in Re: Elusive Holdings, Inc. ( 2020 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-19-00809-CV
In re Elusive Holdings, Inc.
ORIGINAL PROCEEDING FROM TRAVIS COUNTY
MEMORANDUM OPINION
Relator Elusive Holdings, Inc. has filed a petition for writ of mandamus seeking
relief from an order signed by the trial court on October 28, 2019, disqualifying Elusive’s
attorney, Tom Murphy, from representing the company in its lawsuit against former shareholder
and real party in interest Jacob White. We will conditionally grant mandamus relief.
FACTUAL BACKGROUND
In September 2019, Elusive sued White, Elusive’s former Chief Operating
Officer, alleging that White had violated a nondisclosure-confidentiality agreement and had
taken property belonging to Elusive. It asserted claims for breach of contract and breach of
fiduciary duty, sought injunctive relief, and asked for punitive damages and attorney’s fees.
White filed a motion to disqualify that reads in full:
This Motion to Disqualify Attorney is brought by Defendant, Jacob White, who
shows in support: That Mr. Tom Murphy has previously consulted and
represented Defendant in matters which could make it impossible to adequate
maintain the Attorney/Client relationship in this proceeding. Defendant, Jacob
White prays that the Court grant the Motion to Disqualify Attorney.
The trial court held a hearing on the motion, during which the court asked if
White was going to put on evidence. White’s attorney responded, “My client is here. He could
testify, but I don’t believe he needs to, to lay out the specific allegations.” No evidence was
presented, and the trial court only heard argument from the parties’ attorneys.
White’s attorney explained that White was one of two partners in Elusive, along
with Justin Blackburn, and that Blackburn had ousted White. He further stated that attorney
Murphy had been Elusive’s attorney for some time and that:
I know that [Murphy] has drafted numerous documents, but the subsidiary
company, it’s a essentially a group of LLCs, which includes Elusive Aviation,
Trunnion Aviation, Trinity Growth Partners. Many of these he has actually
drafted the formation documents for the subsidiaries. They all—well, four of
them do list my client as the director. He consulted with the company daily on its
runnings—or not daily—but periodically on its runnings. My client did reach out
to him as general counsel for the company and [Murphy] did advise both
Blackburn and Mr. White on the daily runnings of the company. Now, there’s a
dispute as to who owns the company and the valuation of the company, and
essentially general counsel is representing one of the two equal owners.
Murphy then responded on behalf of Elusive, saying:
I don’t represent Justin Blackburn at all on this. I represent Elusive Holdings.
Elusive Holdings is a construction company primarily doing business building
restaurants in the state of Texas. Elusive Holdings has several subsidiary
companies they had formed and stuff, and I did form some of those companies;
but all that time was as a legal counsel for Elusive Holdings or those subsidiary
companies, never Mr. Blackburn, never Mr. White during that.
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Murphy explained that he had represented White in a private landlord-tenant dispute in 2017,
when White was still an officer of Elusive. He also said that he had given White the names of
several family lawyers for White’s recent divorce proceeding. Murphy said,
So that’s the extent of my representation of him. I’ve always represented Elusive
Holdings. I did not form Elusive Holdings. They already formed, came to me. I
represented them in numerous construction matters, and then I have also formed
companies that are subsidiaries and owned in part by Elusive Holdings. . . . There
are currently two principal shareholders; Mr. Blackburn and Mr. White. Through
the mechanisms of the company, Mr. White was—his employment was
terminated, and he was ousted from the board. He’s still a shareholder, so that’s
not the issue here. What the underlying lawsuit of this case is, Your Honor, is Mr.
White signed a nondisclosure agreement and confidentiality agreement. We’re
alleging he violated that agreement, and we’re also alleging that he took property
of Elusive Holdings and he’s maintaining it for himself. So the issues and the
facts are entirely separate. There’s no substantial connection. They’re not
substantially related and they’re not substantially similar. There is no facts of my
representation of Mr. White in the landlord-tenant case that would overlap into
the dispute of him violating his nondisclosure and confidentiality agreement and
the allegation of him taking property that’s owned by Elusive. And that really is
the standard here, Your Honor.
At that point, the trial court ruled that it was going to grant the motion to
disqualify because it would not prejudice Elusive to retain new counsel at the early stages of the
proceeding. It further stated that it was “so easy to slip into an attorney-client privilege
relationship with someone even when we don’t realize we’re doing it; and, above all else, we
need to avoid even an appearance of impropriety or a conflict.” White had not brought an order
for signature, so the trial court transformed the motion to disqualify into an order, signing the
motion and writing on it, “Granted this 28th day of Oct, 2019.” Elusive then filed its petition for
mandamus relief.
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APPLICABLE RULES AND CASELAW
Disqualification is a severe remedy. The courts must adhere to an exacting
standard when considering motions to disqualify so as to discourage their use as a
dilatory trial tactic. Thus, the burden is on the movant to establish with specificity
a violation of one or more of the disciplinary rules. Mere allegations of unethical
conduct or evidence showing a remote possibility of a violation of the disciplinary
rules will not suffice under this standard.
Spears v. Fourth Court of Appeals, 797 S.W.2d 654, 656 (Tex. 1990) (citations omitted); see
also In re Chonody, 49 S.W.3d 376, 379-80 (Tex. App.—Fort Worth 2000, orig. proceeding).
As for the disciplinary rules, Rule 1.09 governs conflicts of interest between
current and former clients:
(a) Without prior consent, a lawyer who personally has formerly represented a
client in a matter shall not thereafter represent another person in a matter adverse
to the former client:
(1) in which such other person questions the validity of the
lawyer’s services or work product for the former client;
(2) if the representation in reasonable probability will involve a
violation of Rule 1.05 [governing confidential information and
barring attorney from revealing such information]; or
(3) if it is the same or a substantially related matter.
Tex. Disciplinary Rules Prof’l Conduct R. 1.09, reprinted in Tex. Gov’t Code, Tit. 2, subtit. G,
app. A. Representation against a former client is not allowed if there is a “reasonable
probability” that the representation would cause the lawyer to violate obligations owed to the
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former client related to the use or disclosure of confidential information or if the representation
involves the same or a substantially related matter. Id. cmt.
Meanwhile, Rule 1.12 governs representation of an organization: “A lawyer
employed or retained by an organization represents the entity.” Id. R. 1.12(a). The comments
explain that an attorney “employed or retained to represent an organization represents the
organization as distinct from its directors, officers, employees, members, shareholders or other
constituents.” Id. cmt. 1. Comment 4 to Rule 1.12 explains:
There are times when the organization’s interest may be or become adverse to
those of one or more of its constituents. In such circumstances the lawyers should
advise any constituent, whose interest the lawyer finds adverse to that of the
organization of the conflict or potential conflict of interest, that the lawyer cannot
represent such constituent, and that such person may wish to obtain independent
representation. Care should be taken to assure that the individual understands
that, when there is such adversity of interest, the lawyer for the organization
cannot provide legal representation for that constituent individual, and that
discussions between the lawyer for the organization and the individual may not be
privileged insofar as that individual is concerned. Whether such a warning should
be given by the lawyer for the organization to any constituent individual may turn
on the facts of each case.
Id. cmt. 4. And the comments addressing derivative actions by members of a corporation
seeking to compel directors to perform their legal obligations state:
The question can arise whether counsel for the organization may defend such an
action. The proposition that the organization is the lawyer’s client does not alone
resolve the issue. Most derivative actions are a normal incident of an
organization’s affairs, to be defended by the organization’s lawyer like any other
suit. However, if the claim involves serious charges of wrongdoing by those in
control of the organization, a conflict may arise between the lawyer’s duty to the
organization and the lawyer’s relationship with those managing or controlling its
affairs.
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Id. cmt. 10-11.
Finally, Rule 3.08, “Lawyer as Witness,” says that, subject to certain exceptions,
an attorney cannot act as an advocate in a proceeding if he “knows or believes” that he might be
a “witness necessary to establish an essential fact on behalf of the lawyer’s client.” Id.
R. 3.08(a).
DISCUSSION
With those rules and standards in mind, we now turn to the issues at hand.
Elusive asserts that the trial court abused its discretion by granting the motion to disqualify
Murphy without having required White to show evidence requiring the disqualification, by not
applying the proper “substantial relationship” standard, and by not stating the factors that
established such a relationship. We agree.
Our review is abuse of discretion, see Spears, 797 S.W.2d at 656 n.3, but as noted
above, White had the burden of showing “with specificity a violation of one or more of the
disciplinary rules,” see id. at 656. At the hearing, White’s attorney vaguely referenced the
conflict-of-interest rules when he stated that in this lawsuit, “essentially general counsel is
representing one of the two equal owners.” However, if seeking disqualification based on a
conflict of interest, White had to show a “substantial relation between the two representations”
see NCNB Tex. Nat’l Bank v. Coker, 765 S.W.2d 398, 399-400 (Tex. 1989); Chonody, 49
S.W.3d at 379-80 (movant must establish “the existence of a prior attorney-client relationship in
which the factual matters involved were so related to the facts in the pending litigation that it
involved a genuine threat that confidences revealed to his former counsel will be divulged to his
present adversary or used to his disadvantage”), or otherwise establish facts that could support
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disqualification based on a conflict of interest. White, however, did not refer to the disciplinary
rules or provide any evidence, much less raise the specter of a violation of the disciplinary rules.
White did not argue or present any evidence that Murphy’s representation of him in the real-
estate dispute might have given Murphy any relevant confidential information or that the matters
were in any way related. Nor is there a rule that general counsel for a company must be
disqualified if a dispute arises between the company and an officer, and in fact Rule 1.12
provides to the contrary. See Tex. Disciplinary Rules Prof’l Conduct R. 1.12.
If White was arguing a Rule 3.08 conflict, he had the burden of establishing the
likelihood of Murphy being a fact witness. See Spears, 797 S.W.2d at 656. “Mere allegations of
unethical conduct or evidence showing a remote possibility of a violation of the disciplinary
rules will not suffice,” id., and “[t]he fact that a lawyer serves as both an advocate and a witness
does not in itself compel disqualification,” In re Sanders, 153 S.W.3d 54, 57 (Tex. 2004).
“Disqualification is only appropriate if the lawyer’s testimony is ‘necessary to establish an
essential fact,’” Sanders, 153 S.W.3d at 57 (quoting Tex. Disciplinary R. Prof’l Conduct 3.08(a),
and thus “the party requesting disqualification must demonstrate that the opposing lawyer’s dual
roles as attorney and witness will cause the party actual prejudice,” id.
In his response to Elusive’s petition for mandamus relief, White argues that
Murphy could conceivably be a fact witness due to his work as Elusive’s general counsel and his
interactions with White in that capacity. White also speculates that the court “could have
determined that [Murphy] is a key witness in the dispute between White and Blackburn who
should be disqualified under” Rule 3.08 and that Murphy “has intimate knowledge of Elusive’s
operations, dealings between the two owners, circumstances of the ousting, and what Elusive’s
property and ‘confidential information’ that Blackburn alleges White stole and used for his own
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purposes may include.” However, as Elusive points out, this lawsuit is between Elusive and
White—it is not a lawsuit between the two partners. Further, and more importantly, it was
White’s burden to establish such facts in the trial court, but he did not raise the possibility that
Murphy might be a fact witness and never asserted, much less established, that Murphy would be
called to testify about information he had learned during White’s time as an Elusive executive.
See In re Lavizadeh, 353 S.W.3d 903, 904 (Tex. App.—2011 Dallas, orig. proceeding) (“The
trial court, having been presented no evidence of the necessity of [attorney] Turner’s testimony,
could not have reasonably concluded that Turner’s testimony was necessary to establish an
essential fact of the other relators’ case.”).
White also asserts that the trial court “was in a much better position than this
Court to evaluate the evidence, balance the competing interests, apply the law, and reach a
decision to disqualify Attorney Murphy.” However, the supreme court has explained that a trial
court should state “the precise factors” weighing in favor of disqualification. See Coker, 765
S.W.2d at 400. The Coker court held that when a party seeks to disqualify his former attorney
from representing his opponent, the party must prove that his prior attorney-client relationship
involved facts so related to the present case as to create a genuine threat that privileged
confidences will be divulged, explaining, “Sustaining this burden requires evidence of specific
similarities capable of being recited in the disqualification order.” Id. (emphasis added). The
trial court’s order in Coker recited that the court “finds the subject matter involved in both
representations are similar enough for there to be an appearance that the attorney-client
confidences which could have been disclosed by the defendant might be relevant to the law
firm’s representation of the plaintiff in this suit.” Id. The supreme court determined that the
order was inadequate:
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The vagueness of the court’s order indicates that the substantial relation test was
not used; had it been, the court should have been able to state without difficulty
the precise factors establishing a substantial relationship between the two
representations. To hold that the two representations were “similar enough” to
give an “appearance” that confidences which could be disclosed “might be
relevant” to the representations falls short of the requisites of the established
substantial relation standard.
Id.
The order in this case provides no explanation, stating only that the motion was
granted. Further, in explaining its ruling, the trial court stated that Elusive would not be
prejudiced by having to retain new counsel, that it was “easy to slip into an atty-client privileged
relationship with someone,” and that attorneys should avoid an appearance of impropriety, but it
did not indicate that it had considered White’s burden under Coker and Spears.
CONCLUSION
White notes that his motion to disqualify was filed and ruled on soon after the
lawsuit was filed and that Elusive has since hired a new attorney, as ordered by the trial court,
asserting that Elusive is thus not prejudiced by the trial court’s order. However, “[m]andamus is
appropriate to correct an erroneous order disqualifying counsel because there is no adequate
remedy by appeal.” Sanders, 153 S.W.3d at 56; see In re EPIC Holdings, Inc., 985 S.W.2d 41,
54 (Tex. 1998) (appeal of ruling on attorney disqualification does not adequately remedy injury
suffered by party).
On this record, White did not carry his burden of showing a violation of the Rules
so as to meet the Coker/Spears requirements. The trial court thus abused its discretion in
granting the motion to disqualify. We conditionally grant the writ of mandamus and order the
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trial court to vacate its order disqualifying Murphy as Elusive’s attorney. The writ will issue
only if the trial court does not comply.
__________________________________________
Jeff Rose, Chief Justice
Before Chief Justice Rose, Justices Baker and Triana
Filed: April 15, 2020
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