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Lennar Mare Island, LLC v. Steadfast Insurance Co.

United States District Court, E.D. California

April 7, 2015

LENNAR MARE ISLAND, LLC, Plaintiff,
v.
STEADFAST INSURANCE COMPANY, Defendant. AND RELATED COUNTERCLAIMS

ORDER

KIMBERLY J. MUELLER, District Judge.

Lennar Mare Island, LLC (LMI), CH2M Hill Constructors, Inc. (CCI), and Steadfast Insurance Company dispute their obligations in the clean-up of Mare Island, a former U.S. Navy base. Several motions are pending: LMI's motions for partial summary judgment as to the definition of "Government Authority" and "Known Pollution Condition"; Steadfast's motions for leave to amend its counterclaim and for relief from the magistrate judge's discovery order; and CCI's motion to disqualify Steadfast's counsel. On February 27, 2015, the court held a hearing on CCI's motion to disqualify, as this motion must be decided before the others. Ryan Werner appeared for Plaintiff Lennar Mare Island, LLC. Deborah Ballati and Amanda Hairston appeared for CCI. Merri Baldwin, Ethan Miller, and Brandon Rainey appeared for Steadfast Insurance Company. After considering the parties' briefing and arguments presented at the hearing, the court GRANTS the motion to disqualify.

I. BACKGROUND

A. General Background

The United States Navy operated a base at Mare Island in Vallejo, California from 1852 until 1996. Joint Stmt. Discovery Dispute 2, ECF No. 63. After a century of use, the land had become contaminated. Id. After closing the base, the Navy conveyed the land to the City of Vallejo, and Vallejo in turn conveyed a portion of the base to LMI. Id. With the land came obligations to investigate and clean up pollution. Id. at 2-3. LMI entered a contract with CCI in which CCI agreed, first, for a fixed price, to investigate and clean up certain known contamination in LMI's parcel of land, and second, to perform other clean-up tasks for additional compensation. Id. at 3. The contract price included money the Navy had provided to purchase three environmental insurance policies issued by Steadfast. Id. Two of these insurance policies are the subject of this lawsuit: (1) the Remediation Stop Loss or RSL Policy, now expired, which provided coverage to CCI should the cost of its cleanup of "Known Pollution Conditions" exceed a specific amount; and (2) the Environmental Liability Insurance or ELI Policy, which provides coverage to LMI for the cost of remediating pollution other than the Known Pollution Conditions, along with coverage for certain other conditions. Id.

In this action, LMI alleges Steadfast has caused it several million dollars in damages by refusing to pay for claims under the ELI policy or by delaying payments. Id. at 5; First Am. Compl. ¶¶ 16-17, 25-26, 30-31, ECF No. 22. It also seeks declaratory relief that Steadfast must pay certain submitted claims. First Am. Compl. ¶ 34. Steadfast removed the case to federal court in August 2012. Not. Removal 1-2, ECF No. 1. A few days after removal, Steadfast answered LMI's complaint and asserted a counterclaim against both LMI and CCI, seeking declaratory relief in Steadfast's favor. Answer, ECF No. 4; Counterclaim, ECF No. 5. At this time, Steadfast was represented by attorneys with the firm of Sinott, Puebla, Campagne & Curet, APLC. Counterclaim 1, 5, ECF No. 5. In August 2014, several attorneys from Hogan Lovells U.S. LLP associated as additional counsel for Steadfast. Notices of Appearance, ECF Nos. 126-129.

In December 2014 and January 2015, the parties filed a flurry of motions. On December 19, 2014, LMI moved for partial summary judgment of the definition of "Governmental Authority." Mot. Summ. J., ECF No. 160. On the same day, Steadfast moved to amend its counterclaim.[1] Mot. Am. Counterclaim, ECF No. 161. On January 16, 2015, Steadfast moved for partial relief from the magistrate judge's discovery order. ECF No. 176. On the same day, CCI moved to disqualify Hogan Lovells. ECF No. 180. Finally, on January 30, 2015, LMI moved for partial summary judgment of the definition of "Known Pollution Condition." ECF No. 187. As noted, the court held a hearing on February 27, 2015, but heard arguments only on the motion to disqualify. After the hearing, the court allowed Steadfast to submit a sur-reply to address additional evidence offered for the first time in CCI's reply brief on disqualification. See Ballati Reply Decl., ECF No. 220; Wright Reply Decl., ECF No. 223; Brierly Decl., ECF No. 224; McCoy Reply Decl., ECF No. 225; Minute Order, ECF No. 242. Steadfast filed its sur-reply on March 18, 2015. ECF No. 251.

B. Hogan Lovells's Relationship to the Parties

In November 2005, Hogan Lovells's predecessor firm, Hogan & Hartson LLP, began representing CCI's parent corporation, CH2M HILL Companies, Ltd. (CH2M). Dover Decl. ¶ 3, ECF No. 199. Over the next several years, Hogan Lovells represented CH2M in several capacities. Thomas McCoy, CH2M's general counsel since September 2014, submitted a declaration describing the matters in which Hogan Lovells provided legal advice to CH2M and its subsidiaries:

[S]ensitive corporate governance and board fiduciary issues; capital markets strategy to raise capital as well as divestitures to improve the company's balance sheet; amendments to the company charter and an associated Securities and Exchange Commission Proxy Solicitation and Special Shareholder meeting; transfer pricing issues; Securities and Exchange Commission compliance issues; Foreign Corrupt Practices Act compliance; a significant United Kingdom pension plan regulatory matter; and... an internal investigation into project accounting based on a whistleblower complaint.

McCoy Decl. ¶¶ 2, 5, ECF No. 182. Mr. McCoy attached to his declaration a copy of an October 2014 presentation from Hogan Lovells about the firm's representation of CH2M. See id. Ex. A, ECF No. 182-1. The presentation, although mostly redacted, describes Hogan Lovells's assistance "with the purchase of the then Lockheed Hanford company, " "the acquisition of Halcrow in 2011, " and "on a variety of regulatory matters (government contracts, export control, FCPA, sanctions, nuclear regulatory) in both the U.S. and E.U. as well as on corporate matters in both the U.S. and U.K." Id. Ex. A, at 2. Hogan Lovells has provided legal advice to Michael Szomjassy, the CH2M board member responsible for the Mare Island project, who negotiated with the other participants in that project. Wright Decl. ¶ 10, ECF No. 181. CH2M's general counsel, board of directors, and senior management consider Hogan Lovells to be CH2M's "top strategic law firm." McCoy Decl. ¶ 8. Mr. McCoy's declaration reports CH2M "is wholly dependent on Hogan Lovells for nearly all of the most important corporate and regulatory issues currently facing the company." Id. Hogan Lovells billed CH2M approximately $1 million for its work in 2014. Id. ¶ 9. Most of its work for CH2M has been in Colorado and Washington, D.C. Dover Decl. ¶ 2.

In this case, in July 2014, after an unsuccessful settlement conference, Steadfast's counsel at the time, David Campagne, told Steadfast his firm did not have the resources to continue as lead counsel. Campagne Decl. ¶¶ 3-4, ECF No. 198; Duggan Decl. ¶ 3, ECF No. 200. Steadfast began seeking new counsel and was referred to Ethan Miller. Duggan Decl. ¶ 3. Mr. Miller had represented Steadfast previously in a similar matter and had since joined Hogan Lovells, a firm with resources Steadfast considered sufficient for this case. Id. Steadfast believes its decision to hire Hogan Lovells was correct, particularly thanks to Mr. Miller's familiarity with Steadfast's employees and attorneys, many of whom it believes will be deposed here. Id. ¶ 4. Thomas Duggan, the Steadfast team manager for environmental claims, considers this litigation "one of the largest matters Steadfast Environmental Claims has faced in many years." Id. ¶¶ 1-2. He believes that should he lose the assistance of Hogan Lovells and Mr. Miller, "Steadfast will be significantly hampered in its ability to meet the serious allegations in this case." Id. ¶ 5

Steadfast contacted Mr. Miller about this case in July 2014. Miller Decl. ¶ 4, ECF No. 20. Hogan Lovells checked for conflicts of interest and discovered it represented CH2M, although at the time the firm was not providing legal services directly to CCI. Id.; Dover Decl. ¶ 6. Hogan Lovells's only engagement directly with CCI occurred in 2008, when CCI was a joint client with another CH2M affiliate, CH2 Savannah River Company. Dover Decl. ¶ 6. In that matter, a mediation effort, Hogan Lovells advised CCI in a fee dispute after CCI had remediated a former government site. Id.; Wright Decl. ¶ 9. The matter did not involve any insurance or coverage disputes. Dover Decl. ¶ 6; Dover Sur-Reply Decl. ¶ 5, ECF No. 251-3.

Agnes Dover, the Hogan Lovells partner who works most with CH2M, learned Steadfast had contacted Mr. Miller and then called Kirby Wright, CH2M's lead on litigation matters. Dover Decl. ¶¶ 7-8. She believed Hogan Lovells's representation of Steadfast would create no conflict of interest thanks to a prospective waiver of conflicts in CH2M's original engagement letter, but wanted Mr. Wright to know about it. Id. ¶ 8. Mr. Wright remembers he said CH2M was a company that tended to honor its agreements and would review the engagement letter. Wright Decl. ¶ 3; Dover Sur-Reply Decl. ¶ 6. Ms. Dover recalls Mr. Wright reassured her CH2M would not move to disqualify Hogan Lovells. Dover Decl. ¶ 8. Ms. Dover asked Mr. Wright what he would do in her shoes, and he said he would do what was in the law firm's best interest. Wright Decl. ¶ 4. Ms. Dover interpreted this to mean Hogan Lovells should proceed with the Steadfast litigation, Dover Decl. ¶ 8; Mr. Wright avers he did not intend to give consent, Wright Decl. ¶ 4. After their conversation, Ms. Dover sent Mr. Wright an email to confirm Hogan Lovells would continue to represent both Steadfast and CH2M, and to affirm her belief no further consent was needed. Dover Decl. ¶ 9; id. Ex. B, ECF No. 199-2. She reassured him no Hogan Lovells lawyer who represented CH2M would also work on the Steadfast case. Id. Ex. B. She did not hear from Mr. Wright again, and interpreted his silence as consent. See Dover Sur-Reply Decl. ¶ 7 ("Based on my conversation with Mr. Wright... and the fact that neither he nor anyone else in the company objected to our relying on the advance waiver, I had a good faith belief that [CH2M] intended to honor the advance waiver."). Hogan Lovells has not requested, and CH2M and CCI have not provided, any further consent, written or otherwise. Mr. McCoy states that CH2M and CCI have not and will not consent to Hogan Lovells's representation of Steadfast here. McCoy Decl. ¶ 12.

On August 20 and 21, 2014, Ethan Miller, David Skaar, Benjamin Diggs, and Neil O'Hanlon of Hogan Lovells associated as additional counsel for Steadfast. Notices of Appearance, ECF Nos. 126-129. Blaise Curet, Jane Baker, Stephen Wong, and William Campagne of Sinnott, Puebla, Campagne & Curet continue to represent Steadfast as co-counsel. Since August, Hogan Lovells has billed Steadfast several thousand hours for the work of ten attorneys, three paralegals, and other support professionals. Miller Decl. ¶¶ 6, 15. Hogan Lovells attorneys have reviewed and produced documents, responded to discovery requests, conducted interviews on the East Coast and in Southern California, visited the Mare Island site, negotiated deposition schedules, prepared for depositions, strategized with Steadfast, and prepared and filed the currently pending motions. Id. ¶¶ 7-14.

On December 17, 2014, Mr. Miller contacted Deborah Ballati, CCI's counsel, to request CCI stipulate to Steadfast's filing of a first amended counterclaim. Ballati Decl. ¶ 2, ECF No. 183. Ms. Ballati did not agree to the stipulation and explained her understanding that the court's scheduling order did not allow any further pleadings without a showing of good cause. Id. ¶ 3. On December 19, 2014, Steadfast filed a motion to amend its counterclaim. Mot. Am. 14, ECF No. 161. The proposed counterclaim included several new claims, including for misrepresentation and accounting irregularities. Proposed Am. Counterclaim ¶¶ 70-110, ECF No. 164-1. A few weeks later, on January 13, 2015, Mr. McCoy, CH2M's general counsel, contacted Ms. Dover about Hogan Lovells's role in this case. McCoy Decl. ¶ 10. He said that the firm's representation of Steadfast was a "serious concern, " and worried Hogan Lovells attorneys might seek to depose CH2M's senior executives. Dover Decl. ¶ 14. A day after Mr. McCoy spoke with Ms. Dover, CCI's counsel contacted Hogan Lovells to confirm it intended to file a motion to disqualify. Ballati Decl. ¶ 4. After filing its motion, CCI has refused to allow Hogan Lovells to depose CCI witnesses. Miller Decl. ¶ 21. Hogan Lovells has continued to make Steadfast witnesses available for deposition. Id. ¶ 22.

II. DISCUSSION

A. Conflicts of Interest in General

This District has adopted the Rules of Professional Conduct of the State Bar of California, and any applicable state court decisions, as its own standards of professional conduct. E.D. Cal. L.R. 180(e). The District's local rules require both familiarity and compliance with California's Rules. Id. California Rule of Professional Conduct 3-310 provides, in relevant part,

A member [of the State Bar of California] 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.
...
A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has ...

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