Original Proceeding Pursuant to C.A.R. 21 . Jefferson County District Court Case Nos. 13CR1439 and 13CR1451. Honorable Margie L. Enquist, Judge.
Rule Made Absolute.
In this original C.A.R. 21 proceeding, the supreme court reviews the trial court's order disqualifying petitioners' retained counsel of choice under Rule 1.9(a) of the Colorado Rules of Professional Conduct. The trial court found that counsel previously represented another party in the same matter for which counsel now represents petitioners and that the former client and petitioners have materially adverse interests. The supreme court holds that, because the record before it is insufficient to support a finding that the interests of petitioners and the former client are materially adverse in this criminal proceeding, the trial court abused its discretion by disqualifying petitioners' retained counsel of choice under Colo. RPC 1.9(a). Accordingly, the supreme court makes the rule absolute, reverses the trial court's order disqualifying petitioners' counsel of choice, and remands this case to the trial court for further proceedings.
Attorneys for Plaintiff: John W. Suthers, Attorney General, Michael W. Melito, Assistant Attorney General, Erin K. Grundy, Assistant Attorney General, Jacob R. Lofgren, Assistant Attorney General, Denver, Colorado.
Attorneys for Defendant: Walta LLC, Mark G. Walta, Denver, Colorado; Hershey Decker, Kari Hershey, Lone Tree, Colorado.
JUSTICE MÁ RQUEZ delivered the Opinion of the Court. CHIEF JUSTICE RICE dissents.
MÁ RQUEZ, JUSTICE.
[¶1] This original proceeding arises in a criminal case involving Colorado Organized Crime Control Act (" COCCA" ) and other felony charges against several defendants involved in the medical marijuana industry. Petitioners Conley Hoskins and Jane Medicals, LLC (collectively, " Petitioners" ) seek to vacate the trial court's order disqualifying the law firm of Peters Mair Wilcox (" PMW" ) as their counsel. The trial court disqualified PMW under Rule 1.9(a) of the Colorado Rules of Professional Conduct, finding that the firm previously represented another party, All Care Wellness Centers, LLC (" All Care" ), in the same matter for which PMW now represents Petitioners and concluding that All Care and Petitioners have materially adverse interests. Petitioners sought review of the trial court's order under C.A.R. 21, contending that the trial court abused its discretion in disqualifying Petitioners' retained counsel of choice.
[¶2] We issued a rule to show cause and now hold that, because the record before us is insufficient to support a finding that the interests of Petitioners and All Care are materially adverse in this criminal proceeding, the trial court abused its discretion by disqualifying Petitioners' retained counsel of choice under Colo. RPC 1.9(a). Accordingly, we make the rule absolute, reverse the trial court's order disqualifying Petitioners' counsel of choice, and remand this case to the trial court for further proceedings.
I. Facts and Procedural History
[¶3] Petitioners, Conley Hoskins (" Hoskins" ) and Jane Medicals, LLC (" Jane Medicals" ), are defendants in a district court action in which they and several others are charged with COCCA violations and numerous other felonies.
[¶4] Hoskins owns or partially owns several businesses, including All Care and Jane Medicals, both of which are medical marijuana businesses. Hoskins is the sole owner of Jane Medicals. Prior to August 2011, he was the sole owner of All Care. On August 10, 2011, Hoskins and Rafael Craveiro (" Craveiro" ) entered into a Membership Interest Purchase Agreement under which Craveiro acquired a 50 percent membership interest in All Care.
[¶5] In July 2012, the Colorado Department of Revenue (" DOR" ) began to investigate whether certain businesses connected to Hoskins were in compliance with Colorado tax laws and regulations governing the
medical marijuana industry. In September 2012, PMW notified DOR that it had been retained to represent Hoskins, Jane Medicals, All Care, and others involved in the DOR investigation. PMW arranged for employees of All Care and Jane Medicals to be interviewed by DOR officials. PMW informed the employees that it represented the business entities and Hoskins, but not the employees personally. Following these interviews, a statewide grand jury returned an indictment on May 30, 2013, charging Hoskins, Jane Medicals, All Care, and other individuals and entities with violations of COCCA and numerous other felonies. PMW entered an appearance in the criminal case on behalf of Hoskins and Jane Medicals. PMW did not enter an appearance for All Care, and All Care later retained other counsel.
[¶6] The indictment, which contains 71 counts, generally alleges that the defendants associated to form a criminal enterprise that engaged in racketeering and conspiracy activity, including tax evasion, theft, and illegal distribution of marijuana. Hoskins, Jane Medicals, and All Care are co-defendants in several of the counts in the indictment. All 15 counts in the indictment against All Care also name Hoskins.
[¶7] On August 2, 2013, the prosecution moved to disqualify PMW as Petitioners' counsel, alleging that PMW's prior representation of All Care during the DOR investigation was in actual conflict with its current representation of Petitioners. Specifically, the prosecution asserted that PMW learned confidential information about All Care's business dealings, financial data, and trade secrets during the DOR investigation. The prosecution argued that PMW might pursue a defense theory that All Care employees were responsible for any illicit activities and that, if PMW pursued this blame-shifting defense, All Care would be " disadvantaged by [PMW's] knowledge of sensitive and prejudicial information obtained during the prior representation." The prosecution pointed to a letter from PMW to the prosecution during the investigation stating that PMW " originally became involved on Mr. Hoskins' behalf in response to tax and employment issues arising from the malfeasance of key managerial employees." Although this letter did not mention All Care or any of the numerous businesses owned by Hoskins, the prosecution argued that this sentence " possibly foreshadow[ed] [PMW's] intention to distance Hoskins from legal culpability and instead shift liability to the [All Care] employees." Finally, the prosecution stated that it intended to " call All Care to testify against Hoskins and Jane Medicals" and that PMW ethically would be unable to cross-examine its former client. However, the prosecution never identified who it would call to testify as " All Care" or the nature of such testimony.
[¶8] Based on these assertions, the prosecution argued that PMW's prior representation of All Care created a conflict in violation of Colo. RPC 1.9 because the interests of Petitioners and All Care are materially adverse under Colo. RPC 1.9(a). Colo. RPC 1.9(a) provides that a lawyer who has formerly represented a client in a matter shall not later represent another person " in the same or a substantially related matter" in which that person's interests are " materially adverse" to the interests of the former client, unless the former client consents in writing to the representation. The prosecution asserted that All Care, through 50 percent owner Craveiro, had not given written consent for PMW to represent Petitioners in the criminal case.
[¶9] In response to the prosecution's motion to disqualify, Hoskins argued that the prosecution had not met its burden to specify facts demonstrating that his interests and All Care's interests are materially adverse. Hoskins argued that he is a 50 percent owner of All Care and, during the relevant time
frame under the indictment, he was the principal manager of All Care. He also argued that he was the primary, and perhaps the only, high managerial agent of All Care, such that any criminal liability that might attach to All Care would have to be premised on his conduct. Thus, he argued, his interests were aligned with All Care's interests. He contended that the prosecution's conflict claim was founded on a " pyramid" of assumptions regarding future events, including that: (1) All Care and Hoskins will be tried jointly; (2) PMW will develop a blame-shifting defense directed to key managerial employees of All Care; (3) the prosecution will present adverse testimony from a yet-to-be-identified All Care witness; and (4) PMW will seek to discredit that testimony to All Care's detriment using confidential information obtained during its prior representation of All Care. Hoskins (through PMW) also took issue with the prosecution's reliance on PMW's letter referring to " malfeasance of key managerial employees." PMW argued that this reference was to tax and employment issues that arose at Hoskins' car wash businesses and that this was known to the prosecution.
[¶10] Approximately two weeks after the prosecution filed its motion to disqualify, Craveiro's attorney sent a letter to PMW notifying the firm that, pursuant to Section 1 in All Care's Operating Agreement, Hoskins had forfeited his ownership interest in All Care on or around July 19, 2013. Under Section 1 of the Agreement, a manager's ownership in All Care is deemed forfeited if a manager is charged with a felony and fails to " cure said obstructions to ownership" within 30 days. In the letter, Craveiro alleged that Hoskins had been charged with several dozen felonies and had failed to cure this obstruction to ownership within the 30-day period. At the time Petitioners sought review under C.A.R. 21, Hoskins and Craveiro were in arbitration concerning their ownership interests in All Care.
[¶11] On August 28, 2013, Craveiro, who is not a party to this criminal proceeding, filed an " amicus brief" through his personal attorney in support of the prosecution's motion to disqualify PMW. The trial court accepted this filing over Petitioners' objection. That same day, the trial court held an evidentiary hearing on the prosecution's motion to disqualify. Testimony at the hearing established that a dispute had developed between Craveiro and Hoskins over the ownership of All Care and over the fact that an employee had removed marijuana and cash from the All Care store location.
[¶12] At the hearing, Craveiro testified on cross-examination that he was just a manager of the LLC " on paper" and never actually assumed a managerial role or performed management duties for All Care. He acknowledged that Hoskins was responsible for hiring and firing employees for All Care, handling the bank accounts and tax matters, and hiring the certified public accountant and attorneys for the business. He also agreed that all of the alleged conduct at issue in the criminal case occurred while Hoskins was the manager of All Care. Craveiro further acknowledged that he did not transmit any confidential information pertaining to All Care to PMW during the DOR investigation. Rather, he testified that he believed the confidential information PMW obtained during its representation of All Care concerned his personal financial information that was submitted to the state and the City of Lakewood during All Care's licensure process. He later acknowledged that all of those documents had been provided to the government, which then provided them back to Hoskins, and that there was nothing confidential about that information. Although Craveiro testified that he objected to PMW's representing Hoskins, he agreed that as an owner of All Care, Hoskins had full knowledge of, and access to, all of All Care's business records and that Hoskins could share that information with any individual counsel he retained.
He also acknowledged that, during a conference call with Craveiro and counsel for All Care on July 16, 2013, Hoskins and PMW expressed their interest in ensuring that All Care continue to operate. When asked to describe the conflict between All Care and PMW, Craveiro responded, " I guess that's a difficult question. I think in some of the replies that I have seen from my counsel to them, that they are not looking after the best interests of the company."
[¶13] PMW took the position at the hearing that it did not possess any confidential information that would adversely affect All Care and that, although Craveiro and Hoskins obviously had a separate dispute regarding ownership issues, no conflict existed in the criminal case because Hoskins had an interest in ensuring that All Care succeeded as a business. Petitioners' legal ethics expert, Ronald Nemirow, opined that, based on his review of the case, hearing testimony, applicable case law, and ethics rules, nothing suggested that Hoskins' interests were adverse to All Care's interests with regard to the criminal case. Specifically, he saw nothing alleged in the indictment against All Care that was not also alleged against Hoskins, and he saw no indication beyond mere speculation that Hoskins intended or had a motive to blame someone else for the conduct of All Care. He opined that under section 18-1-606, C.R.S. (2013), a corporation can only be held liable through the acts of a high managerial agent, such as Hoskins or Craveiro, but that Craveiro had testified that, as a practical matter, he had not managed the entity. In addition, he opined that even if the arbitration ultimately determined that Hoskins had forfeited his ownership interest in All Care, Hoskins still had an interest in ensuring that the entity's value remained maximized because Hoskins would be entitled to a buyout under the Operating Agreement. Nemirow also observed that, as an owner of All Care, Hoskins is entitled to all of All Care's records, and that he would be entitled to give those records to whomever he chose to represent him as counsel. He opined that because any successor law firm would have access to the same information regarding All Care that PMW has, disqualification of PMW would not accomplish anything. Finally, Nemirow testified that even if it were to Hoskins' advantage to try to shift blame to All Care employees, any prejudice from this defense strategy would be cured by severing the trials.
[¶14] On August 30, 2013, the trial court issued an order disqualifying PMW from representing Petitioners. The trial court found that PMW's previous representation of All Care in the DOR investigation gave rise to a conflict under Colo. RPC 1.9(a) because it was the same matter that was currently before the court in which PMW now represented Petitioners. The trial court concluded that Petitioners and All Care are materially adverse, reasoning that " other managers and employees of All Care" were indicted for the same or related conduct as Hoskins regarding the management of All Care, and therefore finding that " it is more than speculation that Hoskins will not only deny culpability for the criminal conduct that has been alleged against him, but will also attempt to shift blame for the offenses onto other employees and/ or managers of All Care." As support for this conclusion, the court relied on the letter from PMW to the prosecution during the DOR investigation, which stated that PMW " originally became involved on Mr. Hoskins' behalf in response to tax and employment issues arising from the malfeasance of key managerial employees." The trial court further reasoned that " All Care will certainly attempt to shift blame for any illegal behavior away from its other employees and managers and solely onto Hoskins," and that All Care could argue that Hoskins was acting on his own behalf and not as manager of All Care when he engaged in unlawful behavior. The trial court determined that Hoskins' and All Care's trials likely will be severed, but that severance would be insufficient to cure the conflict because PMW obtained confidential information about All Care and " there is no adequate method by which this Court could fashion a remedy that would assure that none of that confidential information would be used by PMW."
[¶15] Petitioners then petitioned this court to issue a rule to show cause under C.A.R. 21.
We issued the show cause order and now make the ...