Waid v. Dist. Ct.
| Decision Date | 22 September 2005 |
| Docket Number | No. 42322.,42322. |
| Citation | 119 P.3d 1219 |
| Parties | Frederick WAID; M. Nafees Nagy, M.D.; Noel A. Gage; and Gage & Gage, LLP, Petitioners, v. The EIGHTH JUDICIAL DISTRICT COURT of the State of Nevada, In and For The COUNTY OF CLARK, and the Honorable David Wall, District Judge, Respondents, and Vestin Fund I, LLC, a Nevada Limited Liability Company; Vestin Fund II, LLC, a Nevada Limited Liability Company; and Daniel Tabas, an Individual, Real Parties in Interest. |
| Court | Nevada Supreme Court |
Lemons Grundy & Eisenberg and Robert L. Eisenberg, Reno, for Petitioners.
Beckley Singleton, Chtd., and Ike Lawrence Epstein, and Daniel F. Polsenberg, Las Vegas; Paul R. Connaghan, Las Vegas, for Real Parties in Interest.
Before the Court En Banc.1
This original petition for a writ of mandamus challenges a district court order disqualifying petitioner Noel Gage and his firm, petitioner Gage & Gage, LLP, from representing petitioners Frederick Waid and M. Nafees Nagy, defendants in the underlying action. We conclude that petitioners have not demonstrated that the district court abused its discretion in ordering disqualification. First, we adopt the Seventh Circuit's test for evaluating when a prior matter and a current matter are substantially related, and we determine that the district court did not abuse its discretion in this regard. Second, petitioners have not met their burden to demonstrate that the district court's conclusion, that the real parties in interest Vestin Fund I and Vestin Fund II were Gage's former clients, was arbitrary or capricious. Accordingly, we deny the petition.
In the underlying district court complaint, filed in late 2002, Vestin Fund I and Vestin Fund II, along with real party in interest Daniel Tabas, seek to collect on personal guarantees for an $11.5 million loan. The original lender, Vestin Mortgage, Inc., assigned its interest in the loan to the Vestin Funds and Tabas. Apparently, the borrower, SBG Group, defaulted and filed bankruptcy, and so the Vestin Funds and Tabas made demand on the guarantors, Waid and Nagy. The defenses asserted in Waid and Nagy's answer include waiver and estoppel, a defective demand under the governing guaranty agreements, and oral agreements to extend the loan until new financing could be found, all of which would preclude enforcement of the guaranties. The parties conducted an early case conference under NRCP 16.1 and filed a report.
In October 2003, approximately one month before the discovery cutoff, Waid and Nagy substituted Noel Gage as their counsel, in place of their former attorney. Gage immediately served a supplemental NRCP 16.1 disclosure that listed several additional witnesses. These witnesses were officers and employees of the Vestin Funds and business entities affiliated with the Vestin Funds: Vestin Mortgage, Inc., and Vestin Group, Inc. Vestin Mortgage is the manager of the Vestin Funds and is wholly owned by Vestin Group (which is a publicly traded corporation).
In describing the anticipated testimony of each of these newly disclosed witnesses, Gage included the following language:
[The witness] is also expected to testify as to his knowledge of any lawsuits against or investigations by state and federal authorities into the above named individuals and entities, and the outcome of such lawsuits/investigations. [The witness] is also expected to testify as to his knowledge of the "Ponzi" scheme being conducted by the above named individuals and entities and its effect on Defendants, the underlying loan, the alleged underlying guaranty, and why these matters are extremely relevant to this matter.
The Vestin Funds filed a motion to disqualify Gage and his firm. The motion was supported by an affidavit by Vestin Group's in-house counsel, Paul Connaghan, detailing Gage's representation of "the Vestin affiliates" in certain prior litigation that occurred in 1999.
The 1999 litigation arose from Vestin Group CEO Michael Shustek's former role as CEO of an entity called Del Mar Mortgage, Inc. Two news articles appearing in Las Vegas papers in 1997 referenced an anonymous letter that accused Del Mar of running a "Ponzi" scheme. Shustek was quoted in the articles as denying the allegations.
It appears that in 1999, the Nevada authorities seized control of Del Mar and its assets and placed them under conservatorship. Shustek hired Noel Gage to file suit against several state departments, divisions and employees; Shustek was the only named plaintiff.
According to petitioners, state personnel sexually harassed Del Mar's female employees during their investigation of Del Mar. They contend that Shustek's purpose in filing his action was to stop the harassment and seek damages for it. In contrast, the Vestin Funds assert that the suit's purpose was to recover Del Mar's seized assets.
Gage undisputedly represented both Shustek and Del Mar in the 1999 litigation. The Vestin Funds allege that Gage participated in confidential meetings between several high-level Del Mar employees, and thereby gained confidential information about Del Mar and the alleged Ponzi scheme. Gage was also given a copy of the anonymous letter referenced in the 1997 newspaper articles. Vestin Group's in-house counsel, Paul Connaghan, who was then outside counsel, also represented Del Mar and Shustek.
The 1999 case was resolved in March 1999 by a stipulation between Shustek and the State of Nevada. The stipulation makes no reference to state personnel's alleged sexual harassment of Del Mar employees. Rather, under the stipulation, the state returned Del Mar's assets and permitted Del Mar to continue operating under certain conditions most notably that Del Mar would stop promising new investors that they could recover their investment in forty-eight hours. Also, Shustek's involvement with Del Mar was limited. The stipulation was approved by Del Mar, which agreed to be bound by its terms. Finally, the stipulation was also approved by other Del Mar affiliates, including Sunderland Acquisition Corporation and Capsource, Inc., which similarly agreed to be bound by its terms.
According to the Vestin Funds, Sunderland is Vestin Group's predecessor, and Capsource is Vestin Mortgage's predecessor. They do not specify exactly how the successions took place. But it appears that several of the former high-level Del Mar employees who allegedly participated in meetings with Gage during the 1999 litigation are now officers for one or more of the Vestin entities. In addition, Michael Shustek is now the CEO of Vestin Group, and he also serves as the resident agent for Vestin Fund I. As noted above, Vestin Mortgage serves as the manager of both Vestin Fund I and Vestin Fund II.
The district court held a hearing and thereafter entered an order disqualifying Gage and his firm. The district court stated that based on the information presented to it, a substantial relationship existed between the issues before the court and Gage's prior representation of "the [Vestin Funds'] Affiliates," and thus disqualification was warranted. This writ petition followed.
Petitioners maintain that the district court improperly disqualified Gage. Disqualification in this matter is governed by SCR 159,2 which provides:
Rule 159. Conflict of interest: Former client. A lawyer who has formerly represented a client in a matter shall not thereafter:
1. Represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents, preferably in writing, after consultation; or
2. Use information relating to the representation to the disadvantage of the former client except as Rule 156 would permit with respect to a client or when the information has become generally known.
The district court has broad discretion in attorney disqualification matters, and this court will not overturn its decision absent an abuse of that discretion.3 Attorney disqualification orders are properly challenged through a petition for a writ of mandamus.4
Disqualification under SCR 159 is warranted only if a prior representation and the current representation are substantially related. The burden of proving that two matters are substantially related falls on the party seeking disqualification.5 We have recognized that
[i]n proving that a prior representation is substantially related to present litigation, however, the moving party is not required to divulge the confidences actually communicated, nor should a court inquire into whether an attorney actually acquired confidential information in the prior representation which is related to the current representation. The court should instead undertake a realistic appraisal of whether confidences might have been disclosed in the prior matter that will be harmful to the client in the later matter.6
A superficial similarity between the two matters is not sufficient to warrant disqualification; rather, the focus is properly on the precise relationship between the present and former representation.7
The Seventh Circuit has formulated a three-part test for determining when a former and present matter are substantially related, which has been adopted by at least two state supreme courts, Illinois and Missouri.8 The Seventh Circuit test requires the trial court to do the following: (1) make a factual determination concerning the scope of the former representation, (2) evaluate whether it is reasonable to infer that the confidential information allegedly given would have been given to a lawyer representing a client in those matters, and (3) determine whether that information is relevant to the issues raised in the present litigation.9 As this framework is useful in analyzing former client conflicts of interest, we adopt it for Nevada.
Here, the district court concluded that the former representation encompassed allegations that Del Mar...
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