CORPORATIONS (INCLUDING CLOSE CORPORATIONS)
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A. Corporations Generally
As will be
apparent below, most of the conflict-of-interest action in the corporate
area involves close corporations. To go directly to that discussion,
click here.
Corporate
Families. This area has spawned much litigation. To go to
the section of this guide on that subject, click here.
Partnerships.
Click here.
Trade
Associations and other Kinds of Associations. Click here.
Model Rule
1.13. This rule applies to corporate representation in a number
of important respects. First it stands for the proposition that a
lawyer retained by a corporation represents the corporation. Rule
1.13(a). That does not mean that the lawyer has an attorney-client
relationship with its officers, Innes v. Howell Corp., 76
F.3d 702 (6th Cir. 1996); Lane v.
Chowning, 610 F.2d 1385 (8th Cir. 1979); U.S. Industries, Inc. v. Goldman,
421 F. Supp. 7 (S.D.N.Y. 1976); Ex parte Tiffin, 879 So. 2d 1160 (Ala. 2003) (stands for
the majority view, but the analysis is not satisfactory).
Rule 1.13(b) provides important guidance to the lawyer for
corporation when one of its constituents is behaving
inappropriately. Rule 1.13(d) reminds the lawyer for the corporation
to explain to the corporation's constituents (shareholders, officers,
employees, etc.) who is, and who is not, the lawyer's client when the
corporation's interests are adverse to those constituents.
B. Close Corporations
The issue that arises most frequently in connection with close
corporations is whether the lawyer for a close corporation is ipso
facto lawyer for the shareholders. This is apt to come up when
the lawyer takes on a matter directly adverse to one of the shareholders,
and the shareholder moves to disqualify the lawyer. It also comes up
when one of the shareholders attempts to sue the lawyer for
malpractice. In most situations, the shareholder cannot sustain the
action unless the shareholder can establish that the shareholder was a
client of the lawyer.
Following are two groups of cases. The first group (Group 1)
contains cases in which the court either denied a motion to disqualify or
found that a lawyer-client relationship did not exist for malpractice
purposes. In either case, the court ruled that being a lawyer for a
close corporation does not, without more, create a lawyer-client
relationship with the shareholders. The second group (Group 2)
contains cases in which the court held that the lawyer for the corporation
had some sort of duty to one or more shareholders. In only a small
handful of those cases did the court rule that lawyer for a close
corporation is ipso facto lawyer for the shareholders.
Group 1. The following cases stand for the
proposition that a lawyer for a close corporation is not ipso facto
lawyer for the shareholders or other constituents. Waggoner
v. Snow, Becker, Klaris & Krauss, 991 F.2d 1501 (9th Cir.
1993) (lawyer told CEO that he only represented the company); Wega
v. Center for Disability Rights, Inc., 2008 U.S. Dist. LEXIS 27643 (W.D.N.Y.
March 31, 2008); Evans
v. Taylorsville City, 2007 U.S. Dist. 72973 (D. Utah Sept. 28, 2007); Jones
v. Winters Bros. Waste Systems, Inc., 2007 U.S. Dist. LEXIS 69460 (E.D.N.Y.
Sept. 19, 2007); Hulbert
v. Cheeks, 2007 U.S. Dist. LEXIS 51471 (N.D. Ill. July 17, 2007);
Civco
Medical Instruments Co., Inc. v. Protek Medical Products, Inc., 2004 U.S. Dist. LEXIS 10840 (S.D. Ia. June 4,
2004) (lawyer for owner/president did not represent corporation); McKinney v. McMeans,
147 F. Supp. 2d 898 (W.D. Tenn. 2001) (representing
one shareholder against the only other shareholder - no disqualification); Correspondent
Services Corp. v. J.V.W. Investment, Ltd., 2000 U.S. Dist. LEXIS 11881
(S.D.N.Y. 2000); In re Manshul
Construction Corp. v. Schulman, 228 B.R. 532 (S.D.N.Y. 1999) (only one
shareholder; no disqualification); In re Berger McGill, Inc., 242
B.R. 413 (S.D. Ohio 1999) (motion to employ counsel granted; court rejected per
se approach in Banks [see following paragraph]); Securities and Exchange Commission v. Credit Bancorp, LTD,
96 F. Supp. 2d 357 (S.D.N.Y. 2000) (involved application of attorney-client
privilege); Stokes v. Firestone (In re Stokes), 156 B.R. 181 (E.D.
Va. 1993); In re United Utensils Corp., 141 B.R. 306 (W.D. Pa. 1992) (one shareholder; no disqualification); In the Matter of
Tetzlaff, 31 B.R. 560 (E.D. Wis. 1983) (no disqualification); Bobbitt v.
Victorian House, Inc., 545 F. Supp. 1124 (N.D. Ill. 1982) (no
disqualification); Wayland v. Shore Lobster & Shrimp Corp., 537 F.
Supp. 1220 (S.D.N.Y. 1982) (no disqualification); Skarbrevik v. Cohen, England
& Whitfield, 282 Cal. Rptr. 627 (Cal. App. 1991) (no liability); Meehan v. Hopps,
301 P.2d 10 (Cal. App. 1956) (no disqualification); Mayer-Wittmann Joint
Ventures, Inc. v. Gunther Int'l., LTD, 1994 Conn. Super. LEXIS 1507 (Conn.
Super. 1994) (no disqualification); Egan v McNamara, 467 A.2d 733
(D.C. App. 1983) (no liability); Rudolf v. Gray, Harrison & Robinson, P.A.,
901 So. 2d 148 (Fla. App. 2005) (liability: without more, lawyer
for a professional association is not lawyer for the owners); Silver Dunes Condo. of Destin, Inc. v. Beggs
& Lane, 763 So. 2d 1274 (Fla. App. 2000) (no liability); Salit
v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 742 So. 2d 381 (Fla.
App. 1999) (no liability); Brennan v. Ruffner, 640 So. 2d 143 (Fla.
App. 1994) (no liability); Felty v. Hartweg, 523 N.E.2d 555 (Ill. App.
1988) (no liability); Hager-Freeman v. Spircoff, 593 N.E.2d 821 (Ill. App.
1992) (no liability); Goerlich v. Courtney Industries, Inc., 581 A.2d 825
(Md. App. 1990) (no liability); Robertson v. Gaston Snow & Ely Bartlett,
536 N.E.2d 344 (Mass. 1989); Fassihi v. Sommers, Schwartz, Silver, Schwartz
& Tyler, P.C., 309 N.W.2d 645 (Mich. App. 1981) (no liability); Holmes v. Winners Entertainment, Inc., 531
N.W.2d 502 (Minn. App. 1995); Carlson v. Fredrikson & Byron, P.A.,
475 N.W.2d 882 (Minn. App. 1991) (no liability); TJD Dissolution Corp. v.
Savoie Supply Co., Inc., 460 N.W.2d 59 (Minn. App. 1990) (no liability); Terre
Du Lac Property Owners' Assoc., Inc. v. Shrum, 661 S.W.2d 45 (Mo.
App. 1983) (no disqualification); McCarthy v. Henderson, 587 A.2d 280
(N.J. Super. 1991); Clear Channel
Spectacolor Media, L.L.C. v. Times Square JV, 2007 N.Y. Misc. LEXIS 6407
(N.Y. Misc. Sept. 18, 2007) (unusual application of "substantial
relationship" test); Purchase
Partners II, LLC v. Westreich, 2007 N.Y. Misc. LEXIS 119 (N.Y. S. Ct. Jan.
23, 2007) (not lawyer for the president); Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC LEXIS 24 (N.C.
Super. Dec. 1, 2006); Maloof v. Benesch, Friedlander, Coplan &
Aronoff, 2004 Ohio App.
LEXIS 5808 (Ohio App. Nov. 24,
2004)
(representing
corporation does not mean lawyer is representing the sole shareholder); Stuffleben v.
Cowden, 2003 Ohio 6334 (Ohio App. Nov. 26, 2003) (applying principle to
attorney-client privilege dispute); Hile v. Firmin, Sprague & Huffman Co., 595 N.E.2d 1023
(Ohio App. 1991); Hatfield v. Seville Centrifugal Bronze, 732 N.E.2d 1077 (Ohio
Common Pleas 2000); Seifert v. Dumatic Ind., Inc., 197 A.2d 454
(Pa. 1964); Lively v. Henderson, 2007 Tex.
App. LEXIS 8951 (Tex. App. Nov. 13, 2007) (lawyer for corporation does not
necessarily owe a fiduciary duty to its sole shareholder); Goeth v. Craig, Terrill & Hale, L.L.P., 2005 Tex. App.
LEXIS 2815 (Tex. App. April 14, 2005); Gamboa v. Shaw, 956 S.W.2d 662
(Tex. App. 1997); Bowen v. Smith, 838 P.2d 186 (Wyo. 1992) (no liability).
Group 2. In the following cases, the
court found that the lawyer did have a duty to constituents of a close
corporation client: DeFazio v. Wallis, 2006 U.S. Dist. LEXIS 58258 (E.D.N.Y. Aug. 14,
2006) (court found that CEO of corporate client reasonably believed he,
too, was client); Rico Records Distributors, Inc. v. Ithier, 2005 U.S. Dist. LEXIS
19483 (S.D.N.Y. Sept. 8, 2005); Rosman v. Shapiro, 653 F. Supp. 1441 (S.D.N.Y.
1987) (just two 50% shareholders enough to distinguish above cases); Woods
v. Superior Court, 197 Cal. Rptr. 185 (Cal. App. 1983) (lawyer could
not handle dispute between shareholders); Opdyke v. Kent Liquor Mart,
Inc., 181 A.2d 579 (Del. 1962) (lawyer had acquired interest adverse to
client);
Eleventh St. Loftominium Ass’n v. Wabash Loftominium, L.L.C., 876 N.E.2d 65 (Ill. App.
2007);
Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings
& Berg, P.C., 541 N.E.2d 997 (Mass. 1989) (lawyer may have
fiduciary duty to shareholders of close corporation); Fassihi
v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 309
N.W.2d 645 (Mich. App. 1981) (50% shareholder not a client, but lawyer has
fiduciary duty to the shareholder); Detter v. Schreiber, 259 Neb. 381,
(2000) (lawyer was not clear as to who was the client); Flores v.
Willard J. Price Associates, LLC, 799 N.Y.S.2d 43 (N.Y. App. 2005) (lawyer for corporation in effect lawyer for majority
shareholder/President; lawyer for LLC in effect lawyer for sole member); Wander v. Meier,
793 N.Y.S.2d 406 (N.Y. App. 2005); Morris v. Morris,
763
N.Y.S.2d 622 (N.Y. App. 2003); Matter of
Greenberg, 614 N.Y.S.2d 825 (N.Y. App. 1994) ("One who has served
as attorney for a corporation may not represent an individual shareholder in
a case
in which his interests are adverse to other shareholders."); In Re Bowman Trading
Co., Inc., 471 N.Y.S.2d 289 (N.Y. App. 1984) (lawyer for close
corporation disqualified because of confidences received from adverse
shareholder); Hakimian Mgm’t. Corp. v.
Richard C. Fiore, Inc., 2007 N.Y. Misc. LEXIS 4844 (N.Y. S. Ct. July
9, 2007); Sturm v. Sturm, 574 N.E.2d 522 (Ohio 1991) (followed Woods,
infra); In Re Brownstein, 602 P.2d 655 (Ore. 1979) and In
Re Banks, 584 P.2d 284 (Ore. 1978) (discipline appropriate where
relationships so close) (but, see Ore.
Op. 1991-85, which seems to put Oregon with the majority position of the
decisions in the prior paragraph); Margulies v. Upchurch, 696 P.2d 1195 (Utah
1985) (firm disqualified); Committee on Legal Ethics v. Frame, 433
S.E.2d 579 (W. Va. 1993) (lawyer disciplined for being adverse to a person
who was the majority shareholder of a close corporation client); Meyer
v Mulligan, 889 P.2d 509 (Wyo. 1995) (summary judgment for the lawyer
for the corporation reversed because it was not clear who else, if anyone,
the lawyer represented); Racey v.
Racey, 2007 CanLII 47156 (Ont. Super. Ct. Oct. 17, 2007); Canadian Arctic
Trading House Ltd. v. Brownstein, 2007 CanLII 36075 (Ont. Super. Ct.
Aug. 31, 2007) (50% shareholder a "near client.").
In Sessions v. Espy, 584
So. 2d 515 (Ala. 2002), the court held that there was
not enough evidence to determine whether the lawyer also represented a
shareholder.
Incorporated Associations.
Shadow Isle, Inc. v. American Angus Ass'n., 1987 U.S. Dist. LEXIS
8590 (W.D. Mo. 1987), involved an incorporated trade association. Sayyah
v. Cutrell, 757 N.E.2d 779 (Ohio App. 2001), involved an
incorporated property owners' association. In each case the court
held that the lawyer for the association was not thereby a lawyer for the
members.
Credit Index, L.L.C. v.
RiskWise International L.L.C., 744 N.Y.S.2d 326 (N.Y. App. July 2, 2002). The defendant's law firm had
represented the majority shareholder of the plaintiff on a matter
substantially related to this case. The majority shareholder remains
a current client of the firm. For those reasons, the court affirmed
the trial court's order granting the plaintiff's motion to disqualify the
firm.
Excellent Analysis of Who
Is Client. Rallis v. Cassady, 84
Cal. App. 4th 285, 100 Cal. Rptr. 2d 763 (Cal. App. 2000). This decision deals with
a Statute of Limitations issue, but is an excellent primer on how a lawyer
who thought he represented only a corporate entity can morph into lawyer
for one of its employees. The court describes the following
situations that could lead to this result and cites cases for each:
(1) the lawyer has represented the individual in the past over a long
period of time or in several matters; (2) the lawyer has repeated contacts
with the individual while representing the corporation; (3) the individual
had a particular personal interest in the matter, but did not have
independent counsel; (4) the corporation gave the individual advice while
representing the corporation; (5) the individual disclosed confidential
information to the lawyer; or (6) the individual paid part of the lawyer's
fees.
Another Excellent
Analysis of Who Is Client, but Using Different Factors. Atlas
Partners II, L.P. v. Brumberg, Mackey & Wall, PLC., 2006 U.S.
Dist. LEXIS 983 (W.D. Va. Jan. 6, 2006).
This is a legal malpractice case arising out of the creation of a
series of LLCs as investment vehicles.
The issue in the case relevant to us is whether the plaintiff,
Atlas Partners II, Limited Partnership (“Atlas Partners”), the
principal member of the LLCs, was a client of defendant law firm (“Brumberg”),
and, therefore, able to sue Brumberg for malpractice.
Brumberg admitted it represented the new LLCs, but denied
representing Atlas Partners. All
of Brumberg’s communications with Atlas Partners were through one Robert
Jordan. Although Jordan was
not the general partner of Atlas Partners, he was authorized by the
general partner to act on behalf of Atlas Partners.
Brumberg, denying a lawyer-client relationship with Atlas Partners,
moved for summary judgment on that and other bases.
The court denied that part of the motion, noting the following: (1)
a lawyer-client relationship need not be express; it can be implied or
inferred from the circumstances; (2) Brumberg was the only law firm
involved in the transactions; (3) Brumberg had multiple clients in many of
the transactions; (4) Brumberg used no engagement letters in the any of
the transactions; (5) Brumberg did not discuss whether or not it had a
lawyer-client relationship with any of the parties; and (6) Brumberg knew
its fees originated with Atlas Partners.
(The court acknowledged that who pays the fees in not always
determinative, but said that that factor, along with the others, made it
impossible to grant summary judgment.)
Assisting Corporate
Squeeze-Out. Granewich v. Harding,
985 P.2d 788 (Ore. 1999) deserves separate mention. A law firm
represented a close corporation. A minority shareholder sued the law
firm for "aiding and assisting" the majority shareholder in
breaching his fiduciary duty to the minority shareholder. The court
held that the complaint stated a cause of action. Another similar
result is in Reis v.
Barley, Snyder, Senft & Cohen LLC, 484 F. Supp. 2d 337 (E.D. Pa.
2007)
; however, the court rejected the theory in LeRoy v.
Allen, Yurasek & Merklin, 872 N.E.2d 254 (Ohio
2007).
Representing
Incorporators - "Relation Back." Jesse v. Danforth,
485 N.W.2d 63 (Wis. 1992); and Manion v. Nagin, 394 F.3d 1062 (8th Cir. 2005). In Jesse,
a law firm had
represented several doctors in setting up a corporation. After the
corporation was formed, the firm represented only the corporation.
Later the firm brought a medical malpractice action against two of the
incorporators. They moved to disqualify the firm, based upon the
earlier representation. The court ruled that the firm should not be
disqualified. As to the earlier representation of the incorporators,
the court said:
[W]here (1) a person retains a lawyer for the purpose of organizing
an entity and (2) the lawyer's involvement with that person is directly
related to that incorporation and (3) such entity is eventually
incorporated, the entity rule applies retroactively such that the
lawyer's pre-incorporation involvement with the person is deemed to be
representation of the entity, not the person.
In Manion
the court relied upon Jesse and ruled that the individual who hired
the law firm to create a corporation was never a client. This was also
the holding in Ariz. Op. 02-06 (September 2002).
A limited partnership case that seems to recognize the same concept is Buehler
v. Sbardellati, 34 Cal. App. 4th 1527 (1995).
Limited
Liability Companies. In Flores v. Willard J. Price Associates, LLC,
799 N.Y.S.2d 43 (N.Y. App. 2005), the court held that the sole
member of an LLC was, thereby, a client of the lawyer for the LLC. Finkelman
v. Greenbaum, 836 N.Y.S.2d 484 (N.Y.
Misc. 2007)
(lawyer for LLC could not represent one member adverse to others).
In
Patrick v. Ressler,
2001 Ohio App. LEXIS 4403
(Ohio App. 2001), and in Chaiklin v. Bacon, 2000 Conn. Super.
LEXIS 1729 (Conn. Super. 2000), the court held that a lawyer who previously
represented an LLC could not represent members of the LLC against a former
member on LLC-related matters. But, in Legal Aid Society of
Cleveland v. W&D Partners I, LLC, 834 N.E.2d 850 (Ohio App. 2005), the court held that a member of an LLC could not sue
the former lawyer for the LLC, because the member of the LLC was never a
client. To similar effect are Wild Game Ng, LLC v. Wong’s Int’l. (USA) Corp., 2006 U.S. Dist.
LEXIS 86913 (D. Nev. Nov. 29, 2006), Blanton v. Prins, 938
So. 2d 847 (Miss. 2005), and Lio v. Zhong, 814 N.Y.S.2d 562 (N.Y. Misc. 2006).
Another LLC
Case. Bottoms v. Stapleton, 706 N.W.2d 411 (Iowa 2005). A 49% owner of an LLC
sued the 51% owner and the LLC. The
plaintiff sought money damages from the individual defendant and injunctive
relief from the LLC. It was not
a derivative action. Law Firm
filed an answer for both defendants. The
plaintiff moved to disqualify Law Firm from representing the LLC.
The trial court granted the motion.
The Iowa Supreme Court reversed.
The court analyzed the issues in light of Iowa’s new Rule 1.7,
which is the same as the new version of ABA Model Rule 1.7.
The court said that currently the interests of the defendants did not
conflict, but conceded that there was a “potential” conflict.
The court went on to say that “potential” conflicts are
“foreign” to Rule 1.7, and that the plaintiff could re-file his motion
if an actual conflict developed.
Residential
Cooperative Corporations. In Ryfun v.
406 W. 46th St. Corp., 732 N.Y.S.2d 216 (N.Y. App.
2001), the court held, in effect, that a lawyer for a residential
cooperative corporation did not necessarily represent the shareholders
of the corporation.
Likewise, see In re Voss, 740 N.Y.S.2d 371 (N.Y. App. 2002).
School Boards. Suing School Board Is not Suing an Individual Board
Member. Culbreth v.
Covington Bd. of Educ., 2007 U.S. Dist. LEXIS 78781 (E.D. Ky. Oct. 24,
2007).
Covered by letter. Lewis v. Professional Audio Concepts,
Inc., 2002 Cal. App. Unpub. LEXIS 9619 (Cal. App. October 17,
2002). The lawyer informed the majority shareholder in a letter
that the lawyer would represent the corporation and the majority
shareholder "as an officer and director" but not "as a
shareholder." The court held that there was, therefore, no
lawyer-client relationship between the lawyer and the majority
shareholder.
Merely Voting a Minority Shareholder's Proxy not the Same as Representing
Corporation. McClain v. TP Orthodontics, 2008 U.S.
Dist. LEXIS 3869 (N.D. Ind. Jan. 17, 2008).
All Shareholders Must Agree to Conflicts Waiver. Williams
v. Stanford, 2008 Fla. App. LEXIS 4242 (Fla. App. March 25, 2008).
Ethics Opinions. Cal.
Op. 2003-163 (2003) (discussing lawyer’s obligations when representing the
corporation and an officer). Cal. Op. 1999-153 (1999) says that a lawyer for a close corporation may
represent it and a shareholder against another shareholder. D.C. Op.
216 (1991) involves a corporation with two 50% shareholders. Where a
bank seized the shares of one of them to collect a debt, the lawyer for
the corporation could represent the corporation against the bank. Ore.
Op. 1991-85 holds that lawyer may be able to represent one of the parties
adverse to another. Mo. Op. 2000061 (2000) and R.I. Ops.
2003-02 (2003) & 93-58 (1993) say that a lawyer for a close corporation may not
represent one of several shareholders against the others without the
others'
consent. But, in R.I. Op. 2005-10 (Nov. 10, 2005), the committee
said that shareholders of a former client close corporation could not
complain about lawyer's current representation. Va. Op. 1517 (1993) says that the lawyer for a close
corporation can represent one shareholder in litigation against the other,
so long as the lawyer has not obtained confidences from the other.
D.C. Op. 328 (April 2005)
considers the
conflicts issues raised by a lawyer’s representation of a constituent of an
organization (director, officer, owner, etc.), and not the organization, on
matters relating to the organization. It
says that while a lawyer may represent the constituent and not the organization,
the lawyer must carefully document that the relationship to avoid
misunderstandings. The opinion then
goes on to consider the circumstances under which the lawyer can then be adverse
to the organization. Ala.
Op. RO-2007-04 (Aug. 2007). Lawyer represents corporation with four shareholders.
Several of the shareholders are feuding.
In this opinion the Bar
Counsel opines that Lawyer can continue representing the corporation and do
legal work for one of the feuding factions on non-corporate matters.
Treatise.
Hazard & Hodes §§ 17.13-17.14.
Law Reviews. William
H. Simon, Whom (or What) Does the
Organization’s Lawyer Represent? An Anatomy of Intra-Client Conflicts,
91 Cal. L. Rev. 57 (2003).
An article critical of the entity
rule as applied to close corporations is,
Lawrence E. Mitchell, Professional Responsibility and the Close Corporation:
Toward a Realistic Ethic, 74 Cornell
L.Rev. 467 (1989). For another approach, see Ibrahim,
Solving the Everyday Problem of Client Identity in the Context of Closely
Held Businesses, 56 Ala.
L.
Rev.
181 (2004).
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