Citations.] If the trial court resolved disputed factual issues, the reviewing court should not substitute its judgment for the trial court's express or implied findings supported by substantial evidence. [Citations.] When substantial evidence supports the trial court's factual findings, the appellate court reviews the conclusions based on those findings for abuse of discretion. [Citation.] However, the trial court's discretion is limited by the applicable legal principles....