Endurance American Specialty Insurance Company v. WFP Securities Corporation et al
Filing
101
ORDER Denying Plaintiff's Motion To Disqualify Plaintiff's Counsel (Re Doc. 76 ). Signed by Magistrate Judge Karen S. Crawford on 3/29/2013. (mdc)
FILED
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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ENDURANCE AMERICAN
SPECIALITY INSURANCE
COMPANY,
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Plaintiff,
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ORDER DENYING PLAINTIFF'S
MOTION TO DISQUALIFY
PLAINTIFF'S COUNSEL
vs.
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CASE NO. llcv2611-JAH(KSC)
WFP SECURITIES CORPORATION;
WFP HOLDINGS, INC., et aI.,
[Doc. No. 76.]
Defendants.
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Before the Court is defendants' Motion to Disqualify Plaintiffs Counsel. [Doc.
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18 No. 76.] In their Motion, defendants seek an order disqualifying Attorney Phillip Hosp
19 and his law firm, Locke Lord, LLP, from any further representation of plaintiff in this
20 action. Defendants argue that Mr. Hosp and Locke Lord, LLP should be disqualified
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from representing plaintiff in this action, because Mr. Hosp improperly obtained
22 defendants' confidential and privileged documents. Defendants also seeks an Order
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removing certain documents from the Court's record and excluding them from use as
24 evidence in this action. In addition, defendants want the Court to require Mr. Hosp and
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Locke Lord, LLP to return any documents that were not obtained through proper
26 channels and to fully disclose how they were obtained. For the reasons outlined below,
27 this Court finds that defendants' Motion to Disqualify Counsel must be DENIED.
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Ilcv2611·JAH(KSC)
Background and Procedural History
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This is the second of two insurance coverage actions that plaintiff Endurance
3 American Specialty Insurance Company ("Endurance") has filed against defendants
4 WFP Securities Corporation, a licensed broker/dealer, and related entities and
5 individual securities representatives and financial advisors (collectively, WFP). Both
6 actions involve the same insurance policy and insurance coverage for the same or
7 similar underlying claims against the WFP defendants. The following is a brief
8 summary of the relevant terms of the subject insurance policy, the underlying claims
9 against WFP, the allegations in the two coverage actions, and the circumstances
10 leading to the instant Motion.
The Insurance Policv.
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A.
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On August 14,2009, Endurance issued a professional liability insurance policy
13 to defendant WFP Securities Corporation ("WFP") for the policy period June 1, 2009
14 to June 1,2010 with a limit on liability of$1 million per claim and in the aggregate,
15 with a self-insured retention ("SIR") of $50,000. The policy provided coverage for
16 wrongful acts committed on or after the retroactive date ofJune 1, 2007 and before the
17 termination of the policy on June 1,2010. [Doc. No. 1-16, at pp. 7,31-32,46.] The
18 policy states that: "[Endurance] shall pay Damages and Claim Expenses on behalf of
19 the Insured resulting from any Claim first made against the Insured and reported to the
20 Company in writing during the Policy Period or any applicable Extended Reporting
21 Period for any Wrongful Act committed on or after the Retroactive Date and before the
22 Policy terminates." [Doc. 1-16, at p. 46.] In addition, the policy states that Endurance
23 "shall have the right and duty to defend, any Claim against the Insured, to which this
24 Policy applies, even if any of the allegations of the Claim are groundless, false, or
25 fraudulent." [Doc. 1-16, at p. 46.]
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The policy includes a number of exclusions. At least three of these exclusions
27 are relevant to the issues raised in this action: First, the application exclusion states in
28 part as follows: "[A]ny claim or lawsuit ... arising from any fact, circumstance, act,
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1 error or omission disclosed or required to be disclosed in response to Question 9, 10
2 and/or 11 [of the insurance application], is hereby expressly excluded from coverage
3 under the proposed insurance policy." [Doc. No. 77-1, at p. 2.] Under Question 9, WFP
4 was required to disclose all "claims, suits or proceedings (including ... any civil,
5 criminal, or regulatory action, or any complaint, investigation or proceeding related
6 thereto) ... during the past five years." Question 10 required disclosure of any "fact,
7 circumstance, incident, situation, or accident (including . . . any civil, criminal, or
8 regulatory action, or any complaint, investigation or proceeding thereto) that may result
9 in a claim." [Doc. No. 77-1, at p. 2.]
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Second, the prior and pending exclusion reads in part as follows: "This Policy
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shall not apply ... to any Claim based upon, arising from, or in consequence of ... any
12 written demand, litigation, proceeding, administrative action or hearing brought prior
13 to or pending as of [June 1,2009]. ..." [Doc. No. 77-1, at p. 2.]
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Third, the policy includes a specific exclusion for any claim "based upon, arising
15 out of, directly or indirectly resulting from, in consequence of, or in any way involving
16 the Robert C. Phalen matter (the "Phalen claim") disclosed on the Endurance Claim
17 Supplemental Application signed and dated on July 6, 2009" (the "Phalen exclusion").
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[Doc. No. 77-3, at p. 95.]
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B.
The Underlying Claims Against WFP.
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After the policy was issued, WFP reported a number of claims to Endurance.
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These claims generally alleged that WFP and its representatives were negligent, failed
22 to investigate and conduct proper due diligence on certain investment
23 recommendations, and made misrepresentations and omissions ofmaterial information
24 when recommending investments (the "underlying claims"). Many ofthese underlying
25 claims are or were the subject ofarbitrations before the Financial Industry Regulatory
26 Authority ("FINRA"). [Doc. No. 77-3, at p. 95-96.]
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On March 11,2010, Endurance agreed to defend three ofthe underlying claims
28 by Jon Kimler, John Sothras, and Jaimie Davis under a reservation ofrights. Attorney
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Ilcv2611-JAH(KSC)
1 Brandon Reif was appointed by Endurance to represent WFP's interests in these
2 matters. In letters to WFP dated March 11, 2010, Endurance advised that Mr. Reif
3 "shall represent the Insured's interests in the defense of [these] matter [s] and [he] will
4 have no involvement in any coverage issues." [Doc. No. 76-2, at Exh. 18-20, at p. 4.]
5 Because of the $50,000 SIR, Endurance instructed Mr. Reifto send his bills directly
6 to WFP until the SIR was exhausted. When the $50,000 SIR was exhausted, Mr. Reif
7 was instructed to send his invoices directly to Endurance for payment. [Doc. No.76-2,
8 at Exh. 18-20, at p. 4.]
9
Even after the $50,000 SIR was exhausted, WFP claims that Mr. Reifs firm
10 continued to send invoices to WFP for payment, and Endurance never paid any ofthe
11 costs ofWFP's defense. [Doc. No. 76-33, Schooler Decl., at p. 2.] On November 16,
12 2010, Endurance denied coverage of all of the underlying claims pending at that time
13 based on certain provisions of the policy, including the Phalen exclusion. [Doc. No.
14 1-14, at pp. 17-45; Doc. No. 77-3, at p. 96; Doc. No. 76-33, Schooler Decl., at p. 2.]
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C.
First Insurance Coverage Action: Interpleader Complaint in the
Central District ofCalifornia.
On February 16,2011, Endurance filed an interpleader Complaint in the United
18 States District Court for the Central District of California against the WFP defendants
19 and many ofthe individual claimants who were pursuing the underlying claims against
20 WFP. [Doc. No. 1-15, at p. 1, 11-19; Doc. No. 79-3, Hosp Decl., at p. 4.] In this
21 action, Endurance was represented by Attorney Phillip Hosp, and WFP was represented
22 by Attorney Stephen Treuer. [Doc. No. 76-1, at p. 6.] Mr. Reif continued to represent
23 WFP's interests in the underlying claims that were being adjudicated by FINRA.
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In the interpleader Complaint, Endurance claimed it had various defenses to
25 coverage and alleged that the relief sought by the claimants in the underlying claims
26 exceeded $18,000,000 and was far in excess of the $1 million aggregate limit of
27 liability under the policy. [Doc. No. 77-3, at p. 96.] Endurance requested that it be
28 allowed to deposit the $1 million aggregate limit of liability into the Court's registry
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llcv2611-1AH(KSC)
1 so that WFP and the claimants could litigate their respective rights to the $1 million.
2 [Doc. No. 77-3, at pp. 96-97; Doc. No. 70-3, at pp. 9, 36-37.] Endurance also sought
3 an injunction restraining the parties from "instituting or prosecuting any proceeding
4 other than the arbitrations, that would affect the policy, pending further order of [the]
5 Court." [Doc. No. 77-3, at p. 97, Doc. No. 70-3, at p. 36.] According to WFP, the
6 interpleader Complaint referenced twenty-one underlying arbitrations and/or claims.
7 [Doc. No. 70-1, at p. 22; Doc. No. 70-3, at pp. 21-35.]
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WFP filed a Motion to Dismiss arguing that the Complaint in interpleader was
9 inappropriate under the circumstances, because Endurance was actually seeking
10 declaratory relief. According to WFP, Endurance was really seeking a determination
11 that it had no duty to defend or indemnify WFP with respect to the underlying claims.
12 [Doc. No. 77-3, at p. 97.] On June 27, 2011, the District Court for the Central District
13 of California agreed with WFP and signed an Order granting WFP's Motion to
14 Dismiss. The Order dismissed the interpleader Complaint with prejudice, stating that
15 Endurance's "duty to defend under the terms ofthe Policy is unambiguous." [Doc. No.
16 77-3, at p. 99.] However, it appears that the action was not actually dismissed with
17 prejudice from the Central District's docket until July 21, 2011. [Doc. No. 76-32,
18 Treuer Decl., at p. 4.]
19
Endurance appealed the Central District's dismissal of the interpleader
20 Complaint. [No. 11-56351.] On January 23, 2012, in its opening brief on appeal,
21 Endurance argued that dismissal of the interpleader Complaint was unwarranted,
22 because it does not have a duty to defend and did not interplead any duty to defend.
23 [Doc. No. 70-6, at pp. 20-23.]
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D.
Second Coverage Action [or Declaratory Relief and Rescission ("the
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Instant Action ").
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1.
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The Complaint.
On July 25, 2011, shortly after the interpleader Complaint was dismissed by the
28 Central District, Endurance filed a new Complaint against WFP in San Diego County
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1 Superior Court. This new Complaint cites the same insurance policy at issue in the
2 prior interpleader action in the Central District of California. Unlike the interpleader
3 action, the individual claimants were not named in this new Complaint. However,
4 some or all of the same claimants and underlying claims are referenced in the new
5 Complaint as part ofthe coverage dispute between Endurance and WFP. [Doc. No. 1
6 16, at p. 7; Doc. No. 70-3, at p. 17.] On November 9,2011, the new action in San
7 Diego Superior Court was removed to this Court based on diversity of citizenship.
8 [Doc. No.1, at p. 4.]
9
The new Complaint includes causes ofaction for declaratory relief and rescission
10 against WFP.
In its cause of action for declaratory relief, Endurance seeks a
11 declaration that coverage of the underlying claims is precluded by: (1) the express
12 terms and conditions ofthe policy and WFP's application for insurance; (2) the public
13 policy against indemnification ofrestitution or disgorgement; and (3) the public policy
14 against insurance coverage for non-fortuitous losses, i. e., the "known loss" doctrine.
15 For example, Endurance contends that coverage ofthe underlying claims is precluded
16 under the "known loss" doctrine, because WFP was aware of the facts and
17 circumstances leading to some or all ofthe underlying claims prior to the inception of
18 the policy period. [Doc. No. 1-16, at p. 25.]
19
In the cause of action for rescission, Endurance asserts that it is entitled under
20 California law to rescind the policy, rendering it void ab initio.
According to
21 Endurance, WFP submitted its application for insurance on July 6, 2009 and knew
22 about but failed to disclose pre-existing or potential claims. In its decision to issue the
23 subject insurance policy, Endurance alleges that it justifiably but detrimentally relied
24 on misinformation provided by WFP in its application. For example, plaintiff alleges
25 defendants were aware of negative information concerning certain investments that
26 could give rise to claims under the policy. However, Endurance alleges WFP failed
27 to disclose potential claims involving these investments in its insurance application.
28 [Doc. No. 1-16, at p. 26-28.]
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2.
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WFP's Cross Complaint.
On October 11, 2012, WFP filed a Cross-Complaint against Endurance and
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3 Lexington Insurance Company ("Lexington"). [Doc. No. 1-3, at p. 2.] The Cross4 Complaint includes causes of action against Endurance and Lexington for breach of
5 contract, breach ofthe implied covenant ofgood faith and fair dealing, and declaratory
6 relief. [Doc. No. 1-3, at p. 2-3.] Lexington is not involved in the pending motions but
7 provided insurance coverage to WFP for the policy period June 1, 2008 to June 1,
8 2009, just prior to inception of the Endurance policy. [Doc. No. 1-3, at p. 5-6.]
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The Cross-Complaint alleges that Endurance breached its obligations under the
10 policy by "(1) failing and refusing to provide a defense ... [ofthe underlying claims];
11 (2) unreasonably asserting the application of multiple SIRs; (3) failing to engage in
12 good faith settlement negotiations in the Underlying Actions; (4) failing to properly
13 and fairly investigate and evaluate its coverage duties with regard to the [underlying
14 claims]; and (5) filing its Interpleader Action, thereby turning its insured into
15 an adverse claimant to policy benefits." [Doc. No. 1-3, at p. 28.] For these and other
16 reasons, the Cross-Complaint also alleges that Endurance acted in bad faith. [Doc. No.
17 1-3, at 29.]
E.
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Facts and Circumstances Leading to the Instant Motion to Disqua/i[v
Endurance's Litigation Counsel in this Action.
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The facts and circumstances leading to the instant Motion to Disqualify
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Plaintiffs Counsel occurred during the course ofthe prior interpleader coverage action
22 in the Central District while WFP's Motion to Dismiss was pending and scheduled to
23 be heard on June 27, 2011. [Doc. No. 77-2, at p. 95.] While this Motion to Dismiss
24 was pending, Endurance served WFP with an early request for production of
25 documents seeking access to every communication WFP had with all of its clients
26 relating to the purchase, sale or holding of any securities between July 1, 2004 and
27 April 19,2011. [Doc. No. 76-12, at p. 10.]
28 III
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1
Believing Endurance's early document request was overly broad, WFP objected
2 and did not produce any documents. [Doc. No. 76-1, at p. 9.] As a result, Mr. Hosp
3 threatened to file a motion to compel on behalf of Endurance, and the parties became
4 embroiled in a discovery dispute. [Doc. No. 76-1, at p. 9-10.] Although Mr. Hosp filed
5 Endurance's Motion to Compel on June 27, 2011, it was taken off calendar for failure
6 to satisfy meet and confer requirements. Mr. Hosp then undertook discussions with
7 Mr. Treuer, WFP's litigation counsel in that action, to resolve the dispute. [Doc. No.
8 76-1, at p. 10.]
9
Almost one year later in May of20 12 and long after the first coverage action was
10 dismissed, attorneys representing WFP in the current coverage action were reviewing
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attorney billing records and discovered that on June 27, 2011, the same date
12 Endurance's Motion to Compel in the prior action was taken offcalendar for failure to
13 meet and confer, Mr. Hosp was seeking access to WFP's documents from Mr. Reif. A
14 paralegal at Mr. Reif's firm made the following time entry on June 27,2011: "Analysis
15 of documents produced by Claimants and Respondents in all WFP Arbitrations for
16 documents to be provided at the request ofEndurance lawsuit participants." [Doc. No.
17 76-24, at p. 5.]
18
In response to an inquiry by WFP's counsel in the current coverage action,
19 Mr. Reifconfirmed that in the Summerof2011, "Endurance's counsel" requested and
20 received a set ofdiscovery from "the then-open cases" that Mr. Reifwas defending for
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WFP. He said he was not "told the purpose" of the production but indicated that
22 Mr. Treuer knew about the request and had also asked for certain documents which
23 were provided pursuant to his request. [Doc. No. 76-25, at p. 2.] A time entry for
24 Mr. Reif dated July 7, 2011 also states that he had a discussion with Mr. Hosp about
25 making deposition transcripts available for viewing at his office. [Doc. No. 76-24, at
26 p.5.]
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On July 8, 2011, around the same time Mr. Hosp was communicating with
28 Mr. Reifto obtain access to WFP's documents and deposition transcripts, Mr. Hosp
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1 also met in person with Mr. Treuer and reached a resolution of the discovery dispute
2 in the interpleader insurance coverage action. WFP agreed to produce a narrow set of
3 documents within two weeks: "All complaints and demands, including any responses
4 thereto, and all communications between WFP and its clients that made those
5 complaints and demands" for the period January 1,2006 through April 19,2011. The
6 parties also agreed to a stipulation that would protect the privacy interests involved.
7 [Doc. No. 76-32, Treuer Decl., at p. 4; Doc. No. 76-17, at p. 2.]
8
As noted above, the Central District dismissed the interpleader Complaint from
9 its docket with prejudice on July 21, 2011, the day before WFP was scheduled to
10 produce documents in response to Endurance's early document request. [Doc. No. 77
11 3, at p. 99; Doc. No. 77-3, at p. 99; Doc. No. 76-32, Treuer Decl., at p. 4.] In light of
12 the dismissal, Mr. Treuer did not produce any documents to Endurance on behalf of
13 WFP. [Doc. No. 76-32, Treuer Decl., at p. 4.] In a Declaration submitted in support of
14 WFP's Motion to Disqualify Counsel, Mr. Treuer has stated that he also did not
15 authorize Mr. Reif to release any of WFP's documents to Mr. Hosp. Mr. Treuer's
16 Declaration further states that to the best ofhis recollection he was never informed that
17 Mr. Hosp had directly contacted Mr. Reifto obtain access to WFP's documents. [Doc.
18 No. 76-32, Treuer Decl., at p. 4-5.]
19
Mr. Hosp's access to WFP's documents through Mr. Reif during the prior
20 interpleader action was discovered and became significant in the current coverage
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action when Mr. Hosp indicated during a discovery conference that he wanted to use
22 certain documents to oppose WFP's Motion for Partial Summary Judgment. He
23 requested that WFP's current litigation counsel, Mr. Hilding, stipulate to the
24 authenticity ofthese documents. [Doc. No. 76-26, at 1-6.] Although Mr. Hilding was
25 "initially puzzled" as to how Mr. Hosp obtained access to these documents, he
26 eventually stipulated to their authenticity so that they could be submitted as exhibits
27 in support ofEndurance's Opposition to WFP's Motion for Partial Summary Judgment.
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1 [Doc. No. 76-1, at p. 12.]1
Mr. Reif believed these documents should remain
2 confidential. However, WFP's counsel in this action apparently did not make a request
3 to have them filed with the Court under seal. [Doc. 79-3, Hosp. Decl., at p. 5.]
Discussion
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5
In the Motion to Disqualify Counsel, WFP argues that this Court should preclude
6 Mr. Hosp and his law finn from representing Endurance in this action, because he
7 initiated improper contacts with Mr. Reifand induced him to breach his duty ofloyalty
8 and confidentiality to WFP, which has resulted in prejudice to WFP. According to
9 defendants, Mr. Hosp had improper "ex parte" contacts with Mr. Reifwithout WFP's
10 knowledge or consent, and as a result of these contacts, Mr. Hosp obtained "covert
11 access" to WFP's "confidential" documents and was able to review "confidential"
12 transcripts.
13
In Opposition to defendants' Motion, Endurance denies that Mr. Hosp induced
14 Mr. Reif to breach his duty of confidentiality and loyalty to defendants. Endurance
15 also denies that Mr. Hosp sought or obtained access to privileged or any other legally
16 protected documents. In support of Endurance's Opposition, Mr. Hosp provided a
17 Declaration with supporting evidence outlining his contacts with Mr. Reif during the
18 relevant time period. According to Mr. Hosp, his contacts with Mr. Reif during the
19 relevant time period only resulted in access to non-privileged, discoverable documents
20 and transcripts.
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The question raised by WFP's counsel about the source of these
documents was, at ltS core, a discovery dispute. Before filing this Motion to DisqualifY
Counsel, WFP's counsel wrote a letter to Endurance's counsel requesting to meet ana
confer but received no response. [Qoc. No. 76-35, Hilding Decl., at p. 2.J Apparently,
Endurance's counsel responded by lette~Tbut the letter was not received oecause it was
addressed incorrectly. [Doc. No. 79-3, HOSP Decl., at p. 2-3.1 In any event the letter
did not provide a direct or comp-Iete res:Qonse to the guestion tbat was raised about the
source ofthe documents. [Doc. No. 81, Supp. Hosp DecL, at 2 and Exh. S.] "Under no
circumstances may the p'arties satisfr the meet and confer requirement by exchanging
written correspondence." CivLR 26.1 (a). Any' further discovery motions filed witliout
satisfying the meet and confer requirements will be denied. In addition, the parties are
directed to the procedures for resolving discovery disputes as set fortn in Judge
Crawford's "Chambers' Rules" which are accessible via the Court's website at
www.casd.uscourts.gov.
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1
In its Reply, WFP further argues that Mr. Hosp was not entitled to copies ofthe
2 documents in Mr. Reifs possession, because they were produced to him by WFP for
3 the purpose ofdefending the underlying claims that were adjudicated through FINRA
4 and were produced in the connection with these arbitrations subject to confidentiality
5 agreements. According to WFP, Endurance was not a party to these agreements and
6 has not agreed to be bound by their tenns.
7
A.
8
"Under the Erie doctrine, federal courts sitting in diversity apply state
Applicable Law.
9 substantive law and federal procedural law." Gasperini v. Centerfor Humanities, Inc.,
10 518 U.S. 415, 426. Questions ofprivilege in a diversity action, including the attorney11
12
client privilege, are governed by California law. Fed.R.Evid. 501.
Federal courts also apply state law in detennining matters of disqualification.
13 In re County of Los Angeles, 223 F.3d 990, 995 (2000). "A judge's authority to
14 disqualify an attorney has its origins in the inherent power of every court in the
15 furtherance ofjustice to control the conduct of ministerial officers and other persons
16 in pending judicial proceedings." Neal v. Health Net, Inc., 100 Cal.AppAth 831,840
17 (2002). "The power is frequently exercised on a showing that disqualification is
18 required under professional standards governing avoidance of conflicts of interest or
19 potential adverse use of confidential infonnation." Responsible Citizens v. Superior
20 Court, 16 Cal.AppAth 1717, 1723-1724 (1993). "[D]isqualification is a drastic course
21
of action that should not be taken simply out of hypersensitivity to ethical nuances or
22 the appearance of impropriety." Roush v. Seagate Technology, LLC, 150 Cal.AppAth
23 210, 281 (2007).
24
"Motions to disqualify counsel present competing policy considerations. On the
25 one hand, a court must not hesitate to disqualify an attorney when it is satisfactorily
26 established that he or she wrongfully acquired an unfair advantage that undennines the
27 integrity of the judicial process and will have a continuing effect on the proceedings
28 before the court. [Citation omitted.] On the other hand, it must be kept in mind that
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1 disqualification usually imposes a substantial hardship on the disqualified attorney's
2 innocent client, who must bear the monetary and other costs of finding a replacement.
3 A client deprived of the attorney of his choice suffers a particularly heavy penalty
4 where, as appears to be the case here, his attorney is highly skilled in the relevant area
5 of the law." Gregori v. Bank ofAmerica, 207 Cal.App.3d 291,300 (1989).
6
"Additionally, as courts are increasingly aware, motions to disqualify counsel
7 often pose the very threat to the integrity of the judicial process that they purport to
8 prevent. [Citation omitted.] Such motions can be misused to harass opposing counsel
9 [citation omitted], to delay the litigation [citation omitted], or to intimidate an
10 adversary into accepting settlement on terms that would not otherwise be acceptable.
11
In short, it is widely understood by judges that 'attorneys now commonly use
12 disqualification motions for purely strategic purposes ....' [Citations omitted.]" Id. at
13 300-301. Therefore, disqualification motions "should be subjected to particularly strict
14 judicial scrutiny." Optyl Eyewear Fashion Int'l Corp. v. Style Cos., 760 F.2d 1045,
15
1050 (9th Cir.1985).
16
B.
Alleged Breach ofthe Attorney-Client Privilege.
17
Without specific evidentiary support, WFP argues that Mr. Hosp and his firm
18 should be disqualified from representing Endurance in this action, because Mr. Hosp
19 "induced" Mr. Reif to breach his duty of loyalty and confidentiality to WFP, and as a
20 result, Mr. Hosp gained access to "attorney-client confidences" through Mr. Reif.
21
[Doc. No.76-1, at p. 2, 22.] WFP would have this Court presume a violation of the
22 attorney-client relationship by Mr. Reif based on his direct cOlmnunications with
23 Mr. Hosp; the "conflicted relationship" between Endurance and WFP; and the fact that
24 Mr. Reifprovided Mr. Hosp with documents stamped "confidential." [Doc. No. 76-1,
25 at p. 22-23.]
26
Under California law, evidentiary privileges, including the attorney-client
27 privilege, are governed by statute. HLC Properties, Ltd. v. Superior Court, 35 Ca1.4th
28 54, 59 (2005). "The party claiming the privilege has the burden of establishing the
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1 preliminary facts necessary to support its exercise, i.e., a communication made in the
2 course ofan attorney-client relationship." Costco Wholesale Corp. v. Superior Court,
3 47 Cal. 4th 725, 733 (2009).
4
Under California Evidence Section 952, the attorney-client privilege applies to
5 confidential communications between a client and a lawyer 44in the course of that
6 relationship and in confidence by a means which, so far as the client is aware, discloses
7 the information to no third persons other than those who are present to further the
8 interest of the client in the consultation or those to whom disclosure is reasonably
9 necessary for the transmission ofthe information or the accomplishment ofthe purpose
10 for which the lawyer is consulted, and includes a legal opinion formed and the advice
11 given by the lawyer in the course of that relationship." Cal. Evid. Code 952.
12 Documents or evidence that are otherwise discoverable do not become privileged
13 simply because they are transmitted to counsel. Costco v. Superior Court, 35 Cal. 4th
14 at 735; Wellpoint Health Networks, Inc. v. Superior Court, 59 Cal.App.4th 110, 119
15 (1997).
16
In support of the claim that Mr. Hosp obtained access to privileged documents
17 or information from Mr. Reif, WFP refers to internal WFP e-mails stamped
18 "confidential" that were clearly in Mr. Hosp's possession, since he submitted them as
19 exhibits to Endurance's Opposition to WFP's Motion for Partial Summary Judgment.
20 [Doc. No. 76-1, at p. 11; Doc. No. 37-2, Exhibits F-G, I-N & P.]
21
However, these
documents are not communications between WFP and its counsel. Documents are not
22 protected from disclosure by the attorney-client privilege simply because they are
23 transmitted to an attorney and stamped "confidential."
24
In support of Endurance's Opposition to WFP's Motion to Disqualify Counsel,
25 Mr. Hosp submitted a Declaration stating under penalty ofperjury that he did not have
26 access to any attorney-client communications or any other legally protected information
27 through Mr. Reif. [Doc. No. 79-3, at p. 5] WFP has not submitted any convincing
28 evidence that disputes the statements made by Mr. Hosp in his Declaration. Instead,
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1 WFP would have this Court simply presume based on the circumstances that Mr. Hosp
2 induced Mr. Reif to provide him with documents or information protected by the
3 attorney-client privilege. Based on the evidence submitted by the parties, and for the
4 reasons outlined more fully below, the facts and circumstances simply do not justify
5 a presumption that the attorney-client privilege was breached. Nor is there any basis
6 for this Court to conclude that Mr. Hosp should be disqualified from representing
7 Endurance in this action because he allegedly induced Mr. Reif to breach his duty of
8 confidentiality and loyalty to WFP or had access to attorney-client privileged
9 communications from Mr. Reif.
Endurance's Access to WFP's "Confidential" Documents.
.
10
C.
11
Referring to the same "confidential" e-mails referenced above, WFP also argues
12 that Mr. Hosp should be disqualified from representing Endurance because he obtained
13 "covert access" to WFP's "confidential" documents from Mr. Reif. [Doc. No. 76-1, at
14 p. 11; Doc. No. 37-2, Exhibits F-G, I-N & P.] All of these "confidential" e-mails
15 indicate that between December 2, 2008 and June 30, 2009, WFP was aware of
16 negative information about certain investments that ultimately lead to the filing of the
17 underlying claims against WFP. In its Opposition to defendant's Motion for Partial
18 Summary Judgment, Endurance cited these documents in support of its argument that
19 it had no duty to defend WFP, because Endurance had a right to rescind the subject
20 policyab initio based on WFP's failure to disclose potential claims in its application
21
for insurance. [Doc. No. 37, at pp. 15-16.] The District Court rejected this argument
22 "even assuming Endurance has a legal right to assert rescission." The District Court
23 reasoned that "the duty to defend turns upon the 'facts known by the insurer at the
24 inception of a third party lawsuit' not on the ultimate issue of coverage." According
25 to the District Court, Endurance did not meet its burden to demonstrate that at the time
26 it made its coverage decision there was no potential for coverage under the subject
27 policy. [Doc. No. 95, Order Granting in Part WFP's Mot. for Partial Summ. J., at p.
28
11.]
- 14-
II cv2611-JAH(KSC)
1
In other words, WFP prevailed on its Motion for Partial Summary Judgment on
2 the issues of Endurance's duty to defend and right to rescind the subject insurance
3 policy. As a result, this Court cannot conclude that Endurance acquired any unfair
4 advantage or that WFP suffered any prejudice because Endurance had access to the
5 subject e-mails. In any event, these e-mails would have eventually been discoverable
6 even if Mr. Hosp did not obtain access to them, because they meet the relevance
7 standard of Federal Rule of Procedure 26(b)?
8
Endurance argues there is no basis to grant WFP's Motion to Disqualify
9 Counsel, because nothing precluded Endurance from obtaining access to documents
10 and information related to the defense ofthe underlying claims from Mr. Reif, even if
11 they were designated "confidential."
Endurance also argues that the evidence
12 contradicts WFP's contention that Mr. Hosp improperly obtained "confidential"
13 documents from Mr. Reif. This Court agrees. While the exact source ofthe documents
14 in question is still somewhat unclear based on the evidence submitted by the parties,
15 there is simply no evidence that they were obtained improperly.
16
"When an insurer provides an unconditional defense for its insured, the insured
17 and the carrier share the same goal-minimizing or eliminating liability in the third party
18 action-and no conflict ofinterest inhibits the ability ofone lawyer to represent both the
19 insurer and the insured. [Citations omitted.] But where the carrier questions the
20 availability of coverage and provides a defense in the third party action subject to a
21
reservation of rights, a conflict exists-because the insured's goal is coverage, which
22 flies in the face of the insurer's desire to avoid its duty to indemnify. [Citation
23 omitted.] Since it is unavoidable that, in the course of investigating and preparing the
24 insured's defense in the third party action, the insured's attorney will come upon
25 information relevant to a coverage issue, it is impossible for the carrier's attorney to
26 represent the insured ... and the insured is entitled to independent counsel." Rockwell
27
2
Under Federal Rule of Civil Procedure 26(b)( 1), "[p]arties may obtain
28 discovery re&arding any nonprivileged matter that is relevant to any party's claim or
defense ....
- 15 -
llcv2611-JAH(KSC)
1 Int'l Corp. v. Superior Court (Los Angeles), 26 Cal.App.4th 1255, 1262-1263 (1994);
2 Cal. Civ. Code § 2860(a)&(b). A conflict may exist between the insurer and the
3 insured "when an insurer reserves its rights on a given issue and the outcome of that
4 coverage issue can be controlled by counsel first retained by the insurer for the defense
5 ofthe claim...." Cal. Civ. Code 2860(b).
6
"When independent counsel has been selected by the insured, it shall be the duty
7 ofthat counsel and the insured to disclose to the insurer all information concerning the
8 action except privileged materials relevant to coverage disputes, and timely to inform
9 and consult with the insurer on all matters relating to the action. Any claim ofprivilege
10 asserted is subject to in camera review in the appropriate law and motion department
11
of the superior court. Any information disclosed by the insured or by independent
12 counsel is not a waiver ofthe privilege as to any other party." Cal.Civ.Code § 2860(d)
13 (emphasis added).
14
As noted above, Endurance originally agreed to defend three ofthe underlying
15 claims against WFP under a reservation of rights. At this time, it also appointed
16 Mr. Reifto defend these three underlying claims. Recognizing the conflict this created,
17 Endurance stated in its letters to WFP dated March 11, 2010 that Mr. Reif "shall
18 represent the Insured's interests in the defense of [these] matter[s] and [he] will have
19 no involvement in any coverage issues."3 [Doc. No. 76-2, atExh. 18-20, at p. 4.] Thus,
20
21
22
23
24
25
26
27
28
3
The conflict between Endurance and WFP is obvious and deep-seated
based on the common factual allegations between the underlying claims and the
allegations in the instant insurance coverage action. Endurance and the underlying
claimants both seek to prove WFP was aware of facts and circumstances leading to the
underlying claims but did not disclose this information when it should have. The
conflict is also evident in the highly litigious and contentious nature ofthe relationship'
between the parties in this action. In addition to the fact that this is the secono
insurance coverage action between the parties, there are currently four voluminous and
acrimonious motIOns for the Court to resolve. Currently penaing motions include:
(1) defendants' Motion to Stay [Doc. No. 70]' (2) defendants' Motion to Dis~alify
Coups~l LQoc. No: 76]; (3) olamti.ff's.Motion
Sanctiops [Doc. No. 80]; and 4) the
partIes Jomt MotIon ror l1etermmatlOn of DIscovery DlsQute [Doc. No. 77]. n the
Joint Motion for Determination of Discovery Dispute, Endurance seeks an order
compelling WFP to produce documents in response to 32 different discovery requests,
as well as monetary sanctions to recover the cost of bringing the Motion. [Doc. No.
77-1, at p. 3.] A total of 629 pages were filed in connectIOn with the Motion to Stay;
ror
- 16 -
llcv2611·JAH(KSC)
1 Endurance clearly viewed Mr. Reifs role as that of independent counsel to represent
2 WFP, and there is nothing to indicate WFP disagreed with the terms of this
3 appointment or sought to select its own independent counsel who had no prior
4 relationship with Mr. Reifor Endurance. 4
5
In his independent role as WFP's defense counsel handling the underlying
6 claims, Mr. Reifhad a duty to "disclose to the insurer all information" concerning the
7 underlying claims so long as the information was not "privileged materials relevant to
8 coverage disputes." Cal. Civ. Code § 2860(d). Indeed, if independent counsel
9 representing the insured "keeps the insurer 'in the dark' by failing to comply with the
10 section 2860 duties until it is too late to remedy the situation," causing damage to the
11
insurer, the insurer may have a cause of action against the attorney for breach of its
12 statutory duties. Assurance Co. ofAmerica v. Haven, 32 Cal.AppAth 78, 89 (1995).
13
Under these circumstances, this Court must reject WFP' s suggestion that because
14 Endurance's interpleader action was pending against WFP in the Central District,
15 Mr. Reif was required to obtain approval from or to inform WFP's litigation counsel,
16 Mr. Treuer, before releasing any unprivileged documents to Mr. Hosp related to the
17 underlying claims. Nor could Mr. Treuer prevent Mr. Reif from releasing any such
18
19 710pages with the instant Motion to Disqualify Counsel ' 188 pages with the Motion
fo,r Sanctions; and 384 pages with the Jomt Motion for b etermination of Discovery
20 DIspute.
21
22
23
24
25
26
27
28
4
WFP unconvincingly attem~ts to show that Mr. Reifhad an incentive to
provide Mr. Hosp with "covert access' to WFP's attorney-client J2rivileged and
confidential information based on an existing relationship oetween Endurance and
Mr. Reifand his law firm. This evidence indicates that Endurance appointed Mr. Reif
to defend at least one other insured. However, without more, this connection between
Mr. Reif and Endurance does not constitute convincing evidence of any wrongdoing
by Mr. Reif. WFP also submitted evidence showmg that Mr. Reifs law firm
Qreviously employed Shimon Getler. Mr. Getler is employed as claims counsel for
Endurance and was assiKned to handle WFP's claims for coverage under the subject
insurance policy. [Doc. No. 76-1, at PI? 7-8, 13-14.] As clarificatIon: WFP submitted
evidence with its Opposition which Shows that Mr. Getler worked m the New York
office ofMr. Reif s tIrm from December 2001 to May 2004 and did not know Mr. Reif
when he worked there. Nor was Mr. Getler employed by Mr. Reifs firm duril}g,its
representation ofWFP; which began in December of2009. [Doc. No. 79, at p. 1~.J In
any event, Mr. Getler s former relationship with Mr. Reifs firm is not a basis to
disqualify Mr. Hosp or his law firm.
- 17 -
I Icv261 I-JAH(KSC)
I
documents to Mr. Hosp because of the pending discovery dispute in the interpleader
2 action. It is true, as noted above, that in a letter dated November 16, 2010 Endurance
3 denied coverage for all ofthe underlying claims that were pending at that time and later
4 denied other claims [Doc. No. 77-3, at p. 96; Doc. No. 76-33, Schooler Decl., at p. 2;
5 Doc. No. 83-6, Supp. Schooler Decl., at p. 1]. However, insurance coverage for the
6 underlying claims and Endurance's duty to defend, which is broader than the duty to
7 indemni:(y,5 are still at issue between the parties to this day, as evidenced by the
8 allegations in the pleadings, WFP's Motion for Partial Summary Judgment, and the
9 District Court's Order Granting in Part WFP' s Motion for Partial Summary Judgment.
10 [Doc. No. 95.] As a result, this Court can only conclude that Mr. Reifs duty to
11 disclose information about the underlying claims to Endurance under Section 2860(d)
12 is a continuing one, regardless of any pending insurance coverage litigation.
13 III
14
15
5
In Montrose Chemical C01poration v. Superior Court, 6 Ca1.4th 287
(1993) ("Montrose F'), the California Supreme Court reiterated the long-standing
16 principle that a liability insurer has a duty to defend if a claim against Its insured
creates a Qotential for mdemnity under the policy. Id. at 295. All msurer's duty to
17 defend is aetermined "in the first instance" by comparing the terms ofthe policy to the
allegations against the insured and to any extrmsic facts which may "reveal a
18 ROSSlbility that the claim may be covered by' the policy." Id "[E]vidence extrinsic to
the underlying complaint can defeat as well as generate a defense duty." Id. at 291.
19 Because tlie insurer s duty to defend is not baseo on a final adjudication of coverage
under the policy but on facts known at the incep.tion of the c1aim, the insurer must
20 defend some claims "where liability under the policy ultimately fails to materialize."
Id. at 295. "Necessarily, an insurer will be required to defend a suit where the evidence
21 suggests, but does not conclusively establish, that the loss is not covered." Therefore,
it nas become axiomatic that an insurer's duty to defend is broader than the duty to
22 indemni:(y. Id. at 295, 299. To prevail in a declaratory relief action seeking a
determination as to whether an insurer has a duty to defend, "the insured must prove
23 the existence of a potential for coverage, while the insurer must establish the absence
ofany suchpotential. In other words, the insured need only show that the underlying
24 claim may tall within policy coverage; the insurer must prove it cannot. Facts merely
tendigg to show that the claim is not covered or may not be covered, but are
25 insufficient to eliminate the possibility that resultant damages (or the nature of the
action) will fall within the sCQPe of coverage, therefore add no weight to the scales."
26 Montrose 1,6 Ca1.4th at 300. Thus, to escape the duty to defend altogether, the insurer
must present evidence sufficient to establIsh "that the underlying cfaim cannot come
27 within the policy, coverage by'-virtue of the scop'e ofthe insunng clause or the breadth
ofan exclusion. ' Id. at JO 1. Even ifan insurer is able to show there is no potential for
28 coverage.,., it is only relieved of the duty to defend pro~pectively( not retroactively.
HaskeT, lnc. v. Superior Court (Aetna), 33 Cal.App.4th g63, 977 1995).
- 18 -
Ilcv2611-JAH(KSC)
1
In addition, evidence submitted by Endurance is more than enough to show that
2 Mr. Hosp did not seek or receive from Mr. Reif anything more than he was entitled to
3 under the law. First, the evidence shows that even before the first coverage action was
4 filed in the Central District, Mr. Hosp was in contact with Dave Lenny, WFP's original
5 coverage counsel, who provided him with documents "solely for the purpose of
6 determining coverage issues" and also offered access to numerous other claims
7 documents. Mr. Lenny's letter to Mr. Hosp dated November 16,2010 states that WFP
8 produced "tens of thousands of pages, possibly up to a total of 100,000 pages" to
9 FINRA in connection with the underlying arbitration claims. Mr. Hosp was advised
10 to make arrangements if he wanted to obtain copies of these documents. Mr. Lenny
11 further advised Mr. Hosp that "there are additional files at the offices of [WFP's]
12 attorneys" and indicated these would be made available to Endurance in due course.
13 [Doc. No. 79-3, Hosp. Decl., atp. 3; Doc. No. 79-1, Ex. Dto Hosp Decl., at pp. 18-20.]
14
Second, the evidence shows that Mr. Hosp wrote a letter to Mr. Reif dated
15 June 22, 2011, while the subject discovery dispute was ongoing, and requested access
16 to "non-privileged documents received or produced" in several of the underlying
17 arbitrations. Mr. Reirs office subsequently produced "non-privileged documents" in
18 response to this request, and the Bates stamps on the documents indicate they were
19 produced and received in the underlying arbitrations. [Doc. No. 79-3, Hosp Decl., at
20 p. 4.] Mr. Reif also stated in his Declaration that he received the same or similar
21
documents from a number of claimants in the underlying arbitrations in response to
22 discovery requests made to them during the prior interpleader action. [Doc. No. 79-3,
23 Hosp Decl., at p. 4-5.] In addition, Mr. Hosp stated in his Declaration that he reviewed
24 "non-privileged transcripts from a FINRA examination at Mr. Reifs office." Most
25 importantly, he has stated under penalty of peIjury that he "did not ask for, or have
26 access to, any attorney-client communications or any other legally protected
27 information of the WFP parties" through Mr. Reif. [Doc. No. 79-3, at p. 5.]
28 III
- 19-
11 cv2611-JAH(KSC)
1
Pursuant to Section 2860(d), WFP was not entitled to withhold documents
2 related to the underlying arbitration claims from Endurance simply by marking them
3 "confidential." Based on Section 2860( d), it is also clear that WFP could not withhold
4 documents related to the underlying arbitration claims simply because they included
5 information that is relevant to coverage issues or because the documents included
6 information that is damaging to WFP' s position on coverage. Nor could WFP withhold
7 these documents from Endurance simply because they included third party information.
8 Whether these documents should have been provided to Mr. Hosp subject to
9 confidentiality agreements that were executed in the underlying arbitrations is between
10 Mr. Reif and Mr. Hosp and not an issue for this Court's consideration. As set forth in
11
Section 2860(d), WFP was only entitled to withhold documents concerning the
12 underlying claims and arbitrations if they were protected by the attorney-client
13 privilege.
Conclusion
14
15
Based on the foregoing, there is simply no evidence from which this Court could
16 conclude that Mr. Hosp acquired any information from Mr. Reif about WFP or the
17 underlying claims that he was not entitled to receive under California law. As a result,
18 this Court cannot conclude that Mr. Hosp and/or his law firm should be disqualified
19 from representing Endurance because Mr. Hosp "wrongfully acquired an unfair
20 advantage that undermines the integrity of the judicial process and will have a
21
continuing effect on the proceedings before the court." Gregori, 207 Cal.App.3d at
22 300. Therefore, this Court finds that WFP's Motion to Disqualify Counsel must be
23 DENIED.
24
25 Date:
IT IS SO ORDERED.
/ti;tw~. 2013
--,~
26
27
28
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Ilcv2611-JAH(KSC)
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