Citations
- 1 F. Supp. 2d 1050
Full opinion text
MEMORANDUM OPINION RE: ORDER TO SHOW CAUSE WHY SANCTIONS SHOULD NOT BE IMPOSED AGAINST FORMER ATTORNEYS OF RECORD AND LAW FIRMS FOLLOWING DISQUALIFICATION FROM FURTHER REPRESENTATION OF PLAINTIFF; AND ORDER
WANGER, District Judge.
I.INTRODUCTION
This matter is before the court on an order to show cause why sanctions should not be imposed against attorneys Kenneth S. Bayer, Timothy D. McCollum and the law firms of McCollum, Bayer & Bunch, and Bayer, Cut-singer & Lopez, following disqualification of these lawyers and their law firms as attorneys of record for plaintiff Terrebonne Ltd. of California.
II. BACKGROUND
The court’s order disqualifying the attorneys and law firms (collectively referred to herein as the “disqualified attorneys”) was entered on August 6, 1997, following the court’s memorandum decision detailing the facts upon which the motion to disqualify was granted. The grounds justifying the disqualification order were the following:
1. Undertaking representation of a new client (the New Hogan investors) whose interests presented an actual conflict of interest with a current client (Terrebonne), arising because of their competing interests in the subject real property, without first obtaining the affected parties’ informed consent.
2. Failing to provide evidence that the disqualified attorneys adequately explained the conflict of interest resulting from the dual representation and received the informed consent of all affected parties to proceed with the dual representation.
3. Directly contacting a represented party in the litigation, Charles Boggs or New Hogan investors who are noteholder-limited partners rather than noteholder-creditors.
4. Acquiring confidential information regarding New Hogan’s litigation strategy and settlement position through a misleading communication with New Hogan’s attorney, and subsequently conveying that information and using it to advance Terrebonne’s position in the litigation.
After issuance of an order to show cause, two separate evidentiary hearings were held at which the disqualified attorneys were provided the opportunity to present evidence as to why they should not be sanctioned for conduct found by the court to be in violation of recognized rules of professional conduct and the relevant court rules and statutes applicable to the conduct of attorneys prac-' ticing in federal court.
III. LEGAL STANDARD
The district court has the duty and responsibility to supervise the conduct of attorneys who appear before it. Erickson v. Newmar Corp., 87 F.3d 298, 301 (9th Cir.1996); Lockary v. Kayfetz, 974 F.2d 1166, 1170 (9th Cir.), cert. denied, sub nom., Pacific Legal Foundation v. Kayfetz, 508 U.S. 931 113 S.Ct. 2397, 124 L.Ed.2d 298 (1993); Trust Corp. v. Piper Aircraft Corp., 701 F.2d 85, 87 (9th Cir.1983). The power of federal judges to impose sanctions for abuses of process is quite broad. In Gas-A-Tron of Ariz. v. Union Oil Co., 534 F.2d 1322 (9th Cir.), cert. denied sub nom. Shell Oil Co. v. Gas a Tron of Ariz., 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976), the court stated:
Whenever an allegation is made that an attorney has violated his moral and ethical responsibility, an important question of professional ethics is raised. It is the duty of the district court to examine the charge, since it is that court which is authorized to supervise the conduct of the members of its bar. The courts, as well as the bar, have a responsibility to maintain public confidence in the legal profession. This means that a court may disqualify an attorney for not only acting improperly but also for failing to avoid the appearance of impropriety.
The district court’s power to sanction derives from several sources: federal statute, Local Rules of Court, and its inherent power. “For a sanction to be validly imposed, the conduct in question must be sanctionable under the authority relied on.” Cunningham v. County of Los Angeles, 879 F.2d 481, 490 (9th Cir.1988) (internal quotations omitted), cert. denied, 493 U.S. 1035, 110 S.Ct. 757, 107 L.Ed.2d 773 (1990).
A. POWER TO SANCTION FOR ATTORNEY MISCONDUCT UNDER LOCAL RULES OF THE EASTERN DISTRICT
The Local Rules of the Eastern District, L.R. 83-184 provides:
In the event any attorney subject to these Rules engages in conduct which may warrant discipline or other sanctions, any Judge ... may initiate proceedings for contempt under 18 U.S.C. § 401 or Fed. R.Crim.P. 42, or may, after reasonable notice and opportunity to show cause to the contrary, take any other appropriate disciplinary action against the attorney. In addition to or in lieu of the foregoing, the Judge ... may refer the matter to the disciplinary body of any Court before which the attorney has been admitted to practice.
L.R. 83-184(a) (1997).
The court’s criminal contempt power arising under § 401 of Title 18 authorizes the court “to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other as — (1) [mjisbehavior of any person in its presence or so near thereto as to obstruct the administration of justice-” Under Rule 42, contempt is criminally punishable “if the judge certifies that the judge saw or heard the conduct constituting the contempt or that it was committed in the actual presence of the court.” Fed. R.Crim.P. 42(a).
Neither the Local Rules nor the Federal Rules provide as clear a definition of “other appropriate disciplinary action,” for instances when attorney digressions do not constitute or warrant criminal contempt. However, district judges do have an “arsenal of sanctions” they can impose for unethical behavior. Erickson v. Newmar Corp., 87 F.3d at 303. These sanctions include monetary sanctions, contempt and the disqualification of counsel. Id. In addition, the court may look for appropriate sanctions under the Rules of Professional Conduct and State Bar Rules of California. See L.R. 83-180(e) (adopting California Rules of Professional Conduct and decisions of any Court applicable thereto as standards of professional conduct in Eastern District courts); see also, e.g., Frazier v. Heebe, 482 U.S. 641, 645, 107 S.Ct. 2607, 96 L.Ed.2d 557 (1987) (district courts have clear statutory authority to promulgate rules governing the admission and conduct of attorneys who appear before them).
B. POWER TO SANCTION DERIVED UNDER FEDERAL STATUTE
The statutory basis for awarding sanctions is found at 28 U.S.C. § 1927. Section 1927 provides in pertinent part:
Any attorney ... who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.
28 U.S.C.S. § 1927 (1989).
The Ninth Circuit has stated that “[b]ecause [] section [1927] authorizes sanctions only for the “multipli[eation of] proceedings,” it applies only to unnecessary filings and tactics once a lawsuit has begun.” In re Keegan Management Co. Sec. Litig. (Keegan Management Company v. Moore), 78 F.3d 431, 435 (9th Cir.1996). Indeed, the term “vexatious” has been defined as “lacking justification and intended to harass.” Overnite Transp. Co. v. Chicago Ind. Tire Co., 697 F.2d 789, 795 (7th Cir.1983) (citing Webster’s Int’l Dictionary (1971) and United States v. Ross, 535 F.2d 346 (6th Cir.1976)). Sanctions awarded pursuant to § 1927 must be based upon a finding that the sanctioned attorney acted in subjective bad faith. United States v. Blodgett, 709 F.2d 608, 610 (9th Cir.1983); New Alaska Development Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir.1989). Subjective bad faith requires the court to find that the attorney knowingly or recklessly advanced a frivolous position, or a meritorious position for the purpose of harassing an adversary. See In re Keegan, 78 F.3d at 436; Salstrom v. Citicorp Credit Serv., Inc., 74 F.3d 183 (9th Cir.1996), cert. denied, sub nom., Webb v. Citicorp Credit Serv. Inc., — U.S. -, 117 S.Ct. 60, 136 L.Ed.2d 23 (1996); MGIC Indemnity v. Moore, 952 F.2d 1120 (9th Cir.1991); Toombs v. Leone, 777 F.2d 465 (9th Cir.1985) (court not required to make express findings as to counsel’s state of mind because record contained sufficient evidence to support decision). As the court in Keegan states:
For sanctions to apply, if a filing is submitted recklessly, it must be frivolous, while if it is not frivolous, it must be intended to harass. Thus, while it is true that reckless filings may be sanctioned, and nonfrivolous filings may also be sanctioned, reckless nonfrivolous filings, without more may not be sanctioned.
Section 1927 requires some element of wrongful purpose. See Blodgett, 709 F.2d at 610. “Bad faith is present when an attorney knowingly or recklessly raises a frivolous argument, or argues a meritorious claim for the purpose of harassing an opponent.” West Coast Theater Corp. v. City of Portland, 897 F.2d 1519, 1528 (9th Cir.1990) (citing Cunningham v. County of Los Angeles, 879 F.2d 481, 490 (9th Cir.1988)); New Alaska, 869 F.2d at 1306. Sanctions are warranted only if actions are so completely without merit as to require the conclusion that they must have been undertaken for an improper purpose such as delay. See Shafii v. British Airways, PLC, 83 F.3d 566, 569 (2d Cir.1996).
Under § 1927, the decision to award sanctions is a matter within the court’s sound discretion. Wages v. Internal Revenue Service, 915 F.2d 1230, 1235 (9th Cir.), cert. denied, 498 U.S. 1096, 111 S.Ct. 986, 112 L.Ed.2d 1071 (1991).
C. POWER TO SANCTION DERIVED UNDER DISTRICT COURT’S INHERENT AUTHORITY TO PUNISH ATTORNEY MISCONDUCT
While the district court should issue sanctions under a rale or statute if possible, Lockary v. Kayfetz, 974 F.2d at 1170; it is not so limited and has discretion to rely on its inherent powers to sanction attorney misconduct. In re Akros Installations, Inc., 834 F.2d 1526, 1532 (9th Cir.1987).
Sanctions imposed under the court’s inherent power requires a specific finding of bad faith. Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980); Yagman v. Republic Ins., 987 F.2d 622, 628 (9th Cir.1993) (In sanctioning counsel, “[ejourts may not invoke [inherent] powers without a ‘specific finding of bad faith’ ”) (quoting United States v. Stoneberger, 805 F.2d 1391, 1393 (9th Cir.1986)); Zambrano v. City of Tustin, 885 F.2d 1473, 1478 (9th Cir.1989) (“To insure that restraint is properly exercised, we have routinely insisted upon a finding of bad faith before sanctions may be imposed under the court’s inherent power.”) “A finding of bad faith ‘does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim will not bar assessment of attorneys’ fees.’ ” Mark Ind., Ltd. v. Sea Captain’s Choice, Inc., 50 F.3d 730, 732 (9th Cir.1995) (quoting Lipsig v. National Student Marketing Corp., 663 F.2d 178, 181 (D.C.Cir.1980)). Under the court’s inherent power to monitor the conduct of attorneys appearing before it, sanctions based on recklessness alone are legally insufficient. Cooler & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); Newton v. Thomason, 22 F.3d 1455, 1463 (9th Cir.1994). When the court’s inherent power to sanction is invoked, the court must exercise discretion in fashioning an appropriate sanction. Erickson, 87 F.3d at 303 (citing Chambers, 501 U.S. at 44-45.)
IV. DISCUSSION
A. ATTORNEY BAYER CONTENDS NO CONTACT WITH CHARLES BOGGS EVER OCCURRED; THE DISQUALIFIED ATTORNEYS CONTEND THE COURT’S DISQUALIFICATION ORDER IS BASED ON A FAULTY PREMISE
The disqualified attorneys assert that Kenneth Bayer did not contact or speak with Charles Boggs, New Hogan’s general partner. The disqualified attorneys contend none of the evidence before the court on the motion to disqualify showed that Mr. Boggs was contacted by Bayer. Mr. Bayer asserts for the first time in response to the order to show cause that he did not speak with Mr. Boggs personally.
The relevant portion of Boggs’ Declaration states: “In November of 1996, I learned that Kenneth S. Bayer, counsel for some of the New Hogan investors, wished information concerning this lawsuit and I instructed that any and all information he requested be provided to him.” This statement is ambiguous concerning whether Bayer directly contacted Boggs in 1996. How Mr. Boggs “learned” of attorney Bayer’s desire for information regarding the Terrebonne litigation was explained at the evidentiary hearing. Mr. Boggs and Mr. Bayer testified at the hearing concerning the issue of contact between them. Their testimony is diametrically opposed as to whether Messrs. Bayer and Boggs spoke directly.
Mr. Boggs testified that in October 1996, Mr. Bayer called his office, identified himself as an attorney representing certain New Hogan Lake Investors, and asked questions regarding New Hogan’s involvement in litigation. Boggs testified he offered information that New Hogan was involved in litigation with Terrebonne and was represented by Mr. Hassen of the law firm, Miller, Starr & Regalia. Mr. Boggs testified he did not remember details of the conversation, including who answered the telephone when Mr. Bayer called, or the date and time of the conversation.
Mr. Bayer testified that no such conversation ever occurred. Additionally, Mr. Bayer and Mr. McCollum have filed under seal all telephone records for the period October-November 1996. CRE Equity Investors’ telephone number, (916) 961-7757, does not appear in any of the records. There is a considerable dispute as to whether the conversation described by Boggs ever occurred. Mr. Hassen’s declaration shows that he was told by Mr. Boggs that an attorney for New Hogan investors would be calling and to provide him with information sought. Following these instructions, Mr. Hassen returned Mr. Bayer’s telephone call on November 8, 1996, and discussed matters concerning New Hogan’s litigation and settlement strategy in the Terrebonne litigation. Mr. Hassen’s actions corroborate Mr. Boggs’ testimony.
Accepting, arguendo, the disqualified attorneys’ position that no contact ever took place with Mr. Boggs, Mr. Bayer nonetheless concealed the true identity of his interests from New Hogan and its attorneys until after he elicited and obtained confidential information. Even if no direct contact occurred, as Mr. Bayer contends, disqualification was justified and sanctions warranted based on this inappropriate conduct, which meets the subjective bad faith standard. The Rules of Professional Conduct expressly forbid such misleading contact with Mr. Has-sen in which Mr. Bayer portrayed the interests of his “New Hogan clients” as aligned with Mr. Hassen’s client, the partnership. Mr. Bayer did not disclose that he was contemplating adverse action against the New Hogan limited partnership, not just Mr. Boggs. Additional bases for disqualification included Mr. Bayer’s inadequate disclosure to New Hogan investors the nature of the actual conflict of interests between Terre-bonne and the New Hogan investors; Mr. Bayer’s undertaking representation of both Terrebonne and New Hogan investors without obtaining the informed written consent of all affected clients; and Mr. Bayer’s undertaking representation of New Hogan investors before full and adequate written disclosure of actual and potential conflicts was made and the New Hogan investors properly referred to truly independent counsel.
B. THE DISQUALIFIED ATTORNEYS REQUEST TO REVIEW MICHAEL HASSEN’S SEALED DECLARATION IN ORDER TO REBUT THE FINDING THAT CONFIDENTIAL INFORMATION WAS ELICITED BY MR. BAYER
The disqualified attorneys assert they have not been permitted to review attorney Has-sen’s sealed declaration to defend against the allegations he makes. Mr. Hassen’s declaration details the confidential information provided to Mr. Bayer about New Hogan’s litigation strategy and settlement position, which would not have been communicated had Mr. Bayer fully disclosed his representation of Terrebonne. Mr. McCollum also asserts in his supplemental declaration that Mr. Hassen has misrepresented Terre-bonne’s settlement position to the court.
The disqualified attorneys assert to refuse them the opportunity to review Mr. Hassen’s declaration is a denial of due process and that they could not respond to the order to show cause unless permitted to cross-examine witnesses and review relevant evidence upon which the court relied. As authority for the right to procedural due process, the disqualified attorneys cite Rosenthal v. Justices of the Supreme Court of California, 910 F.2d 561 (9th Cir.), cert. denied, 498 U.S. 1087, 111 S.Ct. 963, 112 L.Ed.2d 1050 (1991). There, the Ninth Circuit found that procedural due process rights of an attorney subject to disbarment were provided for under California law. That is not the case here. This is not a case proceeding under Cal. Bus & Prof Code § 6083. More importantly, Mr. Hassen was present at both evidentiary hearings. The disqualified attorneys did not call Mr. Hassen as a witness nor did they cross-examine him on these subjects.
Sanctions cannot be imposed without notice, an opportunity to respond, and a hearing. Kirshner v. Uniden Corp. of America, 842 F.2d 1074, 1082 (9th Cir.1988). The form which those procedural protections must take is determined by an evaluation of all the circumstances and an accommodation of competing interests. Tom Growney Equip., Inc. v. Shelley Irrigation Development, Inc., 834 F.2d 833, 835 (9th Cir.1987) (finding subsequent hearing on motion to alter or amend judgment imposing sanctions failed to satisfy due process) (citing Goss v. Lopez, 419 U.S. 565, 579, 95 S.Ct. 729, 42 L.Ed.2d 725 (1975)). When sanctionable conduct occurs outside the presence of the court, counsel should be provided an opportunity to explain the conduct. Blodgett, 709 F.2d at 610. Here that opportunity has been extensively afforded. The court gave notice by issuing an order to show cause re sanctions and held two separate evidentiary hearings. The court offered all parties the opportunity to submit any evidence. In response to the disqualified attorneys’ concerns, the court ordered disclosed to them every provision of the Hassen declaration on which the court relied in deciding the recusal and sanctions issues.
The Ninth Circuit recognizes that an evi-dentiary hearing on a matter for which a party is sanctioned for abuse of the discovery process might be allowed where the party seeks to show that it was impossible to comply with the court’s discovery orders. United States v. Westinghouse Elec. Corp., 648 F.2d 642, 652 (9th Cir.1981). This is not a ease where a party is being sanctioned for failure to comply with a court order. The disqualified attorneys have not cited legal authority to support their claim for enhanced procedural protections.
In Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 592 (9th Cir.1983), the court stated: “When necessary, the district court may hold an evidentiary hearing on a motion for sanctions. Indeed, that method best determines the appropriate sanctions while protecting a party’s due process rights.” The local rules do not provide pre-hearing discovery nor have the disqualified attorneys cited any authority which requires a full trial. Nonetheless, they have in effect been afforded a trial on the merits, after notice, where witnesses were sworn and testified, evidence was received, and oral and written arguments presented.
In determining the need to discover the contents of Mr. Hassen’s sealed declaration, the need for the information is balanced against New Hogan’s right to keep attorney-client privileged communications and attorney work-product protected materials confidential.
The attorney-client privilege protects communications made in confidence by the client in the course of seeking legal advice from a lawyer in his capacity as such, and applies only when invoked by the client and not waived. United States v. Abrahams, 905 F.2d 1276, 1283 n. 10 (9th Cir.1990), overruled on other grounds, United States v. Jose, 131 F.3d 1325 (9th Cir.1997); Tornay v. United States, 840 F.2d 1424, 1426 (9th Cir.1988). The privilege encourages clients to make full disclosure to their attorneys. Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). The party claiming the privilege must show the privilege applies. Abrahams, 905 F.2d at 1283.
The privilege extends only to communications and not to facts. A fact is one thing and a communication concerning that fact is an entirely different thing. The client cannot be compelled to answer the question, ‘What did you say or write to the attorney?’ but may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a state of such fact into his communication to his attorney.
Upjohn Co., 449 U.S. at 395-96 (citation omitted).
Under California law, the attorney-client privilege is waived when the client, “disclose[s] a significant part of the communication or has consented to such disclosure by anyone,” Cal. Evid.Code § 912; or the client places “in issue” the contents of the communication with its attorney. See Rockwell International Corp. v. Superior Court, 26 Cal.App.4th 1255, 1268, 32 Cal.Rptr.2d 153 (1994). There has been no disclosure of privileged communications here by clients, who hold the privilege. Mr. Hassen was induced to reveal privileged confidential information that constituted his work-produet. All relevant information contained in Mr. Hassen’s declaration relied on by the court has been disclosed to all parties.
The statements Mr. Hassen made to Mr. Bayer, which Mr. Hassen claims constituted disclosure of his confidential settlement strategy and his confidential legal opinions about the case are work-produet. The work-product doctrine provides an independent basis upon which litigants may rely to protect an attorney’s trial preparation thoughts and materials. Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947). The doctrine prevents attorneys from benefitting from the fruit of an adversary’s labor. The work-product doctrine provides qualified not absolute protection, which, like other qualified privileges, may be waived. United States v. Nobles, 422 U.S. 225, 239-40, 95 S.Ct. 2160, 45 L.Ed.2d 141 (1975).
Mr. Hassen has invoked the work-product privilege; it is the disqualified attorney’s burden to overcome it, Hickman, 329 U.S. at 512; see In re Grand Jury Investigation, 599 F.2d 1224, 1230 (3d Cir.1979); by showing substantial need for the specific information or that the materials or their substantial equivalent are unattainable by other means without undue hardship. Holmgren v. State Farm Mutual Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir.1992). In any event, the work-product doctrine shelters the mental processes of the attorney and the attorney’s agents, “providing a privileged area within which he can analyze and prepare his client’s case.” Nobles, 422 U.S. at 238.
Due process is afforded by permitting the disqualified attorneys to obtain the facts contained in Mr. Hassen’s sealed declaration which were relied upon by the court. Those facts are as follows:
1.In November 1996, Mr. Hassen was contacted by Mr. Bayer of the law firm, Bayer & Cutsinger, who identified himself as counsel for certain investors of New Hogan. On November 8, 1996, Mr. Hassen returned Mr. Bayer’s call upon the understanding Mr. Boggs wished to cooperate with all New Hogan investors. Mr. Hassen answered Mr. Bayer’s questions about the Terrebonne litigation, title insurance coverage for the dispute, and concerning duty of defense negotiations with the title insurer. Mr. Bayer did not disclose that he was a consulting attorney for Terrebonne. It was not until the end of the conversation that Mr. Bayer told Mr. Hassen he was considering joining the McCollum law firm.
2. Mr. Hassen disclosed to Mr. Bayer his confidential evaluation that New Hogan had determined the value of the real property encumbered by Terrebonne’s deed of trust and the amount of Terrebonne’s settlement offer differed by some $500,000 or more.
3. Mr. Hassen disclosed the title insurer contemplated pulling its defense of New Hogan following success on the motion for partial summary judgment and entry of judgment'on the quiet title, declaratory relief and injunctive relief claims; that New Hogan would likely not have the funds to continue the lawsuit, but that Mr. Boggs was certain he could pool additional resources from the investors. Mr. Hassen disclosed that the title insurance policy excepted senior liens from coverage. Mr. Hassen explained his litigation strategy was to “lay low” and work towards an informal resolution before the title insurer’s defense was pulled.
4. Mr. Hassen expressed concern to Mr. Bayer about New Hogan’s pending motion for summary judgment because Terrebonne had a senior deed of trust on the property. Mr. Hassen explained that New Hogan could prevent Terrebonne from foreclosing on the property, but that Terrebonne’s superior interest in the land precluded an easy settlement.
5. Mr. Hassen states that much of this information, includes his litigation strategy, legal opinions and legal evaluation of the case, and is all privileged.
6. Mr. Hassen alleged that Terrebonne used the information he provided Mr. Bayer to oppose New Hogan’s summary judgment motion, although Terrebonne had not previously shown any awareness how it could defeat New Hogan’s summary judgment motion.
Following release of Mr. Hassen’s redacted declaration to the disqualified attorneys, Mr. Bayer provided a copy of an October 2, 1996 letter to Mr. Hassen in which he states “some of the Investors received limited partnership shares. In this regard, I have been consulted regarding an action to dissolve New Hogan Lake Investors and to remove the partnership’s current general partner in the interim.” Mr. Bayer asserts the letter demonstrates the adverse position taken by the investors against New Hogan, so as to put Mr. Hassen on notice that his conversation should be guarded. Mr. Bayer asserts that the later telephone conversation with Mr. Hassen was similarly “guarded.” Mr. Bayer, however, did not tell Mr. Hassen that Mr. Hassen should exercise caution in dealing with Mr. Bayer because Mr. Bayer represented Terrebonne.
As determined in the decision disqualifying the attorneys, all New Hogan limited partners are represented in the Terrebonne litigation by Mr. Hassen of Miller, Star, that partnership’s attorneys. The October 2, 1996 letter references the Terrebonne litigation, but does not disclose Mr. Bayer then was a legal consultant for Terrebonne and its attorneys. This is precisely the type of misleading contact which induced Mr. Hassen to make confidential disclosures. Mr. Bayer stated at the conclusion of the letter:
the Investors, whether as direct assignees of New Hogan Lake Investors’ rights in the real property, or as residual distribu-tees in a partnership dissolution, also deem themselves to be successors in interest to the partnership’s rights as an insured under the policy of title insurance issued by First American Title Insurance Company. As such, their participation in, and written assent to, any settlement of claims pertaining to the status of title will be required. Any agreement entered into between First American Title Insurance Company and New Hogan Lake Investors without the Investors’ participation and assent will be null and void as it pertains to them.
This letter admits the conflict. This demand is a request for cooperation, which if honored by Mr. Hassen would have naturally resulted in the disclosure of confidential information. Mr. Bayer represented in the letter that the investor group he purported to represent had to approve the settlement, and were aligned with New Hogan generally. In fact, whether the limited partners had individual approval authority for settlement of the lawsuit is not certain under Cal.Corp.Code § 15632 or the limited partnership agreement. However, the noteholder-investors had no such right. They were creditors, not co-owners with the limited partnership of the real property, even their liquidation preference did not give them the legal right to approve a settlement by the limited partnership of the Terrebonne suit. Mr. Bayer’s statement was misleading as to New Hogan investors, who were noteholders.
Normally, a creditor’s interests are adverse to its debtor where a debt is delinquent and unpaid. The October 2, 1996 letter only mentions the prospect of New Hogan investors taking adverse action against New Hogan as debtor. Mr. Bayer states “I have been consulted regarding an action to dissolve New Hogan Lake Investors and to remove the partnership’s current general partner in the interim.” See Exh. B to Bayer’s Third Supp. Decl. (Nov. 24, 1997). Such action could only be taken by New Hogan limited partners, who were then represented by Mr. Hassen in the Terrebonne lawsuit. However, rather than explaining the investors’ adverse position, Mr. Bayer’s letter demands that New Hogan and its attorneys cooperate with him and his New Hogan investor-clients to settle title to the real property. Mr. Bayer failed to disclose that his first loyalty was to Terrebonne. His belief that Terrebonne’s interest was the same as New Hogan investors’ interests in the Terre-bonne litigation can only be supported if the legal positions advanced by Mr. Hassen for New Hogan are ignored. Mr. Hassen’s defense of New Hogan in the Terrebonne litigation was adverse to Terrebonne.
If Messrs. Bayer and McCollum had properly analyzed the law of partnership and professional responsibility, they would not have permitted Mr. Bayer to embark on such conflicted dual representation of New Hogan investors and limited partner. Obtaining confidential information by deceit and then using such information in litigation to the detriment of the New Hogan limited partnership, a party whose interests are alleged to be aligned with Mr. Bayer’s current New Hogan investor clients, violates the California Rule of Professional Conduct 3-310(E). Such conduct caused the need for the recusal proceedings. This course of conduct was legally unjustified; it knowingly or recklessly advanced a meritless legal position, and wrongfully multiplied the proceedings.
C. THE DISQUALIFIED ATTORNEYS ASSERT TERREBONNE CAN NEVER TAKE TITLE TO THE 652 ACRES OWNED BY NEW HOGAN; THE DISQUALIFIED ATTORNEYS CONTEND PLACING NEW HOGAN INTO BANKRUPTCY WOULD NOT HAVE RESULTED IN A “NO ASSET” BANKR UPTCY
The disqualified attorneys assert Terre-bonne “has long recognized New Hogan as the owner of 652 acres of the 2,824 acre parcel.” The disqualified attorneys contend that following the court’s October 5, 1995 decision granting the County of Calaveras’ motion to dismiss, Terrebonne conceded New Hogan’s ownership to the 652 acres. The disqualified attorneys assert: 1) the disclosures made to the New Hogan investors gave a “realistic view” of the “likely outcome” for the litigation; 2) that Terrebonne has not asserted the failure to procure a lot line adjustment as a basis upon which to divest New Hogan of its property interest; 3) that the court’s finding that the involuntary petition against New Hogan filed in the bankruptcy court would result in a “no asset” bankruptcy is erroneous, and that if no lot adjustment is made, New Hogan and Terre-bonne hold the property as tenants in common. The disqualified attorneys also claim the Bankruptcy Judge’s finding in the hearing and subsequent order dismissing the involuntary bankruptcy petition against New Hogan, that the only party benefitting from the bankruptcy is Terrebonne, was “dicta.” However, the Bankruptcy Judge used that finding, among others, to terminate that involuntary bankruptcy proceeding.
In the proceedings in this court, the disqualified attorneys take the court’s comments regarding a “no asset” bankruptcy out of context. The comments form a basis for disqualification when viewed from the eyes of an unknowing client, to whom the disqualified attorneys owed a duty of full disclosure of relevant facts. The court’s cognizance of “what is actually transpiring in this case” has come from its decisions in this case over the last two years, while Terrebonne’s counsel have needlessly multiplied the proceedings in this and other courts.
The disqualified attorneys acknowledged at the hearing on the order to show cause that if Terrebonne recovers the 652 acres because the sale to Thousand Hills is declared fraudulent, ab initio, they would apply to Calaveras County to reduce the tax basis of the entire real property, without regard to New Hogan as a subsequent transferee. The disqualified attorneys have no credible response to the analysis, that if after forcing New Hogan into involuntary bankruptcy, Terrebonne succeeds in its efforts to recover the 652 acres, and the County forecloses its tax lien before any lot line adjustments are approved, New Hogan will be without assets.
The following facts are not reasonably disputed; (1) New Hogan derives its interest in the property through Thousand Hills, a now defunct entity, to which it loaned some $2,000,000 to purchase and develop approximately 2,824 acres, originally owned by Ter-‘rebonne. (2) The property was acquired from Terrebonne, when Terrebonne was in bankruptcy, upon the bankruptcy court’s approval of sale of the real property to Thousand Hills. (3) Thousand Hills executed a purchase-money first deed of trust to Terre-bonne, which contained a release clause. (4) The northerly 625 acres were to be conveyed to Thousand Hills free of Terrebonne’s deed of trust under the release clause, as credit for Thousand Hills’ initial payment to Terre-bonne. (5) Terrebonne’s purchase-money first deed of trust encumbers the balance of the 2,824 acre parcel. (6) To finance the purchase, Thousand Hills obtained a loan from New Hogan, and executed a blanket second deed of trust on the entire acreage to secure the loan from New Hogan. (7) New Hogan then held a senior security interest as to the 625 acres. Its security interest in the remainder of the real property is junior to Terrebonne. (8) In 1991, Thousand Hills defaulted on its loan, New Hogan foreclosed, and title to Thousand Hills’ 652 acres was transferred to New Hogan. (9) In this litigation, and a 1997-filed state court case, Terrebonne asserts that the transfer from it to Thousand Hills was void ab initio. (10) If Terrebonne prevails on this claim, New Hogan’s transferee interest will be voided, as Mr. McCollum has claimed Thousand Hills never had the right, title or interest in the property to convey to New Hogan as security for New Hogan’s loan.
Mr. McCollum pursued this now-admittedly meritless theory against New Hogan, after the October 5, 1995 ruling, by refusing in the spring of 1996 to sign a stipulation prepared by New Hogan’s counsel to dismiss Terrebonne’s quiet title action against New Hogan over the 652 acres. Then the disqualified attorneys filed a state court lawsuit in 1997 advancing this void ab initio title theory against New Hogan. In diametric opposition, the disqualified attorneys argued at the order to show cause hearing that New Hogan is a bona fide purchaser without notice, not chargeable with Thousand Hills’ “fraud,” and New Hogan’s interest in the 652 acres would not be disturbed by the voiding the original sale to Thousand Hills. Despite what Mr. Bayer now asserts, Mr. McCollum, on behalf of Terrebonne advocated a legally meritless theory in spring of 1996 in correspondence refusing to sign the stipulation to dismiss the quiet title cause of action against New Hogan, and as recently as spring of 1997, in filing a new. state lawsuit asserting that the 652 acres should be returned to Terrebonne and title quieted in Terrebonne against New Hogan. The disqualified attorneys representation that Terrebonne does not claim the 652 acres as against New Hogan is directly contradicted by their conduct and the record.
Mr. MeCullom’s conduct needlessly multiplied and prolonged the proceedings as to New Hogan’s efforts to resist Terrebonne’s claims to the 652 acres.
Terrebonne’s 1997 quiet title complaint in the state court against New Hogan’s acreage also would, if successful, divest New Hogan of its interest in the 652 acres. The disqualified attorneys represented to New Hogan investors in October and November of 1996 that it was in the investors’ best interests to force New Hogan into bankruptcy, without simultaneously disclosing that in Spring of 1996, Mr. McCollum on behalf of Mr. Bayer’s co-client, Terrebonne, was seeking to divest New Hogan of its only asset (the 652 acres). The investors were also not informed that Mr. McCollum intended to similarly pursue such a theory to divest New Hogan of its asset in Terrebonne’s 1997 state lawsuit.
In monitoring the conduct of attorneys before it and disciplining conduct which boasts of impropriety, the court may appropriately consider what the attorneys should have done with respect to the client, who has limited or no knowledge of all that has transpired in the case. See Gas-A-Tron, 534 F.2d at 1324-25.
Whenever an allegation is made that an attorney has violated his moral and ethical responsibility, an important question of professional ethics is raised. It is the duty of the district court to examine the charge, since it is that court which is authorized to supervise the conduct of the members of its bar. The courts, as well as the bar, have a responsibility to maintain public confidence in the legal profession. This means that a court may disqualify an attorney for not only acting improperly but also for failing to avoid the appearance of impropriety.
Erickson, 87 F.3d at 303.
The disqualified attorneys’ contention the court fails to understand the actual facts of this case is disingenuous. The complexity and confusion in this case has largely been caused by Terrebonne’s unsuccessful legal maneuvers which have not advanced any party’s interest, but have taken up substantial time and expense of the parties and judicial resources. The disqualified attorneys still have no awareness or understanding of the impropriety of their conduct in contacting New Hogan investors, one of whom, Buck Noel, was a limited partner, then represented in the Terrebonne litigation by Mr. Has-sen and the Miller, Starr law firm. Mr. Bayer purported to give the investors legal advice before early October 1996, without first making full and adequate disclosure and written reference to independent counsel before Mr. Bayer purported to take action on behalf of those investors, by contacting and wrongfully obtaining confidential attorney work-product information from Mr. Hassen.
D. THE DISQUALIFIED ATTORNEYS ASSERT MR. BAYER’S DISCLOSURE TO THE INVESTORS ADEQUATELY INFORMED THEM OF ANY POTENTIAL FOR CONFLICT AND ADVISED THEM TO SEEK INDEPENDENT COUNSEL
Finally, the disqualified attorneys contend Mr. Bayer’s letters to the investors adequately disclosed the nature of the conflict of interest between the investors and Terre-bonne. The attorneys assert the November 9,1996 letter adequately discloses the “worst case” scenario — that Terrebonne would recover the entire property. The December 18, 1996 letter informs the investors of their “right” to consult with other counsel. The disqualified attorneys state that the court’s misconstruction of the letters stems from its view of the impossible — that Terrebonne could recover the entire parcel of land. If Terrebonne’s pursuit of the 652 acres is “impossible,” the disqualified attorneys have not explained why in April and May 1996 Mr. McCollum refused to stipulate to dismiss Terrebonne’s legally meritless claims to the 652 acres against New Hogan in this lawsuit and why Terrebonne sued New Hogan in early 1997, he sued on behalf of Terrebonne in the state court to void the original transfer of the 652 acres. Mr. Bayer and Mr. McCol-lum now characterize the state suit as a “mistake,” but offer no explanation for the spring 1996 refusal to dismiss the quiet title cause of action as to New Hogan.
The disqualified attorneys again misconstrue the court’s prior decision. Mr. Bayer asserts the court concluded the investors were creditors of New Hogan and it was appropriate for him to speak with them. This is not true. On page 12 of that decision, the court stated it was “reasonable” to conclude, based on the offering materials that note-investors were not limited partners of New Hogan but were creditors of the limited partnership. See Memorandum Decision Granting Motion to Disqualify Attorneys, filed August 6,1997. The court also stated it is reasonable to conclude the interests of the note-investors and the limited partners were aligned because “[i]t is difficult to imagine a situation where it is not the goal of a creditor to maximize the success of the venture in which it has invested money.” Id, p. 13:23-25.
The court observed in the decision on page 18 that “to the extent the noteholders are creditors without any equity interests in New Hogan, Bayer’s contact with them does not constitute contact with a represented party.” Id, p. 18:15-18. Mr. Bayer, however, failed to provide evidence to the court that only noteholders were contacted and the only New Hogan investors purported to be represented by him were creditors without any equity interests. Elsewhere, the court stated “[t]o the extent the noteholders are limited partners, Bayer’s contact is a wrongful contact of a party represented by counsel in violation of Rule 2-100.” Id, p. 18:8-10. Mr. Bayer now admits he purported to represent Buck Noel who is a New Hogan limited partner, represented at that time in this case by Mr. Hassen.
Recently, the California Court of Appeals for the Second District determined that an attorney may not be sanctioned for an ex parte communication with an employee of a corporation unless the attorney actually knows the corporation and its employees are represented by an attorney in the matter at the time of the ex parte communication. See Truitt v. Superior Court, 59 Cal.App.4th 1183, 69 Cal.Rptr.2d 558, 97 Daily Journal D.A.R. 14815 (1997). Constructive or presumptive knowledge of representation is insufficient to bring the ex parte contact prohibition into play. Id 59 Cal.App.4th at 1184, 69 Cal.Rptr.2d 558.
Here, Mr. Bayer knew in early October 1996 that the limited partners of New Hogan were represented by counsel against Terrebonne. Mr. Bayer admits in his November 7, 1997 Second Supplemental Declaration, filed under seal, that “As of October, 1996,1 knew that New Hogan was represented by Mr. Hassen .... I NEVER speak with adverse parties whom I know to be represented by counsel.” Bayer’s Second Supp. Deck (Nov. 7, 1997), ¶ 10. In his October 2, 1996 letter to Mr. Hassen, Mr. Bayer also states: “some of the Investors received limited partnership shares. In this regard, I have been consulted regarding an action to dissolve New Hogan Lake Investors and to remove the partnership’s current general partner in the interim.” Recognizing that some of the investors are limited partners, the law in California is clear that' an attorney for a partnership represents its partners as well in matters concerning the partnership. See Wortham & Van Liew v. Superior Court, 188 Cal.App.3d 927, 233 Cal.Rptr. 725 (1987); Responsible Citizens v. Superior Court, 16 Cal.App.4th 1717, 20 Cal.Rptr.2d 756 (1993).
The right to title to the real property which forms the subject of the Terre-bonne litigation is a matter for which New Hogan and its investor-limited partners were adequately represented by counsel. Nonetheless, Mr. Bayer continued to represent Terrebonne seeking to recover the property from New Hogan. He undertook representation of the New Hogan investors, including Buck Noel, a limited partner, whose interests were to clear title to the 652 acres. Under the guise of representing an aligned interest, Mr. Bayer sought from opposing counsel to learn and be kept informed of Mr. Hassen’s legal and settlement strategy and insurance coverage analysis. In October 1996, Mr. Bayer communicated with Mr. Hassen, representing himself to be counsel for New Hogan investors. He did not disclose that Mr. Bayer had been previously engaged and was working as a legal consultant for Terrebonne and Mr. McCollum in this litigation. Despite the appearance of and an actual conflict of interest, Mr. Bayer continued to represent both Terrebonne and the New Hogan investors, who were adversaries in the same lawsuit and substantially related matters, the involuntary bankruptcy and the 1997 state lawsuit. Even after he discovered that Mr. Hassen’s strategy was for New Hogan to look to its investors in an effort to raise settlement monies to achieve a settlement at the expense of Terrebonne; knowing that Terrebonne’s objective was to recover all of the real property. Mr. Bayer pursued the involuntary bankruptcy to liquidate New Hogan and compromise this case on Terrebonne’s terms. As Judge McManus found, if successful, Mr. Bayer’s actions in the name of New Hogan investors would have benefitted only Terrebonne, because once dissolved, New Hogan could not seek additional investor contributions in accordance with Mr. Hassen’s strategy to fund the settlement, which in Mr. Hassen’s legal opinion could be accomplished at Terrebonne’s expense. Mr. Bayer sought to advance Ter-rebonne’s interests, which were directly in conflict with the loyalty obligations he owed New Hogan investors, his new clients. This conflict was not adequately disclosed in writing, and could not be consented to by the affected clients, even after adequate disclosure. See Flatt v. Superior Court, 9 Cal.4th 275, 36 Cal.Rptr.2d 537, 885 P.2d 950 (1994), where the court held an attorney had no duty to advise a new or prospective client of potential adverse consequences of a case when the attorney determines that representation of the new or prospective client created an irremediable conflict with representation of an existing client. Discussing the attorney’s duty of confidentiality owing to an existing client, the court found:
Where the requisite substantial relationship between the subject of the prior and the current representations can be demonstrated, access to confidential information by the attorney in the course of the first representation (relevant, by definition, to the second representation) is presumed and disqualification of the attorney’s representation of the second client is mandatory....
Id. at 283, 36 Cal.Rptr.2d 537, 885 P.2d 950. Discussing the duty of loyalty owed by an attorney to his client, the court found:
In evaluating conflict claims in dual representation cases, the courts have accordingly imposed a test that is more stringent than that of demonstrating a substantial relationship between the subject matter of successive representations, [footnote] Even though the simultaneous representations may have nothing in common, and there is no risk that confidences to which counsel is a party in the one ease have any relation to the other matter, disqualification may nevertheless be required. Indeed, in all but a few instances, the rule of disqualification in simultaneous representation cases is a per se or ‘automatic’ one. [citing cases]
Id. at 284-5, 36 Cal.Rptr.2d 537, 885 P.2d 950.
Here, the dual and concurrent representations undertaken by Mr. Bayer are so substantially related that even if Mr. Bayer had fully and adequately disclosed the nature of the actual conflict of interest involved in representing both Terrebonne’s and the New Hogan investors’ interests in matters relating to the subject real property, the conflict could not have been waived because it would have resulted in a breach of both the attorney’s duty of confidentiality and the duty of loyalty owihg to his first client, Terrebonne. Moreover, the fact that Mr. Bayer attempted to currently represent two clients whose interests are diametrically opposed, without fully disclosing and obtaining all interested clients’ express agreements in writing to waive the conflict makes this instance of attorney misconduct even more troubling. Mr. Bayer’s representation of Terrebonne, his first client, and of the New Hogan investors, his second client, were more than substantially related, they were in the same case. His disqualification was mandatory under the rule expressed in Flatt and other cases. See, e.g., Rosenfeld Construction Co. v. Superior Court, 235 Cal.App.3d 566, 575, 286 Cal.Rptr. 609 (1991); Henriksen v. Great American Savings & Loan, 11 Cal.App.4th 109, 117, 14 Cal.Rptr.2d 184 (1992); Galbraith v. State Bar, 218 Cal. 329, 332-333, 23 P.2d 291 (1933); In re Complex Asbestos Litigation, 232 Cal.App.3d 572, 283 Cal.Rptr. 732 (1991).
The conflicted legal representation came about after Mr. Bayer followed Mr. DeGrav-el’s suggestion that a settlement could be more easily achieved by going directly to the New Hogan investors, without involving the partnership or Mr. Hassen. Mr. Bayer then contacted New Hogan investors directly to persuade them to dissolve the partnership, and elicited confidential information from Mr. Hassen, holding himself out as attorney for the New Hogan investor group. This conduct breached duties of loyalty and confidentiality inherent in the attorney-client relationship. Mandatory disqualification of Mr. Bayer and Mr. McCollum and their law firms was compelled and should have been,
evident [to the attorneys themselves], [and] even (or perhaps especially) to the nonattorney. A client who learns that his or her lawyer is also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel was retained, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.
See Flatt, 9 Cal.4th at 285.
Mr. Bayer did not adequately disclose before October 1996, when he first contacted the New Hogan investors, the nature of the existing, actual conflict of interest, that he represented Terrebonne and the McCollum law firm as a legal consultant in the dispute that underlies this lawsuit, and that he had been referred to the New Hogan investors by Terrebonne’s principal, Mr. DeGravel to attempt to drive a wedge between New Hogan’s general partner and New Hogan’s investors. Mr. Bayer also did not provide evidence that both the investors and Terre-bonne voluntarily and knowingly consented to the conflict after having consulted independent counsel. A careful review of the “disclosure letters” of November 9, 1996 and December 18, 1996, provided by Mr. Bayer to the investors shows that an incomplete factual description of the litigation and the nature of his conflict was provided. There is almost no historical analysis of the conflict between Terrebonne and New Hogan. No mention is made that Terrebonne was pursuing a fraud ab initio theory, that the court might not find New Hogan a bona fide purchaser, or that Mr. Bayer’s first loyalty was owed to Terrebonne and the McCollum law firm, who were existing clients when Mr. Bayer sought to represent New Hogan investors. The investors could not have understood the extent of the conflicts that existed between Terrebonne, its lawyers, and New Hogan’s equity and note investors, based on Mr. Bayer’s inadequate disclosure letters.
Mr. Bayer failed to inform the investors of all facts and the conflicting legal positions of the parties, not to mention the effect of an involuntary bankruptcy on New Hogan. Nowhere did Mr. Bayer inform noteholders that they would lose their liquidation preferences if their notes were avoided in bankruptcy. Mr. Bayer’s letter failed to mention that in litigation in this court, New Hogan believed a favorable settlement of the overall case could be reached, at the expense of Terrebonne. On the facts as they then existed, the same lawyer could not represent Terrebonne and the New Hogan investors, whether limited partners or noteholders.
Mr. Bayer states in his declaration that he attempted to set forth the facts as he “believed would enable the investors to make an informed decision as to Bayer’s representation of them.” Bayer Deck, ¶ 4, p. 2:7-9. He states “[a]t the time, the noteholders, expressed to me that they did not believe there to be a conflict of interest, since there [sic] desire was to make a claim upon New Hogan’s title insurance carrier or failing this, to negotiate directly with Terrebonne as to a settlement of the within litigation and imposition of the property at issue.” Id., p. 2:9-12. This, of course, is not only overly simplistic, it is disingenuous. It is not for the client to conduct legal analysis and conclude that no conflict of interest exists. Rather, it is incumbent upon the attorney to disclose all facts of the prospective conflict and to thoroughly advise the client, in clear language, of the potential or, in this case the actual conflict of interest which is present or could arise based on differing possible scenarios in the development of the litigation. While Mr. Bayer asserts his good intention in the December 18, 1996 letter by urging the investors to seek independent legal advice, this is simply “too little, too late.” By October 1996, Mr. Bayer had already undertaken representation of the New Hogan investors as so-stated to Mr. Hassen. Mr. Bayer has, at no time during the submission of the motion to disqualify, or in the order to show cause proceedings offered signed informed written waivers by the New Hogan investors and Terrebonne’s written, knowing consent, acknowledging the potential and actual conflicts.
In Mr. Bayer’s Supplemental Declaration (filed October 14, 1997), Mr. Bayer sets forth a list of limited partnerships in which Mr. Boggs is the general partner. Mr. Bayer states the investors’ decision to place New Hogan in bankruptcy was in part based on “the larger context of pension fund assets being tied up in ... real estate limited partnerships.” Bayer Supp. Deck (Oct. 14,1997), p. 2:11-13. In his November 7, 1997 Second Supplemental Declaration, Mr. Bayer also appends a chart which purports to show the interrelatedness of the limited partnerships managed by Mr. Boggs. Review of Mr. Bayer’s chart does not reflect New Hogan’s holdings or interest in other ventures. Contrary to Mr. Bayer’s assertions, the chart does not show that New Hogan loaned money to any of the related partnerships. Unless New Hogan is a creditor in these other partnerships, the fact that CRE Equity Investors is involved in other partnerships would not provide assets to New Hogan’s bankruptcy estate. This also ignores that, assuming all these facts to be true, an actual conflict then existed between Terrebonne and New Hogan, which barred simultaneous representation of any New Hogan limited partner by a lawyer for Terrebonne.
Mr. Bayer’s supplemental briefing also proves how he has compromised his clients’ interests. He asserts that he prepared a letter in December 1996 for Mr. McCollum’s signature, which was sent to Mr. Hassen. The letter discusses a proposed settlement between Terrebonne and New Hogan. Here, Mr. Bayer exclusively represented Terre-bonne’s interests against the interests of New Hogan. The settlement proposal suggests lot line adjustments, grants of easements and title to portions of the property, subject to certain conditions. Under the proposed settlement, New Hogan was required to seek participation of its investors in order to complete the settlement as structured by Messrs. Bayer and McCollum.
In the meantime, Mr. Bayer had advocated the initiation of involuntary bankruptcy proceedings against New Hogan by those same investors, which terminated the ability of New Hogan to raise funds from investors to contribute to a pro-New Hogan settlement proposal to purchase Terrebonne’s senior deed of trust. Mr. Bayer had to convince the New Hogan investors that the settlement which favored Terrebonne, was in the investors’ best interests. Through Mr. Hassen, New Hogan was seeking a settlement by which New Hogan would buy the entire property, which contemplated contribution of funds by New Hogan investors. As an advocate for Terrebonne and officer of the court, Mr. Bayer could only advocate the best possible outcome for his client, Terrebonne. He could not simultaneously represent the conflicting interests of New Hogan investors as to the Terrebonne litigation. Mr. Bayer and Mr. McCullom could not objectively define the “best” settlement for New Hogan investors. The tunnel vision of the disqualified attorneys that there was only one reasonable settlement of this case, that favored Terre-bonne, proves why Mr. Bayer could not represent New Hogan investors.
E. IS THERE SUFFICIENT EVIDENCE TO FIND SUBJECTIVE BAD FAITH ON THE PART OF THE DISQUALIFIED ATTORNEYS TO WARRANT SANCTIONS?
Sanctions are warranted when an attorney has shown subjective bad faith by “knowingly or recklessly rais[ing] a frivolous argument or argu[ing] a meritorious claim for the purpose of harassing an opponent.” Trulis v. Barton, 107 F.3d 685, 694 (9th Cir.1995) (quotations omitted) (attorney’s intentional disregard of client’s express instructions and continued insistence that he represented persons who he was not authorized to represent, was reckless as a matter of law and supported award of sanctions).
The Ninth Circuit has sanctioned attorney misconduct for witnessing tampering as a breach of the attorney’s ethical duty not to tamper with material witnesses for the adverse party. Erickson v. Newmar Corp., 87 F.3d 298 (9th Cir.1996). In Lockary v. Kayfetz, 974 F.2d 1166, the attorney failed to follow the clients’ instructions and dismiss the lawsuit after a distribution plan in a related bankruptcy proceeding had been reached disposing of plaintiffs’ rights. An award of sanctions against the attorneys for acts which degrade the judicial system was not an abuse of the district court’s discretion.
The disqualified attorneys’ conduct must be viewed in its entirety. Salstrom, 74 F.3d 183 (finding of subjective bad faith based on combined factors of the number and length of the pleadings, the timing involved in many of the filings, and the substance of the claims asserted, converting a “simple straightforward debt collection action into a full-fledged assault,” was sufficient to justify award of sanctions).
Mr. Bayer began working as a consultant for Terrebonne and the McCollum firm in September 1996. Mr. Bayer concluded that New Hogan should be forced into involuntary bankruptcy and dissolved, but understood that Terrebonne could not accomplish this because it was not a creditor of New Hogan. Mr. Bayer urged a group of New Hogan investors and limited partner to bring an involuntary bankruptcy petition against New Hogan to benefit Mr. Bayer’s undisclosed client, Terrebonne. Mr. Bayer did not disclose to the investors at the outset his role as an attorney-consultant for Terrebonne and its attorneys. He did not disclose the full potential for adverse consequences to New Hogan, its partners and investors, including loss of the noteholders’ liquidation preference in an involuntary bankruptcy. He did not provide an objective evaluation of settlement between Terrebonne and New Hogan of the pending litigation in which the investors would contribute monies to New Hogan, not to settle on Terrebonne’s terms, but to buy the entire property for New Hogan. He did not explain the risk that if Terrebonne succeeded in its effort to recover the 652 acres, New Hogan would be assetless. He did not disclose that he had learned New Hogan