Case Number: 21SMCV00789 Hearing Date: December 17, 2021 Dept: M
CASE NAME: Shauneen Militello, et al. v. Vfarm 1509 Inc., d/b/a/ Rose Collective, a California Corporation, et al.
CASE NO. 21SMCV00789
MOTION: Motion to Disqualify Counsel
HEARING DATE: 12/17/2021
On May 18, 2021, Plaintiff Shauneen Militello, on behalf of herself and all members and shareholders of GBC LLC and Cannaco Research Corporation filed a 127-page (including exhibits) verified first amended complaint containing 22 claims for fraud (1-6), breach of fiduciary duty (7-9), declaratory relief, (10, 21), tortious interference claim (11) breach of contract claims (12-13), conversion claims (14-17), intentional and negligent infliction of emotional distress (18-19), accounting (20), and legal malpractice (22) against numerous defendants, including Ann Lawrence Athey (“Athey”). On November 19, 2021, Defendant Athey filed this instant motion to disqualify Plaintiff’s counsel Spencer Hosie and Hosie Rice, LLP, from continuing to represent Plaintiff Shauneen Militello in this action.
“ ‘A trial court’s authority to disqualify an attorney derives from the power inherent in every court “[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.” ’ ” (Ontiveros v. Constable (2016) 245 Cal.App.4th 686, 694 (quoting People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145 (quoting Code Civ. Proc., § 128(a)(5))).) “ ‘[D]isqualification motions involve a conflict between the clients’ right to counsel of their choice and the need to maintain ethical standards of professional responsibility.’ ” (Id. at 694-95.) “ ‘The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar.’ ” (Id. at 695.) “‘The important right to counsel of one’s choice must yield to ethical considerations that affect the fundamental principles of our judicial process.’” (Id.) In exercising its discretion to disqualify an attorney, the Court is required to make a reasoned judgment which complies with the legal principles and policies applicable to the issue at hand. (Henriksen v. Great Am. Sav. & Loan (1992) 11 Cal.App.4th 109, 113.)
The protection of the attorney-client privilege is not the only ground for a motion to disqualify an attorney. (Kennedy v. Eldridge (2011) 201 Cal.App.4th 1197, 1204 – 1205.) The Court “has an independent interest in ensuring trials are conducted within ethical standards of the profession and that legal proceedings appear fair to all that observe them.” (Id. at 1205 [quoting In re A.C. (2000) 80 Cal.App.4th 994, 1001].) “The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar.” (Id. at 1204.) Accordingly, when an “attorney’s continued representation threatens an opposing litigant with cognizable injury or would undermine the integrity of the judicial process, the trial court may grant a motion for disqualification.” (Id. at 1205.)
Defendant submits 14 objections to exhibits attached to the declaration of Spencer Hosie based on the spousal privilege and lack of authentication. The Court sustains objections nos. 1 -13 for lack of authentication and spousal privilege. Objection no. 14 is MOOT.
Did Militello’s counsel obtain privileged documents?
Defendant Athey brings this motion for an order disqualifying Spencer Hosie and Hosie Rice, LLP, from continuing to represent Plaintiff Militello in this action because Plaintiff obtained and gave her counsel privileged communications between Athey and her husband. The at-issue communications are electronic communications, or GChats, between Athey and her husband, Joel Athey. Generally, “If a privilege is claimed on the ground that the matter sought to be disclosed is a communication made in confidence in the course of the . . . marital or domestic partnership . . . relationship, the communication is presumed to have been made in confidence and the opponent of the claim of privilege has the burden of proof to establish that the communication was not confidential.” (Evid. Code, § 917(a) [emphasis added].) In addition, “[s]ubject to subdivision (b), the presiding officer may not require disclosure of information claimed to be privileged under this division . . ..” (Evid. Code, § 915(a).)
Athey argues that the GChats are privileged because they were between herself and her husband during the course of their marriage. Athey also provides a declaration attesting to these facts specifically providing that the GChats were sent between her CRC email account, email@example.com, and her husband’s email account and that the two communicate with Google chat almost daily. (See Lawrence Decl. ¶¶ 3-4.) Athey also attests that she did not give Militello or anyone at Hosie Rice LLP permission to access that email account of any chat messages associated with that email account. (Lawrence Decl. ¶ 4.) Athey also provides evidence that Militello presented the electronic communications between her husband and herself in Militello’s Motion for Order Appointing a Receiver (“Receivership Motion”) in Case 21STCV13314. (Lawrence Decl. ¶ 3.) Athey also attests that she considered all of the communications in Exhibits Q through Y, BB through DD, and OO, which were included in Militello’s receivership motion, to be private and confidential. (See Lawrence Decl. ¶¶ 3-5.) Here, Athey provides sufficient evidence to apply the presumption that the martial privilege applies. Therefore, the burden shifts to Militello to demonstrate that the communications were not confidential.
Athey contends that Militello could not invoke CRC’s bylaws, which incorporate virtually verbatim Corporations Code Section 1602, to review the electronic communications because the right to inspect corporate records is limited to company records. (Wolf v. CDS Devco (2010) 185 Cal.App.4th 903, 919 [citation omitted].) Corporations Code Section 1602 provides, in part, “Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts.” (Corp. Code, § 1602.) In opposition, Militello argues that pursuant to the terms of CRC’s bylaws, any director was permitted to review company records. (See Ex. A to Hosie Decl.) Exhibit A is an excerpt of the bylaws, which provides, “Every director will have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents.” (Ex. A, § 4 [emphasis added].)
“To be entitled to inspect corporate records, directors must remain disinterested and independent in the performance of their fiduciary duties.” (Wolf v. CDS Devco (2010) 185 Cal.App.4th 903, 919 [citation omitted].) Section 1602 grants to “every director an absolute right (albeit subject to appropriate legal qualifications), to inspect and copy corporate records and documents. (Havlicek, supra, 39 Cal.App.4th 1844, 1855–1856, 46 Cal.Rptr.2d 696; Tritek Telecom, Inc. v. Superior Court (2009) 169 Cal.App.4th 1385, 1390–1391, 87 Cal.Rptr.3d 455 (Tritek ) [“absolute” right is historically subject to exceptions].)” (Id. at. 916.) Moreover, the Court in Wolf, citing Chantiles v. Lake Forest II Master Homeowners Assn. (1995) 37 Cal.App.4th 914, held that Section 1602 “has not been overruled or limited in its holding or reasoning that current director status is required to pursue current inspection rights.” (Id. at 919.) Here, the Court agrees that under Corporations Code section 1602 and the bylaws, only a present director would be able to inspect corporate records and such an inspection would need to be in performance of their fiduciary duties. Athey presented evidence that Militello was removed from the CRC Board of Directors on March 24, 2021. (Lawrence Suppl. Decl., ex. 1.) Therefore, Militello’s inspection rights would depend on whether she was a director at the time she accessed the electronic chats. Since she was no longer a director on March 24, 2021, any director inspection rights would end on that date.
There is no evidence presented to the Court as to whether Militello accessed the electronical communications before or after March 24, 2021. Militello has failed to meet her burden. Any access on or after March 24, 2021, would have been unauthorized under both the bylaws or Corporations Code Section 1602. Furthermore, Militello does not provide evidence that she was acting in a fiduciary capacity when she accessed the electronic communications. Section 1602 does not authorize Militello’s access to these documents.
Militello also argues that to make a marital communication in confidence, one must “have a reasonable expectation of privacy.” Militello contends that Athey had no reasonable expectation of privacy because Militello contends that Athey knew the platform was not confidential pursuant to the company bylaws and the welcome message from Google. (See People v. Von Villas, (1992) 11 Cal. App. 4th 175, 220.) An electronic communication is not privileged “(1) when the electronic means used belongs to the defendant; (2) the defendant has advised the plaintiff that communications using electronic means are not private, may be monitored, and may be used only for business purposes; and (3) the plaintiff is aware of and agrees to these conditions.” (Holmes v. Petrovich Development Co., LLC (2011) 191 Cal.App.4th 1047, 1068.) Militello argues that Athey received a message from Google that the domain administrator had access to all data, “When you use Google services, your domain administrator will have access to your firstname.lastname@example.org account information, including any data you store with this account in Google services.” (Hosie Dec., Ex. D.) The Court notes that Exhibit D is a notice to “email@example.com” and not to “firstname.lastname@example.org.” Furthermore, there is no evidence that Athey received this message. Moreover, the cases that Militello cites in support of her position were based on employer-employee relationships and not director-director relationships. (See Homes v. Petrovich Dev. ZCo., (2011) 192 Cal. App. 4th 1047, 1068.)
Militello also argues that the “joint enterprise” had a monitoring policy, citing to Exhibit C of the Hosie Declaration. Exhibit C is the employee handbook of Farmacy Westwood, and not CRC. Moreover, Athey provides evidence that Militello already provided a declaration under oath that CRC is not affiliated with either the Rose Collective or the Farmacy. (See Supp. Brown Decl., Ex. 1 ¶¶ 8 & 30.) Militello has not identified a monitoring policy by CRC. The welcome message was from the provider, Google, and not CRC, and in any event it was only a recommendation. Militello has also not pointed to any evidence that CRC had a monitoring policy, or that Athey agreed to such a policy.
In summary, Athey has demonstrated that the electronic communications at issue were privileged and Militello has not overcome the marital/spousal privilege, and has not met her burden of proof to establish that the communications were not confidential.
Whether the crime-fraud exemption applies
“There is no privilege under this article [for confidential marital communications] if the communication was made, in whole or in part, to enable or aid anyone to commit or plan to commit a crime or a fraud.” (Evid. Code, § 981.) “In order to establish the crime/fraud exception to the privilege, ‘the party opposing the privilege must establish a prima facie case of fraud’ . . ..” (People v. Superior Court (Bauman & Rose) (1995) 37 Cal.App.4th 1757, 1769 (internal quotations omitted).) A mere assertion or allegation fraud is insufficient, there must be evidence “to establish the fact asserted, i.e., the fraud.” (BP Alaska Exploration, Inc. v. Superior Court (1988) 199 Cal.App.3d 1240, 1262.) “[T]he proponent of the exception need only to prove a false representation of a material fact, knowledge of its falsity, intent to deceive and the right to rely. (This means, of course, that a negligent fraud under Civil Code sections 1572 and 1710 will not suffice.)” (Id. at. 1263 [discussing crime-fraud exception in the context of attorney-client privilege].) Here, Militello insinuates a fraud — “This was a fraud and suffused with lies” apparently referring to the alleged pretextual reasons as to her removal as a director, but Militello also argues that the directors gave no substantive reason for her removal. (Opp. at 11:11 – 11:25.) Militello also cites to the privileged communications themselves. However, “the Legislature does not contemplate disclosure of privileged material in ruling on the crime/fraud exception” unless some statutory exception applies. (State Farm Fire & Casualty Co. v. Superior Court (1997) 54 Cal.App.4th 625, 645, as modified (May 1, 1997), citing enumerated exceptions in subdivision Evidence Code § 915(b).) Since the marital privilege is not listed as an enumerated exception, the Court cannot and does not review the privileged evidence. Here, Militello relies on evidence that the Court cannot consider. Militello has not adequately made a prima facie showing of evidence of the fraud or of the connection between the communication and the fraud.
Whether Hosie and the firm should be disqualified under Rico & State Fund
Athey contends that the Court should disqualify Spencer Hosie and his firm under Rico v. Mitsubishi Motors Corp. (Rico) (2007) 42 Cal. 4th 807, Clark v. Superior Court (2011) 196 Cal. App. 4th 37 and Doe v. Yim (2020) 55 Cal.App.5th 573. Athey argues that with respect to the Rico rule, the failure to comply with the rule result in disqualification. (Rico, 42 Cal.4th at 819-820.)
With respect to the communications, Athey argues that the crime-fraud exception does not apply and that the Court is prohibited from considering the contents of the communications in deciding whether the privilege applies. (See Evid. Code, § 915(a); Costco Wholesale Corp. v. Superior Court (2009) 47 Cal.4th 725, 732.) Athey also argues that Militello did not have the authority to download the privileged communications, there is prejudice from Hosie’s and Militello’s continued and potential uses of the communications in this action, and that Hosie violated his professional responsibilities such that both Hosie and his firm must be disqualified.
Shauneen opposes the motion arguing that (1) Athey had no expectation of privacy, (2) the crime fraud exception applies, (3) strategic advantage and correlative prejudice are required to disqualify counsel and (4) that the Court cannot disqualify Militello’s counsel based on information received from the client.
In Rico, the Supreme Court quoted State Compensation Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, 656 (“State Fund”) when it announced that attorneys “should refrain from examining the materials any more than is essential to ascertain if the materials are privileged, and shall immediately notify the sender that he or she possesses material that appears to be privileged.” (Rico, 42 Cal.4th at 817.) In a footnote, the Court concurred in the lower court’s holding that “[t]he State Fund standard applies to documents that are plainly privileged and confidential, regardless of whether they are privileged under the attorney-client privilege, the work product privilege, or any other similar doctrine that would preclude discovery based on the confidential nature of the document.” (Id. at 818, fn. 9 [emphasis added].) “The State Fund rule is an objective standard. In applying the rule, courts must consider whether reasonably competent counsel, knowing the circumstances of the litigation, would have concluded the materials were privileged, how much review was reasonably necessary to draw that conclusion, and when counsel’s examination should have ended.” (Id. at 818, citing State Compensation Ins. Fund, 70 Cal.App.4th at 656–657.) If an attorney determines that they are in possession of privileged documents, the attorney “shall immediately notify the sender” or the individuals that they appear to belong to. (See Rico, 42 Cal.4th at 817.) “[I]n an appropriate case, disqualification might be justified if an attorney inadvertently receives confidential materials and fails to conduct himself or herself in the manner specified above, assuming other factors compel disqualification.” (Id. at 819 [quoting State Fund, supra, 70 Cal.App.4th at 657].)
Application of State Fund
Athey presented evidence that Militello, her attorney Spencer Hosie, or any other attorney at Hosie’s firm (Hosie Rice LLP), failed to notify Athey that they were in possession of the written communications between Athey and her husband, Joel Athey. (Lawrence Decl. ¶7.) Athey also presented evidence that she “did not give Militello permission to access that email account or any chat messages associated with that email account” and “did not give anyone at Hosie Rice LLP permission to access that email account of any chat messages associated with that email account.” (Lawrence Decl. ¶ 3.) Athey also presented evidence that Hosie refused Athey request to destroy the communications. (See Suppl. Brown Decl. ISO DQ motion, Exs.3 – 4.) The Hosie declaration only provides exhibits but does not attest to any facts surrounding the possession of the communications. (See generally Hosie Decl. ¶¶1-2.) Militello states in her opposition that Hosie substituted in in late July 2021 after the first amended complaint had been filed by another attorney. (Citing, Brown Decl. ISO DQ motion ¶ 10.) However, Athey presented evidence that Hosie used the communications in other filing to attempt to obtain a court-order receiver. (See Exs. 1 & 8 to Brown Decl. ISO DQ motion.)
Here, the facts are that Hosie substituted into the matter after the first amended complaint had been filed (which contains 22 claims) and after Militello alleged that Joel Athey was Athey’s spouse and claimed on information and belief, that both spouses had allegedly conspired to oust Militello (See FAC ¶ 6.). A reasonably competent counsel, knowing the circumstances of the litigation once substituting in, and the nature of the lawsuit, would have concluded that the communications between the spouses were privileged and that very little review would be reasonably necessary to draw that conclusion. There is no excuse for Militello’s counsel continuing to use these communications in litigation or in opposition to this motion.
Whether disqualification is appropriate
Athey argued that the Court can disqualify counsel even when a client is the person who gave the attorney the privileged communication under Clark v. Superior Court (2011) 196 Cal.App.4th 37. Militello opposes disqualification, relying heavily on Neal v. Health Net, Inc. (2002) 100 Cal.App.4th 83, which held:
decisional authority has consistently concluded that a party cannot improperly disclose confidential information to one’s own counsel in the prosecution of one’s own lawsuit. To do otherwise (i.e., barring discussions of an adversary’s confidences known to the client), would defeat the purpose of confidentiality, which is to promote full and open discussions between attorney and client. . . . . Thus, a distinction must be made as to the person who disclosed the adverse party’s attorney-client communications. Disclosure to one’s own attorney of confidential information does not justify disqualification.
(Neal v. Health Net, Inc. (2002) 100 Cal.App.4th 831, 843–844 [citations omitted].) Militello contends that disqualification is not appropriate because there was no advantage gained.
In reply, Athey argues that Neal is distinguishable on its facts and also contends that “there was no evidence that any information, confidential or otherwise, concerning [Neal’s] case was given [to her attorney]” whereas in this matter, it is apparent that Shauneen’s counsel has obtained Athey’s privileged communications. (Neal, 100 Cal.App.4th at 841.) Athey also argues that Fox Searchlight Pictures, Inc. v. Paladino, 89 Cal. App. 4th 294 (2001) and In re Complex Asbestos Litig., 232 Cal. App. 3d 572 (1991) are distinguishable based upon their faacts.
The Court in In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572, 590 made a distinction with respect to a lay client, specifically, “[a] lay client should not be expected to make such distinctions in what can and cannot be told to the attorney at the risk of losing the attorney’s services. [Footnote 7.]” The Court left open the possibility of disqualifying counsel in instances where the client is an attorney. (See id. 590, fn. 7.) Here, Neal is distinguishable since Militello’s counsel has the actually privileged information, which is apparent from the filing of such documents conditionally under seal. In addition, Militello is not a lay client and would also know that certain communications would be privileged under the marital/spousal provision.
“A likelihood the violation would impact the outcome of the [case] . . . and the public’s trust in both the scrupulous administration of justice and the integrity of the bar” is required to disqualify counsel. (McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal.App.5th 1083, 1121.) Militello’s counsel has not merely been exposed to the privileged material but has also attempted to use the contents of such chats in the opposition to this motion, and in a separate motion to appoint a receiver. (See Opp. 1 (“[T]hese communications were sent as an active part of acknowledged fraud; a fraud that continues to this day.”); 4-12 (arguing for application of the crime/fraud exception based primarily on the contents of the privileged chats).) Allowing Militello’s attorney, as well as his firm, to continue representing Militello in this case would negatively affect the public’s trust in both the scrupulous administration of justice and the integrity of the bar.
Athey has demonstrated that Militello’s counsel has attempted to use these communications in other litigation between all of the parties and has used them in opposition to this motion. This case already involves allegations of fraud against attorneys. Knowledge and continued possession, and potential use of these privileged communications would undermine the public’s trust in the administration of justice. The Court finds this measure is prophylactic, in that it is meant to prevent future exploitation and use of the privileged documents to prove Militello’s case and to protect the spousal privilege. Therefore, the Court grants Athey’s motion to disqualify counsel. To ensure that this issue does not reoccur, the Court also orders Militello and her counsel to destroy the privileged communications in their possession and submit declarations to the Court attesting to this destruction within 5 days of this order.
 The Court does not consider Militello’s declaration as evidence in opposition to this motion, which is attached as Exhibit Z to the declaration of Spence Housie. Exhibit Z is fully redacted, and according to the title, was submitted conditionally under seal in opposition to a separate motion to disqualify in case no. 21STCV13314 before Judge Stephen Goorvitch. (See Ex. Z cover.) Militello has not presented a declaration in support of her opposition to this motion. The objections to this declaration/Exhibit Z are MOOT.