Muscle Improvement Inc.

OCR transcription for search; preserved printed pages are authoritative

Case 2:10-bk-12736-PC Doc 184 Filed 08/31/10 Entered 08/31/10 18:47:23 Desa

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: — FILED =—
; ENTERED | i
3 AUG 31 2010 Ig
‘ inal victencr oe al poeRT, a iat
5 Depuly Clerk
6
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8 UNITED STATES BANKRUPTCY COURT
9 CENTRAL DISTRICT OF CALIFORNIA
190
11 || In re:
12 || Muscle Improvement, Inc., Case No.: 2:10-bk-12736SB
Muscle Improvement - Hawthorne, Inc., Case No.: 2:10-bk-12743SB
13 || Muscle Improvement — Commerce, Inc., Case No.: 2:10-bk-12756SB
Abram Tavera and Ruth Tavera, Case No.. 2:10-bk-12765S6
g Corporation Case No.: 2:10-bk-13094SB
is || Muscle Improvement Holding (consolidated under 2:10-bk-012736SB
Corporation, for administrative purposes)
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Debtors. Chapter 11s
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18 AMENDED OPINION ON
DISQUALIFICATION OF COUNSEL FOR
13 CREDITOR ALLSTATE FINANCIAL
GROUP, INC.
20
21 Date: July 13, 2010
Time: 11:00 a.m.
22 Ctrm: 1575
Floor: 15th
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AUTHENTIPE. s) 1

Case 2:10-bk-12736-PC Doc 184 Filed 08/31/10 Entered 08/31/10 18:47:23 Desc
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1
2 The second meeting took place on
1. Introduction November 23, 2009. Ms. Naimi and debtors’
3 agents designated this meeting as a
Chapter 11" debtors Muscle “consultation,” for which Ms. Naimi billed
4 || improvement inc. and five related entities debtors $350. Debtors’ agents brought a
(collectively “Muscle Improvement’) move to financial consultant, Brian Avaylon,? to the
5 || disqualify Haleh Naimi and her law firm as second meeting to discuss their financial
counsel for creditor Allstate Financial Group, condition. The debtors brought a file of
6 |] Inc. (“Allstate”) on the grounds of conflict of documents. Mr. Avaylon reviewed the
interest. Debtors contend that they provided debtors’ financial affairs with Ms. Naimi and
7 || confidential information to Ms. Naimi when together they examined documents in the file.
they consulted with her about representing Ms. Naimi advised the debtors that it would be
& || them in these consolidated bankruptcy cases better to attempt a workout rather than file
(but declined to retain her). The court finds bankruptcy cases because it would be less
9 || that, under California law, Ms. Naimi must be expensive. She also advised the debtors not
disqualified under the “substantial relationship” to make payments to their creditors that could
10 || test. be considered preferential payments.” Neither
John Michael nor any other Allstate
41 ll. Relevant Facts representative attended this meeting.
Debtors ultimately chose not to
12 Debtors have brought an adversary employ Ms. Naimi. Instead, they hired their
proceeding against their principal creditor present bankruptcy counsel Robert Yaspan for
13 || Allstate on a number of claims, including their chapter 11 bankruptcy cases. Allstate
breach of contract and fraud. Allstate has then hired Ms. Naimi to represent Allstate's
14 || appeared through its counsel, Ms. Naimi. interests in these cases.
Debtors now move to disqualify Ms. Naimi and Debtors now move to disqualify Ms.
15 Il her firm, Advocate Solutions, Inc., from Naimi and her firm from representing Allstate
representing Allstate or its representative, or John Michael on conflict of interest grounds.
16 |! John Michael, on conflict of interest grounds.
The disqualification motion is based on two
17 consultations that debtors had with Ms. Naimi 2 Ms. Naimi contends that Mr. Avaylon’s
te {| Prior to their bankruptcy filing, in which they presence at the meeting prevented it from
discussed retaining her to represent them in being confidential, since he was a creditor of
19 |} these cases. a -_ the debtors. The court finds the evidence
At the first meeting with Ms. Naimi, insufficient to support this contention. Instead,
a9 || the parties spent two hours discussing Ms. the court infers that Mr. Avayion was part of
Naimi's prior bankruptcy experience and the debtors’ management and consulting team
51 || debtors’ financial problems. John Michael for the purposes of dealing with their financial
also attended this meeting. After the first problems.
22 meeting, the debtors provided Ms. Naimi
several documents relating to their financial 3 Ms. Naimi disputes the debtors’ account of
23 ||condition. Following the first meeting, Ms. what transpired at this second meeting. For
Naimi sent a retainer agreement to the debtors the purposes of this motion, the court finds this
oq || for signature. The retainer agreement was dispute irrelevant. So long as the parties do
never signed or returned. not agree as to what happened, the court must
25 credit the account of the debtors. Compare
Zimmerman ov. Zimmerman (in re
2g ||’ Unless otherwise indicated, all chapter, Zimmerman}, 16 Cal. App. 4""556, 565 (1993)
section and rule references are to the (disqualification of counsel not required
27 || Bankruptcy Code, 11 U.S.C.A. §§ 101-1532 because parties agreed that no confidential
(West 2009) and to the Federal Rules of disclosures were made in the preliminary
ag {| Bankruptcy Procedure Rules 1001-9036. meeting).

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Case 2:10-bk-12736-PC Doc 184 Filed 08/31/10 Entered 08/31/10 18:47:23 Desc

Main Document

Ill. Analysis

Conflict of interest law is complex
and subtle. While a careful lawyer should
not have difficulty in complying with most of
the applicable rules of professional conduct,
even sophisticated counsel trying to comply
with the rules regarding conflict of interest
must make difficult and uncertain decisions.
In consequence, the disqualification of counsel
on conflict of interest grounds normally does
not reflect on counsel's integrity or
qualifications to practice law. See, e.g., in re
Jaeger, 213 B.R. 578, 583-93 (Bankr. C.D.
Cal. 1997) (disqualifying large law firm for
representing conflicting interests).

The court finds that Ms. Naimi has a
conflict of interest that requires her
disqualification from representing Allstate in
this bankruptcy case.

A. Applicable Law

The federal courts in California do not
have their own rules of professional conduct
for lawyers. Local Rule (“LBR”) 2090-2(a) of
the Bankruptcy Court for the Central District of
California, which governs the professional
responsibility of attorneys practicing before
this court,> incorporates by reference the
district court's local rule 83-3.1.2, which
requires that attorneys comply with the
California Rules of Professional Conduct, as
interpreted by California case law.®

* California Rules of Professional Conduct.
The California rules of professional conduct,
unlike those in all other states, are not based
on the Model Rules of Professional Conduct
promulgated by the American Bar Association.
In consequence, both the California rules and
the case law thereunder may differ from what
is found in other states.

* LBR 2090-2(a) states: “An attorney who
appears for any purpose in this court is subject
to the standards of professional conduct set
forth in Local Civil Rule 83-3.1.2 of the district
court.”

® District Court Local Rule 83-3.1.2 states in
relevant part: “each attorney shall be familiar
with and comply with the standards of

Page 3 of 7

Accordingly, we turn to the applicable
California rules and case law to determine the
motion before the court. See, @.g., Jaeger,
213 B.R. at 583.

In addition, a courts power to
disqualify an attorney from appearing in a
particular case derives from the power of
every court to control the conduct of attorneys
practicing before it. See, e.g., Trone v. Smith,
621 F.2d 994, 999 (9th Cir. 1980); People ex
rel. Dept. of Corporations v. SpeeDee Oif
Change Systems, inc., 20 Cal. 4th 1135, 1145
(1999). Ultimately, a court's decision to
disqualify an attorney is based upon the need
to maintain high standards of professional
responsibility. See id.

B. California Rules on Disqualification
for Conflicts of Interest

Rule 3-310 of the California Rules of
Professional Conduct requires an attorney to
avoid the representation of adverse interests.
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.’

See also Flatt v. Superior Court, 9 Cal. 4th
275, 283-84 (1994).

The chief fiduciary value protected
when an attorney represents successive
clients is client confidentiality. See, e.g., id. at
283; see also, CAL. Bus. & PROF. CODE §
6168(e}(1}) (West 2008) (requiring an attorney,

professional conduct required of members of
the State Bar of California and contained in
the State Bar Act, the Rules of Professional
Conduct of the State Bar of California, and the
decisions of any court applicable thereto.”

? Cal. Rules Prof. Conduct, Rule 3-310(E)
(2009). No written consent to Ms. Naimi’s
representation of Allstate has been offered in
this case.

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1 || “[t]o maintain inviolate the confidence, and at include privileged information) for examination
every peril to himself or herself to preserve the by the court to determine whether a
2 |} secrets, of his or her client.”"} The purpose of subsequent representation is adverse to an
such protection is to permit counsel to give a existing or former client. The disclosure of
3 || client the best advice possible. To enable such information would make public the client
such advice, it is necessary for the client to confidences and secrets that are entitled to
4 || disclose all relevant information, including protection. Thus, courts must use a substitute
information that the client does not want to be approach to determine whether an attorney
5 || made public. The need to protect an earlier has received confidential information material
client's confidential information may require to employment adverse to a client.
6 |/that the attorney be disqualified from a The substitute approach adopted by
contemporaneous or subsequent the courts is the “substantial relationship” test.
7 |\ representation of another client. See, ¢g., This test governs disqualification motions
Speedee Oi, 20 Cal. 4th at 1146 (1999). under Rule 3-310(E). See, e.g., Flatt, 9 Cal.
8 |) Thus, the protection of the confidentiality of Ath at 283; Kirk v. First American Title Ins. Co.,
such communications is fundamental to our 183 Cal. App. 4th 776, 796 (2010); Jessen,
9 II legal system. See id.® 111 Cal. App. 4th at 708. Under the
A court decision on this issue must be substantial relationship test, the subject matter
19 |/a pragmatic decision that focuses on the of an attorney's current representation is
nature and quality of the former considered substantially related to the subject
11 || representation. See, e.g..Jessen v. Hartford matter of the attorney’s prior representation if
Casuaity ins. Co., 111 Cal. App. 4th 698, 706 any information that was material to the
12 || (2003). The court must exercise special care evaluation, prosecution, settlement, or
in making such a decision where the attorney accomplishment of the prior representation is
13 |! was only consulted about possible retention in also material to the evaluation, prosecution,
a4 [| 2 case but was not retained. settlement, or accomplishment of the current
representation. Jessen, 111 Cal. App. 4th at
1s C. Application to Existing Clients 713. Where a_ substantial relationship
between the subject of the prior and the
16 A court may not require an attorney to current representations is shown, access to
disclose confidential information (which may confidential information by the attorney in the
7 course of the first representation (which is
relevant, by definition to the second
1g || In addition to the protection of confidential representation), is presumed = and
communications, our legal system imposes on disqualification of the attorney’s representation
19 || attorneys an obligation of loyalty to their of the second client is mandatory. Fiatt, 9 Cal.
clients. fd. As the California Supreme Court 4th at 283.
20 || Stated in Speedee Off: To prevail under the substantial
relationship test, the former client must satisfy
21 Attorneys have a duty to maintain two elements: (1) the subject matter of the
undivided loyalty to their clients to attorney's current representation _is
22 avoid undermining public confidence substantially related to the subject matter of
in the legal profession and the the attorney's earlier representation of the
23 judicial process [citations omitted]. former client; and (2) the attorney's earlier
The effective functioning of the representation of the former client was one in
24 fiduciary relationship between which confidential information would ordinarily
attorney and client depends on the be disclosed. Jessen, 111 Cal. App. 4th at
25 client's trust and confidence in 709-10; see also City and County of San
counsel. Francisco v. Cobra Solutions, inc., 38 Cal.4th
26 839, 847 (2006); Henriksen v. Great Am. Sav.
id. However, the duty of loyalty is not invoked & Loan, 11 Cal. App. 4th 109, 113-14 (Cal. Ct.
27 |{in this case because of the fleeting nature of App. 1992). A former client who establishes
Ms. Naimi's relationship with the debtors and beth of these elements creates an irrebuttable
2g |! the fact that they declined to retain her. See presumption that the attorney possesses
id. at 1147. confidentia! information. See, e.g., Jessen,

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1 |}111 Cal. App. 4th at 708.° The court must In this case, the substantial
then order disqualification. See id. relationship test is clearly met. First, Ms.
2 Naimi consulted with debtors with respect to
D. Application of Rule the same case in which she is now
3 Where Counsel is Not Retained representing Allstate, the principal creditor.
Furthermore, the subject matter is essentially
4 Rule 3-310(E) applies principally to a the same as the case before the court, and
lawyer's actual engagements for separate thus is substantially related.
> |! clients with possibly differing interests. In this Second, the consultation with the
case, Ms. Naimi was not retained to represent debtors was one in which confidential
6 |/the debtors. Nonetheless, because of the information would ordinarily be disclosed.
initial consultation, Ms. Naimi is now subject to While a potential client would not ordinarily
7 || disqualification from representing Allstate, disclose all of the confidential information
another party in interest. relating to a case, there would ordinarily be an
8 Under California rules, the relationship important measure of disclosure of confidential
of attorney and client is established prima information. Indeed, the debtors present
2 || facie at the time of preliminary consultations evidence in this case that they presented
with a view toward retention, even if actual substantial confidential information to Ms.
10 || retention does not materialize. id.; Perkins v. Naimi at the second meeting and received
West Coast Lumber Co., 129 Cal. 427, 429 legal advice from her on several subjects.
12 |! (1900). Ms. Naimi tries to rebut the
In considering whether a presumption that confidential information was
12 representation was one in which an attorney disclosed during the second meeting. She
would ordinarily acquire confidential contends (and debtors dispute) that she only
13 11 information, a court must consider the nature received financial information which, given the
and extent of the attorney's involvement with bankruptcy filings, is now public information.
14 |\ the former client. See H.F. Ahmanson & Co. v. She further argues a former client's
1s Salomon Bros., Inc., 229 Cal. App. 3d 1445, information is not confidential for conflict-of-
1455 (1991). As an initial matter, a court must interest purposes if it is already available to
ag || Presume that an attorney acquired confidential the adverse client or if the former client has
information if the attorney gave legal advice to reason to believe that the attorney would
7 the client. See Jessen, 111 Cal. App. 4th 698 share the information with the adverse client.
at 709-10. Absent such a showing, a court See Christensen v. U.S. Dist. Court, 844 F.2d
18 must look at whether the attorney was in such 694, 698-99 (9th Cir. 1988).
a position vis-a-vis the former client that the Under California faw, such rebuttal is
19 || attorney was likely to receive confidential impermissible.” See, e.g., Jessen, 111 Cal.
information. See id. at 710-11. App. 4th at 708. Courts have justified the
20 irrebuttable presumption of knowledge of
confidential information as a rule of necessity,
21 “for it is not within the power of the former
® Courts have justified the irrebuttable client to prove what is in the mind of the
22 ||presumption of knowledge of confidential attorney. Nor should the attorney have to
information as a rule of necessity, “for it is not ‘engage in a subtle evaluation of the extent to
23 || within the power of the former client to prove which he acquired relevant information in the
what is in the mind of the attorney. Nor should first representation and of the actual use of
24 ||the attorney have to ‘engage in a subtle that knowledge and information in the
evaluation of the extent to which he acquired
a5 || relevant information in the first representation
and of the actual use of that knowledge and '° Ms. Naimi seeks discovery against debtors
2g || information in the subsequent representation.” to help build a case that she did not receive
Global Van Lines, Inc. v. Superior Court, 144 confidential information from them in the
27 || Cal. App. 3d 483, 489 (Cal. Ct. App. 1983) second meeting. Because the presumption is
(quoting from Developmenis in the Law: irrebuttable, no such discovery could lead to
2g |) Conflicts of interest in the Legal Profession, 94 the discovery of relevant information.
HARV. L, REV. 1244, 1318 (1981)).

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1 || subsequent representation.” Global Van was in a position to review debtors’ private
Lines, Inc. v. Superior Court, 144 Cal. App. 3d documents and to listen to debtors’ agents

2 {| 483, 489 (Cal. Ct. App. 1983) (quoting from and financial consultant speak extensively
Developments in the Law: Conflicts of interest about debtors’ financial condition.

3 |!in the Legal Profession, 94 Harv. L. Rev. Ms. Naimi argues that the presence of
1244, 1318 (1981)). Thus, the court must Mr. Avaylon at the second meeting prevented

4 || order disqualification. See id. any information provided to her from being

In light of the foregoing, it is confidential The court is not persuaded.
> ||immaterial whether Ms. Naimi actually Untike John Michael, it appears to the court
obtained confidential information in the course that Mr. Avaylon was acting as debtors’

© ||of her meeting with debtors’ agents. The two financial consultant, rather than as a
dispositive issues are whether the subject representative for a potentially adverse party,

7 1) matter of their meetings is substantially related and was part of debtors’ financial team. Thus,
to the subject matter of this case, and whether he was within the sphere of confidentiality for

8 || Ms. Naimi’s relationship with debtors was one the debtors. Accordingly, Mr. Avaylon's
in which confidential information would presence at the second meeting did not

? || ordinarily be disclosed. Here, the undisputed destroy debtors' reasonable expectations of
facts resolve both of these issues in favor of confidentiality.

1° || debtors. The court finds that movants have
met their burden to show that Ms. Naimi must IV. CONCLUSION

11 || be disqualified. *"

The subject matter of Ms. Naimi’s This court holds that an attorney must
current representation of Allstate, a creditor be disqualified on conflict of interest grounds if
and adverse party, is substantially related to the attorney meets with a client under

13 || the subject matter of Ms. Naimi’s meetings circumstances in which _ confidential
with debtors’ agents. The subject matter of information would likely be disclosed, and the

14 ‘I the meetings included debtors’ financial attorney subsequently represents an adverse

1s condition. That information is now material to client in a substantially related matter, even if
the prosecution of this bankruptcy case. the former client never employed the attorney.

16 In’ making this ruling, the court For the foregoing reasons, this court
disregards the first meeting with Ms. Nairmi. grants debtors’ motion to disqualify Haleh

7 Because John Michael attended the first Naimi from representing Allstate Financial
meeting on behaif of Allstate, Allstate already Group, Inc. or its representative, John

18 had access to all the information that debtors Michael. The court does not address the
disclosed at the first meeting. Thus, none of issue of disqualification of Ms. Naimi’s law

19 that information is confidential with respect to firm, Advocate Solutions, Inc., because there
Alfstate. is no indication that her firm desires to

20 With respect to the second meeting, represent Allstate without her participation.
however, the court finds that Ms. Naimi likely In view of this decision, counsel may

91 || feceived confidential information. Following well wonder how to obtain protection where
the first meeting, Ms. Naimi requested and counsel is consulted about a case but

22 ||received documents pertaining to debtors’ ultimately not hired. Rule 3-310(E) provides
financial condition. At the second meeting, an answer: counsel may obtain written

23 || Mr. Avaylon showed these documents to Ms. consent from those who attend the
Naimi while discussing debtors’ financial consultation to represent another party in the

24 |jcondition. Additionally, Ms. Naimi charged a case if counsel is not retained by the parties to
legal fee to debtors for this meeting at her the consultation.

a5 || hourly rate as an attorney. Thus, Ms. Naimi

Dated: August 31, 2010

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"In addition, even if (contrary to California

27 || law) rebuttal were permitted, the court finds
that Ms. Naimi has not successfully rebutted

2a || the debtors’ evidence that they did disclose _ffon\Sambel L. Bifford
confidential information to her. Unxed States Bankruptey Judge

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1 NOTE TO USERS OF THIS FORM:

2 |!4) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.

2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3 || 3) Category 1. beiow: The United States trustee and case trustee (if any) will always be in this category.

4) Category Il. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity
4 || (or attormey) who filed an opposition to the requested relief. BO NOT list an address if person/entity is listed in
category I.

6 NOTICE OF ENTERED ORDER AND SERVICE LIST

7 || Notice is given by the court that a judgment or order entitled (specify) AMENDED OPINION ON
DISQUALIFICATION OF COUNSEL FOR CREDITOR ALLSTATE FINANCIAL GROUP, INC. was
a || entered on the date indicated as “Entered” on the first page of this judgment or order and will be
served in the manner indicated below:

|. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING ("NEF") - Pursuant to
10 || controlling General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on
the following person(s) by the court via NEF and hyperlink to the judgment or order. As of August 31,
11 |} 2010, the following person(s) are currently on the Electronic Mail Notice List for this bankruptcy case
or adversary proceeding to receive NEF transmission at the email address(es) indicated below.

12
Robert M. Yaspan, Esq. ryaspan@yaspanlaw.com
13 || United States Trustee ustpregion16.la.ecf@usdoj.gov
Russell Clementson, Esq. russell.clementson@usdoj.gov
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oO Service information continued on attached page
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ll. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment
16 || or order was sent by United States Mail, first class, postage prepaid, to the following person(s) and/or
entity(ies) at the address(es) indicated below:

17
Oo Service information continued on attached page
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lll. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this
19 || judgment or order which bears an “Entered” stamp, the party lodging the judgment or order will serve
a complete copy bearing an “Entered” stamp by U.S. Mail, overnight mail, facsimile transmission or
20 || email and file a proof of service of the entered order on the following person(s) and/or entity(ies) at

the address(es), facsimile transmission number(s), and/or email address(es) indicated below:
21

a2 oO Service information continued on attached page

23 || ADDITIONAL SERVICE INFORMATION (if needed):

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