Risk Update

Lawyer Disqualifications — Firm DQ’d in Patent Case, “Conflict of Authority” Disqualifies Lawyer in LLC Matter

Posted Dan Bressler

“Another LLC Attorney Disqualified Due to ‘Conflict of Authority’” —

  • “A prior LLC Jungle post covered the Court of Appeal’s seminal opinion in the Jarvis v. Jarvis case here: Why Having ‘Co-Managers’ for Your LLC is a Terrible Idea. In the Jarvis case, the Court of Appeal affirmed the disqualification of an attorney not on the typical grounds of an ethical ‘conflict of interest,’ but rather, based on a ‘conflict of authority’ — i.e., the attorney was hired by one of the two 50/50 general partners of a partnership, over the other partner’s objection.”
  • “In a case recently filed by California’s Sixth Appellate District — Altva Capital Management Limited v. Chung — the Court of Appeal followed the framework from Jarvis and affirmed the trial court’s disqualification of an attorney representing an LLC. While the Altva case is unpublished and therefore not binding precedent, it still provides a useful guidepost and confirms the impact of Jarvis on this area of the law.”
  • Facts: LLC co-managed by divorcing spouses; wife hires attorney to represent the LLC in her own derivative action”
  • “Elizabeth Chung and David Chung were a married couple. Title to their home was held by their LLC – Bend Capital, LLC. Elizabeth and David were the only two members of the LLC. Each held a 50% interest, and each was a managing member.”
  • “During their divorce proceedings, Elizabeth and David disputed whether the LLC owed money on a loan then held by Altva Capital Management Limited (‘Altva’). David contended that the loan was legitimate; Elizabeth contended the loan was a fraud perpetrated by David.”
  • “Elizabeth filed a lawsuit against David, Altva, and other parties, and included a derivative claim on behalf of the LLC seeking to invalidate the loan. Her lawsuit alleged that David, in violation of his fiduciary duties to the LLC, fabricated the loan to extract money from the LLC. Altva filed cross-claims against the LLC, Elizabeth, and David.”
  • “Without David’s consent, Elizabeth retained attorney Mikael Abye to represent the LLC in the action. Abye filed a demurrer on the LLC’s behalf against Altva’s cross-complaint. The next day, David filed a motion to disqualify Abye.”
  • “The trial court granted the motion to disqualify Abye from representing the LLC.”
  • “The court observed that while the LLC’s operating agreement allowed either member to bind the LLC ‘in all matters in the ordinary course of business,’ the representation of the LLC in a case featuring a dispute between the LLC’s two members was ‘outside the ordinary course’ of the LLC’s business.”
  • “The Court of Appeal affirmed, following the framework of the Jarvis case.”
  • “The court started by reviewing the LLC’s operating agreement. Section 4.1 of the agreement stated that the LLC would be managed by its members, and that any member could bind the LLC in all matters ‘in the ordinary course’ of business. Matters outside the ordinary course were to be resolved by a ‘majority’ vote — which here would be a unanimous vote since there were only two members who each held a 50% interest. The agreement contained no tie-breaking mechanism, and the court refused to infer one, holding that ‘devising a tie-breaking procedure would rewrite the operating agreement.'”
  • “The LLC, the court noted, ‘is embroiled in litigation because its two equal members disagree about the subject matter of the lawsuit.’ The court agreed with the trial court’s conclusion that ‘the defense of this lawsuit, pitting equal member against equal member, is not a matter in the ordinary course’ of the LLC’s business. As such, the operating agreement did not permit Elizabeth to ‘unilaterally retain counsel’ and direct the LLC’s defense.”

“Verizon Faces Legal Setback as WilmerHale Disqualified in High-Stakes Patent Case” —

  • “In a significant development in the ongoing litigation between Verizon and Headwater Research, a federal magistrate judge in Texas has disqualified the law firm WilmerHale from representing the telecommunications giant. This decision was made just before what promised to be a contentious trial over allegations that Verizon had infringed on patents related to wireless communications technology held by Headwater Research.”
  • “The disqualification reportedly stemmed from WilmerHale’s prior representation of a party with interests adverse to Verizon, raising questions about the firm’s ability to impartially and effectively advocate for its client. The implications of this development extend beyond the immediate case, highlighting the potential for conflicts of interest to disrupt legal strategies and client relations in complex, multi-party litigations.”