ETHICS OPINION 534-1965 CONFLICT OF INTEREST

NUMBER 534

QUESTION

 

Attorney “X” is retained by “A” and “S” to purchase an existing business and organize “R” corporation designed to conduct said business. During the next three years, “X” is continued as attorney for “R” corporation. Some time during this period, the interest of “A” in “R” corporation is purchased by “C” who becomes president of “R” corporation. Thereafter, as a result of personal difficulties, “R” corporation offers to purchase the interest of “B”.

 

An agreement is entered into, which agreement is prepared by “X” and within which he is named as escrowed and transfer agent. Before payment of the entire purchase price to “B” by “R” corporation, “C” allegedly discovers that a relative of “B”, who was an employee of “R” corporation during “B’s” interest therein, has committed certain acts in which he was successful in defrauding “R” corporation of several thousands of dollars. “C” contends that this could have only been accomplished with the cooperation of “B” and therefore refuses to permit’s” corporation to make any more payments to “B” in the purchase of “B’s” interest. Instead, “R” corporation pays the balance of the amount due for “B’s” interest to “X” to hold in escrow under the aforesaid purchase agreement until the equities can be adjusted as provided for in said agreement.

 

“B” thereupon retains an attorney (not “X”) to commence an action against “R” corporation for the balance of the purchase price of “B’s” interest, notwithstanding that “B’s” shares of stock continue to remain with “X” as escrowed and have not been transferred to “R” corporation.

 

The buy and sell contract covering die transaction between “B” and “R” corporation was prepared by “X” without any other attorney representing either of the parties. However, the terms of the transaction had been previously arranged between “B” and “C” (president of “R” corporation) and “X” merely reduced this understanding to writing, No negotiations were conducted by “X” in relation to this agreement. The fee for services rendered were assumed solely by “R” corporation.

 

“X” has been requested by “R” corporation to institute legal proceedings based upon conversion and fraud against the son of “B” (the relative heretofore described). Inasmuch as it is further contemplated that “R” corporation wil1 counterclaim in “B’s” lawsuit against it for “B’ s” participation in this scheme of fraud and conversion, it will be necessary to move to consolidate the two causes of action, inasmuch as they will be decided upon the same set of facts.

 

Since “X” will be the attorney of record in the action against “B’ s” son (for whom he has never performed any legal services), he will be present at the trial of the consolidated actions and will undoubtedly, due to his familiarity with the facts and circumstances, be required to be the advocate on behalf of “R” corporation. For all intents and purposes, therefore, “X” will be conducting the defense of “B’s” claim, the counterclaim by “R” corporation against “B” and the affirmative action by “R” corporation against “B’s” son.

 

In view of these apparent dual roles, would it be ethical:

 

1.  for “X” to appear as the attorney of record in the action commenced by “B” against “R” corporation?

2.  Would it be ethical for “X” to appear as attorney of record in the action by “R” corporation against “B’s” son?

3.  If the answer to (b) be in the affirmative and (a) in the negative, is it ethical for “X” to be trial counsel in connection with the trial of the consolidated issues?

 

ANSWER

 

There was a relationship of attorney and client between “B “and attorney “X” at the time of the purchase of the business and the organization of “R” corporation. Because of the apparently closely-held nature of the corporation it would appear that a relationship of lawyer and client continued to exist between “B” and attorney “X” during the period that “B” had his interest in “R” corporation even though.”X” was technically the attorney for “R” corporation.

 

Accordingly, queries (a) and (b) muse both be answered in the negative, Since the actions are consolidated it would make no difference whether attorney “X” appeared on behalf of “R” corporation against “B” or on behalf of “R” corporation against “B” son.

 

The controlling principle is embodied in the answer of this Association to Question No, 505 which reads in part as follows:

 

“An attorney should not accept employment antagonistic to the interests of a former client where there is a possibility that the Issues might Involve information which he obtained from his former client in the course of his professional employment. (Canon 6 and 37; see County Lawyers Association answers to Questions No 202 and 207).”

 

Since this possibility would exist in the present situation it would not be proper for attorney “X” to assist in the trial of corporation “R’s” action against “B” either as attorney of record in the action where “B” is defendant or in the action in which “B’s” son is defendant.

 

“Entire confidence between a lawyer and his client is essential to the proper discharge of the lawyer’s