MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2001-04
Conflict of Interest pertaining to multiple representation of a corporation, its officers and directors
In your inquiry you pose a fact situation regarding representation of a corporation and its officers and directors. The facts are summarized as follows:
An attorney is representing a Maryland corporation which has become largely defunct due to financial problems, although its corporate charter has not been revoked by the State. The only asset of the corporation is a potential lawsuit against another business entity.
The president of the corporation, who is also a director and a 60% shareholder, is involved with an ongoing dispute with the vice president, who is also a director and the owner of the remaining shares of the corporation. The vice president also happens to be the president’s mother. The dispute, which concerns the repayment of monies lent by the vice president to the corporation and to the president, individually, both for business and personal use, is in litigation in state court. The president has asked the corporate attorney to jointly represent the corporation and the president, defendants in the lawsuit brought by the vice president.
The president has also asked the corporate attorney to form a new company to pursue the same business opportunities as were being pursued by the existing corporation. The president has offered the corporate attorney a personal interest in the company to be formed. The vice president has objected to the formation of the competing business. She has also demanded that the president make the corporate books and financial records of the existing corporation available for her inspection.
Finally, the president has requested the corporate attorney to file suit against another business with which the company has done business to assert various claims. The corporation and the president, individually would be plaintiffs. The vice president objects to the attorney’s dual representation of the corporation and the president in the proposed litigation.
You then pose a series of questions about the fact situation. Initially, however, we point out that the Committee on Ethics will address only matters relating to the Maryland Rules of Professional Conduct. We do not issue opinions on matters of law and as a general rule we do not issue opinions on matters that are the subject of ongoing litigation. Also, rather than reproduce them in their entirety we refer you generally to Rules 1.7. Conflict of interest: General rule, 1.13. Organization as client, 3.7. Lawyer as witness, and the Comment section following each rule, as they bear on many of your questions.
It is clear from the outlined facts that the corporate counsel is in the midst of a serious intra family dispute. His or her situation is further complicated by the fact that there is ongoing litigation between family members and it seems likely that the attorney is a potential witness as to contested issues. Rather than address each of your individual questions it is the Committee’s conclusion that the corporate counsel cannot continue to represent any of the parties. For the reasons that follow we believe it would be next to impossible for the attorney to avoid one or more conflicts.
An attorney for an organization such as a corporation represents that organization and not the individuals who make up or are part of that organization, such as directors, officers and shareholders. He or she represents the organization by acting through its duly authorized constituents. See Rule 1.13(a). Here the corporate attorney would represent the president of the existing corporation individually and separately from his role as a constituent of the existing corporation. Rule 1.13 states in part that a “lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7.” Rule 1.7 provides:
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation.
(c) The consultation required by paragraphs (a) and (b) shall include explanation of the implications of the common representation and any limitations resulting from the lawyer’s responsibilities to another, or from the lawyer’s own interests, as well as the advantages and risks involved.
Rule 1.7 sets up a two-part test prohibiting dual representation on the basis of relationship with existing clients and on limitations imposed by responsibilities outside the proposed representation. In either case the lawyer must independently make his or her own determination that the strictures do not apply and then obtain the informed consent of the clients involved.
In your facts the existing client corporation is no longer in business but is still an existing entity and has a contingent asset, that is, a potential recovery from a lawsuit. On the surface it would appear that the new company will not compete with the existing company because the existing company is not competing for business. Thus, the corporate attorney’s actions in helping to set up the competing company would not seem to be adverse to the existing client corporation. However, given the whole scenario we assume, for example, there may be some claim on the part of the vice president that the president’s past and present actions and motivations have been adverse to the existing corporation and he is responsible for its potential demise. Whether that claim is true or not or is part of the existing litigation is immaterial for the purpose of our response. The potential that such a claim might be made puts the corporate attorney in a precarious position.
We assume the corporate attorney’s relationship with the president would not be adversely affected by setting up the competing corporation, but his or her relationship with the existing client corporation might be adversely affected. The vice president or possibly a creditor of the existing corporation could at least make such a claim. We do not know whether such a claim would prevail; however, if it did, the attorney could be found to have violated either or both Rules 1.13 and 1.7. The fact that the attorney has been offered a personal interest in the new company and could potentially benefit from the success of the competing business to the detriment of the existing business might cement the finding of a violation of the Rules.
Moreover, since there is ongoing litigation between the two shareholders of the company represented by the attorney there is a potential that he or she will be a necessary witness. If that is likely then under most circumstances the corporate attorney may not represent any party in the litigation. See Rule 3.7.
The Committee does not suggest that a lawyer should decline representation every time there is the slightest potential that some future conflict might arise or be asserted by an adverse party. In this case we do not have all of the facts and, even if we did, we would not attempt to predict the outcome. But, in this case the ongoing dispute could result in a fact finder reaching a result that could be grounds for a claim of ethical violations on the part of the corporate attorney.