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Atmosphere Hospitality Management, LLC v. Curtullo

United States District Court, D. South Dakota, Western Division

June 5, 2015

ATMOSPHERE HOSPITALITY MANAGEMENT, LLC, Plaintiff,
v.
ZELJKA CURTULLO, Defendant, and SHIBA INVESTMENTS, INC., KARIM MERALI, and Defendants and Third-Party Plaintiffs,
v.
JAMES HENDERSON, Third-Party Defendant.

ORDER GRANTING MOTION TO DISQUALIFY COUNSEL

KAREN E. SCHREIER, District Judge.

Plaintiff, Atmosphere Hospitality Management, LLC, and third-party defendant, James Henderson (collectively, Atmosphere), move to disqualify Courtney Clayborne as counsel for defendants/third-party plaintiffs, Shiba Investments, Inc., and Karim Merali (collectively, defendants). Defendants oppose Atmosphere's motion to disqualify counsel. For the following reasons, Atmosphere's motion is granted.

BACKGROUND

Atmosphere brought this action in May 2013 against defendants to resolve issues related to a License Agreement and a Property Management Agreement between the parties that allowed Shiba to operate a hotel it owned under Atmosphere's brand, Adoba®. Atmosphere alleges defendants breached the agreements, tortiously interfered with Atmosphere's business expectancy, defamed Atmosphere, fraudulently induced Atmosphere to enter into the agreements, committed deceit, misappropriated Atmosphere's trade secrets, and converted Atmosphere's property. See Docket 37. Defendants filed a third-party complaint against James Henderson and counterclaims against Atmosphere alleging breach of the agreements, conversion of defendants' property, and tortious interference with defendants' business expectancy.[1] See Docket 46; Docket 47.

Atmosphere brings this motion to disqualify Clayborne as counsel because Atmosphere believes he is a necessary witness in this case. Atmosphere contends that it will be necessary to call Clayborne as a witness to clarify inconsistent statements given by Merali and Clayborne at various stages of the discovery process, to testify to Clayborne's role in drafting and executing the License Agreement and Property Management Agreement, and to authenticate and provide foundation for admission into evidence of certain evidence.

Specifically, Atmosphere argues Clayborne's testimony is relevant to the following material factual disputes: (1) the timing of changes made to the License Agreement and Property Management Agreement; (2) the identity of those making the changes; (3) the knowledge of the parties regarding the changes; and (4) the authenticity of a December 31, 2011, email. Atmosphere states all four fact questions are relevant to its claim of fraudulent inducement. Atmosphere further states, in relation to its claim of tortious interference with business expectancy, that Clayborne is a necessary witness because only he can testify to conversations he had with Atmosphere's business contacts. In response, defendants seek to minimize the number of factual disputes and deny any of the alleged factual inconsistencies are material to the underlying claims.

LEGAL STANDARD

The court applies South Dakota law to matters regarding the conduct of counsel in diversity jurisdiction cases. Poulos v. Summit Hotel Prop., LLC, No. CIV 09-4062-RAL, 2010 WL 2034634, at *8 (D.S.D. May 21, 2010). The South Dakota Rules of Professional Conduct provide:

(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless: (1) The testimony relates to an uncontested issue; (2) The testimony relates to the nature and value of legal services rendered in the case; or [sic] (3) Disqualification of the lawyer would work substantial hardship on the client; or (4) Except as otherwise provided by statute.

SDRPC 3.7(a)(1)-(4) (codified at SDCL 16-18 app.)[2] The South Dakota Supreme Court requires a party seeking disqualification of opposing counsel to show that: "(1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case." Rumpza v. Donalar Enter., Inc., 581 N.W.2d 517, 525 (S.D. 1998) (relying on Shelton v. Am. Motors Corp., 805 F.2d 1323, 1327 (8th Cir. 1986)).

The district court has discretion to grant or deny a motion to disqualify an attorney, "and will be reversed only upon a showing of abuse of that discretion.'" Midwest Motor Sports v. Arctic Sales, Inc., 347 F.3d 693, 700 (8th Cir. 2003) (quoting Petrovic v. Amoco Oil Co., 200 F.3d 1140, 1154 (8th Cir. 1999)). Disqualification motions are subject to particularly strict judicial scrutiny because there is the potential for abuse by opposing counsel. Id. at 700-01. Despite this high standard of proof, any legitimate doubts created by the movant must be resolved in favor of disqualification. Meidinger v. City of Rapid City, No. CIV. 12-5064-JLV, 2014 WL 1653127, at *1 (D.S.D. Apr. 24, 2014) (citing Olson v. Snap Prods., Inc., 183 F.R.D. 539, 542 (D. Minn. 1998)); see also Coffelt v. Shell, 577 F.2d 30, 32 (8th Cir. 1978).

The Shelton test, although normally used to determine whether to allow the deposition of counsel in current litigation, is "[b]y logical extension [applicable] to determine whether an opposing counsel may be called as a witness at trial." Wilson Rd. Dev. Corp. v. Fronabarger Concreters, Inc., No. 1:11-CV-00084-CEJ, 2015 WL 269795, at *1 (E.D. Mo. Jan. 21, 2015).[3] While SDCL 19-1-3 does state if counsel becomes a witness, he cannot continue to participate in the trial, the statute does not indicate "that when an attorney is involved in the case, he may never testify as a witness." In re Estate of Heibult, 653 N.W.2d 101, 105 (S.D. 2002) (emphasis in original). Nevertheless, once an attorney testifies, he runs the risk that he "may inadvertently attack his own client's credibility by testifying in a matter which conflicts with the client's testimony.... Thus, it becomes a matter of evidence and not simply a matter of ethics.'" Rumpza, 581 N.W.2d at 524 (quoting Estes v. Millea, 464 N.W.2d 616, 619 n. 4 (S.D. 1990)). When determining whether to disqualify an attorney, "[i]t is relevant that one or both parties could reasonably foresee that the lawyer would probably be a witness." SDCL 16-18, app., Rule 3.7, cmt. 4. And "if it is foreseeable that current counsel must testify as prohibited by S.D.C.L. § 19-1-3... counsel should withdraw from representation." Bjornestad v. Progressive N. Ins. Co., No. CIV 08-4105, 2009 WL 2588286, at *3 (D.S.D. Aug. 20, 2009).[4]

DISCUSSION

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