Court Opinion

ID: 9892727
Source: CourtListenerOpinion
Date Created: 2023-10-24 18:05:40.438782+00
Date Added: 2024-06-11T08:37:12.945985
License: Public Domain

Filed 10/24/23 RWB Platinum Vape v. Sadler CA4/1
                   NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.

                 COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                                       DIVISION ONE

                                              STATE OF CALIFORNIA

RWB PLATINUM VAPE, INC., A                                                   D080723
CALIFORNIA CORPORATION; AND
RED WHTIE & BLOOM BRANDS,
INC., A CANADIAN CORPORATION,
                                                                            (Super. Ct. No. 37-2022-
          Plaintiffs and Respondents,                                      00013335-CU-BC-CTL)

          v.

GEORGE SADLER AND CODY
SADLER,

          Defendants and Appellants.

          APPEAL from an order of the Superior Court of San Diego County,
Ronald F. Frazier, Judge. Affirmed.
          Austin Legal Group, APC, Tamara M. Rozmus, and Gina M. Austin, for
Defendants and Appellants.
          Kibler Fowler & Cave LLP, Matthew J. Cave, Kevin C. Kroll, and Shiqi
W. Borjigin, for Plaintiffs and Respondents.
                            I. INTRODUCTION

      In 2014, George and Cody Sadler (the Sadlers)1 formed Vista Prime
Management LLC and several other entities that collectively comprised a
cannabis manufacturing brand named Platinum Vape. They sold the
business to RWB Platinum Vape (RWB) in 2020. Gina Austin, the owner and
managing attorney for Austin Legal Group APC (ALG), and ALG represented
the Sadlers and the Platinum Vape entities in the sale.
      RWB hired George as the Chief Executive Officer (CEO) of the newly
acquired Platinum Vape entities (referred to as VPM after the sale). ALG
continued to represent George individually. George also retained ALG to
represent VPM. In September 2021, VPM sued RWB, and RWB cross-
complained. ALG represented VPM and the Sadlers in that litigation. The
parties settled on October 1, 2021.
      In April 2022, RWB sued the Sadlers for misrepresentation in
connection with the September 2021 settlement, breach of the securities
purchase agreement, and violations of noncompetition provisions. RWB
moved to disqualify ALG from representing the Sadlers. The court granted
RWB’s motion.
      On appeal the Sadlers contend that RWB lacks standing to request
ALG’s disqualification because ALG never acquired confidential information
about RWB. They also contend that ALG did not successively represent the
Sadlers, VPM, and RWB, so they cannot be disqualified on that basis.
Further, they maintain that ALG does not have information about RWB

1     Because the Sadlers share a surname, we will refer to them by first
names when we refer to them individually. No disrespect is intended. (See
In Re Marriage of Smith (1990) 225 Cal.App.3d 469, 475, fn. 1.)
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material to the present dispute. The Sadlers argue, therefore, the court erred
by disqualifying ALG.
      We conclude RWB has standing. We also hold substantial evidence
supports the trial court’s conclusion that RWB and VPM share a unity of
interests and are closely enough related to treat them as a single entity for
purposes of a conflicts analysis. We further find the previous litigation and
the present dispute are substantially related. Accordingly, the trial court did

not abuse its discretion in disqualifying ALG, and we affirm.2

          II. FACTUAL AND PROCEDURAL BACKGROUND

      The Sadlers organized Vista Prime Management, LLC in California in
2014. They also formed several other entities that, along with Vista Prime,
comprised a cannabis manufacturing brand named Platinum Vape.
      George retained ALG to represent him individually and to represent
the Platinum Vape entities. ALG provided the Platinum Vape entities with
general legal advice about cannabis law and regulation compliance.
      In 2020, Brad Rogers, on behalf of Red White and Bloom Brands, Inc., a
publicly traded Canadian company, approached George to purchase the
Platinum Vape brand. Red White and Bloom formed RWB Platinum Vape, a
wholly owned American subsidiary, to purchase the Platinum Vape entities.
      ALG represented the Sadlers and the Platinum Vape entities in the
transaction.
      The parties executed sales documents, including a securities purchase
agreement (SPA), a restrictive covenant agreement, and employment

2     In their opening brief, the Sadlers also argue that ALG did not
concurrently represent the Sadlers and VPM. Because we affirm the
disqualification based on successive representation, we do not address this
contention.
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agreements with George and Cody. The SPA required the Sadlers to deliver
to RWB all items, equipment, and records required to operate the companies.
It gave RWB full access to the premises, properties, personnel, books, records,
contracts, and documents pertaining to VPM.
      The SPA also required RWB to enter employment agreements with
Cody and George that would pay them annual salaries, stock bonuses,
incentives, and vacation pay in accordance with RWB’s policies. Further, the
Sadlers each entered into restrictive covenant agreements with RWB that
included non-competition provisions.
      In his employment agreement with RWB, George agreed to serve as the
CEO, director, and manager of all Platinum Vape entities. George was
eligible to participate in stock incentive plans and programs that RWB
established. Earnings were tied to RWB’s fiscal years. The deal closed on
September 11, 2020.
      ALG then entered a new engagement agreement with VPM to provide
general counsel services, including “corporate, land use, litigation, and
cannabis.” George signed the engagement letter for VPM.
      For the rest of 2020 and during 2021, George managed VPM. He
directed ALG’s provision of general legal and cannabis law compliance
services. ALG communicated directly with RWB about VPM’s integration
with RWB.
      In September 2021, a dispute arose between the Sadlers and RWB
resulting in several lawsuits. ALG filed one of those suits against RWB and
Rogers on behalf of VPM.
      VPM alleged that RWB interfered with VPM by attempting to steal
assets and interfere with contracts and customers. VPM also alleged that

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RWB attempted to access programs, accounts, and point of sale software
stored on the computers.
      RWB filed a verified cross-complaint. RWB alleged that after it
purchased VPM, RWB discovered financial irregularities. The cross-
complaint contended that the Sadlers engaged in embezzlement, fraud, and
violations of their non-competition obligations. It explained that the Sadlers
were asserting that they were the owners of VPM. The cross-complaint also
stated the Sadlers breached the SPA.
      Responding to the Sadlers’ actions, RWB implemented a policy that
required their head office to approve all expenses over $5,000. RWB also
prohibited the Sadlers from continuing as signatories on the businesses’ bank
accounts and implemented a two-tiered signing system for spending.
      In this dispute ALG represented the Sadlers and VPM in settlement
negotiations. ALG communicated directly with several RWB employees and
officers. In defending VPM, ALG reviewed agreements and enjoyed access to
the VPM agreements, and to confidential, proprietary information.
      The parties agreed to a settlement around September 18, 2021, with
the matter finally resolving on October 1, 2021. On October 4, 2021, ALG
sent a letter ending its VPM representation. RWB terminated George’s
employment, and Rogers took over as the CEO of VPM.

      In April 2022, RWB filed the instant action,3 alleging that the Sadlers
made intentional misrepresentations and concealments to induce settlement
in the previous litigation. The verified complaint also alleges that the
Sadlers failed to satisfy the conditions precedent contemplated by the
settlement agreement. It further claims the Sadlers breached the SPA, the

3     The suit named several other defendant entities: GC Global, LLC; C.S.
Designs, Inc., Urban Therapies Manufacturing LLC, and Urban Therapies
Distribution LLC.
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restrictive covenant agreements, and the settlement agreement. Ms. Austin
and ALG appeared as attorneys of record on the Sadlers’ behalf.
      RWB moved to disqualify them from representing the Sadlers in the
litigation. The Sadlers opposed the motion.
      The court disqualified ALG. In its statement of decision, the court
noted that ALG previously represented the Sadlers and VPM. It found that
RWB and VPM are “ ‘closely enough’ ” related to confer standing to RWB to
seek disqualification of ALG. The court also found “that RWB and VPM,
LLC, were ‘closely enough related to be treated as one entity for purposes of
the conflict herein.’ ” The court determined that the September 2021
litigation subject matter and the current dispute are substantially related.
Further, it concluded that the nature of ALG’s employment meant
confidential material would normally be imparted. The trial court concluded
that ALG’s disqualification was mandatory.

                              III. DISCUSSION

      A. Standing.

      “[A] moving party must have standing, that is, an invasion of a legally
cognizable interest, to disqualify an attorney.” (Great Lakes Construction,
Inc. v. Burman (2010) 186 Cal.App.4th 1347, 1357.) Standing is a legal
question, which we may determine independent of the trial court’s ruling.
(Id. at p. 1354.) Although the complaining party generally “must have or
must have had an attorney-client relationship with the attorney” it seeks to
disqualify (Id. at p. 1356), “no California case has held that only a client or
former client may bring a disqualification motion.” (Kennedy v. Eldridge
(2011) 201 Cal.App.4th 1197, 1204.)

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      At least arguably, a legally cognizable interest for disqualifying an
opposing attorney may arise from generalized policy concerns surrounding
the rule, e.g., the integrity of the process. (Lyle v. Superior Court (1981) 122
Cal.App.3d 470, 482-483 [addressing an attorney-witness situation].) Even if
generalized policy concerns were not an acceptable way to confer standing, if
an attorney’s relationship with a corporate family gives the attorney “a
significant practical advantage in a case against an affiliate, then the
attorney can be disqualified from taking the case.” (Morrison Knudsen Corp.
v. Hancock, et al. (1999) 69 Cal.App.4th 223, 253 (Morrison).) As we explain
post, in our view ALG’s prior relationship with VPM gives the Sadlers a
practical advantage in this litigation against RWB. Therefore, even though
RWB itself never retained ALG, we agree with the trial court that RWB and
VPM “are ‘closely enough’ related for purposes of this litigation to confer
standing to RWB to bring the motion to disqualify ALG[.]”

      B. Disqualification.

      “[D]isqualification motions involve a conflict between the clients’ right
to counsel of their choice and the need to maintain ethical standards of
professional responsibility.” (People ex rel. Dept. of Corporations v. SpeeDee
Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145 (SpeeDee Oil).)
However, “[t]he paramount concern must be to preserve public trust in the
scrupulous administration of justice and the integrity of the bar.” (Ibid.)
      We review an attorney’s disqualification for an abuse of discretion
(SpeeDee Oil, supra, 20 Cal.4th at p. 1143; Jessen v. Hartford Casualty Ins.
Co. (2003) 111 Cal.App.4th 698, 705) and “accept[ ] as correct all of [the
court’s] express or implied findings supported by substantial evidence.” (City
National Bank v. Adams (2002) 96 Cal.App.4th 315, 322 (City National

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Bank).).) We presume the trial court’s order is correct, and we indulge all
presumptions to support the order, resolving conflicts in favor of the
prevailing party and the trial court’s resolution of any factual disputes. (In re
Marriage of Zimmerman (1993) 16 Cal.App.4th 556, 561-562.) “We will
reverse the trial court’s ruling only where there is no reasonable basis for its
action.” (City National Bank, at p. 323.)

             1. Successive Representation.

      Disqualification motions typically arise in two factual circumstances:
“(1) in cases of successive representation, where an attorney seeks to
represent a client with interests that are potentially adverse to a former
client of the attorney; and (2) in cases of simultaneous representation, where
an attorney seeks to represent in a single action multiple parties with
potentially adverse interests.” (In re Charlisse C. (2008) 45 Cal.4th 145, 159.)
“In simultaneous representation cases, ‘[t]he primary value at stake . . . is the
attorney’s duty—and the client’s legitimate expectation—of loyalty, rather
than confidentiality.’ ” (Id. at p. 160, quoting Flatt v. Superior Court (1994) 9
Cal.4th 275, 284 (Flatt).) In successive representation cases, the concern is
an attorney’s duty of confidentiality. (Western Sugar Coop v. Archer-Daniels-
Midland Co. (C.D.Cal. 2015) 98 F.Supp.3d 1074, 1080 [applying the
California State Bar Act and the California Rules of Professional Conduct].)
      The Sadlers contend the trial court incorrectly concluded that ALG
previously represented RWB, making a successive representation analysis an
abuse of discretion. RWB contends that ALG’s prior representation of VPM
qualifies for a conflicts analysis because VPM and RWB share a unity of
interests.

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      Morrison is instructive. There, the court prevented a law firm
(Hancock) from representing a water district in any dispute with Morrison
Knudsen Corporation (Morrison), or Morrison’s wholly owned subsidiary,
Centennial Engineering (Centennial), even though Hancock had never
represented Centennial. (Morrison, supra, 69 Cal.App.4th at pp. 227, 238.)
Morrison’s primary comprehensive insurance policy underwriters hired
Hancock to monitor the defense attorneys that Morrison retained on errors
and omission claims, though Hancock never oversaw claims against
Centennial. (Id. at pp. 227, 238.) Still, when the water district sued
Centennial, the court concluded that based on a “unity of interest” analysis
Morrison and Centennial should be treated as a single entity under
California conflict of interest rules. (Id. at pp. 238, 240-247, 252.)
      The appellate court affirmed the trial court’s reasoning. It identified
several factors to consider when determining if corporate entities could be
considered a single unit for evaluating representational conflicts: (1) whether
the two entities overlap in areas like operations and management personnel;
(2) whether the attorney previously received confidential information from
one entity that is substantially related to the claim currently against the
other entity; and (3) whether there is overlapping control of the legal affairs
of the two entities. (Morrison, supra, 69 Cal.App.4th at pp. 245-248.) The
court also identified as a relevant factor whether affiliates might be joined in
a lawsuit. (Id. at p. 247.)
      Here, the trial court concluded—RWB and VPM were “ ‘closely enough
related to be treated as one entity for purposes of the conflict herein.’ ”
(See Morrison, supra, 69 Cal.App.4th at pp. 247-248.) We examine the record
to determine whether substantial evidence supports this conclusion.
(SpeeDee Oil, supra, 20 Cal.4th at p. 1143.)

                                        9
      The SPA gave RWB full control over VPM’s operations. It stated that
RWB would have all items and equipment required to operate the companies.
It provided for RWB to possess keys to the properties and full access to the
premises, properties, personnel, books records, contracts, and documents that
pertained to VPM.
      Although George ran the day-to-day operations of VPM, he did so only
because RWB provided him with that authority through the employment
agreement. RWB retained sole discretion to address George’s compensation
and any stock incentive plans. And George’s earnings were tied to RWB’s
fiscal year.
      Not only did the SPA give RWB full control over VPM’s operations, but
RWB expected to be heavily involved in VPM’s activities. Attorney billing
invoices show that ALG communicated with RWB in March 2021 about
VPM’s integration with RWB. RWB’s verified cross-complaint from the
September 2021 lawsuit explains that after RWB became concerned about
VPM’s finances, RWB required its approval for VPM spending over $5,000.
RWB also instituted a policy requiring two-tiered signing authority for
business bank accounts. These actions and details demonstrate operational
overlap and integration.
      Allegations in VPM’s September 2021 verified cross-complaint against
the Sadlers similarly reflect that it was the parties’ intent that VPM would be
fully integrated into RWB. The September 2021 cross-complaint alleges the
Sadlers were in violation of their agreements because they were preventing
RWB from accessing VPM’s physical facilities, bank accounts, QuickBooks
records, databases, and accounts receivable and payable, among other things.
Thus, RWB intended to have access to and control over VPM.

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      The Sadlers maintain that ALG never obtained any of RWB’s
confidential information because RWB was represented in the previous
dispute by attorneys other than ALG. This reasoning ignores ALG’s exposure
to VPM’s legal issues and business practices. ALG provided general legal
business services and cannabis law compliance services to VPM until October
1, 2021. It also represented VPM in the previous lawsuit, negotiating the
settlement agreement on behalf of VPM. That lawsuit addressed whether
there were financial irregularities in how the Sadlers managed VPM. The
parties disputed control over assets, access to programs and accounts, and
relationships with customers. As VPM’s attorney, ALG was privy to
confidential information about how the Sadlers ran VPM, the contracts VPM
negotiated and entered, control over VPM’s facilities, and VPM’s financial
management.
      The current dispute alleges the Sadlers fraudulently induced the
settlement by misrepresenting and concealing information about VPM,
including information about its finances. Moreover, the verified complaint
alleges that the Sadlers made intentional misrepresentations to induce
settlement. RWB also alleges the Sadlers stole or destroyed some of VPM’s
confidential records to prevent RWB from uncovering financial and operating
irregularities. ALG’s knowledge about what the Sadlers told RWB and how
that matched VPM’s business documentation, or the existence of such
documentation at all, is relevant to this dispute. Given ALG’s previous
access to VPM’s agreements and legal business, as well as its direct
representation of both the Sadlers and VPM in the dispute giving rise to this
litigation, the court’s factual conclusion that ALG had access to relevant,
confidential information is not unreasonable.

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      The trial court did not expressly address in its order two factors
mentioned in Morrison: whether there is overlapping control of the legal
affairs of the RWB and VPM and whether affiliates might be joined in a
lawsuit. (Morrison, supra, 69 Cal.App.4th at p. 247.) Neither of these factors
tips the scales against finding a unity of interests. Although the Sadlers
managed the day-to-day legal affairs of VPM during the previous litigation,
RWB appears to do so now because Rogers, who is the CEO and Chairman of
the Board of Directors of RWB, is the current CEO of VPM. Further, when
the court asked the Sadlers’ counsel at the disqualification hearing whether
VPM could be joined, the attorney did not dispute that possibility.

              2. Substantially Related Matters.

      The Sadlers next contend that ALG’s prior representation of VPM
pertained only to VPM’s general business practices. The Sadlers further
contend that ALG did not represent RWB and so has no confidential
information specific to RWB that is substantially related to the current
litigation. The Sadlers argue that RWB fails to identify any category of
information that ALG gained through its contacts with RWB, noting that
ALG did not assist RWB with the transaction documents, the settlement
agreement, or otherwise represent RWB in the previous dispute. However,
because we treat RWB and VPM as the same entity for purposes of a conflict
analysis, we consider ALG’s previous representation of VPM in reaching our
conclusion.
      “To determine whether there is a substantial relationship between
successive representations, a court must first determine whether the attorney
had a direct professional relationship with the former client in which the
attorney personally provided legal advice and services on a legal issue that is

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closely related to the legal issue in the present representation.” (City and
County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 847
(Cobra Solutions).) If the former representation involved a direct personal
relationship because the attorney personally provided legal advice and
services on an issue closely related to the issue in the present litigation, the
attorney is presumed to possess confidential information. (Ibid.) If the
attorney’s contact with the prior client was not direct, the court examines the
attorney’s relationship to the prior client and considers the relationship
between the prior and current representations. (Ibid.) If the subject of the
previous representation “ ‘make[s] it likely the attorney acquired confidential
information’ that is relevant and material to the present representation, then
the two representations are substantially related. [Citations.]” (Ibid.)
“When a substantial relationship between the two representations is
established, the attorney is automatically disqualified from representing the
second client.” (Cobra Solutions, at p. 847, citing Flatt, supra, 9 Cal.4th at p.
283.)
        From September 11, 2021, until October 1, 2021, ALG provided general
legal business services and cannabis compliance services for VPM. ALG also
represented VPM in the lawsuit it filed against RWB, and it defended VPM
against RWB’s cross-complaint. Although VPM’s complaint regarded control
over access to programs, accounts, and point of sale software, the cross-
complaint regarded VPM’s contracts and clients, as well as whether VPM had
financial irregularities and whether the Sadlers engaged in embezzlement,
fraud, and violations of their non-competition obligations while managing
VPM.
        The current dispute questions whether the Sadlers acted fraudulently
to induce the settlement agreement, as well as whether they violated its

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terms. Like the previous cross-complaint, the complaint here also alleges
that the Sadlers violated their non-competition obligations and breached the
SPA. Accordingly, in its representation of VPM in the previous litigation,
ALG “personally provided legal advice and services on a legal issue that is
closely related to the legal issue in the present representation.” (Cobra
Solutions, supra, 38 Cal.4th at p. 847.) Further, the trial court did not err in
presuming ALG possessed confidential information because there is a
substantial relationship between the subject of the prior and the current
representations. Accordingly, “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; indeed, the disqualification
extends vicariously to the entire firm. [Citations.]” (Flatt, supra, 9 Cal.4th at
p. 283.) Thus, it was not an abuse of discretion to disqualify ALG.

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                           IV. DISPOSITION

     The judgment is affirmed. Appellants to bear costs on appeal.

                                                                 RUBIN, J.

WE CONCUR:

BUCHANAN, Acting P. J.

CASTILLO, J.

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