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Cappello Disqualified for Conflict of Interest

Legal Battle Against Real Estate Mogul Gets Personal


As clashes of the titans go, the showdown pitting Barry Cappello, Santa Barbara’s premier legal samurai, against Jim Knell, ​a downtown commercial real-estate mogul, ​proved too short to generate many sparks. That’s because Judge Thomas Anderle disqualified Cappello from representing Emmett McDonough ​— ​an unhappy investor who claims Knell got rich at his expense by charging exorbitant management fees and withholding key information ​— ​in a lawsuit against Knell and his company SIMA Management. Judge Anderle ruled that because Cappello’s law firm had represented Knell in several serious real-estate disputes from 1984 to 1987 ​— ​one involving an attempt by the California Department of Real Estate to revoke Knell’s real estate license ​— ​that it would constitute a conflict of interest for Cappello to now lead the charge against his former client.

Barry Cappello
Click to enlarge photo

Paul Wellman (file)

Barry Cappello

The conflict was not merely theoretical, Anderle ruled, but direct and immediate. In 1985, Knell was convicted of a felony for falsifying loan documents, prompting the state Department of Real Estate to seek revocation of his license. Attorneys working for Cappello defended Knell, arguing at the time that he had been acting under orders of his employer and that he’d rehabilitated himself by wearing a wire and helping to secure a federal conviction of his boss, who wound up serving time. In that case, the judge ultimately shortened Knell’s probation from five years to three, and finding he posed no threat to the real-estate community, ruled that disclosure letters would not be necessary.

Late last year, however, Cappello filed legal papers arguing that Knell should have informed McDonough at the outset of their professional relationship ​— ​which dates back to 1998 ​— ​of his past legal troubles. Had McDonough been so informed, Cappello argued, he would never have invested with Knell. In response to the conflict of interest allegations, Cappello initially denied that he or his firm had ever represented Knell, and that to the extent anyone in his office ever did, they did so without his knowledge or approval. Based on documentation provided by the real-estate department, Anderle found Cappello’s recollection to be at variance with the facts.

Cappello said he did not intend to appeal Anderle’s ruling because it would only cause further delays. “Justice delayed is justice denied,” he wrote in an email. “Mr. McDonough will obtain new counsel and will prosecute James Knell expeditiously.” Attorneys for Knell said McDonough had long prospered by investing in partnerships managed by Knell, but that he suffered ​— ​along with everyone else ​— ​when the bottom fell out of the real-estate market.

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