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CERTAIN UNDERWRITERS AT LLOYD'S LONDON v. ARGONAUT

April 21, 2003

CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Highlands Insurance Company (UK), Ltd., and London & Edinburgh General Insurance Company, Ltd., Petitioners,
v.
ARGONAUT INSURANCE COMPANY, a California corporation, Respondent.



The opinion of the court was delivered by: EDWARD CHEN, Magistrate Judge.

ORDER GRANTING RESPONDENT'S MOTION TO DISQUALIFY (Docket No. 27)
This matter came on for hearing on April 10, 2003. Peter Whalen of Hancock, Rothert & Bunshoft appeared on behalf of the Petitioners and Mitchell Orpett of Tribler Orpett & Meyer appeared on behalf of Respondent. Having considered the arguments in support of and in opposition to Argonaut Insurance Company's motion to disqualify Hancock, Rothert & Bunshoft as counsel for Certain Underwriters at Lloyd's, London, and the argument of counsel, and good cause appearing therefor,

[264 F. Supp.2d 917]

      the Court hereby GRANTS the motion.

  I. FACTUAL BACKGROUND

  In the underlying motion in this case, Petitioners Certain Underwriters at Lloyd's, London, Highlands Insurance Company, Ltd. and London & Edinburgh General Insurance Company, Ltd. ("Certain Underwriters") seek to disqualify George Gottheimer, Jr., the neutral umpire ("Umpire") of a pending arbitration proceeding between Certain Underwriters and Argonaut Insurance Company ("Argonaut") and to vacate certain orders issued by the Umpire. Respondent Argonaut moves to dismiss, pursuant to Rule 12(b)(6), or to stay, until after the arbitration hearing, both of Certain Underwriters' motions.

  The parties entered into certain reinsurance agreements ("Reinsurance Agreements") in favor of Argonaut. Certain Underwriters' Mot. to Disqualify at 3-4. The pending arbitration arose from a dispute regarding coverage under these reinsurance contracts. Argonaut had submitted claims to Certain Underwriters in the approximate amount of $2.5 million for legal expenses from an underlying coverage action between Argonaut and an alleged insured. Id. at 4-5. Certain Underwriters denied coverage and initiated arbitration proceedings against Argonaut on December 14, 2001. Id. at 5. Each party appointed a party arbitrator, and these party arbitrators nominated two candidates for the umpire position. Id. Mr. Gottheimer was selected as the umpire. Id.

  At issue in this suit are two Interim Orders issued by the Umpire. Interim Order #2 required Certain Underwriters to make an interim cash payment or post an irrevocable letter of credit in the amount of $2,535,491.32 by December 31, 2002. Interim Order #3 imposed sanctions on Certain Underwriters of $10,000 a day, dating back to January 17, 2003, for each day in which Certain Underwriters are not in compliance with Interim Order # 2. In the underlying on-going arbitration proceedings, Certain Underwriters are represented by the law firm of Lord Bissell & Brook.

  Certain Underwriters filed an action in San Francisco Superior Court styled as a petition to disqualify the arbitration Umpire and to vacate Interim Orders #2 and #3. That action was removed to this Court on March 13, 2003. The law firm of Hancock, Rothert & Bunshoft ("Hancock") represents Certain Underwriters in this petition. On March 14, 2003, counsel for Argonaut wrote to Hancock, demanding that it withdraw as counsel because of conflict of interest, since Hancock previously represented and currently represents a subsidiary of Argonaut, Argonaut Northwest Insurance Company ("Argonaut NW"), in other matters. Argonaut's MPA to Disqualify; Exh. B. On March 21, 2003, Hancock responded in a letter indicating its belief that it did not believe that Argonaut was a client of Hancock because Argonaut and Argonaut NW are separate entities. Id. at Exh. D. Hancock also took the position that it was not treating Argonaut as a present client because neither Argonaut nor Argonaut NW were the lead underwriters in the London Market Insurers cases in which Hancock represents participating insurers. Id.

  On April 2, 2003, Argonaut moved to disqualify Hancock as counsel for Certain Underwriters, arguing that such representation is adverse to Hancock's current representation of an Argonaut subsidiary, Argonaut NW, which should be treated as a single entity with Argonaut for conflict purposes. Argonaut's MPA to Disqualify, at 4-7. Argonaut also argues that Hancock should be disqualified based upon its

[264 F. Supp.2d 918]

      former representation of Argonaut in matters substantially related to the present litigation, which involves contract interpretation and reinsurance industry custom and practice related to asbestos bodily injury claims. Id. at 7-10. The Court scheduled a hearing on shortened time for April 10, 2003.

  II. LEGAL ANALYSIS

 A. Disqualification Generally

  The right to disqualify counsel is a discretionary exercise of the trial court's inherent powers. Visa U.S.A., Inc. v. First Data Corp., 241 F. Supp.2d 1100, 1104 (N.D.Cal. 2003) (citing United States v. Wunsch, 84 F.3d 1110, 1114 (9th Cir. 1996)). Pursuant Local Rule 11, every attorney before this Court must "comply with the standards of professional conduct required of the members of the state Bar of California." N.D. Cal. Civil Local Rule 11(a)(1). Accordingly, in this matter the Court applies California law. See e.g., Asyst Technologies v. Empak, Inc., 962 F. Supp. 1241, 1242 (N.D.Cal. 1997); Elan Transdermal Ltd. v. Cygnus Therapeutic Systems, 809 F. Supp. 1383, 1387 (N.D.Cal. 1992).

  Disqualification "ultimately involves a conflict between a client's right to chosen counsel and the need to maintain ethical standards of professional responsibility." State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422, 1428, 86 Cal.Rptr.2d 20 (1999). When considering the disqualification of counsel based upon a conflict of interest, courts must consider a host of relevant factors:
[T]he court must weigh the combined effect of a party's right to counsel of choice, an attorney's interest in representing a client, the financial burden on a client of replacing disqualified counsel and any tactical abuse underlying a disqualification proceeding against the fundamental principle that the fair resolution of disputes within our adversary system requires vigorous representation of parties by independent counsel unencumbered by conflicts of interest.
Allen v. Academic Games Leagues of America, 831 F. Supp. 785, 789 (C.D.Cal. 1993) (citing In re Lee G., 1 Cal.App.4th 17, 26, 1 Cal.Rptr.2d 375 (1991)). On the one hand, because a motion to disqualify is often tactically motivated, and can be disruptive to the litigation process, it is a drastic measure that is generally disfavored. Visa U.S.A., 241 F. Supp.2d at 1104. At the same time, "the paramount concern must be the preservation of public trust both in the scrupulous administration of justice and in the integrity of the bar." State Farm Mut., 72 Cal.App.4th at 1428, 86 Cal.Rptr.2d 20.

 B. Concurrent Representation

  The starting point for analyzing this issue is Rule 3-310 of the Rules of Professional Conduct, which states:
(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 (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or (3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.
Rules of Professional Conduct of the State Bar of California, Rule 3-310(C).

  Rule 3-310 prohibits, in the absence of each client's informed consent, concurrent representation of clients whose interests are adverse. Flatt v. Superior Court, 9 Cal.4th 275, 284, 36 ...


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