Militello v. VFARM 1509 ( 2023 )

Filed 3/21/23
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
SHAUNEEN MILITELLO et al., B318397
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No.
v. 21SMCV00789)
VFARM 1509 et al.,
Defendants and Respondents.
APPEAL from an order of the Superior Court of
Los Angeles County, Mark A. Young, Judge. Affirmed.
Hosie Rice, Spencer Hosie, Diane S. Rice and Darrell R.
Atkinson for Plaintiffs and Appellants Shauneen Militello,
Spencer Hosie and Hosie Rice LLP.
Zweiback Fiset & Zalduendo, Rachel L. Fiset and Jeanine
Zalduendo for Defendant and Respondent Ann Lawrence Athey.
_______________________
Shauneen Militello, Ann Lawrence Athey (Lawrence) and
Rajesh Manek are the co-owners of Cannaco Research
Corporation (CRC), a licensed manufacturer and distributor of
cannabis products. All three individuals served as officers of
CRC until February 2021, when Lawrence and Manek voted to
remove Militello from her position, and as directors of CRC until
March 2021, when Lawrence and Manek removed Militello from
that position as well. In April 2021 Militello sued Lawrence,
Manek and others, including Joel Athey, Lawrence’s husband, in
a multicount complaint alleging causes of action for breach of
contract, breach of fiduciary duty, fraud and other torts.
In November 2021 Lawrence moved to disqualify Militello’s
counsel, Spencer Hosie and Hosie Rice LLP, on the ground
Militello had impermissibly downloaded from Lawrence’s CRC
email account private communications between Lawrence and
Athey, protected by the spousal communication privilege (Evid.
Code, § 980), and provided them to her attorneys, who then used
them in an attempt to obtain a receivership for CRC in a parallel
proceeding. Militello opposed the motion, arguing in part
Lawrence had no reasonable expectation her electronic
communications with her husband were confidential because she
knew Militello, as a director of CRC, had the right to review all
communications on CRC’s corporate network. Militello also
argued disqualification is not appropriate when a lawyer has
received the adverse party’s privileged communications from his
or her own client. The trial court granted the motion, finding
that Militello had not carried her burden of establishing
Lawrence had no reasonable expectation her communications
with her husband would be private, and ordered the
disqualification of Hosie and Hosie Rice.
2
We affirm. The evidence before the trial court supported
its finding that Lawrence reasonably expected her
communications were, and would remain, confidential. And
while we acknowledge disqualification may not be an appropriate
remedy when a client simply discusses with his or her lawyer
improperly acquired privileged information, counsel’s knowing
use of the opposing side’s privileged documents, however
obtained, is a ground for disqualification.
FACTUAL AND PROCEDURAL BACKGROUND
1. CRC’s and Militello’s Lawsuits
Militello, Lawrence and Manek were business partners,
owning, directly or indirectly, singly or in various combinations,
several corporate entities forming a vertically integrated
cannabis business. All three were shareholders and directors of
CRC, a licensed manufacturer and distributor of cannabis
products. Manek owned two dispensaries; Lawrence and
Militello had long-term management contracts with the
dispensaries with their income tied to store revenue. Militello
was the sole owner of Beaux Canna, which developed and
marketed cosmetics containing CBD oil.
In September 2020 Militello, with the initial agreement of
Lawrence and Manek, moved the email accounts for CRC and the
partners’ other businesses from Microsoft onto Google Workspace
(then known as G Suite). In a lawsuit CRC filed against Militello
in Los Angeles County Superior Court on April 7, 2021 for breach
of fiduciary duty and violation of the California Comprehensive
Computer Data Access and Fraud Act (Pen. Code, § 502),
Cannaco Research Corporation v. Militello (L.A.S.C.
No. 21STCV13314) (CRC action), CRC alleged Militello had
improperly interfered with CRC’s computer systems and
3
operations. Specifically, CRC alleged Militello, without the
knowledge or consent of the CRC board (that is, without
informing Lawrence and Manek), set up G Suite, paid for by
CRC, to host email accounts for Beaux Canna and assigned
herself the exclusive role as super-administrator, which gave her
control over all the accounts of the various businesses in the
G Suite organizational structure. CRC further alleged Militello
searched for and reviewed other individuals’ emails, deleted
entire email accounts, diverted CRC emails to alias accounts and
blocked Lawrence and Manek’s access to various electronic
documents systems necessary for CRC to conduct its business.
CRC sought a permanent injunction requiring Militello to restore
administrative control over the G Suite to CRC and preventing
her future access to the company’s systems.
On April 29, 2021 Militello filed the complaint in the
instant action, and on May 18, 2021 a first amended complaint,
on behalf of herself and derivatively on behalf of CRC, naming as
defendants Lawrence, Manek and various other entities that
formed part of the former partners’ integrated cannabis business,
including cannabis dispensaries. Also named as defendants were
Athey, who Militello alleged represented her during certain
difficult contract negotiations with Lawrence and Manek, and
1
Athey’s law firm, Holmes, Taylor, Cowan & Jones LLP. The first
amended complaint alleged 22 causes of action (in 490
1
Lawrence, Athey and Militello are active members of the
California State Bar and apparently worked together at some
point at DLA Piper, where Athey and Militello represented
Manek. Militello alleged in her first amended complaint that
Lawrence was her mentor when she was “a practicing corporate
attorney at a large law firm.”
4
paragraphs) including for breach of contract, breach of fiduciary
duty and fraud. In brief, Militello alleged Lawrence, with the
cooperation of Manek, conspired with Athey to force Militello out
of her position at CRC, as well as from various lucrative
consulting agreements procured through Militello’s efforts, to
increase their share of the profits from the business and to shield
the illicit accounting practices being used in the business. On
June 4, 2021 the trial court (Judge Young) denied Militello’s
application for a receivership for CRC.
On August 13, 2021 Militello filed a cross-complaint, and
on September 1, 2021 an amended cross-complaint, in the CRC
action against CRC, Lawrence and Manek, again asserting
causes of action for breach of contract and breach of fiduciary
duty, as she had in the instant action, and also alleging wrongful
termination and whistleblower retaliation. On September 28,
2021, now represented by Hosie Rice in both lawsuits, Militello
filed a second request for appointment of a receiver, albeit in the
CRC action (heard in the writs and receivers department by
Judge Chalfant). In support of the motion Spencer Hosie
submitted a declaration that attached as exhibits copies of
numerous electronic communications between Lawrence and
Athey that Militello had obtained from Lawrence’s email account
on CRC’s computer system and provided to her lawyers. Both the
motion for a receiver and Militello’s declaration in support of it
quoted extensively from those communications (sometimes
referred to by the parties and trial court as “GChats”).
The motion for appointment of a receiver was denied. The
court granted Lawrence’s application to seal the electronic
communications based upon the spousal communication
privilege, but stated its ruling “does not mean Militello is
5
foreclosed from revisiting the privilege issues in future motions or
at trial.”
2. The Motions To Disqualify Hosie Rice
a. The motion in the CRC action
CRC, Lawrence and Manek moved to disqualify Spencer
Hosie and Hosie Rice from representing Militello in the CRC
action. The motion argued Hosie’s and his firm’s disqualification
was required because the electronic communications between
Lawrence and Athey, which Militello had downloaded, were
protected by the spousal communication privilege; Militello did
not have permission to access Lawrence’s email account or to
read her private communications with her husband; and, after
being given the confidential communications by Militello, Hosie
not only failed to inform Lawrence that he had them but also
used them as the basis for renewing Militello’s motion for a
receivership.
The trial court (Judge Goorvitch) denied the motion.
Although acknowledging the communications were privileged, as
Judge Chalfant had ruled, subject only to possible application of
the crime-fraud exception, the court concluded disqualification
was not necessary because CRC did not demonstrate prejudice:
“The Court reviewed the communications at issue and did not
find any information that provides Militello’s counsel a strategic
advantage based upon having learned useful information about
the issues in this litigation. CRC’s motion speaks only generally
about Militello’s counsel having obtained such an advantage and
does not identify any specific information that provides this
advantage. This is especially true because this case relates only
to CRC’s claims that Militello unlawfully accessed the computer
and deprived access to electronic and physical workspaces. The
6
2
Court dismissed the cross-complaint on October 29, 2021.” The
order denying the motion stated it applied only to the CRC action
“and shall not preclude CRC from seeking the same relief in
3
Case Number 21SMCV00789 [the case now before this court].”
b. The motion in the case at bar
Lawrence moved in the instant action to disqualify Hosie
and Hosie Rice, asserting the same grounds (failure to disclose to
Lawrence that counsel had received her presumptively privileged
communications from Militello and the use of those privileged
communications in the CRC action receivership motion) as had
been advanced in the CRC action. Militello filed an opposition,
arguing Lawrence had no reasonable expectation her
communications over the corporate network were private (that is,
she knew Militello could access and review them); the
communications were part of the scheme to defraud Militello by
forcing her out of the parties’ cannabis business and thus within
the crime-fraud exception; disqualification was unwarranted
2
After the receivership motion was denied, the cross-
defendants demurred to Militello’s cross-complaint. Militello
dismissed all her causes of action except for wrongful termination
against CRC. The trial court sustained the demurrer to that
remaining cross-claim, leaving only CRC’s complaint against
Militello in the CRC action.
3
In its order the court noted CRC’s counsel had stated he did
not intend to waive the privilege by referring to the
communications in connection with the motion to disqualify and
Militello’s counsel confirmed he did not intend to argue waiver.
The court then found “no waiver of the marital privilege of Joel
Athey and Ann Lawrence Athey based upon the proceedings in
this matter, i.e., the arguments on this motion.”
7
because counsel’s access to the emails provided no strategic
advantage in the litigation; and, finally, disqualification is never
justified by virtue of a party disclosing confidential information to
his or her own counsel.
Lawrence filed a reply memorandum and objected to
portions of Hosie’s declaration in opposition to the motion based
on the spousal privilege and lack of authentication.
The trial court granted the motion and ordered
4
disqualification of Hosie and his law firm. The court first ruled
Lawrence had presented sufficient evidence to apply the
presumption the spousal communication privilege applied to her
communications with Athey, referring to Lawrence’s declaration
describing the daily email exchange she had with her husband
from her CRC email account and averring she considered the
messages private and confidential and had not given Militello or
anyone at Hosie Rice permission to access her account.
The court then found Militello had failed to carry her
burden to establish the communications were not confidential.
The court explained Militello had not presented evidence she
accessed the electronic communications while she was still a
director of CRC and, in any event, she was not authorized to do
so under Corporations Code section 1602 unless acting in a
fiduciary capacity, which she had not established. As for
Militello’s contention Lawrence had no reasonable expectation of
privacy when sending emails over the CRC platform, the court
found there was no evidence that CRC had a monitoring policy
4
The court also ordered Militello and her counsel to destroy
all privileged communications in their possession “[t]o ensure
that this issue does not reoccur.”
8
(whether through its governing bylaws or an employee
handbook), that Lawrence had agreed to such a policy or that
Lawrence had notice from a Google message warning of the
accessibility of her email account to others at the company.
Finally, the court found Militello had failed to make a prima facie
showing the communications were made to enable the
commission of a crime or fraud (and noted it was prohibited from
reviewing the privileged communications themselves to evaluate
this contention).
Emphasizing the litigation involved Militello’s claim she
was the victim of fraud perpetrated by Lawrence and others and
Hosie had already attempted to use the emails to the
disadvantage of Lawrence, the court found that possession and
potential future exploitation of the communications would
prejudice Lawrence and undermine the public’s trust in the
administration of justice. Then, pointing out that Militello was
an attorney and should know that the communications between
Lawrence and Athey were protected by the spousal
communication privilege, the court rejected the argument that
disclosure to one’s own attorney of confidential information does
5
not justify disqualification.
5
The trial court sustained 13 of 14 objections by Lawrence to
exhibits attached to Hosie’s declaration filed in opposition to
Lawrence’s motion “for lack of authentication and spousal
privilege.” Militello argues the exhibits were properly
authenticated but does not address the court’s second ground for
sustaining the objections. (See People v. JTH Tax, Inc. (2013)
212 Cal.App.4th 1219, 1237 [“[w]hen a trial court states multiple
grounds for its ruling,” the appellant must address each of them
“because ‘one good reason is sufficient to sustain the order from
which the appeal was taken’”].) Nor does she explain how she
9
Militello, Hosie and Hosie Rice filed timely notices of
6
appeal.
DISCUSSION
1. Standard of Review
A trial court’s decision to grant or deny a motion to
disqualify counsel is generally reviewed for abuse of discretion.
(People v. Suff (2014) 58 Cal.4th 1013, 1038; In re Charlisse C.
(2008) 45 Cal.4th 145, 159; People ex rel. Dept. of Corporations v.
SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1143
(SpeeDee Oil).) “As to disputed factual issues, a reviewing court’s
role is simply to determine whether substantial evidence
supports the trial court’s findings of fact . . . . As to the trial
court’s conclusions of law, however, review is de novo; a
disposition that rests on an error of law constitutes an abuse of
discretion.” (In re Charlisse C., at p. 159; see Haraguchi v.
Superior Court (2008) 43 Cal.4th 706, 711-712.) While the trial
court’s “‘application of the law to the facts is reversible only if
arbitrary and capricious’” (In re Charlisse C., at p. 159; accord,
Doe v. Yim (2020) 55 Cal.App.5th 573, 581), “where there are no
material disputed factual issues, the appellate court reviews the
trial court’s determination as a question of law.” (SpeeDee Oil, at
could properly use emails exchanged between Lawrence and
Athey to argue the court erred in disqualifying Hosie and Hosie
Rice.
6
“[T]he order disqualifying [counsel] is appealable.” (URS
Corp. v. Atkinson/Walsh Joint Venture (2017) 15 Cal.App.5th
872, 880; see Meehan v. Hopps (1955) 45 Cal.2d 213, 215-216.)
“Disqualified attorneys themselves have standing to challenge
orders disqualifying them.” (A.I. Credit Corp., Inc. v. Aguilar &
Sebastinelli (2003) 113 Cal.App.4th 1072, 1077.)
10
p. 1144; accord, O’Gara Coach Co., LLC v. Ra (2019)
30 Cal.App.5th 1115, 1124 (O’Gara Coach); California Self-
Insurers’ Security Fund v. Superior Court (2018) 19 Cal.App.5th
1065, 1071.)
When deciding a motion to disqualify counsel, “[t]he
paramount concern must be to preserve public trust in the
scrupulous administration of justice and the integrity of the bar.
The important right to counsel of one’s choice must yield to
ethical considerations that affect the fundamental principles of
our judicial process.” (SpeeDee Oil, supra, 20 Cal.4th at p. 1145;
accord, O’Gara Coach, supra, 30 Cal.App.5th at p. 1124.)
“[W]here 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, regardless of whether a motion is
brought by a present or former client of recused counsel.”
(Kennedy v. Eldridge (2011) 201 Cal.App.4th 1197, 1205.)
2. The Spousal Communication Privilege and the
Presumption of Confidentiality
Evidence Code section 980 provides, “Subject to Section 912
[concerning waiver] and except as otherwise provided in this
article, a spouse . . . , whether or not a party, has a privilege
during the marital or domestic partnership relationship and
afterwards to refuse to disclose, and to prevent another from
disclosing, a communication if he or she claims the privilege and
the communication was made in confidence between him or her
and the other spouse while they were spouses.” As the Law
Revision Commission Comments make clear, “The privilege may
be asserted to prevent testimony by anyone, including
eavesdroppers.”
11
Evidence Code section 917, subdivision (a), states, “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, . . . 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.” (Accord, Costco Wholesale
Corp. v. Superior Court (2009) 47 Cal.4th 725, 733 (Costco) [once
the party claiming one of the communication privileges
establishes facts necessary to support a prima facia claim of
privilege, “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 the communication was not
confidential or that the privilege does not for other reasons
apply”]; Doe v. Yim, supra, 55 Cal.App.5th at p. 587.) Evidence
Code section 917, subdivision (b), further provides, “A
communication between persons in a relationship listed in
subdivision (a) does not lose its privileged character for the sole
reason that it is communicated by electronic means or because
persons involved in the delivery, facilitation, or storage of
electronic communication may have access to the content of the
communication.” Notwithstanding subdivision (b), presumptively
confidential communications sent from and received on a
company-owned computer will not be protected from disclosure as
privileged if the computer-user had been “warned that it was to
be used only for company business, that e-mails were not private,
and that the company would randomly and periodically monitor
its technology resources to ensure compliance with the policy.”
(Holmes v. Petrovich Development Co., LLC (2011)
191 Cal.App.4th 1047, 1068-1069.)
12
Subject to certain exceptions not applicable in this case,
“the presiding officer may not require disclosure of information
claimed to be privileged . . . in order to rule on the claim of
privilege.” (Evid. Code, § 915, subd. (a); accord, Costco, supra,47 Cal.4th at p. 739 [“Evidence Code section 915 prohibits a court
from ordering in camera review of information claimed to be
privileged in order to rule on the claim of privilege”]; cf. id. at
pp. 738-739 [“nothing in Evidence Code section 915 prevents a
party claiming a privilege from making an in camera disclosure
of the content of a communication to respond to an argument or
tentative decision that the communication is not privileged”].)
3. Militello Failed To Carry Her Burden To Establish
Lawrence’s Communications with Athey Were Not
Protected by the Spousal Communication Privilege
The communications at issue are presumptively privileged
under Evidence Code section 980. In her declaration in support
of the motion to disqualify Hosie Rice, Lawrence identified
exhibits attached to Hosie’s declaration in support of Militello’s
motion for appointment of a receiver in the CRC action as
“written communications between Joel Athey, my husband, and
me, and no one else. The messages indicate they were between
the account ann@crcdistro.com, which is my email account at
CRC, and my husband’s email account.” Lawrence declared she
considered all the emails with her husband included with
Militello’s motion to be “private and confidential
communications” and explained she had not given Militello or
anyone at Hosie Rice permission to access her email account or
any chat messages associated with that email account.
a. Lawrence’s reasonable expectation of privacy
13
Militello attempted to overcome the presumed privileged
nature of these communications, arguing Lawrence knew the
communications platform she was using was not confidential and,
therefore, Lawrence had no reasonable expectation of privacy.
Militello pointed to Corporations Code section 1602, which
authorizes a director to inspect all books and records of the
7
corporation of which he or she is a director; CRC’s bylaws, which
essentially repeat the language of Corporations Code
8
section 1602; and a message Google provided when CRC moved
to G Suite that the domain administrator had access to all data.
The trial court found, notwithstanding these provisions,
Militello had not carried her burden of establishing Lawrence
had no reasonable expectation her communications with her
husband would be private. On appeal Militello has not
demonstrated the evidence compelled a finding in her favor on
this issue as a matter of law. (See Phipps v. Copeland Corp. LLC
(2021) 64 Cal.App.5th 319, 333 [Where, as here, “the trier of fact
has expressly or implicitly concluded that the party with the
7
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.”
8
Section 4 of the CRC bylaws provided, “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 right of inspection
includes the right to copy and make extracts of documents.”
14
burden of proof did not carry the burden and that party appeals,
generally the question for a reviewing court becomes whether the
evidence compels a finding in favor of the appellant as a matter of
law. Specifically, the question becomes whether the appellant’s
evidence was (1) uncontradicted and unimpeached and (2) of such
a character and weight as to leave no room for a judicial
determination that it was insufficient to support a finding”
(cleaned up)]; accord, Atkins v. City of Los Angeles (2017)
8 Cal.App.5th 696, 734.)
As the trial court emphasized, Militello presented no
evidence CRC had a policy of monitoring individual email
accounts—there was no CRC company handbook with a policy
prohibiting Lawrence from using her CRC email account for
personal communications or indicating her account would be
monitored to ensure compliance with that restriction—let alone
9
that Lawrence had agreed to such a policy. In addition, the
Google welcome message concerning the domain administrator’s
ability to access data was not directed to Lawrence’s email
10
account, and there was no evidence she ever received it.
As for Militello’s right as a director to inspect corporate
records, as set forth in Corporations Code section 1602 and CRC’s
9
A company handbook proffered by Militello, which
contained a monitoring policy, was for one of the dispensaries,
not CRC. Militello had elsewhere stated the dispensary was not
affiliated with CRC.
10
We disregard, as we must, Militello’s quotation from a
presumptively privileged email to support her claim Lawrence
knew Militello was reading her communications. (See Evid.
Code, § 915, subd. (a); Costco, supra, 47 Cal.4th at p. 740.)
15
bylaws, the trial court ruled Militello had failed to present
evidence that she was still a director at the time she accessed
Lawrence’s email account (that is, before the board removed her
on March 24, 2021) or that she was acting in good faith in her
fiduciary capacity as a director when she did so. The trial court
cited case law holding that current director status is required to
pursue inspection rights and the inspection must be performed in
furtherance of the director’s fiduciary duties. Militello insists the
court’s analysis, even if correct in terms of her right to download
the communications, failed to recognize that, because she could
have accessed Lawrence’s email account prior to March 24, 2021,
Lawrence had no reasonable expectation of privacy as to these
email communications, which were made prior to her removal as
a director.
Militello is correct as to the proper time to evaluate
whether Lawrence’s expectation of privacy was reasonable.
However, it is by no means clear a director’s right to inspect
corporate books and records includes the surreptitious review of
another director’s individual email account on the company’s
G Suite. (Cf. Wolf v. CDS Devco (2010) 185 Cal.App.4th 903, 919
[the statutory right of inspection is to be used only to aid the
performance of the director’s fiduciary duties].) CRC’s bylaws do
not define the pertinent terms, and neither the bylaws nor any
other company document put Lawrence on notice her electronic
communications with her husband through G Suite were not
confidential.
Neither of the cases cited by Militello supports her
assertion the general right to inspect corporate records, absent a
specific policy concerning individual email accounts, defeated
Lawrence’s reasonable expectation her communications with her
16
husband would remain confidential. As discussed, in Holmes v.
Petrovich Development Co., LLC, supra, 191 Cal.App.4th 1047,
the employee had been expressly advised communications made
over her company computer were not private and would be
monitored and had stated she was aware of, and agreed to, that
policy. (Id. at p. 1068.) Similarly, in United States v. Hamilton
(4th Cir. 2012) 701 F.3d 404 the employee (a teacher) had
received and signed a policy stating users of the school’s
computer system had no expectation of privacy in their emails
and that all information sent or stored on the system was subject
to inspection and monitoring at any time. (Id. at p. 408.)
b. The crime-fraud exception
Militello also contends Lawrence’s communications with
Athey fell within Evidence Code section 981’s crime-fraud
exception to the spousal communication privilege and argues, at
the very least, she made a showing sufficient to warrant an in
camera review by the trial court—without citation to any
authority that would except a crime-fraud claim from the
prohibition in Evidence Code section 915, subdivision (a), on
examining the communication at issue to determine its privileged
11
nature. In support Militello notes only that (1) Athey was
11
Evidence Code section 915 does identify in subdivisions (a)
and (b) several types of privilege claims for which an in camera
inspection of the material may be made, for example a claim
under Evidence Code section 1060 regarding trade secrets. The
crime-fraud exception is not among them. (See State Farm Fire
& Casualty Co. v. Superior Court (1997) 54 Cal.App.4th 625, 645
[“[f]rom these enumerated exceptions to Evidence Code
section 915, we conclude that the Legislature does not
17
serving as her lawyer as she negotiated contractual agreements
with Lawrence and Manek in December 2020; (2) prior to and
during those negotiations (and afterward, for that matter), Athey
and Lawrence communicated with each other; (3) within weeks of
signing the new agreements, Lawrence began her efforts to force
Militello out of the company; and (4) Lawrence and Manek
thereafter entered into a contract to sell CRC’s real estate.
As stated in the Law Revision Commission Comments to
Evidence Code section 981, the exception provided by the section
“is quite limited. It does not permit disclosure of communications
that merely reveal a plan to commit a crime or fraud; it permits
disclosure only of communications made to enable or aid anyone
to commit or plan to commit a crime or fraud.” Nothing in the
anodyne evidence presented by Militello—that Lawrence and
Athey continued their usual practice of daily, or almost daily,
electronic communications during the work day while Athey was
purportedly representing Militello in her negotiations with his
wife—reasonably supports an inference that the purpose of those
communications was to enable or aid a fraud against Militello
(even if we were to conclude Militello’s evidence adequately made
a prima facie showing of fraud). Indeed, given the trial court’s
finding that Militello had failed to carry her burden of showing a
connection between the communications and the fraud she
alleged, we could reverse the court’s ruling only if the evidence
compelled a finding the communications were in aid of a fraud. It
does not.
contemplate disclosure of privileged material in ruling on the
crime/fraud exception”].)
18
4. The Trial Court Acted Within Its Discretion in
Disqualifying Hosie and Hosie Rice
Our colleagues in Division Four of this court explained in
Doe v. Yim, supra, 55 Cal.App.5th 573, a case involving, in part,
the potential misuse of confidential information protected by the
spousal communication privilege, “The power to disqualify
counsel is frequently exercised on a showing that disqualification
is required under professional standards governing avoidance of
potential adverse use of confidential information. Even in the
absence of an official standard on point, counsel may be
disqualified where counsel has obtained the secrets of an adverse
party because the situation implicates the attorney’s ethical duty
to maintain the integrity of the judicial process.” (Id. at p. 586,
cleaned up.) We articulated the same principle in O’Gara Coach,
supra, 30 Cal.App.5th at page 1129, “Richie, even though no
longer an officer of O’Gara Coach, has no right to disclose
information protected by [the lawyer-client] privilege without
O’Gara Coach’s consent. [Citations.] And now that Richie is a
member of the California State Bar, O’Gara Coach is entitled to
insist that he honor his ethical duty to maintain the integrity of
the judicial process by refraining from representing former
O’Gara Coach employees in litigation against O’Gara Coach that
involve matters as to which he possesses confidential
information.” (See Rico v. Mitsubishi Motors Corp. (2007)
42 Cal.4th 807, 818 (Rico) [“‘[a]n attorney has an obligation not
only to protect his client’s interests but also to respect the
legitimate interests of fellow members of the bar, the judiciary,
and the administration of justice’”].)
Doe v. Yim, supra, 55 Cal.App.5th 573 and O’Gara Coach,
supra, 30 Cal.App.5th 1115 fully support the trial court’s exercise
19
of its discretion to disqualify Hosie and Hosie Rice based on the
lawyers’ unauthorized possession and use in court filings of
12
Lawrence’s confidential communications with her husband.
Militello makes three arguments challenging that conclusion:
Lawrence’s disclosure of the contents of her emails was not
inadvertent; the communications did not provide any strategic
advantage to Militello, making disqualification of her counsel
unduly punitive; and disqualification is not a proper response to a
client’s disclosure of an adverse party’s confidential information
12
As an additional ground for disqualifying Hosie and Hosie
Rice, Lawrence cites case law holding a lawyer has an ethical
obligation upon receiving another party’s inadvertently produced
attorney-client privileged materials to notify the party entitled to
the privilege and to refrain from using the material until any
issue of privilege has been resolved. (E.g., Rico, supra, 42 Cal.4th
at pp. 810, 817-818; State Comp. Ins. Fund v. WPS, Inc. (1999)
70 Cal.App.4th 644, 656-657; see McDermott Will & Emery LLP
v. Superior Court (2017) 10 Cal.App.5th 1083, 1106.) Lawrence
argues Hosie Rice’s disqualification was justified, even if her
communications with Athey are ultimately found not to be
privileged, because Hosie made full use of presumptively
privileged spousal communications without notifying her the firm
had obtained her emails and first seeking to resolve the issue
whether the communications were confidential or otherwise not
properly shielded from disclosure. (See Rico, at p. 819
[disqualification affirmed where attorney “‘not only failed to
conduct himself as required under State Fund, [citation] but also
acted unethically in making full use of the confidential
document’”].) Because we hold the communications remain
protected by the spousal communication privilege and Hosie
Rice’s disqualification was proper following its use of that
material, we need not address this alternate argument.
20
to his or her own attorney. None of Militello’s contentions has
merit.
To the extent Militello’s first argument—that Lawrence
failed to prove disclosure of her communications with Athey was
unintentional—is not simply a repackaged version of the
contention Lawrence should have known Militello could monitor
her CRC platform communications, it is belied by the record. In
her declaration Lawrence confirmed she believed her
communications with Athey were private and stated she had not
authorized their disclosure. Even if Militello accessed and
downloaded the emails believing she had a right to do so as a
CRC director, the record establishes it was not done with
Lawrence’s actual knowledge or permission.
Militello’s second argument is equally without merit. Hosie
Rice made aggressive use of the Lawrence emails in its motion for
appointment of a receiver in the CRC action and in both cases
contended the emails provided evidence of a fraud perpetrated by
Lawrence and Ashley that is the foundation for the instant
lawsuit. In the opening page of her opposition to the motion to
disqualify, for example, Militello asserted, “[T]hese
communications were sent as an active part of acknowledged
fraud; a fraud that continues to this day.”
To be sure, as Militello points out, the court in the CRC
action denied the motion for disqualification because it concluded
the communications did not provide Militello a strategic
advantage in that lawsuit. But the issues in Militello’s
affirmative lawsuit against Lawrence, Athey and others are very
different from those necessary for her defense of the CRC action.
And there is a very real potential that lawyers at Hosie Rice,
having read the emails, as opposed to simply relying on
21
Militello’s recollection of what they may have said, will be able to
use that information throughout the litigation, for example, in
drafting discovery requests and responses and preparing for trial,
as our Division Four colleagues recognized was likely when
affirming the similar disqualification order in Doe v. Yim based
on counsel’s improper access to information protected by the
spousal communication privilege. (See Doe v. Yim, supra,
55 Cal.App.5th at p. 588.)
Moreover, even if we were confident Hosie Rice would not
once again attempt to use Lawrence’s emails to its client’s
advantage, it was well within the trial court’s discretion to
disqualify Hosie and his law firm because, as the court wrote,
given their past improper use of confidential information,
allowing them to continue to represent Militello in this case
“would negatively affect the public’s trust in both the scrupulous
administration of justice and the integrity of the bar.” That is the
essence of the holdings in Doe v. Yim and O’Gara Coach.
Militello’s final argument—disqualification is not
appropriate when the lawyers receive the adverse party’s
privileged communications from their own client—finds some
support in the case law, but does not justify reversal of the
decision to disqualify Hosie and Hosie Rice under the
circumstances here. In Roush v. Seagate Technology, LLC (2007)
150 Cal.App.4th 210, for example, the court, before holding the
moving party had not carried her burden of establishing any
confidential information had been shared with opposing counsel,
explained disqualification may be warranted when counsel has
obtained the secrets of an adverse party other than through a
prior representation “not because the attorney has a direct duty
to protect the adverse party’s confidences, but because the
22
situation implicates the attorney’s ethical duty to maintain the
integrity of the judicial process.” (Id. at p. 219.) Nonetheless, the
Roush court observed in dicta, “[W]here the attorney’s client is
the attorney’s source of privileged information relating to the
litigation, courts typically refuse to allow the disqualification,
concluding that clients do not act inappropriately in providing
information to their own attorney. ‘Since the purpose of
confidentiality is to promote full and open discussions between
attorney and client [citation], it would be ironic to protect
confidentiality by effectively barring from such discussions an
adversary’s confidences known to the client. 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.’ [Citation.] Further, in such situations, disqualification
would do nothing to protect the attorney-client privilege because
the client still has the information and may pass it on to new
counsel, leaving the adversary in the same position.” (Id. at
pp. 219-220; see Neal v. Health Net, Inc. (2002) 100 Cal.App.4th
831, 843-844 [holding no confidential information had been
disclosed, but stating in dicta, even if it had been, “[d]isclosure to
one’s own attorney of confidential information does not justify
13
disqualification”].)
In contrast to these general statements untethered to the
specific issues decided by the Roush and Neal courts, in Clark v.
Superior Court (2011) 196 Cal.App.4th 37 (Clark) the court of
13
As the trial court noted in its ruling granting the motion to
disqualify Hosie Rice, to the extent this analysis depends on the
lack of sophistication of a lay client, it is inapplicable to Militello,
who is an active member of the State Bar.
23
appeal denied a writ petition seeking to overturn the trial court’s
decision to disqualify counsel who received stolen attorney-client
privileged documents from his client and affirmatively used
information from the documents in a lawsuit against the client’s
former employer. (Id. at pp. 54-55.) Explaining its determination
that disqualification was not an abuse of discretion, the court
held, “On this record, a trier of fact could conclude [the
disqualified lawyer’s] continued representation of [the client]
could trigger doubts over the integrity of the judicial process
because whenever [the lawyer’s] advocacy against [the former
employer/adverse party] began to touch on matters contained in
the privileged documents that [the lawyer] retained (for over nine
months) and excessively reviewed, the inevitable questions about
the sources of [the lawyer’s] knowledge (even if [the lawyer] in
fact obtained such knowledge from legitimate sources) could
undermine the public trust and confidence in the integrity of the
adjudicatory process.” (Id. at p. 55.)
In O’Gara Coach, supra, 30 Cal.App.5th at page 1130 we
noted, without attempting to resolve, the apparent conflict
between the holding in Clark and the dicta in earlier cases
stating disqualification was not appropriate when a client
improperly disclosed confidential information to his or her own
attorney. But we hinted at a resolution.
The issue in O’Gara Coach was whether Darren Richie’s
law firm, Richie Litigation, P.C., could represent a former senior
executive of O’Gara Coach Company in litigation against O’Gara
Coach given evidence that Richie, the former president and chief
operating officer of O’Gara Coach, had been a client contact for
outside counsel investigating charges of fraudulent conduct at the
company and, as such, was privy to attorney-client privileged
24
information relevant to the litigation. (O’Gara Coach, supra,
30 Cal.App.5th at p. 1119.) Even though Richie left O’Gara
Coach before becoming a member of the State Bar, we held his
possession of O’Gara Coach’s confidential information
disqualified him from representing the former senior executive;
and, because there was no showing Richie had been effectively
screened from other members of his firm, the firm could not
continue to represent the former executive. (Id. at p. 1131.)
However, we suggested—expressly noting we were not deciding—
it might be proper for Richie Litigation to represent Richie in his
own litigation against O’Gara Coach. (Ibid.)
Unlike in Clark, however, there was no suggestion Richie
had taken with him privileged documents from O’Gara Coach.
That is the crucial difference, we believe, between Clark and the
case at bar, on the one hand, and a broad reading of language in
cases generally indicating disqualification is not appropriate
when it is the lawyer’s own client who provided the improperly
14
acquired privileged information, on the other. Courts cannot
14
In Roush v. Seagate Technology, LLC, supra,
150 Cal.App.4th 210 the disclosure of allegedly confidential
information apparently consisted only of discussions involving
potential case strategies and evidence, rather than providing
counsel with privileged documents. (See id. at p. 221.) Similarly,
in Neal v. Health Net, Inc., supra, 100 Cal.App.4th 831 the
disclosures occurred during “discussions of an adversary’s
confidences known to the client,” rather than through the sharing
of privileged documents. (Id. at p. 844.)
In contrast to the oral disclosures in these cases, in Cooke
v. Superior Court (1978) 83 Cal.App.3d 582 the client in a
dissolution proceeding had given her attorney copies of attorney-
client privileged documents belonging to her husband that had
25
effectively police what a client, after reading or hearing another
party’s confidential communications, chooses to tell his or her
lawyer. As the cases indicate, attempting to restrict oral
disclosures of that sort risks undue interference with candid
discussions between the client and counsel; and disqualification
would, in any event, be an ineffective remedy because the client
might provide the same information to new counsel. But it is an
entirely different matter if the client improperly obtained (or
maintained) possession of written or digital copies of an adverse
party’s confidential information and provided them to counsel for
use in litigation. Insisting that counsel not read purloined
documents any more closely than is necessary to determine if
they are privileged, as described in Rico, supra, 42 Cal.4th at
pages 810 and 818 and State Comp. Ins. Fund v. WPS, Inc. (1999)
70 Cal.App.4th 644, 656-657, and prohibiting their use if they
been surreptitiously copied and delivered to the wife by her
husband’s butler. (Id. at p. 592.) The trial court prohibited the
use of the documents in the dissolution proceedings but declined
to disqualify the wife’s counsel. The court of appeal denied both
the wife’s request for writ relief concerning her use of the
documents and the husband’s request for writ relief on the issue
of disqualification. (Ibid.) But the court’s disqualification ruling
was based on its understanding that disqualification was never
appropriate based on exposure to privileged information absent
an attorney-client relationship between the party moving for
disqualification and the attorney sought to be disqualified—not
because it was the lawyer’s own client who had provided the
improperly acquired privileged information. (Ibid.) That view of
the law, as we explained in O’Gara Coach, supra, 30 Cal.App.5th
at page 1130, is inconsistent with the Supreme Court’s decision
in Rico, supra, 42 Cal.4th 807, as well as many subsequent
decisions from the courts of appeal.
26
are, will not inhibit legitimate attorney-client conversations; and
a client whose counsel is disqualified for defying such a rule is
not likely to repeat the violation. On the other hand, as the trial
court ruled here, to allow continued representation of a client
after counsel has been provided with, and then used, improperly
obtained confidential information would undermine the public’s
trust in the fair administration of justice and the integrity of the
bar.
DISPOSITION
The order disqualifying Militello’s counsel Spencer Hosie
and Hosie Rice is affirmed. Lawrence is to recover her costs on
appeal.
PERLUSS, P. J.
We concur:
SEGAL, J.
FEUER, J.
27