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Blue Water Sunset, LLC v. Philip Markowitz

February 2, 2011

BLUE WATER SUNSET, LLC, PLAINTIFF AND APPELLANT,
v.
PHILIP MARKOWITZ, DEFENDANT AND RESPONDENT.



(Los Angeles County Super. Ct. No. BC316696) APPEAL from an order of the Superior Court of Los Angeles County. Rex Heeseman, Judge.

The opinion of the court was delivered by: J. Ashmann-gerst

CERTIFIED FOR PUBLICATION

Affirmed in part and reversed in part.

Blue Water Sunset, LLC (Blue Water) filed a motion to disqualify attorney Gary Kurtz (Kurtz) from a derivative action during which he briefly represented certain defendants as well as limited liability company plaintiffs*fn1 at the same time. The trial court denied the motion and Blue Water appealed. Pursuant to Forrest v. Baeza (1997) 58 Cal.App.4th 65, 74-75 (Forrest), Kurtz should have been disqualified from representing the limited liability company plaintiffs. In reversing in part and affirming in part, we announce a limited exception to the rule that a complaining party lacks standing to seek disqualification of an attorney unless the party and attorney have some sort of attorney-client or fiduciary relationship. If an attorney simultaneously represents a limited liability company and a member with conflicting interests in a derivative action filed by the second and only other member, and if the limited liability company's consent to concurrent representation is required by California Rules of Professional Conduct, rule 3-310,*fn2 the second member has vicarious standing to move to disqualify. Vicarious standing is based on the limited liability company's standing under existing case law and the second member's unilateral right under rule 3-600 to decide for the limited liability company whether to waive the conflict of interest.

FACTS*fn3

Background; initiation of this action

Blue Water and Philip Markowitz (Markowitz) are each 50 percent members of Rail Prop LLC (Rail Prop), First View LLC (First View) and Markowitz Investment Group LLC (Markowitz Investment) (collectively the limited liability companies). Separately, Markowitz owns an entity called Four Star Properties, LLC (Four Star). In 2004, Blue Water sued Markowitz and asserted, inter alia, causes of action for dissolution of the limited liability companies, breach of contract, breach of fiduciary duty, accounting, declaratory relief, fraud and fraudulent conveyance. Allegedly, Markowitz misappropriated income and conveyed real estate assets of the limited liability companies to others, including Four Star, without consideration. Blue Water maintained that in order to accomplish the fraudulent transfer of assets, Markowitz conspired with a co-defendant by the name of Douglas Kramer (Kramer). To the degree that the causes of action asserted were derivative in nature, the limited liability companies were named as nominal defendants.*fn4 (Blue Water Sunset, LLC v. First View, LLC, supra, B204012 [nonpub. opn.].)

The receivership estate

The trial court appointed a receiver for real property owned by the limited liability companies that consisted primarily of a truck parking facility. In October 2005, the trial court issued an amended order transferring property owned by Four Star into the receivership estate. The order was based on evidence that Markowitz caused Rail Prop to deed property to Four Star, he was operating both the receivership property and the Four Star property as a parking lot, and he was not turning over the rental income from the properties to the receiver.*fn5

Kurtz and Sandler

Kurtz and Steven Sandler (Sandler) shared an office, a secretary and amenities. Sandler was Four Star's attorney of record. He eventually introduced Kurtz to Markowitz and, in November 2005, Kurtz substituted in as the attorney for Markowitz. Soon thereafter, Kurtz replaced Sandler as Four Star's attorney and, later, Sandler became the attorney for the limited liability companies. Markowitz filed a cross-complaint and sued derivatively and individually against Blue Water and the limited liability companies.*fn6

The demurrer; the appeal

On behalf of Markowitz, Kramer, Four Star and the limited liability companies, Kurtz prepared and filed demurrers to the twelfth and thirteenth causes of actions for fraud and fraudulent conveyance. The papers argued: Each of the challenged claims was derivative and Blue Water lacked standing because it did not satisfy the pleading requirements imposed on it by Corporations Code section 800, subdivision (b).*fn7 The fraud claim was time-barred, and the fraudulent conveyance claim was factually deficient because, inter alia, Blue Water did not allege that it was a creditor with a right to payment and the limited liability companies were insolvent. Kurtz appeared at the October 1, 2007, hearing on behalf of Markowitz and Four Star. In addition, Kurtz made a special appearance on behalf of the limited liability companies because Sandler was not in attendance.*fn8 (Blue Water Sunset, LLC v. First View, LLC, supra, B204012 [nonpub. opn.].)

The trial court sustained the demurrers without leave to amend on the grounds that Blue Water failed to satisfy Corporations Code section 800, subdivision (b), both claims were barred by the three-year statute of limitations, and the fraudulent conveyance claim was factually deficient. Four Star and Kramer were subsequently dismissed. Blue Water filed an appeal and argued that the demurrers were improperly sustained as to all of the defendants. (Blue Water Sunset, LLC v. First View, LLC, supra, B204012 [nonpub. opn.].) Kurtz filed a respondent's brief on behalf of Four Star and Markowitz and Sandler filed a joinder in that brief on behalf of the limited liability companies and Kramer. We affirmed the dismissals of Four Star and Kramer and held that the orders with respect to Markowitz and the limited liability companies were not appealable. (Blue Water Sunset, LLC v. First View, LLC, supra, B204012 [nonpub. opn.].)

The motion to disqualify

On December 16, 2008, Blue Water filed a motion arguing that Kurtz was subject to automatic disqualification because he concurrently represented clients with adverse interests and did not obtain the conflict waivers required by rule 3-310 and rule 3-600. Markowitz opposed the motion on various grounds, including that Blue Water lacked standing.

The motion was denied. In its written order, the trial court concluded that the rule of mandatory disqualification did not apply because Kurtz did not concurrently represent the limited liability companies and Markowitz at the time of the hearing. The trial court found that disqualification was inappropriate because Kurtz did not breach a duty of confidentiality to the ...


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