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Gong v. RFG Oil, Inc.

166 Cal. App. 4th 209 (2008)

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Gong v. RFG Oil, Inc.

California Court of Appeal

166 Cal. App. 4th 209 (2008)

Facts

Brothers Jeffrey Gong (plaintiff) and David Gong owned RFG Oil, Inc. (RFG) (collectively, defendants), a Valvoline oil-change franchise. David owned 51 percent of RFG’s shares and Jeffrey 49 percent. Both were directors and had a buy-sell agreement that said if one brother left the business, the other could purchase his shares at “book value.” When David suffered a debilitating injury, Jeffrey assumed management. Two years later, David reassumed management duties amid allegations Jeffrey had mismanaged the business. Ultimately RFG terminated Jeffrey and made him resign as a corporate officer. Jeffrey sued for involuntary dissolution of RFG, declaratory relief and specific performance as to the buy-sell agreement, breach of fiduciary duty, and wrongful discharge. Jeffrey alleged David conducted the business affairs to further his own interests at Jeffrey’s expense, including using corporate funds to repay a personal loan and directing Jeffrey to prepare inaccurate corporate-tax returns. Initially one law firm represented both David and RFG. When the trial court found the buy-sell agreement required David to purchase Jeffrey’s shares at fair market value, RFG gained a significant role because the agreement required RFG to pay for an appraiser David selected. Jeffrey wanted to ensure RFG’s attorney would be neutral instead of protecting David’s interest. Dan Lawton and his firm (Lawton) substituted in as counsel for RFG. When David decided to switch firms, Lawton also substituted in as counsel for David, then cross-claimed to cancel Jeffrey’s shares alleging he defrauded the business and breached fiduciary duties by breaking promises to help David meet RFG’s cash needs. Jeffrey immediately moved to disqualify Lawton. The trial court denied the motion, reasoning Jeffrey had unreasonably delayed by not moving to disqualify the first firm from representing both David and RFG at the outset. Jeffrey appealed.

Rule of Law

Issue

Holding and Reasoning (McIntyre, J.)

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