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CWT Canada II Limited Partnership v. Bridges

United States District Court, D. Arizona

August 17, 2017

CWT Canada II Limited Partnership, et al., Plaintiffs,
v.
Kevin J. Bridges, et al., Defendants. Tony Ker, Counterclaimant,
v.
CWT Canada II Limited Partnership, et al., Counterdefendants.

          ORDER

          HONORABLE G. MURRAY SNOW UNITED STATES DISTRICT JUDGE.

         Pending before the Court are Plaintiffs' Motion to Disqualify Wilenchik & Bartness, P.C. from Representing Defendant Richard Carrigan Because of a Non-Waivable Conflict of Interest, (Doc. 54), Defendants Richard Carrigan and Tony Ker's Motion to Disqualify, (Doc. 63), and Plaintiffs' Motion for Leave to File Sur-Reply in Opposition to Motion to Disqualify, (Doc. 75). For the following reasons, the Court denies the three motions.[1]

         BACKGROUND

         Though the parties use strong and in some cases inflammatory language to describe differing accounts of the background to this lawsuit, the essential facts for purposes of these motions are not greatly in dispute.

         Plaintiffs controlled a company called Changing World Technologies (“CWT”), which itself was a holding company for another company called Renewable Environmental Solutions, LLC (“RES”). RES was in the renewable diesel fuel business. In the course of this business it received certain tax credits from the United States Government. In December of 2012, Plaintiffs decided to reorganize CWT. The plan was for a company called GEM Holdco, LLC (“GEM”) to buy 60% of CWT after a period of time, and subsequently sell it to another company called RDX.[2] Defendants Tony Ker and Richard Carrigan served on RDX's board; non-party Dennis Danzik served as its CEO.

         Apparently, GEM and RDX had an agreement that RDX would only buy its share of CWT through GEM, and not directly from Plaintiffs. But Plaintiffs instead sold CWT to RDX directly. As part of this purchase, RDX agreed to remit to Plaintiffs tax credits that CWT had accrued, but not yet received, as of the purchase date.

         GEM filed a lawsuit in New York state court, suing CWT, RDX and Danzik for tortious interference, breach of contract and other related claims based on the sale of CWT directly to RDX. Schlam Stone & Dolan (“Schlam”), the law firm representing Plaintiffs here, represented all the defendants in the New York action. Subsequently, GEM filed an additional claim of defamation adding Ker and Carrigan based on a press release Danzik had released about GEM. Schlam represented Ker and Carrigan as well on this claim. The defamation claim was later dropped, and with it, Ker and Carrigan were dropped as defendants. Subsequently, Schlam withdrew from representing RDX and Danzik, and CWT (still represented by Schlam) sued RDX and Danzik over an alleged theft of the tax credits that RDX was supposed to remit to CWT.

         There are currently three related lawsuits pending in this district. In CWT Canada II LP et al v. Elizabeth Danzik et al, No. CV-16-00607-DGC, the Plaintiffs are suing Danzik's wife and the Danziks' LLC based on their role in the alleged theft of the tax credits. In Dennis M. Danzik et al v. CWT Canada II Limited Partnership et al, No. CV-17-00969-JAT, Danzik and RDX sue the Plaintiffs (and certain other parties) for alleged fraud relating to the sale of CWT to RDX. And in this action, also based on the alleged theft of tax credits, Plaintiffs sue several members of RDX's board, as well as a company known as Danzik Applied Sciences, LLC (“DAS”). It is also asserted that the United States Attorney's Office is investigating Dennis Danzik for the alleged theft of tax credits.

         The Defendants in this matter are represented by Wilenchik & Bartness PC (“WB”). Plaintiffs filed a motion to disqualify WB from representing Carrigan, because WB also represents Danzik in one of the other actions in this district, as well as in the U.S. Attorney's Office investigation. Plaintiffs assert Danzik and Carrigan have adverse interests.

         Schlam represents the Plaintiffs in this matter. Concurrent with their response to Plaintiffs' motion to disqualify, Defendants filed a motion to disqualify Schlam on the basis of Schlam's prior representation, in the New York case, of Defendants Ker and Carrigan.

         DISCUSSION

         I. Legal Standard

         The United States District Court for the District of Arizona has adopted the Arizona Rules of Professional Conduct as its ethical standards. L.R. Civ. P. 83.2(e). The Court therefore applies Arizona ethical rules in evaluating motions to disqualify counsel. See Roosevelt Irrigation Dist. v. Salt River Project Agric. Improvement & Power Dist., 810 F.Supp.2d 929, 944 (D. Ariz. 2011).

         To avoid the use of ethical rules for the tactical disqualification of opposing counsel, “[o]nly in extreme circumstances should a party to a lawsuit be allowed to interfere with the attorney-client relationship of his opponent.” Optyl Eyewear Fashion Int'l Corp. v. Style Cos., Ltd., 760 F.2d 1045, 1050 (9th Cir. 1985) (explaining that disqualification motions should be subject to “particularly strict scrutiny” because of their potential for abuse); see also In re Cty. of L.A., 223 F.3d 990, 996 (9th Cir. 2000) (“A motion to disqualify a law firm can be a powerful litigation tactic to deny an opposing party's counsel of choice.”). The moving party has the burden of showing that the Court should disqualify an attorney from representing his client. Alexander v. Superior Court, 141 Ariz. 157, 161, 685 P.2d 1309, 1313 (1984); Amparano v. ASARCO, Inc., 208 Ariz. 370, 377, 93 P.3d 1086, 1093 (Ct. App. 2004).

         “To preserve the integrity of the judicial system[, ] close or doubtful cases should be resolved in favor of disqualification.” Richards v. Holsum Bakery, Inc., No. CV09-00418-PHX-MHM, 2009 WL 3740725, at *6 (D. Ariz. Nov. 5, 2009). However, because of the “great prejudice often associated with an enforced change of counsel, courts applying these standards have granted disqualification only when the moving party has demonstrated substantial and irreparable harm growing out of the ethical violation.” Id. (quoting Complaint of Korea Shipping Corp., 621 F.Supp. 164, 169 (D. Alaska 1985)). “Whenever possible the courts should endeavor to reach a solution that is least burdensome upon the client or clients.” Alexander, 141 Ariz. at 161. The Court has no “rule of automatic disqualification, ” and will instead consider a number of factors in determining whether disqualification is warranted. Research Corp. Techs., Inc. v. Hewlett-Packard Co., 936 F.Supp. 697, 701 (D. Ariz. 1996). These factors include “(1) the nature of the ethical violation, (2) the prejudice to the parties, including the extent of ...


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