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


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  •                     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.
    2
    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.
    3
    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
    4
    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
    .
    5
    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
    6
    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
    7
    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
    8
    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
    9
    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
    10
    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,
    11
    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.