in Re Trojan Group Contractor, Inc.

• Court: Court of Appeals of Texas
• Decided: October 20, 2022
• Docket: 09-22-00295-CV
• Status: Published

Opinion

In The

Court of Appeals

Ninth District of Texas at Beaumont

__________________

NO. 09-22-00295-CV __________________

IN RE TROJAN GROUP CONTRACTOR, INC.

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Original Proceeding 284th District Court of Montgomery County, Texas Trial Cause No. 22-04-05396-CV __________________________________________________________________

MEMORANDUM OPINION

In an interpleader action concerning a construction project and construction

retainage, the project owner, 2301 South Mountain Residence Corporation (“South

Mountain”), filed a motion to disqualify counsel of record for the building

contractor, Trojan Group Contractor, Inc. (“Trojan”), alleging that Trojan’s attorney

of record had also represented South Mountain in a separate lawsuit to foreclose one

of the materialman’s liens on the same construction project and that the suits were

substantially related. The trial court held a hearing on the motion, received evidence

and testimony, and thereafter granted the motion to disqualify counsel. In a

1 mandamus petition, Trojan argues the trial court abused its discretion by

disqualifying Trojan’s chosen counsel because South Mountain waived any conflict

of interest. For the reasons explained below, we deny the petition for a writ of

mandamus.

The underlying interpleader suit was filed by New Era Life Insurance

Company (“New Era”), with respect to a dispute over retainage funds. New Era

deposited the retainage into the court and named defendants Trojan and South

Mountain, as well as other named defendants who had filed mechanics and

materialman’s liens on the project. One of the other named defendants in the

interpleader is L&W Supply Corporation. Trojan, represented by the Vethan Law

Firm, filed an answer, as well as a counterclaim and crossclaims. In addition to

claims asserted against other parties, Trojan crossclaimed against South Mountain

for breach of contract and to foreclose Trojan’s constitutional lien. South Mountain

filed an answer and crossclaim against Trojan for breach of contract and violation of

the trust fund statute.

Approximately one month after the interpleader was filed, South Mountain

filed a motion to disqualify the Vethan Law Firm and its associated attorneys from

representing Trojan in the interpleader lawsuit. In its Motion to Disqualify, South

Mountain alleged that Trojan falsely said it had paid many of its subcontractors and

material suppliers, when in fact the subcontractors and suppliers had not been paid,

2 leading to the filing of approximately $400,000 in mechanic and materialman’s liens

(M & M Liens) on the project and that the liens were filed before the interpleader

suit. Additionally, in the motion to disqualify, South Mountain explained that before

the interpleader was filed, one of the M & M Lienholders (L&W Supply) had filed

a lawsuit to foreclose its lien against South Mountain, D.J. Saldana, and Saldana’s

Company, Divisions Construction (the L&W suit). A Default Judgment was sought

by L&W Supply against South Mountain in that suit. Saldana took South Mountain’s

principal owner to see Saldana’s attorneys, the Vethan Law Firm, and South

Mountain then hired the Vethan Law Firm to act as counsel for South Mountain and

file an answer for South Mountain in the L&W suit. Before filing an answer on

behalf of South Mountain, the Vethan Law Firm met with Saldana and South

Mountain’s principal Zheng Heng Zheng and explained they would require Saldana

and South Mountain to sign a letter agreement waiving any potential conflicts of

interest. According to South Mountain, the Vethan Law Firm filed an answer on

behalf of South Mountain, but it later withdrew as counsel for South Mountain in

the L&W suit, and on the same day then sent a demand letter on behalf of Trojan.

South Mountain argued the waiver was drafted by the Vethan Law Firm and did not

mention Trojan or any disputes between South Mountain and Trojan.

In response, Trojan argued South Mountain waived disqualification and

waived any complaint of a conflict. Trojan argued the waiver applied to the Vethan

3 Law Firm’s representation of Trojan on its claims against South Mountain because

the waiver agreement South Mountain signed stated that in the event of a conflict

the parties agreed that Vethan could continue to represent Saldana and his

Companies, and Saldana is a Director of Trojan. Trojan argued the L&W suit and

the interpleader action are not substantially related and South Mountain had not

identified confidential information in the Vethan Law Firm’s possession that

resulted in harm or prejudice to South Mountain.

The trial court heard South Mountain’s motion to disqualify on July 29, 2022,

wherein the trial court received exhibits and testimony from South Mountain’s

corporate representative, Zheng Heng Zheng, testimony from Saldana, and from Rex

Chuang. The parties also submitted some additional legal authority to the trial court

and arguments. On July 31, 2022, the trial court entered an Order reflecting its ruling

and granted South Mountain’s motion to disqualify the Vethan Law Firm.

The trial court’s Order stated in pertinent part:

After considering the Mot[i]on, the evidence presented and the arguments of counsel the Court finds that an actual conflict of interest exists between The Vethan Law Firm’s representation of Trojan in this matter and its prior representation of South Mountain in the lawsuit filed against South Mountain by L&W Supply Corp. and that disqualification of The Vethan Law Firm in this matter is required to protect the due process rights and confidential information of South Mountain. THEREFORE,

IT IS ORDERED The Vethan Law Firm is disqualified from any further representation of the Trojan Group Contractor[], Inc., or its affiliates, officers, agents, servants and employees in this matter. 4 In its mandamus petition, Trojan argues the trial court erred by denying Trojan

its counsel of choice when South Mountain signed a conflict waiver that specifically

identified the potential conflict in the first paragraph. That paragraph stated:

We at the Vethan Law Firm (“VLF”) are pleased that South Mountain Residence Corporation seeks to employ our Firm in connection with the above-referenced matter. As you already know, VLF has represented Dagoberto Saldana Jr. and Superlative Construction Inc., d/b/a Division Construction and its various corporate parents, subsidiaries, and affiliates as may exist or later be formed, [(]collectively as the “Companies”) in his ongoing business affairs for some time. VLF presently represents Mr. Saldana and his Companies in various construction disputes. This technically puts the Firm in several “dual representation” and possible conflicts positions. Such potential conflicts and dual representations permitted only in certain instances, and this letter is to make sure you are completely apprised of the situation.

Trojan argues South Mountain agreed to waive any complaint of the conflict

to the extent Saldana’s business interests or those of his companies’ conflict with

South Mountain, as follows:

In addition to providing counsel each of the Companies, we currently represent Mr. Saldana in his overall business interests. To the extent the business interests of Mr. Saldana or of the Companies conflict with South Mountain Residence Corporation, each of you acknowledge this possibility, and agrees to waive any complaint of this conflict, even with respect to matters arising in the Lawsuit or as concerns L&W generally.

Trojan argues South Mountain agreed that the Vethan Law Firm would

continue to represent Saldana and his companies if the Vethan Law Firm determined

there was a conflict and withdrew as counsel for South Mountain, as follows:

5 Should VLF, in its sole discretion, determine at a later date that multiple representation of the Companies and South Mountain Residence Corporation, individually, is no longer possible, the parties agree that the Firm shall withdraw from representation of South Mountain Residence Corporation, and shall continue to represent its longstanding clients, the Companies and Mr. Saldana.

Trojan contends the trial court failed to properly apply the Texas Supreme

Court’s guidance from In re Cerberus Capital Management, L.P. See 164 S.W.3d

379 (Tex. 2005) (original proceeding). According to Trojan, the waiver disclosed

the Vethan Law Firm’s prior representation, and the waiver letter was sufficient, that

in the hearing South Mountain’s corporate representative acknowledged that he

knew that Saldana is a Trojan partner, and that the waiver “specifically flagged the

potential conflict that predicated the subsequent motion to disqualify.”

In Cerberus Capital, a lawyer prepared an asset purchase agreement for

WSNet but was advised to stop work on the agreement because the deal would not

go forward. Id. at 380. The following year a shareholder filed a shareholder

derivative suit, alleging Cerberus Capital usurped WSNet’s corporate opportunity to

purchase the assets. Id. Cerberus Capital approached the WSNet lawyer’s firm about

representation and the firm obtained a written waiver from WSNet that disclosed the

relevant facts about the prior representation. Id. at 381. The waiver letter disclosed

that the lawyer had been engaged in a limited capacity in connection with the

unconsummated acquisition of certain cable television systems as described in the

shareholder’s petition, that he prepared a generic asset purchase and sale agreement 6 over the weekend but was told on Monday the company would not be acquiring the

assets, and that the lawyer did not participate in any negotiations concerning the

proposed transaction. Id. The waiver letter also disclosed the law firm’s proposed

representation of Cerberus Capital in the shareholder derivative suit, the subject

matter of its prior work for WSNet, the time period involved, the attorney involved,

the nature of the discussion with WSNet’s general counsel, and how the prior

representation concluded. Id. at 382-83. Additionally, WSNet had in its possession

the draft of the asset purchase agreement and the shareholder’s petition when it

waived the conflict of interest. Id. at 383. The Supreme Court of Texas concluded

that WSNet who was a former client knowingly waived the conflict. Id.

We find Cerberus Capital is distinguishable from the facts before us in this

mandamus proceeding. Notably, the waiver letter that the Vethan Law Firm obtained

lacks the same detail that was present in Cerberus Capital. The Vethan Law Firm’s

letter fails to mention Trojan, its constitutional lien, or any potential litigation

concerning the retainage in South Mountain’s project. The waiver fails to specify

that by waiving a conflict of interest as to the L&W suit, South Mountain had

consented to the Vethan Law Firm representing Trojan on any affirmative claims

against South Mountain in the same or in a subsequent lawsuit.

Trojan also argues the L&W suit and the New Era retainage interpleader

lawsuit are not substantially related. According to Trojan, in the L&W suit, L&W

7 Supply was suing on an unpaid drywall invoice and according to Trojan, in the

interpleader suit, Trojan has crossclaims against South Mountain because Trojan has

a constitutional lien on the retainage funds, so Trojan argues the claims are not

substantially related.

Matters are substantially related if specific facts tie the former and current

representations together and create a genuine threat of disclosure of confidences

revealed to counsel in the former representation. In re Thetford, 574 S.W.3d 362,

374 (Tex. 2019) (orig. proceeding). L&W Supply’s suit to foreclose its

materialman’s lien against South Mountain’s property is substantially related to the

retainage suit because South Mountain alleges Trojan breached the construction

contract on the same project by failing to pay L&W Supply’s claim.

“[A] trial court’s decision regarding disqualification, based on a careful,

thorough consideration of all the evidence, is entitled to great deference by an

appellate court.” Id. at 365. After reviewing the parties’ arguments and the

mandamus record, the trial court appears to have carefully and thoroughly

considered the evidence presented on the issue, and relator has failed to establish a

clear abuse of discretion by the trial court. Accordingly, we deny the petition for a

writ of mandamus.

8 PETITION DENIED.

PER CURIAM Submitted on September 19, 2022 Opinion Delivered October 20, 2022

Before Kreger, Horton and Johnson, JJ.