## Facts

- RFG Oil, Inc. was a closely held corporation owned by two brothers: David (51%) and Jeffrey (49%); both were the only directors, and David controlled the board.
- A buy-sell agreement governed the purchase of a departing brother’s shares; litigation later determined the purchase price had to be fair market value, not book value.
- After employment and governance disputes, Jeffrey sued David and RFG, including claims related to dissolution, fiduciary duties, and enforcement of the buy-sell agreement.
- Corporate counsel initially represented both David and RFG; after the fair-market-value ruling, new counsel (Lawton) appeared for RFG and later also for David.
- While representing both clients, Lawton filed a cross-complaint for David seeking, among other relief, cancellation of Jeffrey’s shares and alleging misconduct by Jeffrey.
- Jeffrey alleged facts suggesting RFG’s interests could diverge from David’s, including alleged misuse of corporate funds by David and actions affecting corporate tax reporting.
- Jeffrey moved to disqualify Lawton from representing both David and RFG based on concurrent conflicts; the trial court denied the motion, citing delay and finding disqualification unwarranted.

## Issues

1. Whether concurrent representation of a closely held corporation and its controlling shareholder/director required disqualification when an actual conflict existed between their interests and there was no informed written consent.
2. Whether the trial court abused its discretion by denying disqualification based partly on alleged delay in challenging prior dual representation by different counsel.
3. What remedy was appropriate if a conflict required disqualification: disqualification as to the corporation only, or as to both clients.

## Decision

- The appellate court reversed the order denying disqualification.
- The court held there was an actual conflict between David and RFG that made Lawton’s concurrent representation impermissible under the governing conflict-of-interest rule.
- The court rejected the trial court’s delay rationale as a basis to deny disqualification on this record.
- The court remanded with directions to disqualify Lawton as counsel for RFG, while permitting Lawton to continue representing David.

## Legal Principles

- A lawyer may not concurrently represent clients with actually conflicting interests in the same matter without informed written consent.
- Corporate counsel’s duty of loyalty runs to the corporate entity, even in a closely held corporation dominated by a controlling shareholder.
- Dual representation of a corporation and a director/shareholder may be permissible when interests are aligned, but becomes impermissible when litigation positions and factual allegations create an actual divergence, including possible corporate claims against the insider.
- A court may order targeted disqualification limited to the conflicted representation (e.g., disqualifying counsel only as to the corporation) to protect loyalty and the integrity of the proceedings while minimizing prejudice.

## Conclusion

The court required disqualification because a law firm representing both a closely held corporation and its controlling shareholder faced an actual conflict that compromised counsel’s loyalty to the corporation, and the corporation lacked valid informed consent to the concurrent representation; the proper remedy was to disqualify the firm only as corporate counsel.


Gong v. RFG Oil, Inc., 166 Cal. App. 4th 209 (Ct. App. 2008)