in Re Trojan Group Contractor, Inc. ( 2022 )

In The
Court of Appeals
Ninth District of Texas at Beaumont
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NO. 09-22-00295-CV
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IN RE TROJAN GROUP CONTRACTOR, INC.
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Original Proceeding
284th District Court of Montgomery County, Texas
Trial Cause No. 22-04-05396-CV
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MEMORANDUM OPINION
In an interpleader action concerning a construction project and construction
retainage, the project owner, 2301 South Mountain Residence Corporation (“South
Mountain”), filed a motion to disqualify counsel of record for the building
contractor, Trojan Group Contractor, Inc. (“Trojan”), alleging that Trojan’s attorney
of record had also represented South Mountain in a separate lawsuit to foreclose one
of the materialman’s liens on the same construction project and that the suits were
substantially related. The trial court held a hearing on the motion, received evidence
and testimony, and thereafter granted the motion to disqualify counsel. In a
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mandamus petition, Trojan argues the trial court abused its discretion by
disqualifying Trojan’s chosen counsel because South Mountain waived any conflict
of interest. For the reasons explained below, we deny the petition for a writ of
mandamus.
The underlying interpleader suit was filed by New Era Life Insurance
Company (“New Era”), with respect to a dispute over retainage funds. New Era
deposited the retainage into the court and named defendants Trojan and South
Mountain, as well as other named defendants who had filed mechanics and
materialman’s liens on the project. One of the other named defendants in the
interpleader is L&W Supply Corporation. Trojan, represented by the Vethan Law
Firm, filed an answer, as well as a counterclaim and crossclaims. In addition to
claims asserted against other parties, Trojan crossclaimed against South Mountain
for breach of contract and to foreclose Trojan’s constitutional lien. South Mountain
filed an answer and crossclaim against Trojan for breach of contract and violation of
the trust fund statute.
Approximately one month after the interpleader was filed, South Mountain
filed a motion to disqualify the Vethan Law Firm and its associated attorneys from
representing Trojan in the interpleader lawsuit. In its Motion to Disqualify, South
Mountain alleged that Trojan falsely said it had paid many of its subcontractors and
material suppliers, when in fact the subcontractors and suppliers had not been paid,
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leading to the filing of approximately $400,000 in mechanic and materialman’s liens
(M & M Liens) on the project and that the liens were filed before the interpleader
suit. Additionally, in the motion to disqualify, South Mountain explained that before
the interpleader was filed, one of the M & M Lienholders (L&W Supply) had filed
a lawsuit to foreclose its lien against South Mountain, D.J. Saldana, and Saldana’s
Company, Divisions Construction (the L&W suit). A Default Judgment was sought
by L&W Supply against South Mountain in that suit. Saldana took South Mountain’s
principal owner to see Saldana’s attorneys, the Vethan Law Firm, and South
Mountain then hired the Vethan Law Firm to act as counsel for South Mountain and
file an answer for South Mountain in the L&W suit. Before filing an answer on
behalf of South Mountain, the Vethan Law Firm met with Saldana and South
Mountain’s principal Zheng Heng Zheng and explained they would require Saldana
and South Mountain to sign a letter agreement waiving any potential conflicts of
interest. According to South Mountain, the Vethan Law Firm filed an answer on
behalf of South Mountain, but it later withdrew as counsel for South Mountain in
the L&W suit, and on the same day then sent a demand letter on behalf of Trojan.
South Mountain argued the waiver was drafted by the Vethan Law Firm and did not
mention Trojan or any disputes between South Mountain and Trojan.
In response, Trojan argued South Mountain waived disqualification and
waived any complaint of a conflict. Trojan argued the waiver applied to the Vethan
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Law Firm’s representation of Trojan on its claims against South Mountain because
the waiver agreement South Mountain signed stated that in the event of a conflict
the parties agreed that Vethan could continue to represent Saldana and his
Companies, and Saldana is a Director of Trojan. Trojan argued the L&W suit and
the interpleader action are not substantially related and South Mountain had not
identified confidential information in the Vethan Law Firm’s possession that
resulted in harm or prejudice to South Mountain.
The trial court heard South Mountain’s motion to disqualify on July 29, 2022,
wherein the trial court received exhibits and testimony from South Mountain’s
corporate representative, Zheng Heng Zheng, testimony from Saldana, and from Rex
Chuang. The parties also submitted some additional legal authority to the trial court
and arguments. On July 31, 2022, the trial court entered an Order reflecting its ruling
and granted South Mountain’s motion to disqualify the Vethan Law Firm.
The trial court’s Order stated in pertinent part:
After considering the Mot[i]on, the evidence presented and the
arguments of counsel the Court finds that an actual conflict of interest
exists between The Vethan Law Firm’s representation of Trojan in this
matter and its prior representation of South Mountain in the lawsuit
filed against South Mountain by L&W Supply Corp. and that
disqualification of The Vethan Law Firm in this matter is required to
protect the due process rights and confidential information of South
Mountain. THEREFORE,
IT IS ORDERED The Vethan Law Firm is disqualified from any further
representation of the Trojan Group Contractor[], Inc., or its affiliates,
officers, agents, servants and employees in this matter.
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In its mandamus petition, Trojan argues the trial court erred by denying Trojan
its counsel of choice when South Mountain signed a conflict waiver that specifically
identified the potential conflict in the first paragraph. That paragraph stated:
We at the Vethan Law Firm (“VLF”) are pleased that South
Mountain Residence Corporation seeks to employ our Firm in
connection with the above-referenced matter. As you already know,
VLF has represented Dagoberto Saldana Jr. and Superlative
Construction Inc., d/b/a Division Construction and its various corporate
parents, subsidiaries, and affiliates as may exist or later be formed,
[(]collectively as the “Companies”) in his ongoing business affairs for
some time. VLF presently represents Mr. Saldana and his Companies
in various construction disputes. This technically puts the Firm in
several “dual representation” and possible conflicts positions. Such
potential conflicts and dual representations permitted only in certain
instances, and this letter is to make sure you are completely apprised of
the situation.
Trojan argues South Mountain agreed to waive any complaint of the conflict
to the extent Saldana’s business interests or those of his companies’ conflict with
South Mountain, as follows:
In addition to providing counsel each of the Companies, we
currently represent Mr. Saldana in his overall business interests. To the
extent the business interests of Mr. Saldana or of the Companies
conflict with South Mountain Residence Corporation, each of you
acknowledge this possibility, and agrees to waive any complaint of this
conflict, even with respect to matters arising in the Lawsuit or as
concerns L&W generally.
Trojan argues South Mountain agreed that the Vethan Law Firm would
continue to represent Saldana and his companies if the Vethan Law Firm determined
there was a conflict and withdrew as counsel for South Mountain, as follows:
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Should VLF, in its sole discretion, determine at a later date that
multiple representation of the Companies and South Mountain
Residence Corporation, individually, is no longer possible, the parties
agree that the Firm shall withdraw from representation of South
Mountain Residence Corporation, and shall continue to represent its
longstanding clients, the Companies and Mr. Saldana.
Trojan contends the trial court failed to properly apply the Texas Supreme
Court’s guidance from In re Cerberus Capital Management, L.P. See 164 S.W.3d
379 (Tex. 2005) (original proceeding). According to Trojan, the waiver disclosed
the Vethan Law Firm’s prior representation, and the waiver letter was sufficient, that
in the hearing South Mountain’s corporate representative acknowledged that he
knew that Saldana is a Trojan partner, and that the waiver “specifically flagged the
potential conflict that predicated the subsequent motion to disqualify.”
In Cerberus Capital, a lawyer prepared an asset purchase agreement for
WSNet but was advised to stop work on the agreement because the deal would not
go forward. Id. at 380. The following year a shareholder filed a shareholder
derivative suit, alleging Cerberus Capital usurped WSNet’s corporate opportunity to
purchase the assets. Id. Cerberus Capital approached the WSNet lawyer’s firm about
representation and the firm obtained a written waiver from WSNet that disclosed the
relevant facts about the prior representation. Id. at 381. The waiver letter disclosed
that the lawyer had been engaged in a limited capacity in connection with the
unconsummated acquisition of certain cable television systems as described in the
shareholder’s petition, that he prepared a generic asset purchase and sale agreement
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over the weekend but was told on Monday the company would not be acquiring the
assets, and that the lawyer did not participate in any negotiations concerning the
proposed transaction. Id. The waiver letter also disclosed the law firm’s proposed
representation of Cerberus Capital in the shareholder derivative suit, the subject
matter of its prior work for WSNet, the time period involved, the attorney involved,
the nature of the discussion with WSNet’s general counsel, and how the prior
representation concluded. Id. at 382-83. Additionally, WSNet had in its possession
the draft of the asset purchase agreement and the shareholder’s petition when it
waived the conflict of interest. Id. at 383. The Supreme Court of Texas concluded
that WSNet who was a former client knowingly waived the conflict. Id.We find Cerberus Capital is distinguishable from the facts before us in this
mandamus proceeding. Notably, the waiver letter that the Vethan Law Firm obtained
lacks the same detail that was present in Cerberus Capital. The Vethan Law Firm’s
letter fails to mention Trojan, its constitutional lien, or any potential litigation
concerning the retainage in South Mountain’s project. The waiver fails to specify
that by waiving a conflict of interest as to the L&W suit, South Mountain had
consented to the Vethan Law Firm representing Trojan on any affirmative claims
against South Mountain in the same or in a subsequent lawsuit.
Trojan also argues the L&W suit and the New Era retainage interpleader
lawsuit are not substantially related. According to Trojan, in the L&W suit, L&W
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Supply was suing on an unpaid drywall invoice and according to Trojan, in the
interpleader suit, Trojan has crossclaims against South Mountain because Trojan has
a constitutional lien on the retainage funds, so Trojan argues the claims are not
substantially related.
Matters are substantially related if specific facts tie the former and current
representations together and create a genuine threat of disclosure of confidences
revealed to counsel in the former representation. In re Thetford, 574 S.W.3d 362,
374 (Tex. 2019) (orig. proceeding). L&W Supply’s suit to foreclose its
materialman’s lien against South Mountain’s property is substantially related to the
retainage suit because South Mountain alleges Trojan breached the construction
contract on the same project by failing to pay L&W Supply’s claim.
“[A] trial court’s decision regarding disqualification, based on a careful,
thorough consideration of all the evidence, is entitled to great deference by an
appellate court.” Id. at 365. After reviewing the parties’ arguments and the
mandamus record, the trial court appears to have carefully and thoroughly
considered the evidence presented on the issue, and relator has failed to establish a
clear abuse of discretion by the trial court. Accordingly, we deny the petition for a
writ of mandamus.
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PETITION DENIED.
PER CURIAM
Submitted on September 19, 2022
Opinion Delivered October 20, 2022
Before Kreger, Horton and Johnson, JJ.
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