Miesen v. Hawley Troxell Ennis & Hawley LLP

          MEMORANDUM DECISION AND ORDER

          David C. Nye U.S. District Court Judge.

         I. OVERVIEW

         This matter comes before the Court on two Motions to Disqualify Attorney Roderick Bond. Dkts. 275, 278. At the time the Motions were filed, Bond represented both Plaintiff Dale Miesen and Third-Party Defendant Reed Taylor. After these Motions were filed, but before briefing was complete, Reed Taylor hired alternate counsel. Because of this change in circumstances, the Court permitted the parties to file supplemental briefs. After receiving these supplemental briefs, the Court held oral argument and took the Motions under advisement. As explained below, the Court finds good cause to DENY the Motions so long as Reed Taylor proceeds with alternate counsel.

         II. FACTUAL BACKGROUND

         A. The Original Parties and Dispute

         This is a shareholder's derivative action, the Court's jurisdiction over which is based upon diversity of citizenship. Plaintiff Dale Miesen is a minority shareholder of the Defendant AIA Services Corporation (“AIA”), the alleged wronged corporation. Donna Taylor was originally named as a plaintiff in this action. However, the Court dismissed her, in both her personal and representative capacities, because her presence destroyed diversity. See Dkt. 178.

         There were originally two groups of defendants in this action. The first group consists of AIA Services Corporation, AIA Insurance, Inc. (collectively “AIA Entities”), CropUSA Insurance Agency, CropUSA Insurance Services (collectively “CropUSA”), and several controlling shareholders and officers of those entities, namely: R. John Taylor, James Beck, Michael Cashman, Connie Taylor Henderson, and JoLee Duclos^[1](individuals, collectively “AIA Controlling Defendants”). The second group consists of the law firm Hawley Troxell Ennis & Hawley, LLP, and several of its attorneys who represented the AIA Entities and CropUSA during the events that gave rise to this action, namely: Gary Babbitt, Richard Riles, and John Ashby (collectively “Hawley Troxell Defendants”). There is now one additional defendant, GemCap Lending I (“GemCap”). GemCap first intervened in this action in July of 2016. Later, Miesen asserted claims against GemCap in the Third Amended Complaint.

         The operative complaint is the Third Amended Complaint. Dkt. 211. In it, Miesen alleges, among other things, that the AIA Controlling Defendants engaged in fraud and breached their fiduciary duties to the AIA minority shareholders. AIA was formed in 1983. It sold insurance products to members of farmers' and growers' associations and worked with farmers and growers to form trusts and/or related cooperatives. In the late 1990s, the AIA Board of Directors, controlled by the AIA Controlling Defendants, decided to begin selling crop insurance through a wholly-owned subsidiary called CropUSA. Miesen alleges that the AIA Controlling Defendants unlawfully transferred CropUSA from AIA to their own possession. The AIA Controlling Defendants then proceeded to unlawfully fund, subsidize, and operate CropUSA using AIA's assets. Through their operation of CropUSA, the AIA Controlling Defendants defrauded AIA of millions of dollars. Miesen also alleges that the AIA Controlling Defendants committed a “laundry list” of other unlawful acts, self-dealing, malfeasance, and intentional torts. Miesen has highlighted specific acts Defendant John Taylor allegedly committed. John Taylor was President of both AIA Entities and CropUSA during all of these events. Miesen alleges that John Taylor unlawfully transferred real property to AIA, required AIA to pay the liabilities on the property, unlawfully amended AIA's Bylaws, and issued himself Series A Preferred Shares in AIA. Miesen claims that all of the above described acts hurt AIA's minority shareholders.

         Hawley Troxell represented both AIA and CropUSA during the relevant timeframe. Accordingly, Miesen claims the Hawley Troxell Defendants aided and abetted the fraud the AIA Controlling Defendants perpetuated against AIA and its minority shareholders and committed legal malpractice.

         B. Third Party Complaint Against Reed Taylor

         In May 2017, the AIA Controlling Defendants, along with CropUSA, filed a Third Party Complaint against Reed Taylor. Dkt. 218. Except for short intervals, Reed Taylor served as a director for AIA from its founding in 1983 until early 2001. He also served as an officer of AIA at various times until he redeemed his shares in 1995. In addition, he served on an advisory board for CropUSA from 1999 until 2007. Based on his involvement with these entities, the AIA Controlling Defendants assert that if they are found liable for their actions as officers/directors of AIA and for their actions as members of the CropUSA advisory board, Reed Taylor should be found jointly liable. The AIA Controlling Defendants also assert that Reed Taylor accepted millions of dollars in illegal stock redemption payments from AIA and caused AIA to incur millions of dollars in legal fees. Accordingly, the AIA Controlling Defendants and CropUSA have asserted claims for contribution against Reed Taylor for the fiduciary-duty claims and the fraud claims. Id.

         Reed Taylor denies these allegations. He has also asserted his own counterclaims against the AIA Controlling Defendants and CropUSA. Dkt. 276. Most of these claims involve AIA's 401(k) Profit Sharing Plan (“the Plan”). Specifically, Reed Taylor asserts class action claims against the AIA Controlling Defendants for breach of fiduciary duties owed to the Plan participants, in violation of the Employment Retirement Income Security Act (“ERISA”). Reed Taylor also claims the AIA Controlling Defendants engaged in transactions prohibited by ERISA.

         C. Facts Relevant to the Motions to Disqualify

         Attorney Lee Rousso filed the original complaint in this action, on behalf of Miesen and Donna Taylor, on August 11, 2010. Dkt. 1. Attorney Bond first appeared on March 18, 2012, on behalf of Donna Taylor. Dkt. 58. Bond then appeared as counsel for Miesen on March 23, 2016. Dkt. 122. At that time the Court removed attorney Lee Rousso from the case. On July 28, 2017, after Reed Taylor was served with the Third Party Complaint, Bond appeared on Reed Taylor's behalf. Dkt. 246. A few months later, on October 31, 2017, the Controlling AIA Defendants and CropUSA filed the first Motion to Disqualify Bond. Dkt. 275. Four days later, the Hawley Troxell Defendants followed suit with their own Motion to Disqualify. Dkt. 278.

         On February 13, 2018, Reed Taylor filed a Notice of Substitution of Counsel, notifying the Court that he was voluntarily dropping Bond as an attorney and replacing him with Michael S. Bissell of Campbell & Bissell. The Movants^[2] objected to this substitution. They argued the substitution does not cure the conflict in interest and the Court still must disqualify Bond from representing any party in this case.

         It is important to note that Bond has been representing Reed Taylor since as early as 2007. Since then, Bond has represented Reed Taylor in a handful of disputes involving AIA, primarily state court actions. For example, Bond has brought suit, on Reed Taylor's behalf, against AIA and its directors in a dispute over a stock redemption agreement. Bond then sued, on Reed Taylor's behalf, the lawyers involved in the stock redemption agreement. Bond has also sued AIA, its officers, and other related entities on behalf of Donna Taylor, Reed Taylor's ex-wife and a former plaintiff in this lawsuit. The Movants have described these various suits in their briefs in support of the Motions to Disqualify in detail. See Dkt. 275, 278-1. A comprehensive accounting of these disputes and Bond's involvement is not necessary here. However, the Court does acknowledge Bond's lengthy and intimate representation of Reed Taylor over the last decade.

         III. LEGAL STANDARD

         State law governs motions to disqualify counsel. See In re Cnty. of L.A., 223 F.3d 990, 995 (9th Cir. 2000). In Idaho, courts also look to “the Idaho Rules of Professional Conduct as adopted and interpreted by the Idaho Supreme Court” in determining whether disqualification of an attorney is proper. Andersen v. Valley Cty., No. 1:16-CV-00554-CWD, 2017 WL 2311668, at *3 (D. Idaho May 26, 2017); Parkland Corp. v. Maxximum Co., 920 F.Supp. 1088, 1090 (D. Idaho 1996) (“[I]n deciding whether to disqualify counsel, the Court looks to the local rules regulating the conduct of the members of its bar.” (citation omitted)).

         Disqualifying counsel is an exercise of the court's inherent powers. Anderson v. Valley Cty, No. 1:16-CV-00554-CWD, 2017 WL 2311668, *3 (D. Idaho May 26, 2017). “The decision to grant or deny a motion to disqualify counsel is within the discretion of the trial court.” Foster v. Traul, 175 P.3d 186, 194 (Idaho 2007) (citing Weaver v. Millard, 819 P.2d 110, 114 (Idaho Ct. App. 1991)). Under Idaho law, “[t]he moving party has the burden of establishing grounds for the disqualification.” Crown v. Hawkins Co., 910 P.2d 786, 794 (Idaho Ct. App. 1996). However, “[t]he goal of the court should be to shape a remedy which will assure fairness to the parties and the integrity of the judicial process.” Weaver, 819 P.2d at 115. In addition, “[w]henever possible, courts should endeavor to reach a solution that is least burdensome to the client.” Id. Finally, because opposing counsel could potentially misuse a motion to disqualify for tactical purposes, such motions are subjected to “particularly strict judicial scrutiny.” Optyl Eyewear Fashion Int'l Corp. v. Style Co., 760 F.2d 1045, 1050 (9th Cir. 1985) (citation omitted).

         IV. ANALYSIS

         The Movants argue that disqualification is required by Rule 1.7 of the Idaho Rules of Profession Conduct. In response, Opponents first argue that the movants do not have standing to object to Reed Taylor's choice of counsel as none of them are Bond's current or former clients. Second, Opponents argue Reed Taylor's new counsel cures any ...