No CV. JONES, IN THE DISTRICT COURT Plaintiff

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1 No CV JONES, IN THE DISTRICT COURT Plaintiff v. MONTGOMERY COUNTY, TEXAS ROSSITTO, Defendant 9 TH JUDICIAL DISTRICT KING FABRICATION, LLC S MOTION TO SHOW AUTHORITY, OR IN THE ALTERNATIVE, TO DISQUALIFY COUNSEL Intervenor, King Fabrication, LLC, (hereinafter the Company ) files this Motion to Show Authority, or in the alternative, to Disqualify Counsel, and would show the Court as follows: I. Introduction 1. By this motion, the Company seeks to be represented by its own counsel. Plaintiff has asserted derivative claims for the benefit of the Company, but Plaintiff has no authority to retain counsel for the Company or to deny the Company its right to separate counsel. Therefore, the Company requests that the Court rule that Plaintiff s counsel does not represent the Company directly, or in the alternative to disqualify Plaintiff s counsel from simultaneous representation of both the Plaintiff and the Company. II. Procedural Background 2. Plaintiff originally brought this action solely in his individual capacity asserting claims solely against Defendant, with the apparent intent to prevent the Company from appearing as a party. However, many of the claims alleged by Plaintiff belong solely to the Company and could be asserted by Plaintiff only as derivative claims. 3. When Defendant pointed out this defect, Plaintiff attempted to remedy the defect by amending the pleadings to allege certain claims as derivative claims on behalf of the 1

2 Company. However, Plaintiff failed to name the Company as a party to the lawsuit and to serve the Company with citation. (Plaintiff subsequently claimed that the Company was added as a party when the derivative claims were added, despite the fact that the Second Amended Petition does not say that the Company is a party.) The dispute between Plaintiff and Defendant as to whether the Company was a necessary party became moot on June 13 when the Company intervened as a party with its own separate counsel. Plaintiff then moved to strike the intervention, while at the same time making the contradictory argument that the Company was already a party. Plaintiff also filed a Third Amended Petition stating explicitly that the Company was indeed a party and that the Plaintiff s lawyers were the attorneys for the Company. 4. Despite the fact that Plaintiff has taken the ridiculous position that the Company s intervention as a plaintiff should be stricken, while at the same time purporting to add the Company as a plaintiff, the simple fact is that the Company is a party and should be a party. The question is who represents the Company? III. Evans & Kosut, PC Does Not Have Authority to Represent the Company. 5. It is well-established in Texas that a corporation is not only a proper party to a derivative claim, but is an indispensable party to a minority shareholder s breach of fiduciary duty lawsuit against a controlling shareholder. See Barthold v. Thomas, 210 S.W. 506, (Tex. Comm n App. 1919, jmt adopted); Providential Inv. Corp. v. Dibrell, 320 S.W.2d 415, 418 (Tex. Civ. App. Houston 1959, no writ). Accord In re Marriage of Scott, 117 S.W.3d 580, 583 (Tex. App. Amarillo 2003, no pet.); DeBord v. Circle Y of Yoakum, Inc., 951 S.W.2d 127, 134 (Tex. App. Corpus Christi 1997), rev d on other grounds, Stary v. DeBord, 967 S.W.2d 352 (Tex. 1998); Texas Soc. v. Fort Bend Chapter, 590 S.W.2d 156, 160 (Tex. Civ. App. Texarkana 1979, writ ref d n.r.e.); Motorola, Inc. v. Chapman,761 F. Supp. 458 (S.D. Tex. 2

3 1991). Ordinarily, the plaintiff is required to name the corporation as a nominal defendant, notwithstanding the fact that the plaintiff shareholder purports to represent the interests of the corporation. See Meyer v. Fleming, 327 U.S. 161, 168 (1946). In bringing a derivative claim for the benefit of the corporation, the plaintiff acts in a fiduciary capacity on behalf of the corporation; the plaintiff does not mystically transform into the corporation. The Company is entitled to be a party in the lawsuit, to have its own counsel, and to take its own position on plaintiff s claims. Nothing in article 5.14 entitles a minority shareholder bringing a derivative claim to chose the counsel for the corporation. 6. Moreover, Plaintiff does not have the authority to hire Evans & Kosut, P.C. to act as attorneys for the Company. The exact nature of the organizing documents and form of governance are in dispute in this case. However, it is undisputed that Mr. Rossitto is the president of the Company and has legitimate operational control of the Company, including the power to hire and fire agents for the Company. If Mr. Jones is ultimately adjudged correct that the management of the Company has been wholly reserved to the members and that he is entitled to 50% control, his theory nevertheless admits that Mr. Rossitto is the president. Nothing in Mr. Jones legal theory would give him individually the power to retain counsel for the Company or to countermand a decision that was within the scope of the president s authority. 7. As attested in the attached affidavit, the president of the Company, consistent with the ethical duties on himself and his counsel, retained Fryar Law Firm, PC as the exclusive counsel to represent the Company. IV. Evans & Kosut, PC Has a Conflict of Interest in Representing the Company 8. Rules 1.06(a) and (b) of thetexas Disciplinary Rules of Professional Conduct preclude the same lawyer or law firm from representing opposing parties in the same litigation or 3

4 representing parties whose adverse interests limit the lawyer s responsibilities to one or the other. The simultaneous assertion of derivative claims brought on behalf of a company and individual claims brought by the same shareholder seeking to represent the company is rife with conflict of interest. See Tuscano v. Tuscano, 403 F.Supp.2d 214, 223 (E.D.N.Y. 2005) ( Any individual claims raised by a shareholder in a derivative action present an impermissible conflict of interest. ). In this case, Jones's interests and the interests of the Company are not the same. Jones, through his counsel, has already sought to prevent the Company from becoming a party, sought to deny the Company its choice of counsel, and sought to assert solely for his own benefit claims that belong exclusively to the Company. The most obvious example of conflict is Jones's request to have the derivative claim treated as a direct claim. If Jones prevails on the claims, then the court will have the option either to award 100% of the damages to the Company where the money might be used for the benefit of the company, such as in expanding operations, or the court may reduce the judgment to 40% of the total and have that money awarded directly to Jones. Jones plainly has a conflict of interest in arguing that a smaller amount of money should be paid directly to himself rather than a larger amount of money paid to the Company. While Texas courts have not addressed the issue, courts in other jurisdictions have held that the potential conflict of interest involved in a shareholder bringing both individual and derivative claims requires separate counsel for the corporation. See Hawk Indus., Inc. v. Bausch & Lomb, Inc., 59 F.R.D. 619, 624 (S.D.N.Y. 1973) (disqualifying plaintiff s counsel), Ruggiero v. American Bioculture, Inc., 56 F.R.D. 93 (S.D.N.Y. 1972) (same). 9. For these reasons, the Company respectfully requests that this Court rule that Evans & Kosut, PC does not have authority to represent the Company in any way other than to represent Mr. Jones as an individual member of the Company in bringing a claim for the benefit 4

5 of the Company, and that the Fryar Law Firm, PC is the exclusive counsel for the Company in this litigation. Alternatively, the Company respectfully requests that Evans & Kosut PC be disqualified from further direct representation of the Company. Respectfully Submitted, FRYAR LAW FIRM, P.C. F. Eric Fryar Texas Bar No FM 1960 Rd. W., Ste 400 Houston, Texas Tel. (281) Fax (281) COUNSEL FOR INTERVENOR CERTIFICATE OF SERVICE I certify that a copy of the foregoing instrument was served on all parties and counsel of record pursuant to the Texas Rules of Civil Procedure as on July 11, 2007 by facsimile and efiling: Irving Stern Kay Carnley Vickers Zimmerman, Axelrad, Meyer, Stern & Wise, PC 3040 Post Oak Blvd., Ste 1300 Houston, Texas Counsel for defendant Roger Evans John Davidson Evans & Kosut, PC 616 FM 1960 W, Ste 400 Houston, Texas Counsel for plaintiff. F. Eric Fryar 5

6 STATE OF TEXAS COUNTY OF HARRIS AFFIDAVIT OF ERIC FRYAR Befo re me, the undersigned notary, on this day personally appeared Eric Fryar, the affiant, a person whose identity is known to me. After ] admini stered an oath to affiant, he testifi ed: "My name is Eric Fryar. I am over ] 8 years of age, of sound mind and capabl e of making this affid avit. Th e facts stated in this affidavit are within my personal knowledge and are true and correct. "I am an attorn ey licensed to practice law in the State of Texas. I am the sole shareholder of Fryar Law Firm, P.c. "1was retained to represent King Fabrication, LLC in this litigation on June 12, 2007, by Lou is Rossitto, the majority owner and president of the Company. 1 have reviewed the Company' s filings with the Secretary of State and the legal positions of the parties to this litigation. It is my opinion that, even if Mr. Jones ultima tely prevails on his position regarding the governance of the company, then the management of the company would simply be dea dlocked by the disagreement of the two members, and Mr. Rossitto would remain in operational con trol because there is no dispute that he is the president of the company. Therefore, Mr. Rossitto had the actual authority to retain my services as counsel for the Company. "C onversely, Mr. Jones has no authority to hire Evan s & Kosut, PC to represent the Company directly- as opposed to representing Mr. Jones in his prosecution of derivative claims for the benefit of the Company. Also Mr. Jones would have no authority to countermand a decision of the president of the Company regarding the retention of counse l. Therefore, Evans & Kosut PC has no authority to act as attorneys at law for King Fabrication LLC." L~ Sworn to and subscribed before me b I 6

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