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Fidelity and Deposit Company of Maryland v. Travelers Casualty and Surety Company of America

United States District Court, D. Nevada

December 19, 2017

Fidelity and Deposit Company of Maryland, Plaintiff
v.
Travelers Casualty and Surety Company of America, et al., Defendants

          ORDER OVERRULING OBJECTION; AFFIRMING MAGISTRATE ORDER; AND DENYING MOTION TO DISQUALIFY [ECF NO. 277]

          Jennifer A. Dorsey, U.S. District Judge.

         This coverage dispute between two insurance companies derives from a previous case concerning the same underlying facts between the Clark County School District (CCSD) and defendant Travelers Casualty and Surety Company of America.[1] The law firm Kolesar & Leatham (K&L) represented CCSD in that case against Travelers, and now K&L represents Fidelity in this case against Travelers. Travelers moved to disqualify K&L on conflict-of-interests grounds, Magistrate Judge Foley denied the motion, and Travelers objects. After reviewing Judge Foley's order for clear error, I affirm.

         Background

         In 2010, CCSD contracted with Big Town Mechanical, LLC to install HVAC systems at five elementary schools. The contract required Big Town to take out performance-and-labor and material-payment bonds for the installation at each school. Big Town obtained performance and payment bonds from Travelers, and Big Town became the principal and CCSD the obligee. In the event that Big Town defaulted on its obligation under the contract, Travelers would complete Big Town's performance.

         Big Town subcontracted with F.A.S.T. Systems, Inc.-a party that is not invovled in this coverage-dispute litigation-to work on the HVAC-installation projects at each of the schools. The subcontract required F.A.S.T. to take out performance-and-labor and material-payments bonds, just as Big Town had done for CCSD. F.A.S.T. obtained performance and payment bonds from Fidelity, and F.A.S.T. became the principal and Big Town the obligee. In the event that F.A.S.T defaulted on its obligation, Fidelity would complete F.A.S.T.'s performance.

         F.A.S.T. defaulted on the project at the five schools, so Fidelity hired Perini, who hired Fisk Electric Company, who hired ControlCo to perform F.A.S.T.'s obligations. Fidelity's team was unable to complete the project according to the required specifications, so CCSD held Big Town in default and Travelers had to complete Big Town's performance. After a considerable delay, Travelers and its team of hired contractors and subcontractors finally finished the HVAC-installation projects, but CCSD sued Travelers for damages incurred as a result of the delay, including liquidated delay damages. K&L represented CCSD.

         CCSD and Travelers settled the case with Travelers paying CCSD $5 million in damages and CCSD assigning its claims to Travelers. Fidelity sues Travelers in the instant action to collect damages it believes are owed for its work in satisfying the subcontract. K&L represents Fidelity in this case against Travelers.

         Travelers moved to disqualify K&L, arguing that K&L's representation of Fidelity is in apparent conflict with its representation of CCSD in the prior case. Magistrate Judge Foley denied the motion, reasoning that Travelers does not have standing under Nevada Rule of Professional Conduct 1.9 to move for disqualification and that none of the non-client exceptions to Rule 1.9 apply here. Travelers objects, and after reviewing that objection and Judge Foley's order, I find that Travelers has failed to demonstrate that Judge Foley committed clear error or issued an order that was contrary to law.

         Discussion

         A. Standards of review

         1. Reviewing a magistrate judge's final determination

         “A district judge may reconsider any pretrial matter referred to a magistrate judge in a civil or criminal case under LR IB 1-3, when it has been shown the magistrate judge's order is clearly erroneous or contrary to law.”[2] “The district judge may affirm, reverse, or modify, in whole or in part, the magistrate judge's order. The district judge may also remand the matter to the magistrate with instructions.”[3] “An order is contrary to law when it fails to apply or misapplies relevant statutes, case law, or rules of procedure.”[4] The magistrate judge's finding must be overturned if, “after reviewing the entire record, [the court is] left with the definite and firm conviction that a mistake has been committed.”[5]

         2. Disqualification standards

         “Disqualification motions present courts with a delicate and sometimes difficult balancing task.”[6] “Close cases are resolved in favor of disqualification.”[7] But “[p]articularly strict judicial scrutiny should be given to a motion to disqualify opposing counsel because there is a significant possibility of abuse for tactical advantage.”[8] “The moving party bears the burden of establishing an ethical violation or other factual predicate upon which the motion depends.”[9]“Attorneys admitted to practice before this court must ‘adhere to the standards of conduct prescribed by the Model Rules of Professional Conduct as adopted and amended from time to time by the Supreme Court of Nevada” except to the extent they are “modified by this court.”[10]

         a. Nevada Rule of Professional Conduct 1.9

         Rule 1.9 of the Nevada Rules of Professional Conduct precludes a “lawyer who has formerly represented a client in a matter” from representing “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 gives informed consent, confirmed in writing.”[11] It also precludes a “lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter” from using “information relating to the representation to the disadvantage of the former client” or revealing “information relating to the representation except[, ]” in either instance, “as these Rules would permit or require with respect to a client.”[12] The Nevada Supreme Court held in Nevada Yellow Cab Corp. v. Eight Judicial District Court that a “party seeking disqualification must establish three elements: (1) that it had an attorney-client relationship with the lawyer, (2) that the former matter and the current matter are substantially related, and (3) that the current representation is adverse to the party seeking disqualification.”[13] And “as a general rule, only current and former clients have standing to seek disqualification of counsel due to a conflict of interest.”[14]

         b. Non-client exceptions

         There are exceptions to that general rule, however. One exception allows a non-client to “seek disqualification[] if but only if the non-client demonstrates an injury that is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.”[15] Another exception permits a court to “disqualify an attorney from representing a particular client in order to preserve the integrity of its judgment [and] maintain public confidence in the integrity of the bar.”[16]

         B. Judge Foley's Rule 1.9 application was not clearly erroneous or contrary to law.

         Judge Foley held that “Travelers' motion to disqualify Kolesar & Leatham falters on the first element” of the Nevada Yellow Cab test.[17] The first element requires Travelers to show that it has an attorney-client relationship with K&L. But, Travelers can't show that it has a direct attorney-client relationship with K&L because K&L represented CCSD against Travelers in the previous case. Instead, Travelers argues that one of the rights assigned to it in the settlement agreement is CCSD's right to disqualify K&L from this case.[18] Although Travelers quotes only the first sentence of the assignment-of-rights provision in its objection, [19] the entire paragraph reads:

(c) Assignment.
In exchange for and effective ten (10) business days after Travelers' payment to CCSD of the Settlement Payment and retroactive to the Effective Date, CCSD assigns, transfers and conveys to Travelers all of CCSD's rights arising out of or related to the Contracts with BTM, the Projects, the BTM Claims on the Projects, and the Action (as well as all related damages in connection therewith), including but not limited to all direct costs, resultant damages, liquidated damages (including the LDs set forth in Exhibit C), interest and fee claims thereon. The purpose of this assignment is to give Travelers the ownership of and the right to assert any and all claims that CCSD has asserted and/or could have asserted in any ongoing or future dispute/litigation that Travelers is or may eventually be involved in. The Parties' [sic] agree that this assignment does not affect CCSD's ownership of the equipment and renovations that BTM installed/performed on the Projects.[20]

         Magistrate Judge Foley did not interpret this provision to include an assignment to Travelers of CCSD's right to disqualify K&L, and Travelers fails to show that his conclusion was clearly erroneous or contrary to law. The second sentence of the provision expressly limits the assignment and explains the provision's purpose: to assign CCSD's claims for “including but not limited to all direct costs, resultant damages, liquidated damages . . ., interest and fee claims.” The right to disqualify K&L is not a claim, so Judge Foley did ...


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