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Dream Team Holdings LLC v. Alarcon

United States District Court, D. Arizona

September 28, 2016

Dream Team Holdings LLC, et al., Plaintiffs,
Rudy Alarcon, et al., Defendants.


          Douglas L. Rayes United States District Judge.

         Defendants have filed a motion to disqualify Plaintiffs' counsel. (Doc. 20.) On July 26, 2016, the Court held a telephonic conference on the motion, stayed the case pending resolution of the motion to disqualify, and ordered supplemental briefing. (Doc. 38.) Briefing is now complete. For the reasons stated below, the motion is granted in part.


         On April 29, 2016, Plaintiffs Dream Team Holdings, LLC (Dream Team) and Green Light District Holdings, LLC filed suit against Defendants in Maricopa County Superior Court alleging nine causes of action, including breach of contract and fraud. (Doc. 1-1.) Plaintiffs allege that they invested a large sum of money in Defendants Energy Clinics, LLC (Energy Clinics) and Organica Patient, Inc.'s (Organica) medical marijuana business, but failed to receive member distributions under the Operating Agreement. (Id., ¶ 34.) On May 9, 2016, Defendants Energy Clinics, Kristen Abelon, and Rudy Alarcon removed the case to this Court on the basis of diversity jurisdiction. (Doc. 1.)

         Shortly thereafter, Defendants filed the instant motion to disqualify, alleging that Plaintiffs' counsel, John Armstrong, engaged in improper ex parte communications with five current employees of Defendant Energy Clinics in violation of Arizona Rule of Professional Conduct 4.2. (Doc. 20.) The five employees are Matt Tupuola, Jason Wendlandt, Tuia Galeai, Shannon Fernandez, and Angie Mercado. (Doc. 46 at 5.) In mid-May 2016, after Plaintiffs filed the lawsuit, Defendants learned that Plaintiffs' counsel had contacted Wendlandt and Tupuola. (Doc. 20-1 at 7.) Abelon and Alarcon confronted both Wendlandt and Tupuola about their conduct, but they “walked out” and quit Energy Clinics. (Id.) Subsequently, Abelon allegedly began receiving threatening text messages from Mike Smith, the manager of Dream Team. (Id.)

         On May 21, 2016, Defendants' counsel, Shane Ham, sent a letter to Armstrong to cease the improper communications. (Id. at 10-12.) Ham also demanded that Armstrong and all counsel of record disclose the extent of their contacts with Energy Clinics employees and turn over copies of all such communications. (Id. at 11.) Armstrong admitted that he engaged in ex parte contacts with the employees, but stated that several employees had contacted him regarding concerns about illegal practices carried out at Organica and that none of them were managerial employees. (Id. at 14.) Later that day, Armstrong sent another letter to Ham stating:

We are now getting reports that your clients have threatened the personal safety of several employees, along with threatening all employees about their job security should any of them report their suspicions that that [sic] your clients may have engaged in unlawful conduct. I sincerely hope that this is mere rumor. But regardless, it would be in everyone's best interest if your clients clarified that they are no making such threats to their employees. So again, we are reaching out for a sit down with just lawyers or the lawyers and the key principals to see if its [sic] possible to reach a business solution.

(Id. at 19.) Plaintiffs' counsel failed to list the employees with whom they had communicated and the extent of those communications.

         At a telephonic conference on July 26, 2016, the Court ordered that Plaintiffs' counsel disclose any statements taken from employees or former employees of Defendants and that Smith, Alarcon, and Abelon be deposed. (Doc. 38.) Both parties submitted supplemental briefs, and Plaintiffs disclosed that they obtained declarations from Tupuola, Wendlandt, and Galeai in mid-May 2016. Defendants request that the Court disqualify Horwitz & Armstrong and suppress the declarations. (Doc. 46 at 9.)


         The Arizona Rules of Professional Conduct “apply to attorneys admitted or otherwise authorized to practice before the United States District Court for the District of Arizona.” LR Civ. 83.2(e). Arizona Rule of Professional Conduct 4.2 provides: “In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so.” “The prohibition is intended to (1) prevent unprincipled attorneys from exploiting the disparity in legal skills between attorneys and lay people, (2) preserve the integrity of the attorney-client relationship, (3) help to prevent the inadvertent disclosure of privileged information, and (4) facilitate settlement.” Lang v. Superior Court, 826 P.2d 1228, 1230 (Ariz.Ct.App. 1992). Where an organization is involved, Rule 4.2 prohibits attorneys from communicating with three groups of individuals: “(1) those having a managerial responsibility on behalf of the organization; (2) any person whose act or omission in connection with the matter may be imputed to the organization; and (3) any person whose statement may constitute an admission on the part of the organization.” Id. at 1230-31. Importantly, this ethical obligation is triggered if the statement of the employee “might” be admissible-it need not be demonstrated that the statement is, in fact, admissible. See State ex re. Ariz. Dept. of Health Servs. v. Gottsfield, 146 P.3d 574, 577 (Ariz.Ct.App. 2006).

         Defendants argue that the communications at issue fall within the first and third groups. They assert that statements from all five employees may constitute party admissions and that Tupuola and Wendlandt were managerial employees of Defendants. The Court finds that Defendants' first argument regarding party admissions is dispositive, and thus it will not address whether Tupuola and Wendlandt were managerial employees.

         I. Statements that May Constitute Admissions

         “A statement is an admission for the purposes of Rule 4.2 if it constitutes an admission by a party-opponent under Arizona Rule of Evidence 801(d).” Richards v. Holsum Bakery, Inc., No. CV09-00418-PHX-MHM, 2009 WL 3740725, at *5 (D. Ariz. Nov. 5, 2009). Under Rule 801(d)(2)(D), an admission by a party-opponent is “a statement by the party's agent or servant concerning a ...

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