Liquor Bike, LLC v. Iowa District Court for Polk County ( 2021 )

IN THE SUPREME COURT OF IOWA
No. 20–0268
Submitted April 14, 2021—Filed May 21, 2021
LIQUOR BIKE, LLC,
Plaintiff,
vs.
IOWA DISTRICT COURT FOR POLK COUNTY,
Defendant.
Certiorari to the Iowa District Court for Polk County, Jeanie Vaudt,
Judge.
A limited liability company filed a petition for a writ of certiorari
challenging a district court order to disqualify counsel. WRIT SUSTAINED
AND CASE REMANDED.
McDonald, J., delivered the opinion of the court, in which all justices
joined.
Billy J. Mallory (argued) of Brick Gentry, P.C., West Des Moines, for
plaintiff.
William M. Reasoner (argued) and David L. Wetsch of Dickinson,
Mackaman, Tyler & Hagen, P.C., Des Moines, for defendant.
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McDONALD, Justice.
“A party’s right to select its own counsel is an important public right
and a vital freedom that should be preserved; the extreme measure of
disqualifying a party’s counsel of choice should be imposed only when
absolutely necessary.” Macheca Transp. Co. v. Phila. Indem. Ins., 463 F.3d
827, 833 (8th Cir. 2006) (quoting Banque Arabe Et Internationale
D’Investissement v. Ameritrust Corp., 690 F. Supp. 607, 613 (S.D. Ohio
1988)). Here, notwithstanding the general rule that a legal entity is
separate and distinct from its owners, the district court disqualified Liquor
Bike, LLC’s counsel on the ground counsel’s representation of Liquor Bike
in this matter was directly adverse to a current client of counsel’s law firm
in another matter. We granted Liquor Bike’s petition for writ of certiorari,
and we sustain the writ.
I.
In April 2019, Heartland Plastic & Reconstructive Surgery, P.C.,
engaged Douglas Fulton of Brick Gentry, P.C., to represent Heartland with
respect to an application for certificate of need to establish an ambulatory
surgery center. Heartland is a professional corporation owned solely by
Dr. Eugene Cherny. Dr. Cherny is the only officer of Heartland.
In July 2019, attorney David Wetsch of Dickinson, Mackaman, Tyler
& Hagen, P.C., sent a demand letter on behalf of Vivone, LLC, to Liquor
Bike. The demand letter stated the two entities own adjacent properties
and a recent survey found there was a small encroachment of the property
line. The letter demanded Liquor Bike remove the encroachment or
contact attorney Wetsch to negotiate an encroachment easement. The
properties at issue were unrelated to Heartland or Dr. Cherny’s medical
practice.
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Liquor Bike’s attorney was Billy Mallory of the Brick Gentry firm.
Mallory and Wetsch tried to resolve the boundary-line dispute but were
unable to do so. In September 2019, Vivone, represented by attorneys
Wetsch and William Reasoner of the Dickinson firm, filed a petition for
injunction in the district court. In the petition, Vivone requested Liquor
Bike be ordered to remove the encroachment. Reasoner requested Mallory
accept service for Liquor Bike, and Mallory agreed to do so. On October
22, Mallory filed an answer, affirmative defenses, and counterclaims on
behalf of Liquor Bike.
Three weeks after Liquor Bike asserted counterclaims against
Vivone, Vivone moved to disqualify Mallory and the Brick Gentry firm from
representing Liquor Bike in the boundary-dispute litigation. The basis for
the motion was a purported concurrent conflict of interest. According to
the motion, Brick Gentry represented Heartland and Dr. Cherny and Brick
Gentry’s defense of Liquor Bike in the boundary dispute was adverse to
Dr. Cherny. According to the motion, the representation of Liquor Bike
was adverse to Dr. Cherny because (1) Dr. Cherny was a member of
Vivone; (2) the manager of Vivone was another company, JSV Community
Properties, Inc.; and (3) Dr. Cherny owned 100% of the voting stock of JSV.
JSV is a holding company for real estate investments.
The motion to disqualify counsel came on for an evidentiary hearing.
The engagement letter between Brick Gentry and Heartland was admitted
into evidence. The engagement letter stated, “This letter confirms our
agreement to represent Heartland Plastic & Reconstructive Surgery, PC,
with regard to an application for an Iowa Certificate of Need for an
Ambulatory Surgery Center.” The engagement letter was signed on behalf
of Heartland by Dr. Cherny. There is no indication in the engagement
letter that Brick Gentry represented Dr. Cherny in his individual capacity
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in the certificate-of-need matter. The evidence also showed Dr. Cherny
was not a member of Vivone. Brenda Rowe owned 49% of the membership
interest in Vivone, and JSV owned the remaining 51%. Dr. Cherny was
the president, secretary, and treasurer of JSV. He owned 100% of the
voting stock of JSV and 55% of the outstanding stock of JSV. Joseph,
Stephen, and Vincent Cherny owned the remaining 45% of the stock of
JSV, 15% each.
The district court disqualified Mallory and Brick Gentry from
representing Liquor Bike in the boundary-dispute litigation. The district
court found, “The bottom line is this: Brick is on both sides of the fence
here as it relates to Dr. Cherny.” Because of this, the district court
reasoned, Mallory’s representation of Liquor Bike adverse to Vivone
violated Iowa Rule of Professional Conduct 32:1.7. In particular, the
district court relied on comment 6 to the rule:
Loyalty to a current client prohibits undertaking
representation directly adverse to that client without that
client’s informed consent. Thus, absent consent, a lawyer
may not act as an advocate in one matter against a person the
lawyer represents in some other matter, even when the
matters are wholly unrelated.
Iowa R. Prof’l Conduct 32:1.7 cmt. [6] (2019).
II.
A motion to disqualify an attorney is reviewed for abuse of discretion.
See Killian v. Iowa Dist. Ct., 452 N.W.2d 426, 428 (Iowa 1990). “A district
court ‘abuses its discretion when its ruling is based on clearly untenable
grounds.’ ” NuStar Farms, LLC v. Zylstra, 880 N.W.2d 478, 482 (Iowa
2016) (quoting Bottoms v. Stapleton, 706 N.W.2d 411, 415 (Iowa 2005)).
The party moving for disqualification bears the burden of proving the
grounds for disqualification. See Bottoms, 706 N.W.2d at 418.
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III.
“[O]ur starting point in evaluating a claim that an attorney should
be disqualified from representing a party is the ethical principles outlined
in the Iowa Rules of Professional Conduct.” Id. at 415. In evaluating
whether an attorney should be disqualified, courts should balance the
right to choose a specific attorney against the need for ethics that preserve
public trust and integrity in the legal system. See id. “Because of the
potential for abuse by opposing counsel, ‘disqualification motions should
be subjected to particularly strict scrutiny.’ ” Macheca Transp. Co., 463
F.3d at 833 (quoting Harker v. Comm’r, 82 F.3d 806, 808 (8th Cir. 1996)).
The Iowa Rules of Professional Conduct outline when a concurrent
conflict of interest would prevent representation:
(a) Except as provided in paragraph (b), a lawyer shall
not represent a client if the representation involves a
concurrent conflict of interest. A concurrent conflict of
interest exists if:
(1) the representation of one client will be directly
adverse to another client; or
(2) there is a significant risk that the representation of
one or more clients will be materially limited by the lawyer’s
responsibilities to another client, a former client, or a third
person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent
conflict of interest under paragraph (a), a lawyer may
represent a client if:
....
(4) each affected client gives informed consent,
confirmed in writing.
Iowa R. Prof’l Conduct 32:1.7. Individual attorney conflicts are imputed
to the entire firm with which they are associated. See id. r. 32:1.10(a)
(“While lawyers are associated in a firm, none of them shall knowingly
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represent a client when any one of them practicing alone would be
prohibited from doing so by rule 32:1.7 or 32:1.9 . . . .”).
We hold the district court abused its discretion in concluding
Mallory’s representation of Liquor Bike in the boundary-dispute litigation
was directly adverse to Dr. Cherny in violation of rule 32:1.7(a)(1). We
analyzed the issue of directly adverse representation of concurrent clients
in NuStar Farms, LLC v. Zylstra. 880 N.W.2d at 484–85. There, we held a
concurrent conflict justified disqualification. See id. The Zylstras
consulted with an attorney for estate planning and reviewing manure
easements in an agreement with NuStar Farms, LLC. See id. at 480. The
attorney marked the manure easements document but advised the couple
to seek the advice of a different attorney. See id. Several years passed
during which the attorney represented the Zylstras in various other
matters when the attorney also began representing NuStar in a loan-
covenants matter. See id. at 481. The attorney started contacting the
Zylstras on behalf of NuStar about the failure to provide a deed. See id.
After several emails to the Zylstras regarding NuStar’s deed, the attorney
stated he intended to take legal action against the Zylstras on behalf of
NuStar and informed the Zylstras that he would cease representing them
in any matter. See id. We held that the attorney’s “representation of
NuStar was a directly adverse concurrent conflict of interest” because the
attorney clearly intended to “pursue a future, adverse action against the
Zylstras on behalf of NuStar.” Id. at 484.
Unlike NuStar, here there is no direct adversity between existing
clients. First, the Brick Gentry firm did not represent Dr. Cherny in the
certificate-of-need matter, and the district court abused its discretion in
finding otherwise. The Brick Gentry firm represented Heartland in the
certificate-of-need matter. Heartland is a professional corporation
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separate and distinct from Dr. Cherny. See Iowa Code § 490.622(2)
(“Unless otherwise provided in the articles of incorporation, a shareholder
of a corporation is not personally liable for the acts or debts of the
corporation.”); id. § 496C.3 (stating the business corporation act applies
to professional corporations); Briggs Transp. Co. v. Starr Sales Co., 262
N.W.2d 805, 809 (Iowa 1978) (“Central to corporate law is the concept a
corporation is an entity separate from its owners. The separate corporate
personality ordinarily enables corporate stockholders to limit their
personal liability to the extent of their investment.”). “A lawyer employed
or retained by an organization represents the organization acting through
its duly authorized constituents.” Iowa R. Prof’l Conduct 32:1.13(a)
(emphasis added). Contrary to the district court’s conclusion, a lawyer’s
representation of an organization does not necessarily mean the lawyer
also represents the owners, employees, or other constituents of the
organization. See id. r. 32:1.7 cmt. [34] (“A lawyer who represents a
corporation or other organization does not, by virtue of that
representation, necessarily represent any constituent or affiliated
organization, such as a parent or subsidiary.”); Terre Du Lac Prop. Owners’
Ass’n v. Shrum, 661 S.W.2d 45, 48 (Mo. Ct. App. 1983) (“A corporation is
a legal entity, separate and apart from the person or persons who are
stockholders and directors of the corporation and counsel who represents
a corporation is not ordinarily precluded from acting as counsel in suing
a director. . . . Representing a closely held corporation does not inherently
mean that counsel is acting as counsel to the individual director-
shareholders.”).
There are circumstances, however, in which the evidence could
establish an attorney–client relationship between the lawyer and the
organization’s owners, employees, or constituents. See generally Glueck
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v. Jonathan Logan, Inc., 653 F.2d 746 (2d Cir. 1981) (discussing vicarious
or attenuated clients); Colorpix Sys. of Am. v. Broan Mfg. Co., 131 F. Supp.
2d 331 (D. Conn. 2001) (same); First Republic Bank v. Brand, 51 Pa. D. &
C.4th 167, 177–79 (2001) (reviewing cases that have addressed the issue
of whether an attorney for a closely-held corporation also represents the
closely-held corporation’s stockholders). But that evidence is lacking here.
The engagement letter in the certificate-of-need matter clearly expressed
Brick Gentry represented Heartland. While Dr. Cherny testified he viewed
Brick Gentry as his lawyers in the certificate-of-need proceeding, there is
no evidence Brick Gentry represented Dr. Cherny in his personal capacity
in the certificate-of-need matter. Vivone, as the party seeking
disqualification, had the burden of production and persuasion to establish
the existence of an attorney–client relationship, and it failed to carry those
burdens. See, e.g., Terre Du Lac Prop. Owners’ Ass’n, 661 S.W.2d at 48(“Don Shrum chose to adopt the advantages of the corporate form of doing
business with respect to the enterprise that was involved in the litigation
in which the corporation was represented by the Roberts firm. There is no
evidence that the law firm ever represented Don Shrum individually.”);
Jesse v. Danforth, 485 N.W.2d 63, 69 (Wis. 1992) (holding representation
was not directly adverse where lawyer represented professional
corporation and not physician shareholders).
Second, Dr. Cherny was not an adverse party in the boundary-
dispute litigation. Brick Gentry represented Liquor Bike in the boundary-
dispute litigation. The adverse party in that litigation was Vivone and not
Dr. Cherny. As a limited liability company, Vivone is “an entity distinct
from its members.” Iowa Code § 489.104(1). Further, Dr. Cherny was not
even a member of Vivone. The evidence showed Vivone was owned 51%
by JSV and 49% by Brenda Rowe. Dr. Cherny owned 55% of JSV, and
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three other Chernys owned the remainder. JSV is a legal entity distinct
from its shareholders. See id. § 490.622(2); Briggs Transp. Co., 262
N.W.2d at 809. Brick Gentry has never represented Vivone, Rowe, JSV,
Dr. Cherny, or the other owners of JSV. The district court abused its
discretion in disregarding the separate legal status of Vivone and JSV to
find Liquor Bike was actually adverse to Dr. Cherny in the boundary-
dispute litigation.
We also conclude disqualification is not warranted under rule
32:1.7(a)(2). That rule provides that even where a lawyer’s representation
of one client is not directly adverse to another client, there may
nonetheless be a concurrent conflict of interest if “there is a significant
risk that the representation of one or more clients will be materially limited
by the lawyer’s responsibilities to another client.” Iowa R. Prof’l Conduct.
32:1.7(a)(2).
The mere possibility of subsequent harm does not itself
require disclosure and consent. The critical questions are the
likelihood that a difference in interests will eventuate and, if
it does, whether it will materially interfere with the lawyer’s
independent professional judgment in considering
alternatives or foreclose courses of action that reasonably
should be pursued on behalf of the client.
Id. r. 32:1.7 cmt. [8]. Here, Vivone failed to prove there is a “significant
risk” that Brick Gentry’s representation of Liquor Bike or Heartland will be
materially limited in any respect. Id. r. 32:1.7; Bottoms, 706 N.W.2d at
417 (“[I]f there is a significant risk that representation of one client will
materially limit the representation of another client, a conflict of interest
actually exists . . . .”).
There is no risk the Brick Gentry firm could take advantage of
confidential information. The certificate-of-need matter is a regulatory
proceeding in which all information filed in support of the application is
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accessible to the public. All of the financial information Heartland
provided to Brick Gentry in support of the application became public
information. Further, there is no evidence Dr. Cherny provided Brick
Gentry with information related to Vivone that might potentially raise an
issue. See, e.g., Castillo v. St. Paul Fire & Marine Ins., 938 F.2d 776, 778
(7th Cir. 1991) (affirming denial of motion to disqualify where information
provided by physician during course of representation “gave the
defendants no advantage or insight into his professional corporate affairs
of any consequence”); Terre Du Lac Prop. Owners’ Ass’n, 661 S.W.2d at 48(“There is no contention that plaintiff’s counsel may have learned anything
of a confidential nature in its representation of the corporation in the
pollution case that would be helpful to his present client.”).
Vivone failed to prove that Brick Gentry’s representation of Liquor
Bike in the boundary dispute litigation would be materially limited. The
boundary-dispute litigation between Liquor Bike and Vivone is not related
to Heartland or Dr. Cherny’s medical practice. Based upon Dr. Cherny’s
testimony at the disqualification hearing, he will not be a witness in the
boundary-dispute litigation because he lacks personal knowledge of the
encroachments at issue, which arose prior to Vivone acquiring the
property:
Q. And you had stated as part of this case you had
directed David Wetsch to engage in negotiations with the
neighboring property related to an alleged encroachment by a
couple feet related to a fence; correct? A. Yes.
Q. And you don’t have any personal knowledge as to
the events as a creation of this fence and the trash enclos[ure]
and the concrete wall or anything like that, do you? A. That
was before I owned the property.
....
Q. You have no personal knowledge, do you, related to
anything that occurs on the Vivone property on the south side,
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do you? A. Oh, no. I know all the time who’s renting it, where
the vacancy is, what repairs are needed, are being done
because I am the manager.
Q. Post 2014; correct? A. Yes.
Q. Nothing prior to 2014; correct? A. No.
Vivone has not articulated any theory supported by competent
evidence showing a significant risk the Brick Gentry firm’s representation
of Liquor Bike will materially interfere with its representation of any its
clients. See, e.g., McCarthy v. John T. Henderson, Inc., 587 A.2d 280, 285
(N.J. Super. Ct. App. Div. 1991) (“[T]here is simply no basis in the record
to conclude that any information was conveyed to [the law firm] of the
nature that could be used to defendants’ disadvantage in the present case
which involves wholly unrelated issues.”).
IV.
“Attorney disqualification is a drastic measure because it destroys
the attorney–client relationship by prohibiting a party from representation
by counsel of his or her choosing.” Schwartz v. Cortelloni, 685 N.E.2d 871,
877 (Ill. 1997). Motions to disqualify opposing counsel are thus disfavored
and “should be subjected to particularly strict scrutiny.” Macheca Transp.
Co., 463 F.3d at 833 (quoting Harker, 82 F.3d at 808). Here, the district
court did not subject this motion to strict scrutiny and instead found a
concurrent conflict of interest where none exists. We sustain the petition
for writ of certiorari, vacate the district court’s order disqualifying counsel,
and remand this matter for further proceedings.
WRIT SUSTAINED AND CASE REMANDED.