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June 30, 2003

Hetos Investments, Ltd. V. Todd Kurtin (2003) 110 Cal.App.4th 36

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The Fourth District holds that a law firm is not necessarily disqualified from representing its clients in a lawsuit that challenges the enforceability of a legal document prepared by the firm.

Hetos Investments, Ltd., Todd Kurtin, and other parties to a real estate development operating agreement entered into a settlement agreement.  Gray, Cary, Ware & Freidenrich represented Hetos.  Hetos approached Kurtin for an advance on monies it was to receive under the settlement agreement.  Kurtin agreed to loan Hetos the money but insisted on an usurious interest rate.  Hetos retained Gray, Cary to draft the promissory note in accordance with the agreed upon terms.  Gray Cary prepared the promissory note and forwarded it to Hetos.

Gray, Cary subsequently represented Hetos in a suit against all parties to the operating agreement, including Kurtin.  Hetos asserted a cause of action for usury in relation to the promissory note.  Kurtin filed an unsuccessful motion to disqualify Gray, Cary because the firm prepared the illegal promissory note.  Kurtin argued for disqualification under Rule 3-210 of the Rules of Professional Conduct, Rule 1.16(a) of the ABA Model Rules, and the appearance of impropriety.

The Court of Appeal held that Gray Cary’s preparation of the promissory note was not grounds for disqualification.  State Bar Rule of Professional Conduct 3-210 prohibits a member from advising the violation of any law, unless the member believes in good faith that such law is invalid.  Since Gray, Cary’s only client is Hetos, this rule would only apply if Kurtin could show that the firm advised Hetos to violate the usury laws.  Kurtin offered no authority that it is illegal for an individual to agree to pay a usurious interest rate.  Thus, rule 3-210 was not violated.

Rule 1.16(a) of the Model Rules of Professional Conduct provides that a lawyer shall not represent a client if the representation will result in violation of the rules of professional conduct.  The court underscored that the ABA Model Rules have not been adopted in California and have no legal force of their own.  Regardless, a violation of a model rule does not necessarily compel disqualification as a matter of law.

The court also held that the appearance of impropriety does not compel disqualification.  The purpose of a disqualification is prophylactic, not punitive.  Thus, the question is whether there is a genuine likelihood that the attorney’s conduct will affect the outcome of the proceedings.  In the instant case, the usury cause of action is limited to whether the interest provision contained in the promissory note violates the usury law.  This determination is unlikely to be dependent on facts related to Gray Cary’s involvement and would have no effect on the outcome of the proceedings.

Comment: This case is another example of the reluctance to limit a party’s choice of counsel in response to an adversary’s claim of an ethical breach.

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