Legacy Villas at La Quinta Homeowners Association, a California non-profit mutual… v. Centex Homes, a Nevada General partnership

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LEGACY VILLAS AT LA QUINTA
HOMEOWNERS ASSOCIATION, a
California non-profit mutual benefit
corporation,
Plaintiff,
And
PETERS & FREEDMAN, LLP,
Movant - Appellant,
v.
CENTEX HOMES, a Nevada General
partnership; CENTEX REAL ESTATE
CORPORATION; CENTEX REAL
ESTATE HOLDINGS LP, a Delaware
limited partnership; NOMAS CORP, a
Nevada corporation,
Defendants - Appellees.
No. 12-57189
D.C. No. 5:11-cv-00845-VAP-OP
MEMORANDUM*
LEGACY VILLAS AT LA QUINTA
HOMEOWNERS ASSOCIATION, a
California non-profit mutual benefit
No. 13-56241
D.C. No. 5:11-cv-00845-VAP-OP
FILED
SEP 22 2015
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.

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corporation,
Plaintiff,
And
PETERS & FREEDMAN, LLP,
Movant - Appellant,
v.
CENTEX HOMES, a Nevada General
partnership; CENTEX REAL ESTATE
CORPORATION, a Nevada corporation;
CENTEX REAL ESTATE HOLDINGS
LP, a Delaware limited partnership;
NOMAS CORP, a Nevada corporation,
Defendants - Appellees.
Appeal from the United States District Court
for the Central District of California
Virginia A. Phillips, District Judge, Presiding
Argued and Submitted March 3, 2015
Pasadena, California
Before: PREGERSON, FERNANDEZ, and NGUYEN, Circuit Judges.
Appellant law firm Peters & Freedman, LLP appeals (1) the district court’s
April 30, 2012 order disqualifying the law firm from representing La Quinta
Homeowners Association (“the Homeowners Association”) against Centex Homes
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(“Centex”), and (2) the district court’s November 7, 2012 order finding the law
firm in contempt of the disqualification order.
We have jurisdiction under 28 U.S.C. § 1291.1 Reviewing the orders for
abuse of discretion, see Kayes v. Pac. Lumber Co., 51 F.3d 1449, 1465 (9th Cir.
1995); Irwin v. Mascott, 370 F.3d 924, 931 (9th Cir. 2004), we reverse.
In 2004, Centex, a developer of residential properties, created the
Homeowners Association to manage Legacy Villas, one of Centex’s condominium
communities. In the beginning, Centex employees served on the Homeowners
Association’s Board of Directors as the controlling majority.2 In May 2006, the
1 Centex argues that Peters & Freedman lacks standing to appeal the
disqualification order and that the appeal of the disqualification order is moot. We
disagree. By asserting an injury of its own, Peters & Freedman has standing to
appeal the disqualification order. Cf. In re Grand Jury Subpoena Issued to
Chesnoff, 62 F.3d 1144, 1145 (9th Cir. 1995) (“Appellants [lack standing because
they] have not identified any right of their own that has been affected by the
district court’s order. Instead, by their own account, they seek to protect their
client’s right to counsel of his choice.”); Valley Forge Christian College v.
Americans United for Separation of Church & State, Inc., 454 U.S. 464, 472
(1982). Despite the settlement of the underlying case, the appeal of the
disqualification order is not moot because the disqualification order exposes Peters
& Freedman to “further sanctions by the bar and portends adverse effects upon
counsel’s careers and public image.” Lasar v. Ford Motor Co., 399 F.3d 1101,
1109 (9th Cir. 2005) (quoting Kleiner v. First Nat’l Bank of Atlanta, 751 F.2d
1193, 1200 n.14 (11th Cir. 1985)).
2 Between 2006 and 2008, three to four Centex employees served on the
Board at any given time.
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Homeowners Association retained Peters & Freedman as legal counsel. In May
2008, control of the Homeowners Association was turned over to the homeowners.
During the two year period from 2006-2008 in which Peters & Freedman
represented the Centex-controlled Homeowners Association, Peters & Freedman
attended four Homeowners Association Board meetings and assisted the
Homeowners Association with collecting of delinquent homeowner assessments.
Peters & Freedman also sent two letters to Board members who were Centex
employees. One letter dated December 4, 2006 was sent to Sandy Duff on and
contained advice on a property management agreement. A generic “Developer
Transition Checklist” form was sent to Jayne Carilo and listed documents to be
turned over to the new homeowners-controlled Homeowners Association.
After control of the Board was turned over to the homeowners on May 30,
2008, the Homeowners Association, represented by Peters & Freedman, filed two
lawsuits against Centex. On September 13, 2010, in state court, the Homeowners
Association brought a construction defect action against Centex. On April 14,
2011, also in state court, the Homeowners Association sued Centex for breach of
fiduciary duty, alleging that the Centex-controlled Board mismanaged the
Homeowners Association’s budget and finances. Centex removed this lawsuit to
federal court on June 1, 2011.
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In March 2012, Centex moved to disqualify Peters & Freedman in the
federal action. The district court granted the motion and disqualified Peters &
Freedman on three grounds: a conflict of interest under California Rule of
Professional Conduct 3-310(E), the advocate-witness rule, and the appearance of
professional impropriety under Canon 9 of the Model Rules of Professional
Responsibility. Peters & Freedman withdrew from representing the Homeowners
Association in the federal action. The firm continued to represent the Homeowners
Association in the state construction defect action.
On January 30, 2012, during discovery in the federal action, Centex
subpoenaed records from Personalized Property Management (“PPM”), the
Homeowner Association’s property management company. In April 2012, PPM
produced a disk to Centex containing all of the Homeowner Association’s
electronic records, including a significant amount of privileged materials related to
both the state and federal actions. When Peters & Freedman contacted Centex’s
federal counsel regarding those privileged materials, the district court found Peters
& Freedman in contempt of the disqualification order.
Peters & Freedman timely appealed both orders.
1. The Disqualification Order
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A. Conflict of interest under California Rule of Professional Conduct
3-310(E)
Before an attorney may be disqualified under Rule 3-310(E) from
representing a party in a suit that is adverse to a former client, the party seeking the
attorney’s disqualification must first establish that the attorney represented the
party in a manner giving rise to an attorney-client relationship.3 Civil Serv.
Comm’n v. Superior Court, 163 Cal. App. 3d 70, 76-77 (1984).
The evidence offered by Centex and relied upon by the district court does
not support the finding of an implied attorney-client relationship between Peters &
Freedman and Centex. The letter addressed to Sandy Duff and the Developer
Transition Checklist sent to Jayne Carilo provide advice to the recipients in their
capacities as Homeowners Association Board members, not in their capacities as
Centex employees. The declaration by Jayne Carilo, stating that she understood
Peters & Freedman to be providing her advice in her capacity as a Centex
employee, is also not persuasive evidence of an implied attorney-client
relationship. Centex, as an experienced developer, could not have reasonably
believed that Peters & Freedman represented Centex. See Sky Valley Ltd. P’ship v.
3 Rule 3-310(E) states: “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 obtained confidential information material to the employment.”
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A.T.X. Sky Valley Ltd., 150 F.R.D. 648, 655 (N.D. Cal. 1993) (“We question
whether a commercially sophisticated party that allegedly has a multi-million
dollar interest in a project would form an attorney-client relationship without a
shred of paper memorializing even the most basic terms of that alleged
relationship.”).
Moreover, the totality of the circumstances weighs against the existence of
an implied relationship. The contacts between Peters & Freedman and Centex
were limited in nature and quantity, there is no evidence that Centex employees
divulged any confidential information to Peters & Freedman, and there is no
evidence that Centex paid for any of Peters & Freedman’s services. See Fink v.
Montes, 44 F. Supp. 2d 1052, 1060 (C.D. Cal. 1999) (listing some factors to
consider when evaluating whether an implied attorney-client relationship exists).
Because no attorney-client relationship–implied or actual–existed between Peters
& Freedman and Centex, Peters & Freedman should not have been disqualified
under Rule 3-310(E).
B. The Advocate-Witness Rule
Under the advocate-witness rule, a lawyer cannot serve as an advocate in a
trial in which the lawyer is likely to testify as a witness, unless an exception
applies. Model Rules of Prof’l Conduct R. 3.7; Cal. R. of Prof. Conduct 5-210.
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Because the advocate-witness rule lends itself to the “potential for abuse,” motions
to disqualify under this rule “should be subjected to ‘particularly strict judicial
scrutiny.’” Optyl Eyewear Fashion Int'l Corp. v. Style Cos., Ltd., 760 F.2d 1045,
1050 (9th Cir. 1985).
Centex has not established that disqualification would be proper under this
rule, nor did the district court subject the motion to the appropriate level of
scrutiny. Centex and the district court generally asserted that Peters & Freedman
attorneys are all relevant witnesses to the extent that the attorneys have knowledge
of the firm’s actions in representing the Homeowners Association’s Board, but
Centex only specifically identified one Peters & Freedman attorney who would
serve as a potential witness. Centex has not sufficiently demonstrated–nor did the
district court ask–why every Peters & Freedman attorney is a necessary witness.
The advocate-witness rule does not prohibit attorneys from serving as trial counsel
in a trial where an attorney from the same firm will testify. See Model Rules of
Prof’l Conduct R. 3.7(b); Cal. R. of Prof. Conduct 5-210.
After considering the improbability that all Peters & Freedman attorneys
were necessary witnesses, that this case was scheduled for a bench trial, and the
client’s right to representation by an attorney of his or her choosing, we find that
disqualification of all Peters & Freedman attorneys under the advocate-witness rule
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was not called for. See Lyle v. Superior Court, 122 Cal. App. 3d 470, 481-83
(1981).
C. Appearance of Impropriety under Canon 9 of the Model Code of
Professional Responsibility
“Although this court has held that Canon 9 alone can be a sufficient ground
for disqualification, the circumstances are extreme, i.e., when the alleged
impropriety is clear, affects the public view of the judicial system or the integrity
of the court, and is serious enough to outweigh the parties’ interests in counsel of
their own choice.” Optyl Eyewear Fashion Int’l Corp., 760 F.2d at 1049.
Disqualification under Canon 9 is not warranted in this case.
2. The Contempt Order
Because we find that the district court’s disqualification order is invalid, we
also find that the contempt order is invalid. Kirkland v. Legion Ins. Co., 343 F.3d
1135, 1142 (9th Cir. 2003) (“The validity of a contempt adjudication is based on
the legitimacy of the underlying order.”).
For these reasons, we REVERSE the disqualification order and VACATE
the contempt order and sanctions. Costs are awarded to Peters & Freedman.
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