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March 4, 2002

City National Bank v. Adams (2002) 96 Cal.App.4th 315

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The Second District holds that an attorney who had drafted an opinion letter concerning a loan for his bank client is disqualified from representing the borrower in subsequent litigation about the loan.

City National Bank loaned Glenn Adams $150,000, secured by a promissory note and a requirement that he maintain collateral equal to at least 50% of the outstanding balance of the loan.  The purpose of the loan was to exercise options to purchase stock in U.S. Digital Corporation.  The loan was further secured with the shares purchased with the loan proceeds.  In 1999, the stock began to decline in value, and soon was insufficient to secure the loan.  Adams informed the bank that he could not repay the loan or pledge additional collateral and asked the bank to sell the stock to satisfy his obligation.

The bank requested an opinion on whether it could sell the stock from Jeffrey Davidson, an attorney recommended by Adams.  Davidson rendered his opinion, but not until after the stock had so declined in value that it was insufficient to repay the loan.  The bank filed suit against Adams for breach of contract and overdraft.  Adams cross-complained alleging the bank had failed to sell the stock in a timely manner.  When Davidson appeared on Adam’s behalf, the bank moved to disqualify Davidson based on his opinion letter.

The trial court granted the motion.

The Court of Appeal held that the “substantial relationship” test continues to guide courts relying on disqualification motions made by former clients.  If confidences could have been exchanged between the lawyer and the client, the court will conclusively presume they were exchanged and disqualify the attorney.  There is an exception in the rare instance where the lawyer can show that there was no opportunity for the exchange of confidential information.  However, even this exception is not available if the lawyer’s former and current employment are on opposite sides of the same matter or the current matter involves the work done for the former client.  When a lawyer represents a former client’s adversary in the same matter, everything the lawyer does will injure the former client.

The court presumed that Davidson received confidential information from the bank, because he failed to rebut this presumption the disqualification order was affirmed.

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