Natomas Gardens Investment Group LLC et al v. Sinadinos et al

Filing 178

MEMORANDUM and ORDER signed by Judge Frank C. Damrell, Jr on 9/14/09: The court GRANTS in part and DENIES in part Deane's motion to disqualify Barth from representing Natomas and Solorio. The court stays all proceedings in the case for 60 days to permit Natomas to find substitute counsel. (Kaminski, H)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v. JOHN G. SINADINOS, STANLEY J. FOONDOS, STEPHEN FOONDOS, et al., Defendants. ----oo0oo---On June 1, 2009, defendant Larry Deane ("Deane") filed a counterclaim against plaintiff/counter-defendant Natomas Gardens Investment Group, LLC ("Natomas") and third-party claim against third-party defendant Eric Solorio ("Solorio"), a shareholder in Natomas. Therein, Deane, also a shareholder in Natomas, alleges NATOMAS GARDENS INVESTMENT GROUP LLC, a California limited liability company, ORCHARD PARK DEVELOPMENT LLC, a California limited liability company, Plaintiffs, MEMORANDUM AND ORDER UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA ----oo0oo----

NO. CIV. S-08-2308 FCD/KJM

individual claims for express indemnity, breach of contract, 1

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implied indemnity, and equitable indemnity against Natomas and Solorio, as well as shareholder derivative claims on behalf of Natomas against Solorio for breach of fiduciary duty, breach of contract and the implied covenant of good faith and fair dealing and intentional interference with prospective economic advantage. (Docket #125.) This matter is now before the court on Deane's motion to disqualify the law firm of Barth, Tozer & Timm ("Barth") as counsel for plaintiff/counter-defendant Natomas in this action;1 Deane also seeks a ruling precluding Barth from representing Solorio in this action and in a related state court action. Deane contends disqualification is required because Natomas' and Solorio's interests are adverse in this action due to Deane's assertion of derivative claims on behalf of Natomas against Solorio, and thus, Barth's simultaneous representation of them is unethical and in violation of California law. Barth opposes the

motion, arguing that Deane's counter- and third-party claim is so frivolous that the court should dismiss Deane's claims against Natomas and Solorio, thereby mooting any alleged conflict between the parties or, alternatively, permit Barth to "cure" the conflict of interest by withdrawing as Solorio's counsel.2 Deane did not assert a counterclaim against plaintiff Orchard Park Development LLC ("Orchard Park"), also represented by Barth, and he does not move to disqualify Barth from representing Orchard Park. Thus, nothing herein precludes Barth from continuing to represent Orchard Park in this action. As set forth below, Orchard Park asserts the same claims for relief against defendants as does Natomas. (2nd Am. Compl., filed June 1, 2009.) Because oral argument will not be of material assistance, the court orders this matter submitted on the briefs. E.D. Cal. L.R. 78-230(h). 2
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For the reasons set forth below, the court GRANTS in part and DENIES in part Deane's motion to disqualify Barth from representing Natomas and Solorio. BACKGROUND This case originally arose out of a failed business venture between Solorio and Deane, and their various alleged coconspirators. As alleged in Natomas' and Orchard Park's second

amended complaint ("SAC"), beginning in 2003, Solorio negotiated to obtain rights to purchase undeveloped real property from several property owners in the Sacramento area. 1, 2009, ¶ 44.) (SAC, filed June

Solorio endeavored to subsequently develop and

sell this land, for which he formed a limited liability company, Natomas. (Id. at ¶ 45.) In seeking financing for his potential

project, Solorio met defendants Deane and John Sinadinos ("Sinadinos"). (Id. at ¶ 46.) Sinadinos recommended that

Stanley Foondos, a certified public accountant, support Solorio's proposed development project through performance of all accounting and tax reporting responsibilities. (Id. at ¶ 52.)

By the end of 2003, Solorio, acting on behalf of Natomas, had assembled purchase rights to a number of contiguous parcels in the Sacramento area, upon which Sinadinos made the necessary deposits in escrow. (Id. at ¶ 53.) By mid-2004, Natomas had

obtained rights to purchase and develop fourteen parcels of land in Sacramento county comprising approximately 109 acres. ¶ 54.) (Id. at

This development project was designated Florin Vineyards,

and Sinadinos formed a limited liability company, Village Capital Group LLC ("Village"), as the development company associated with the project. (Id. at ¶¶ 54-55.) 3 Natomas was given a 45 percent

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stake in Village, while the other 55 percent was held by Chi-Sac Village Capital Group Investors LLC ("Village Investors LLC"), a company managed and controlled by Sinadinos and Stanley Foondos. (Id. at ¶¶ 12, 20.) additional 85 acres. In October 2004, Solorio bought an The development project was named Vintage

Creek, and Sinadinos formed another limited liability company, Vintage Creek LLC, to be associated with the project. ¶ 57.) Additionally, during April-May 2005, Solorio assembled property acquisition rights for a development project located in Madera County, California. (Id. at ¶ 61.) Solorio, acting (Id. at

through his own limited liability company, Orchard Park, negotiated and executed five option agreements to purchase contiguous parcels of real property comprising approximately 265 acres. (Id.) Acting upon Sinadinos' representations as to his

substantial development experience, Solorio agreed to include Sinadinos as a shareholder of Madera Avenue 12 Capital Group LLC ("Madera"), a limited liability company formed for the development of the Madera properties. (Id. at ¶ 62.)

According to Deane, "the basic structure of each company was identical. Natomas was to assign the various purchase agreements

to the two LLC's (Vintage and Village), and provide the sweat equity with respect to entitlements, and the Chi-Sac groups were to provide the capital necessary to make the non-refundable downpayments on the various parcels, in amounts of up to $4 million for each project." 1, 2009, at ¶ 9.) (Counter- and Third-Party Claim, filed June Deane further alleges that Natomas is

"comprised of two "camps" of persons, those aligned with Solorio 4

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and those who are the friends and family of Deane." ¶ 10.)

(Id. at

Deane and Solorio comprise the majority of the shares in

Natomas; Deane representing a 34.28% interest and Solorio representing a 57.13% interest as the former managing member. (Id. at ¶ 11.) The remaining 8.59% is divided between 12 other Two of the investors

investors who are not controlling members.

are aligned with Solorio, and the remaining ten are Deane's friends and family. (Id.) When Natomas was in full operation, Solorio managed the daily operations but required Deane's consent as the other major shareholder for more "significant operational decisions." at ¶ 12.) (Id.

Deane alleges that Vintage and Village were also

managed through this same operational structure, with Natomas being the controlling branch from which consent was required for any significant transactions. (Id. at ¶ 13.)

Deane alleges that the business relationship between himself and Solorio began to deteriorate around October 2007. ¶ 18). (Id. at

Further, Deane asserts Solorio became less interested in

the progress of what was becoming a failed business venture as a result of the downturn in the economy and began seeking a buy out of his interests in Natomas. (Id.) Around this same time,

Solorio retained Barth who had no prior association with either Solorio, Natomas, or any of the other Natomas shareholders. (Id.) Deane became suspicious of Solorio's attempt to secure a buy out. He claims Solorio continually sought to obstruct Natomas'

business with frivolous investigations; he defamed members of Natomas and the other related LLCs; and he sabotaged potential 5

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investment deals.

(Id. at ¶ 19.)

Deane alleges Solorio and

Barth began investigating misconduct by members of the LLCs, which not only wasted valuable resources, but also cost Natomas necessary capital in the form of lost investment opportunities. (Id.) Natomas and Orchard Park filed the original complaint in this court on September 29, 2008; however, that complaint was never served and plaintiffs thereafter filed and served a first amended complaint on November 4, 2008, alleging claims against defendants for individual violations of the Racketeer Influence and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq.("RICO"), RICO conspiracy, fraud, breach of fiduciary duty, professional legal malpractice, professional accounting malpractice, and conversion. Plaintiffs also sought a petition for writ of (FAC at ¶¶ 192-251.)

mandate to compel inspection of records.

As the majority shareholder of Natomas, Solorio states that due to the expiring statute of limitations, and the potential risk that inaction could cause harm to Natomas, he was compelled to retain Barth as counsel for Natomas in this action. Mot. to Disqualify, filed Aug. 7, 2009, at 6.) On October 21, 2008, Deane filed suit against Solorio and Natomas, among others, in Sacramento County Superior Court (sometimes referred to herein as the "State Court Action") and served an amended complaint against the parties on October 30, 2008. In that action, Deane alleges claims for involuntary or (Opp'n to

voluntary dissolution of Natomas and breach of fiduciary duties by Solorio and others. Ex. C.) (Barth Decl., filed Aug. 7, 2009, at ¶ 5,

Barth initially represented Solorio in the State Court 6

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Action, but because of its involvement with Natomas in this action, Barth later accepted representation of Natomas in the State Court Action as well. In the State Court Action, Deane filed an ex parte application for appointment of receiver for Natomas on November 20, 2008. The state court granted the motion on December 19,

2008, citing Deane and Solorio's complete "inability to work together," and on March 12, 2009, the court appointed Scott Sacket as the receiver for Natomas. 2009, Ex. 6 at 2.) Thereafter, Deane moved the state court to disqualify Barth as counsel for Natomas and Solorio in both the State Court Action and in this action. Deane argued disqualification was mandated (Opp'n RJN, filed August 7,

because an attorney who represents a corporate entity (Natomas) is automatically disqualified from representing its principals, especially in situations involving allegations of fraud and corporate dissolution. (Id.) On May 26, 2009, the state court

granted Deane's motion to disqualify Barth from further representation of Natomas, but found that Barth could continue to represent Solorio in state court because there was no evidence that the prior dual representation resulted in any prejudice to the parties. (Id. at 3.) The state court ordered the receiver (Id.) The state

to obtain independent counsel for Natomas.

court declined to consider Deane's request to disqualify Barth from this action, stating that it lacked authority to make such a ruling. On August 3, 2009, the state court discharged the receiver because Deane failed to comply with a July 6, 2009 order 7

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directing him to pay all funds requested by and owed to the receiver. (Opp'n RJN, Ex. 7 at 1.) The state court then stayed

the State Court Action pending resolution of these proceedings. (Id. at Ex. 10 at 1.) While the above matters took place in state court, various defendants in this action filed motions to dismiss plaintiffs' FAC. After this court granted in part and denied in part the

various motions (Docket #123), giving plaintiffs leave to file a second amended complaint,3 Deane filed the subject counter- and third-party claim against Natomas and Solorio, asserting: (1) individual claims for express indemnity and breach of contract against Natomas; (2) implied indemnity and equitable indemnity claims against Solorio; and (3) three shareholder derivative claims against Solorio on behalf of Natomas. #125.) (Docket

The derivative claims allege breach of fiduciary duty,

breach of contract and the implied covenant of good faith and fair dealing and intentional interference with prospective economic advantage. (Id.) Barth accepted service of the

counter- and third-party claim on behalf of Natomas and Solorio. However, Barth answered Deane's claim and filed a counterclaim

In said complaint, plaintiffs allege federal claims for relief for violation of RICO and state law claims for fraud, breach of fiduciary duties, professional legal malpractice, professional accounting malpractice, conversion and for writ of mandate to compel inspection of records. Defendants have filed various motions to dismiss in response thereto; said motions are currently set to be heard October 16, 2009. However, due to the stay entered by this court and in order to give Natomas' new counsel adequate time to respond, said motions will be continued to January 15, 2010. If new counsel for Natomas is retained quickly and the parties wish to hear these motions at an earlier time, they may file a stipulation and order advancing the hearing to an available law and motion date in 2009. 8

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against Deane on behalf of Natomas only.

(Docket #153.)

Solorio

answered Deane's third-party claim against him in pro per. (Docket #152.) ANALYSIS At the time Deane filed the instant motion to disqualify, Barth represented Natomas in this action and Solorio in the State Court Action. Deane contends that this joint representation of

the parties violates California law because due to Deane's shareholder derivative claims brought on behalf of Natomas against Solorio, Natomas' and Solorio's interests are adverse and Solorio cannot waive the conflict of interest on behalf of Natomas.4 Barth opposes the motion, arguing primarily that

(1) the court should consider the merits of Deane's counter- and third-party claim and find that it is frivolous, thereby mooting the alleged conflict of interest and rendering consideration of the motion to disqualify unnecessary, and (2) if the court reaches the motion to disqualify, Barth can "cure" the conflict of interest by withdrawing as Solorio's counsel in the State Court Action. I. Applicable Standards

Barth contends that the court may properly deny the motion to disqualify because the allegations of Deane's counter- and third-party claim are wholly frivolous. Barth asserts that under

federal law, this court can assess the merits of Deane's claim At times, Deane suggests that Barth's representation of Natomas and Solorio violated ethical rules from the inception of this case. However, the court does not rule on that issue herein since the basis for the instant motion is the alleged conflict of interest which arose as a result of Deane's assertion of derivative claims on behalf of Natomas against Solorio. 9
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against Natomas and Solorio in the context of ruling on the disqualification motion. The cases relied upon by Barth,

however, are not persuasive because the authorities are either inapplicable or directly contradict its contentions. For

example, the Hausman case, cited by Barth, involved a shareholder derivative action where the court had to determine whether the shareholder's right to bring such an action was "substantive," thus bringing choice of law rules into play. 299 F.2d 696 (2d Cir. 1962). Hausman v. Buckley,

The case did not involve a

disqualification motion nor did it address the more specific issue of whether a court should consider the substantive merits of a pleading in assessing whether disqualification of counsel is warranted. Hausman is thus wholly inapplicable to this case.5

Barth also cites Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963). Barth maintains this case supports its

contention that in deciding a motion to disqualify, a court should consider the substantive merits of the party's claim allegedly giving rise to the conflict. Lewis indicates just the opposite. However, the court in

The court held:

The interests of the officer, director and majority shareholder defendants in this action are clearly adverse, on the face of the complaint, to the interests Similarly, Barth's citation to In re Oracle is also inapposite. Like Hausman, that case did not involve a motion for disqualification or any discussion of the propriety of considering the merits of a party's pleading to assess whether an actual conflict of interest exists. In re Oracle Sec. Litigation, 829 F. Supp. 1176, 1179 (N.D. Cal. 1993). Rather, in In re Oracle, the court considered whether a proposed settlement agreement in a joint derivative and class action suit was stipulated to in a fair manner; in the course of that inquiry, the court took into consideration the fact that Oracle's in house counsel represented both the company and the defendant principals. Id. 10
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of the stockholders [of the company] other than defendants. I have no doubt that [the conflicted law firm] believe[s] that there is no merit to this action. Plaintiff, of course, vigorously contends to the contrary. The court cannot and should not attempt to pass upon the merits at this stage. Id. at 239-40 (emphasis added). Barth has not cited any authority to support the proposition that this court should evaluate the substantive merits of Deane's claim against Natomas and Solorio in the context of a motion to disqualify. conclusion. And, the authority on point, supports the opposite In Lewis, the court held that whether the interests

of the parties are adverse should be determined on the face of the complaint rather than through an examination of the underlying merits of the derivative action. This court finds

Lewis persuasive and consistent with the case law discussed below addressing disqualification motions in the context of shareholder derivative claims. Thus, the court considers here only the

allegations of Deane's counter- and third-party claim to ascertain whether an actual conflict of interest was created by Deane's assertion of shareholder derivative claims on behalf of Natomas against Solorio.6

Because the court finds that consideration of the substantive merits of Deane's counter- and third-party claim is not appropriate at this juncture, it has disregarded the parties' arguments on the merits of Deane's claim. Both sides submitted lengthy arguments and extensive declarations to support their respective factual contentions in this case. Those arguments are not relevant to the motion. Additionally, Barth makes certain procedural objections to Deane's pleading, arguing it does not sufficiently allege a derivative claim pursuant to Fed. R. Civ. P. 23.1. Again, that issue goes to the merits of Deane's pleading, and while an appropriate argument for a Fed. R. Civ. P. 12(b)(6) motion, it is not an argument this court must address in the context of a disqualification motion. 11

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II.

Actual Conflicts in Derivative Suits

In determining motions for disqualification, the court applies the applicable state law. In re County of Los Angeles,

223 F.3d 990, 994 (9th Cir. 2000); E.D. Cal. L.R. 83180(e)(adopting California's standards of professional conduct and providing that the American Bar Association's Model Rules of Professional Conduct may be considered for guidance). "Ultimately, disqualification motions involve a conflict between the clients' right to counsel of their choice and the need to maintain ethical standards of professional responsibility." Recordings Inc. v. MySpace, Inc., 526 F. Supp. 2d 1046, 1058 (C.D. Cal. 2007) (citations omitted). In accordance with the UMG

local rules, it is appropriate to examine the applicable standards of professional conduct required of members of the State Bar of California. Rule 3-310 of the California Rules of

Professional Conduct provides in pertinent part: (C) A member shall not, without the informed written consent of each client; (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or Represent time in a person or matter is matter. a client in a matter and at the same separate matter accept as a client a entity whose interest in the first adverse to the client in the first

(2)

(3)

Deane incorrectly asserts, at times, that Barth represents both Natomas and Solorio in this action. While Barth accepted

service for both parties in this action, ultimately, Solorio 12

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answered Deane's third-party claim in pro per and Barth filed an answer and counterclaim on behalf of only Natomas. However,

Barth does represent Solorio in the related State Court Action.7 Thus, Deane has appropriately raised the issue of an actual conflict of interest arising due to Deane's assertion of derivative claims in this action. oblige

Deane's counter- and third-party claim named both Natomas and Solorio as defendants, but Natomas is also a real plaintiffin-interest because Deane is bringing the shareholder derivative claims against Solorio on Natomas' behalf. In a derivative suit,

a minority shareholder in a corporation can bring claims on behalf of the corporation. Typically, the action is an

extraordinary measure brought against corporate officers and directors who refuse to acknowledge any breach of fiduciary duty or mismanagement of funds, often because of their own involvement in the wrongdoing. Due to the circumstances, Natomas is also a "It is only a `nominal defendant,'

defendant in this action.

however, because any relief that the plaintiff obtains from the defendant officers and directors accrues to the benefit of the corporation, making it the real party in interest. Thus, it has

been said, the corporation in a derivative action `is in the anomalous position of being both a plaintiff and a defendant.'" Baytree Capital Associates, LLC v. Quan, Case No. 08-2822 CAS, 2008 U.S. Dist. LEXIS 87872, *20-21 (C.D. Cal. Aug. 18, 2008) (citations omitted). The fact that the State Court Action is currently stayed is of no avail because Barth simultaneously represents the interests of Solorio and Natomas in matters involving the same corporate actors and many of the same substantive issues. 13
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When an attorney simultaneously represents two seemingly adverse parties, the court must question whether the attorney can ever impartially preserve its duty of loyalty to both parties simultaneously. (1994). Flatt v. Superior Court, 9 Cal. 4th 275, 284

There are a few rare instances when simultaneous

representation is permissible, despite an actual conflict of interest, but generally "the rule of disqualification in simultaneous representation cases [involving actual conflicts of interest] is a per se or `automatic' one." Id. (citing Cinema 5,

Ltd. v. Cinerama Inc., 528 F.2d 1387 (2d Cir. 1976)). In the specific context of shareholder derivative actions, courts have consistently recognized that the "law clearly forbids dual representation of a corporation and directors in a shareholder derivative suit, at least where, as here, the directors are alleged to have committed fraud." Forrest v.

Baeza, 58 Cal. App. 4th 65, 74 (1997); see also Gong v. RFG Oil, Inc., 166 Cal. App. 4th 209, 215 (2008) (holding that in a derivative suit, the organization named as a defendant is actually a plaintiff and case law forbids dual representation in a derivative suit alleging fraud by the principals because the principals and the organization have adverse, conflicting interests); In re Oracle, 829 F. Supp. at 1188 (disqualification warranted where "the same counsel represents both the corporation and the director and officer defendants, [and thus] the interests of the corporation are likely to receive insufficient protection"); Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1317 (3d Cir. 1993)(recognizing that "except in patently frivolous cases -- allegations of directors' fraud, intentional misconduct, 14

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or self-dealing require separate counsel" for the corporation and its directors); Lewis, 218 F. Supp. at 239 (holding that "the interests of the officer, director and majority stockholder defendants in this action are clearly adverse, on the face of the complaint, to the interest of the stockholders," thus mandating disqualification of counsel); Messing v. FDI, Inc. 439 F. Supp. 776, 782 (D. N.J. 1977) (finding that "because in the instant case the directors have been accused of fraud and the corporation has elected to take an active stance in the litigation, it is enough for now to decide that, under these combined circumstances, the corporation must retain independent counsel"). In each of these cases, the courts recognized the difficulties created by dual representation in a shareholder derivative suit, including the inability to ensure an attorney's duty of loyalty to his client, preventing conflicts of interest which could prejudice a client, and maintaining client confidentiality. In general, the courts emphasized that to

permit such dual representation would unfairly prejudice the shareholder bringing the derivative action on behalf of the corporation. Id.

For example, in Forrest, the court found an actual conflict of interest existed where an attorney simultaneously represented two closely held family-run corporations as well as two of the three shareholders of those corporations in a derivative action. The court noted that the paramount concern in a dual representation scenario is "the preservation of public trust in the scrupulous administration of justice and the integrity of the bar." 58 Cal. App. 4th at 73. Ultimately, the court found that 15

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the interests of the corporations and the individual defendants were adverse, in light of the derivative claims, and held that the integrity of the justice system was best served by allowing the attorney to represent the individual defendants and requiring independent counsel for the corporation. Id. at 82.

Barth's reliance on cases involving merely potential conflicts of interest are unavailing. For example, Barth relies

primarily on Klemm v. Superior Court, 75 Cal. App. 3d 893, 898 (1977), a case which involved joint representation of a husband and wife in a child custody matter. In Klemm, it was undisputed

that no actual conflict of interest presently existed between the husband and wife. Rather, the court held that only a potential

conflict existed since at the present time the husband and wife had settled their disputes by agreement. Id. The court,

however, acknowledged that if the wife later sought support outside the terms of the agreement, the attorney would be disqualified from representing either party. Id. at 900 (holding

that "common sense dictates that it would be unthinkable to permit an attorney to assume a position at a trial or hearing where he could not advocate the interests of one client without adversely injuring those of the other." To the contrary here, due to Deane's assertion of derivative claims on behalf of Natomas against Solorio, there is necessarily a conflict between the corporation (Natomas) and the alleged wrongful actor (Solorio). The central allegation in Deane's

counter- and third-party claim is that Solorio breached his fiduciary duty to Natomas and its shareholders by obstructing the sales of real property, defaming Natomas' stockholders, and 16

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generally abusing his position as majority shareholder. (Counter- Third-Party Claim at ¶ 43.) Thus, this case is wholly

distinguishable from Klemm because nothing has been settled between the parties and there remains contentious litigation regarding improprieties and unethical business practices claimed by both sides which affect Natomas. As the above cases

recognize, under these circumstances, it is impossible for Barth to represent Solorio in the State Court Action and simultaneously maintain an unbiased posture on behalf of Natomas' interests in this action because Natomas' interests in the shareholder derivative action are adverse and actually conflicting with Solorio. Because Deane alleges wrongdoing against Solorio on

behalf of Natomas, the two parties are diametrically opposed.8 Therefore, the court rejects the notion that the conflict of interest is merely hypothetical or potential and concludes that disqualification is required based on the allegations of Deane's counter- and third-party claim which creates an actual conflict of interest between Natomas and Solorio. III. Complete Disqualification If the court concludes, as it has, that an actual conflict of interest has been created by Deane's assertion of derivative claims on behalf of Natomas against Solorio, Barth requests permission to "cure" the conflict by withdrawing as Solorio's For this reason, Barth's reliance on Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co., 68 Cal. App. 4th 856 (1998) is also unavailing since it too involved only an undisputed potential conflict of interest. Likewise, Barth's citation to a State Bar of California opinion is unpersuasive; that opinion did not involve a shareholder derivative action where, like in the above cases, the dual representation of the corporation and the shareholder defendant is unavoidably adverse. 17
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counsel in the State Court Action.

Deane objects, arguing that

Barth should be disqualified from representing both Natomas and Solorio because to permit otherwise would "reward" Barth for its unethical conduct. case law. Barth's suggestion that the conflict at issue could be "cured" by its withdrawal as the individual shareholder's counsel has been rejected by the courts: While this procedure removes the outward appearances of dual representation, the substance of the wrong remains. A residual bias in favor of the individual defendan[t] might continue to undermine counsel's judgment. This potential bias would stem from the fact that counsel's first loyalty might remain with the directors and officers of the corporation, who have been his principal contact with the inanimate corporate client in the past. In addition, counsel might fear that rendering advice antagonistic to the insiders' interest would impair future relations with his corporate client. For these reasons...[having] the corporation secure new counsel seems the sounder alternative. Baytree Capital, 2008 U.S. Dist. LEXIS 87872 at *28-29 (quoting Comment, Independent Representation for Corporate Defendants in Derivative Suits, 74 Yale L.J. 524, 533-534 (1965)). Baytree Neither party's argument is supported by the

Capital involved a request to recuse an attorney who represented the corporation in the derivative suit and had previously represented the individual corporate defendants in related matters. The court concluded that it would be inappropriate to

allow a firm to continue representing a corporation with ties to the individual defendants because of the high likelihood of bias and inadequate representation. Id. Thus, Barth cannot cure the

conflict at issue simply by withdrawing as Solorio's counsel.

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However, Deane's assertion that Barth must be disqualified from representing both Natomas and Solorio is not required, nor necessary. Deane contends that strong public policy concerns

dictate that Barth be disqualified because allowing him to remain as counsel for either party would permit it to profit from unethical conduct, in representing adverse interests. concern lacks foundation and support. Deane's

If Barth is disqualified

from representing Natomas, the adverse interests will still be present between Natomas and Solorio, but Barth will no longer be representing adverse parties. More importantly, Barth will no

longer be assisting Natomas in bringing a derivative claim against a client he has an interest in protecting. Further,

because any distinction between Natomas and its major shareholders is fictional, it would not be improper for Barth to represent Solorio in either action. Gong v. RFG Oil, Inc., 166

Cal. App. 4th 209, 217 (2008) (citing Forrest, 58 Cal. App. 4th at 76). Indeed, permitting Barth to continue representing Solorio is "consistent with federal authority in the precise circumstance of attorney disqualification in shareholder derivative litigation, which holds that while dual representation of a corporation and its directors is impermissible (at least if the directors are charged with fraud), the attorney who formerly represented both clients may continue to represent the individual ones." Forrest,

58 Cal. App. 4th at 81 (citing Musheno v. Gensemer, 897 F. Supp. at 838); Lewis, 218 F. Supp. at 239. Based on these authorities,

the court finds that while Barth's disqualification from representing Natomas is mandated, Barth can continue to represent 19

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Solorio in the State Court Action or in this action, if Solorio wishes to have Barth substitute in as his counsel in this matter. IV. Future Representation of Natomas

Having determined that Barth must be disqualified from representing Natomas in this action, lastly, the court considers who may represent Natomas in the future. Pursuant to the Local

Rules of this court, Natomas, as a limited liability company, cannot appear in this action pro per; it must be represented by counsel. E.D. Cal. L.R. 83-183. Thus, the court will stay all

proceedings in this case for 60 days to permit Natomas to find substitute counsel.9 Case law makes clear that said counsel for the corporation in a derivative action must be "independent counsel" who has had no previous connection with the corporation or its individual directors or shareholders. In re Oracle Sec. Litig., 829 F.

Supp. at 1189; Lewis, 218 F. Supp. at 240 (holding "it would be wise for the corporation to retain independent counsel, who have had no previous connection with the corporation, to advise it as to the position which it should take in [the] controversy"); Messing, 439 F. Supp. at 782 (recognizing that only "[i]ndependent counsel for the corporation, unshackled by any ties to the directors, [is] in the unique position of having only the corporation's interest at stake"). Thus, the court directs

Natomas to retain independent counsel that has no prior ties to the company or any party to this case.

All other pending motions in the case will be continued by separate minute order of the court. 20

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CONCLUSION For the foregoing reasons, the court GRANTS in part and DENIES in part Deane's motion to disqualify Barth from representing Natomas and Solorio. Barth is hereby disqualified

from representing Natomas in this action; however, Barth may continue to represent Solorio in the related State Court Action or may substitute in as Solorio's counsel in this action. Natomas is directed to retain independent counsel having no prior relationship with the company or the individual defendants in this action. The court stays all proceedings in the case for 60

days to permit Natomas to find substitute counsel. IT IS SO ORDERED. DATED: September 14, 2009

FRANK C. DAMRELL, JR. UNITED STATES DISTRICT JUDGE

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