Laura Knight, et al. v. Perry Ferguson, et al., ___Cal.Rptr.3d___, 2007 WL 1140379 (Cal.App.Dist.2nd 2007)

Brief Summary
The court upheld the disqualification of the defendants’ lawyer in a lawsuit over a partnership and lease agreement because, prior to the suit, the lawyer had briefly represented the plaintiff in the course of a discussion with another party in the same business about the partnership and lease agreement.

Complete Summary
Laura Knight owned the Pascucci restaurant in Santa Barbara. When she decided to open a branch of the restaurant in Goleta, she found a potential partner, Steven Sponder, to assist with financing. They negotiated with a business in bankruptcy to become the assignee of its ground lease at the Camino Real Marketplace. In December 2004, Ms. Knight met with Attorney Richard Wideman to discuss the lease and her partnership for the new restaurant. No partnership with Mr. Sponder was formed. Instead Ms. Knight’s sister and brother-in-law, Perry and Paula Ferguson (the “Fergusons”), took what would have been Mr. Sponder’s place. In 2005, Ms. Knight sued the Fergusons for breach of contract and to dissolve the corporation, alleging that they breached their duties as corporate directors and improperly removed her from managing the restaurant. The Fergusons cross-complained for fraud, breach of contract and breach of fiduciary duty. Id. at *1.

Although the Fergusons initially had other counsel, Mr. Wideman substituted into the case and Ms. Knight then moved to disqualify him. The motion was based on the negotiations with Mr. Sponder as well as on discussions that occurred between Ms. Knight and Mr. Wideman concerning potential litigation against Mr. Sponder. These discussions took place at a time when the deal with Mr. Sponder appeared to be falling apart, but before the Fergusons took over the role that had been intended for Mr. Sponder. The lower court granted the motion for disqualification and this appeal resulted. Id. at *2.

On appeal, the court applied California’s version of the substantial relationship test, which requires that “where an attorney successively represents clients with adverse interests, and where the subjects of the two representations are substantially related, … the attorney [must] be disqualified from the second representation.” People ex. rel. Dept. of Corporations v. Speedee Oil Change Systems, Inc. (1999) 20 Cal. 4th 1135, 1146. That case also held that where there is a substantial relationship, it is presumed the attorney had access to confidential information. Id. at 1146. Ms. Knight retained Mr. Wideman to discuss a lease and partnership for the creation of the same restaurant at issue in the current dispute. 2007 WL 1140379 at *3. The court refused to narrow the substantial relationship test to the strict facts, claims and issues involved in the present action even though the Fergusons argued that the present case would concern different issues. The court held that Mr. Wideman’s prior representation of Ms. Knight against Mr. Sponder and his present representation of the Fergusons against Ms. Knight were substantially related and therefore ordered disqualification. The court found that Mr. Wideman had acquired pertinent confidential information from Ms. Knight even though the Fergusons had been present at the time of the discussions between Ms. Knight-Mr. Wideman about Mr. Sponder. The court also found that even if he had no such confidential information, the relationship between the two matters was substantial enough to require disqualification.

Significance of Case
As the appellate court noted near the end of its opinion, “Cases involving conflicts are far from precise. Some of Mr. Wideman's arguments… are reasonable, and have more than a modicum of merit. Nevertheless, the trial court acted well within its discretion” and so the trial court’s decision was appropriately affirmed. Id. at *5. This comment suggests, however, that the appellate court might also have sustained the trial court if disqualification had not been ordered.

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