ETHICS OPINION 588-1971 CONFLICT OF INTEREST; STOCKHOLDER’S DERIVATIVE SUIT

Opinion Number 588

NUMBER 588

QUESTION.

 

I would appreciate your opinion on the following situation.

 

A, B and C are three stockholders in P Corporation. C commenced an action both individually and on behalf of the corporation against A and B, who were officers and directors and together hold the majority stock in this close corporation, I am representing them in connection with that law suit. Pursuant to an order of the Court, they have been restrained pendente lite from acting as officers or directors of P Corporation. I also represent A in an action against C seeking similar relief against C. I nor have I represented P Corporation in any other manner.

 

The father of A had loaned some money to P Corporation before the commencement of any litigation. A and B both feel that the corporation should repay the loan, C, who is now the sole operating officer of P Corporation, apparently takes the position that this was not a loan. A’s father has asked me to represent him in connection with his claim against P Corporation on the loan. A’s father has been advised that I represent A and B in the litigation aforementioned. A and B have consented to my representing A’s father in connection with his claim.

 

I would appreciate your opinion on my accepting the retainer from A’s father on his claim.

 

ANSWER.

 

Inasmuch as the action by A and B against C is a derivative action, the attorney in effect represents corporation P. BCL Sec. 720 in the action by A’s father upon the alleged loan, the lawyer would represent a party whose interest is adverse to corporation P.

 

DR 5-105 (A) provides that:

 

“(A) A lawyer shall decline preferred employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the preferred employment, except to the extent permitted under DR 5-105 (C).”‘

 

DR 5-105 (C) provides that:

 

“(C) In the situations covered by DR 5-105(A) and (B), a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise .of his independent professional judgment on behalf of each,”

 

As stated in EC 5-14,

 

“…This problem arises whenever a lawyer is asked to represent two or more clients who may have differing interests, whether such interests be conflicting, inconsistent, diverse, or otherwise discordant.”

 

In view of the fact that A and B “feel” that corporation P should repay the loan and they consent to the attorney representing them and the corporation in the derivative action against C and also representing A’s father in his claim against the corporation, it might be argued that if A and B prevail in their action, they obviously will cause the note to be paid, and that hence there is not inconsistency in the lawyer’s accepting both employments. See NYC. 744 (1949). Nevertheless, the cause of action in the derivative suit belongs to the corporate entity, whereas the fact that C disputes the existence of the loan, suggests that a disinterested lawyer representing corporation P might contend that (notwithstanding the feeling of A and B to the contrary) that matter should be litigated.

 

The Code provides in EC 5-15 and 5-16 that:

 

“EC 5-15 If a lawyer is requested to undertake or to continue representation of multiple clients having potentially differing interests, he must weigh carefully the possibility that his judgment may be impaired or his loyalty divided if he accepts or continues the employment, He should resolve all doubts against the propriety of the representation. A lawyer should never represent in litigation multiple clients with differing interests; and there are few situations in which he would be justified in representing in litigation multiple clients with potentially differing interests….”

 

“EC 5-16 In those instances in which a lawyer is justified in representing two or more clients having differing interests, it is nevertheless essential that each client be given the opportunity to evaluate his need for representation free of any potential conflict and to obtain other counsel if he so desires, Thus before a lawyer may represent multiple clients, he should explain fully to each client the implications of the common representation and should accept or continue employment only if the clients consent. If there are present other circumstances that might cause any of the multiple clients to question the undivided loyalty of the lawyer, he should also advise all of the clients of those circumstances.”

 

Under the circumstances, the Committee is of the opinion that the lawyer should not accept the employment as attorney for A’s father. It is evident that he cannot obtain corporation P’s consent, for his clients have been restrained pendente lite from acting as officers or directors of corporation P. Thus, he cannot comply with the provisions of EC 5-16. A lawyer should avoid even the appearance of professional impropriety. Canon 9.