The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge
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 individual claims for express indemnity, breach of contract, 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;*fn1 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.*fn2
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.
This case originally arose out of a failed business venture between Solorio and Deane, and their various alleged co-conspirators. 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. (SAC, filed June 1, 2009, ¶ 44.) 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. (Id. at ¶ 54.) 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.) Natomas was given a 45 percent 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.) In October 2004, Solorio bought an additional 85 acres. The development project was named Vintage Creek, and Sinadinos formed another limited liability company, Vintage Creek LLC, to be associated with the project. (Id. at ¶ 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 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 down-payments on the various parcels, in amounts of up to $4 million for each project." (Counter- and Third-Party Claim, filed June 1, 2009, at ¶ 9.) Deane further alleges that Natomas is "comprised of two "camps" of persons, those aligned with Solorio and those who are the friends and family of Deane." (Id. at ¶ 10.) 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 investors who are not controlling members. Two of the investors 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." (Id. at ¶ 12.) 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. (Id. at ¶ 18). 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 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 mandate to compel inspection of records. (FAC at ¶¶ 192-251.) 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. (Opp'n to 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 voluntary dissolution of Natomas and breach of fiduciary duties by Solorio and others. (Barth Decl., filed Aug. 7, 2009, at ¶ 5, Ex. C.) Barth initially represented Solorio in the State Court 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. (Opp'n RJN, filed August 7, 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 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 to ...