Atmosphere Hospitality Management, LLC v. Shiba Investments, Inc. et al

Filing 255

ORDER granting 195 Motion to Disqualify Counsel. Signed by U.S. District Judge Karen E. Schreier on 6/5/2015. (KC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
ATMOSPHERE HOSPITALITY
MANAGEMENT, LLC,

CIV. 13-5040-KES

Plaintiff,
ORDER GRANTING MOTION
TO DISQUALIFY COUNSEL

vs.
ZELJKA CURTULLO,
Defendant,
and
SHIBA INVESTMENTS, INC.,
KARIM MERALI, and
Defendants and
Third-Party Plaintiffs,
vs.
JAMES HENDERSON,
Third-Party Defendant.

Plaintiff, Atmosphere Hospitality Management, LLC, and third-party
defendant, James Henderson (collectively, Atmosphere), move to disqualify
Courtney Clayborne as counsel for defendants/third-party plaintiffs, Shiba
Investments, Inc., and Karim Merali (collectively, defendants). Defendants
oppose Atmosphere’s motion to disqualify counsel. For the following reasons,
Atmosphere’s motion is granted.

BACKGROUND
Atmosphere brought this action in May 2013 against defendants to
resolve issues related to a License Agreement and a Property Management
Agreement between the parties that allowed Shiba to operate a hotel it owned
under Atmosphere’s brand, Adoba®. Atmosphere alleges defendants breached
the agreements, tortiously interfered with Atmosphere’s business expectancy,
defamed Atmosphere, fraudulently induced Atmosphere to enter into the
agreements, committed deceit, misappropriated Atmosphere’s trade secrets,
and converted Atmosphere’s property. See Docket 37. Defendants filed a thirdparty complaint against James Henderson and counterclaims against
Atmosphere alleging breach of the agreements, conversion of defendants’
property, and tortious interference with defendants’ business expectancy.1 See
Docket 46; Docket 47.
Atmosphere brings this motion to disqualify Clayborne as counsel
because Atmosphere believes he is a necessary witness in this case.
Atmosphere contends that it will be necessary to call Clayborne as a witness to
clarify inconsistent statements given by Merali and Clayborne at various stages
of the discovery process, to testify to Clayborne’s role in drafting and executing
the License Agreement and Property Management Agreement, and to
authenticate and provide foundation for admission into evidence of certain
evidence.

Defendants also originally asserted Henderson had violated the
Racketeer Influenced and Corrupt Organizations Act (RICO). See Docket 8. This
claim was later dismissed. See Docket 67.
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Specifically, Atmosphere argues Clayborne’s testimony is relevant to the
following material factual disputes: (1) the timing of changes made to the
License Agreement and Property Management Agreement; (2) the identity of
those making the changes; (3) the knowledge of the parties regarding the
changes; and (4) the authenticity of a December 31, 2011, email. Atmosphere
states all four fact questions are relevant to its claim of fraudulent inducement.
Atmosphere further states, in relation to its claim of tortious interference with
business expectancy, that Clayborne is a necessary witness because only he
can testify to conversations he had with Atmosphere’s business contacts. In
response, defendants seek to minimize the number of factual disputes and
deny any of the alleged factual inconsistencies are material to the underlying
claims.
LEGAL STANDARD
The court applies South Dakota law to matters regarding the conduct of
counsel in diversity jurisdiction cases. Poulos v. Summit Hotel Prop., LLC, No.
CIV 09-4062-RAL, 2010 WL 2034634, at *8 (D.S.D. May 21, 2010). The South
Dakota Rules of Professional Conduct provide:
(a) A lawyer shall not act as advocate at a trial in which the lawyer
is likely to be a necessary witness unless: (1) The testimony relates
to an uncontested issue; (2) The testimony relates to the nature
and value of legal services rendered in the case; or [sic] (3)
Disqualification of the lawyer would work substantial hardship on
the client; or (4) Except as otherwise provided by statute.

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SDRPC 3.7(a)(1)-(4) (codified at SDCL 16-18 app.)2 The South Dakota Supreme
Court requires a party seeking disqualification of opposing counsel to show
that: “(1) no other means exist to obtain the information than to depose
opposing counsel; (2) the information sought is relevant and nonprivileged; and
(3) the information is crucial to the preparation of the case.” Rumpza v. Donalar
Enter., Inc., 581 N.W.2d 517, 525 (S.D. 1998) (relying on Shelton v. Am. Motors
Corp., 805 F.2d 1323, 1327 (8th Cir. 1986)).
The district court has discretion to grant or deny a motion to disqualify
an attorney, “ ‘and will be reversed only upon a showing of abuse of that
discretion.’ ” Midwest Motor Sports v. Arctic Sales, Inc., 347 F.3d 693, 700 (8th
Cir. 2003) (quoting Petrovic v. Amoco Oil Co., 200 F.3d 1140, 1154 (8th Cir.
1999)). Disqualification motions are subject to particularly strict judicial
scrutiny because there is the potential for abuse by opposing counsel. Id. at
700-01. Despite this high standard of proof, any legitimate doubts created by
the movant must be resolved in favor of disqualification. Meidinger v. City of
Rapid City, No. CIV. 12-5064-JLV, 2014 WL 1653127, at *1 (D.S.D. Apr. 24,
2014) (citing Olson v. Snap Prods., Inc., 183 F.R.D. 539, 542 (D. Minn. 1998));
see also Coffelt v. Shell, 577 F.2d 30, 32 (8th Cir. 1978).
The Shelton test, although normally used to determine whether to allow
the deposition of counsel in current litigation, is “[b]y logical extension
[applicable] to determine whether an opposing counsel may be called as a
witness at trial.” Wilson Rd. Dev. Corp. v. Fronabarger Concreters, Inc., No.
Defendants only address subsection (1) as a defense under Rule 3.7(a).
Therefore, the court will not address subsections (2), (3), and (4).
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1:11-CV-00084-CEJ, 2015 WL 269795, at *1 (E.D. Mo. Jan. 21, 2015).3 While
SDCL 19-1-3 does state if counsel becomes a witness, he cannot continue to
participate in the trial, the statute does not indicate “that when an attorney is
involved in the case, he may never testify as a witness.” In re Estate of Heibult,
653 N.W.2d 101, 105 (S.D. 2002) (emphasis in original). Nevertheless, once an
attorney testifies, he runs the risk that he “ ‘may inadvertently attack his own
client’s credibility by testifying in a matter which conflicts with the client’s
testimony. . . . Thus, it becomes a matter of evidence and not simply a matter
of ethics.’ ” Rumpza, 581 N.W.2d at 524 (quoting Estes v. Millea, 464 N.W.2d
616, 619 n. 4 (S.D. 1990)). When determining whether to disqualify an
attorney, “[i]t is relevant that one or both parties could reasonably foresee that
the lawyer would probably be a witness.” SDCL 16-18, app., Rule 3.7, cmt. 4.
And “if it is foreseeable that current counsel must testify as prohibited by
S.D.C.L. § 19-1-3 . . . counsel should withdraw from representation.”
Bjornestad v. Progressive N. Ins. Co., No. CIV 08-4105, 2009 WL 2588286, at *3
(D.S.D. Aug. 20, 2009).4

The South Dakota Supreme Court has declined to follow a strict
interpretation of the word “trial” and has determined disqualification can occur
“at any time during the proceedings where the attorney testifies and does not
come within one of the recognized exceptions[.]” Rumpza, 581 N.W.2d at 525.
Similarly, the Eighth Circuit Court of Appeals has held the necessary witness
rule “does not normally disqualify the lawyer from performing pretrial activities;
. . . [unless] the ‘pretrial activity includes obtaining evidence which, if admitted
at trial, would reveal the attorney’s dual role.’ ” Droste v. Julien, 477 F.3d 1030,
1035-36 (8th Cir. 2007) (quoting World Youth Day, Inc. v. Famous Artists Merc.
Exch., Inc., 866 F. Supp. 1297, 1303 (D. Colo. 1994)).
3

Atmosphere noticed its intent to use Clayborne as a witness on Dec. 21,
2013. Docket 196 at 21. Also, Clayborne has already been deposed.
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DISCUSSION
I.

Information Not Available Through Other Means
Atmosphere claims Clayborne is a necessary witness because only he

possesses certain information related to Atmosphere’s fraudulent inducement
claim. Atmosphere also alleges that evidence of Clayborne’s direct
communications with Royal Realties relates to Atmosphere’s allegation of
tortious interference with business expectancy. Lastly, Atmosphere claims
Clayborne is essential to authenticate and identify documents that will be
introduced as evidence under Federal Rules of Evidence 9015 and are related to
both claims.
Atmosphere states that throughout the course of discovery Merali has
given conflicting testimony regarding the timeline of the drafting of the
agreements, who made changes to the agreements, where the changes were
made, and who knew of the changes. While Merali and Clayborne testified that
only Merali, Clayborne, and Henderson were privy to any conversations
regarding the ongoing drafting of the agreements, Atmosphere points out that
overall, Merali’s testimony conflicts with Henderson’s testimony and
Clayborne’s testimony. Other discovery responses are also conflicting, and
Atmosphere has not been able to verify much of the information. This includes,
but is not limited to, facts surrounding any conversations regarding changes to

To authenticate or identify an item introduced as evidence, there must
be “evidence sufficient to support a finding that the item is what the proponent
claims it is.” Fed. R. Evid. 901(a). This includes “[t]estimony that an item is
what it is claimed to be.” Fed. R. Evid. 901(b)(1).
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the agreements, what changes were made on the date Henderson signed the
agreements, and who made those changes. See Docket 196 at 5-14.
Also, Atmosphere states the exhibits presented at Clayborne’s deposition
were screen shots from Clayborne’s computer. During his deposition Clayborne
acknowledged each screen shot was likely from his computer. Atmosphere
states the exhibits will be introduced at trial with regard to its fraudulent
inducement claim, and Clayborne will be a necessary witness to authenticate
the exhibits for admission.
Defendants argue the information sought is available through multiple
means other than counsel. Defendants claim “[a]s to statements made are [sic]
not made by any party, those are available by asking in [sic] the party whether
or not they made certain admissions whether it be by deposition or written
discovery.” Docket 206 at 6-7. Defendants state there is no conflict with regard
to the existence of the two agreements, and the only contested issue is whether
or not Henderson was aware of specific changes that had been made to the
documents at the time he signed said documents. Docket 206 at 4-5. Further,
defendants argue “[a]ny party, other than counsel, can testify as to who made
changes to the documents.” Docket 206 at 5.
Defendants’ argument is not persuasive. While other witnesses may be
able to testify to certain conversations with Clayborne or that they operated
under the assumption that Clayborne himself made changes to the
agreements, only Clayborne can testify to the changes he personally made to
the agreements, the timing of those changes, and his knowledge of any changes
made by someone other than him. See Rumpza, 581 N.W.2d at 525 (remanding
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the case to determine disqualification “where the attorney’s conduct went
beyond that of giving legal advice” and went to direct participation in a
contested issue).
One purpose of disqualification “is to avoid the possible confusion which
might result from the jury observing the lawyer act in dual capacities–as
witness and advocate.” Droste, 477 F.3d at 1035-36. With the factual questions
surrounding when changes were made to the agreements, and who made them,
there are significant factual disputes for a jury to resolve in addition to
Henderson’s knowledge of the changes and the existence of the two
agreements. Thus, the ability to examine Clayborne “to discover information
peculiarly within counsel’s knowledge and centrally relevant to the issues . . .
may not only be the most expedient approach, but the only realistically
available approach.” Pamida, Inc. v. E.S. Originals, Inc., 281 F.3d 726, 731 (8th
Cir. 2002). Also, defendants do not acknowledge the foundation issue of screen
shots from Clayborne’s computer. Clayborne is the only source available to
establish the foundation for these exhibits. Therefore, based on his
participation in the events leading up to this litigation, Clayborne possesses
information that is not reasonably available from another source and directly
relates to the issues in this case.
II.

Information is Relevant and Nonprivileged
Defendants did not raise the issue of privilege in response to any of

Atmosphere’s allegations. Nevertheless, Atmosphere must prove that the
information is relevant and nonprivileged. See Shelton, 805 F.2d at 1327.

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As previously noted, Merali and Henderson have given conflicting
testimony regarding the timeline, and Atmosphere alleges Clayborne is the only
other witness who could be called to verify what events occurred when. The
issues of when, where, by whom, and to whose knowledge the changes to the
two agreements were made are material and disputed. The evidence sought to
be introduced through Clayborne is also relevant and probative.
Additionally, Atmosphere’s motion relies on information provided as
exhibits through depositions and other documents and answers produced in
the course of discovery. The only assertions of privilege or protection made by
Clayborne during his deposition were with respect to Clayborne’s contacts at
Royal Realties. Even though Atmosphere has the burden to prove information
is nonprivileged, the Shelton test has not changed the rule that the party
claiming privilege has the burden of demonstrating the existence of a privilege.
See First Sec. Sav. v. Kan. Bankers Sur. Co., 115 F.R.D. 181 (D. Neb. 1987). No
privilege log was ever provided, and defendants did not raise the issue of
privilege in their brief pertaining to this matter.
“ ‘If documents otherwise protected by the work-product rule have been
disclosed to others with an actual intention that an opposing party may see the
documents, the party who made the disclosure should not subsequently be
able to claim protection for the documents as work product.’ ” Pittman v.
Frazer, 129 F.2d 983, 988 (8th Cir. 1997) (quoting 8 C. Wright & A. Miller,
Federal Practice and Procedure § 2024 at 209 (3d ed. 1994)). Similarly, “[t]he
failure of a party to provide a court with sufficient information to determine the
question of privilege raises substantial questions concerning the efficacy of the
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objection[.]” Dak., Minn. & E. R.R. Corp. v. Acuity, 771 N.W.2d 623, 636 (S.D.
2009); see also Dziadek v. Charter Oak Fire Ins. Co., No. CIV. 11-4134-RAL,
2014 WL 820049, at *14 (D.S.D. Mar. 3, 2014) (holding state and federal law
require production of a privilege log to assert attorney-client privilege). Because
defendants have failed to establish a factual basis for the protection or privilege
and have also failed to produce a privilege log, on the existing record it does not
appear that the information is privileged.
III.

Information is Crucial to the Preparation of the Case
Atmosphere has the burden to prove that the information sought from

Clayborne is crucial to the preparation of its case. See Shelton, 805 F.2d at
1327. Atmosphere’s claim of fraudulent inducement requires a showing that
defendants committed one of the five acts set forth in SDCL 53-4-5, and
Atmosphere must prove defendants’ fraudulent behavior induced Atmosphere
to act to its detriment. Docket 88 at 5-6. Likewise, Atmosphere’s claim of
tortious interference with a business relationship requires (1) the existence of a
valid business relationship or expectancy (2) of which the interferer has
knowledge, and (3) the interferer acts intentionally and unjustifiably, (4) which
causes harm, and (5) damaged the party who relied upon the relationship or
expectancy. Miller v. Huron Reg’l Med. Ctr., Inc., No. CIV. 12-4138-KES, 2014
WL 1608695, at *2 (D.S.D. Apr. 22, 2014) (citing Selle v. Tozser, 786 N.W.2d
748, 753 (S.D. 2010)).
Part of Atmosphere’s argument for fraudulent inducement relies on the
timing of changes made to the agreements and who knew of those changes.
Similarly, Atmosphere’s argument for tortious interference with business
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expectancy hinges on any communication made by defendants or Clayborne
with the other business. Finally, the documents sought to be introduced into
evidence by Atmosphere relate to its claim of fraudulent misrepresentation and
provide relevant information on the timing of changes made to the agreements
by Clayborne. Atmosphere has therefore met its burden that the information
possessed by Clayborne is crucial to Atmosphere’s preparation of its case.
Clayborne is the only reasonably available and reliable source for certain
nonprivileged information sought that is relevant to resolving disputed factual
questions crucial to the claims in this case. Atmosphere has met its burden of
proof under Shelton to establish Clayborne is a necessary witness. Thus,
Atmosphere’s motion to disqualify Clayborne as counsel for defendants is
granted.
IV.

Insurance Claim
In its reply brief, Atmosphere raises the issue of an alleged insurance

claim discovered during Merali’s deposition. The court does not consider
arguments raised for the first time in reply briefs because the opposing party is
not provided with an opportunity to respond. See Winterboer v. Edgewood Sioux
Falls Senior Living, LLC, No. CIV. 12-4049-KES, 2014 WL 28863 at *4 n.1
(D.S.D. Jan. 2, 2014) (citing Johnson v. Berry, 171 F. Supp. 2d 985, 990 n.3
(E.D. Mo. 2001)). Also, the court does not construe a single paragraph in
Atmosphere’s reply brief, Docket 226 at 13, to be a motion to compel because it
does not comply with the procedures for motions set out in the local rules for
the District of South Dakota, nor does it comply with the requirements for a
motion to compel under Federal Rule of Civil Procedure 37.
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Furthermore, new counsel for defendants would be obligated to
supplement their initial disclosures if it is discovered the initial disclosures are
incomplete or incorrect. Fed. R. Civ. P. 26(e) (requiring supplementation); Fed.
R. Civ. P. 26(a)(1)(A)(iv) (requiring insurance agreements to be disclosed as part
of initial disclosures).
CONCLUSION
Atmosphere has met its burden under Shelton to show that Clayborne is
a material witness, and no exception recognized in South Dakota law is
present. Accordingly, it is
ORDERED that the motion to disqualify (Docket 195) is granted, and
Courtney Clayborne is disqualified from further representation of
defendants/third-party plaintiffs in this matter. Defendants must file a notice
of appearance for their new counsel by July 6, 2015.
Dated June 5, 2015.
BY THE COURT:

/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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