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End-of-life notice: American Legal Ethics Library

As of March 1, 2013, the Legal Information Institute is no longer maintaining the information in the American Legal Ethics Library. It is no longer possible for us to maintain it at a level of completeness and accuracy given its staffing needs. It is very possible that we will revive it at a future time. At this point, it is in need of a complete technological renovation and reworking of the "correspondent firm" model which successfully sustained it for many years.

Many people have contributed time and effort to the project over the years, and we would like to thank them. In particular, Roger Cramton and Peter Martin not only conceived ALEL but gave much of their own labor to it. We are also grateful to Brad Wendel for his editorial contributions, to Brian Toohey and all at Jones Day for their efforts, and to all of our correspondents and contributors. Thank you.

We regret any inconvenience.

Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Arizona Legal Ethics

1.7   Rule 1.7 Conflict of Interest: General Rule

1.7:100   Comparative Analysis of Arizona Rule

1.7:101      Model Rule Comparison

The 2003 amendments changed the title of the Rule from "Conflict of Interest: General Rule" to "Conflict of Interest: Current Clients," and restructured the Rule, but made only one substantive change. That was the addition of the requirement that a client's informed consent to or waiver of a conflict of interest be confirmed in writing.

AZ-ER 1.7 is substantially identical to MR 1.7. The only difference is that AZ-ER 1.7 places the requirement for informed client consent in AZ-ER 1.7(b) itself, while MR 1.7 states it as a separate MR 1.7(b)(4).

There are minor differences between the Comments which accompany the two Rules as well. In the case of paragraphs 5, 7 and 25, the differences are editorial. Paragraph 10 of the Comment to AZ-ER 1.7 does not contain the third sentence of the corresponding paragraph of the Comment to MR 1.7, which discusses conflicts created by employment discussions with an opponent of the lawyer's client. The final sentences of paragraphs 15 and 20 of the Comment to AZ-ER 1.7 do not appear in paragraphs 15 and 20 of the Comment to MR 1.7. Finally, the Comment to AZ-ER 1.7 does not contain paragraph 21 of the Comment to MR 1.7, which deals with revocation of client consent to conflicting representation and the potential ramifications of such an occurrence.

1.7:102      Model Code Comparison

AZ-ER 1.7 carries forward the prohibition against representing clients whose interests in a matter conflict, absent the fully informed consent of the clients involved in certain situations, that was formerly contained in DRs 5-101(A) and 5-105(A), (B) and (C). The Comment to AZ-ER 1.7 states that it goes beyond the provisions of former DR 5-105(A) in requiring that, when the lawyer's other interests are involved, not only that the client consent after full consultation, but also that the representation reasonably appear not to be adversely affected by the lawyer's other interests. The Comment notes that this appears to be the intended meaning of DR 5-105(C), and is also implicit in former EC 5-2.

Although the Model Rules of Professional Conduct did not retain the prohibition on the appearance of impropriety contained in Canon 9 of the Code of Professional Responsibility, the Arizona Supreme Court has held that the "appearance of impropriety" standard survives as part of any analysis of a possible conflict of interest. Gomez v. Superior Court, 149 Ariz. 223, 717 P.2d 902 (1986); State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). See also Arizona Ethics Opinion No. 2000-09.

1.7:200   Conflicts of Interest in General

AZ-ER 1.7(a)(1) establishes the general rule that a lawyer may not accept an engagement by a client if the representation of that client will be directly adverse to the interests of another client. AZ-ER 1.7(a)(2) provides that a lawyer may not represent a client if the representation may be materially limited by the lawyer's responsibilities to another client, a former client or a third person, or by the lawyer's interests. In both cases, the conflict may be cured if the lawyer reasonably believes that the engagement will not adversely affect the relationship with, and the representation of, the clients involved, the representation is not prohibited by law and both clients consult give informed consent, unless the conflict in question is one to which the client cannot properly consent.

The conflict of interest rules are based on three basic considerations: (1) a concern that, where a conflict is present, the lawyer's representation of one or both clients will suffer, (2) the expectation of each client that the lawyer owes them a duty of loyalty, and (3) the concern that representation of conflicting interests will lead to the compromise of information that the lawyer has a duty to maintain in confidence, under Rule ER 1.6. See Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993); In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987); Maricopa County Public Defender's Office v. Superior Court, 187 Ariz. 162, 927 P.2d 822 (App. 1996).

1.7:210      Basic Prohibition of Conflict of Interest

The Comment to AZ-ER 1.7 emphasizes that the prohibition on the representation of clients whose interests conflict is a fundamental aspect of the lawyer's duty to clients:

Loyalty and independent judgment are essential elements in the lawyer's relationship to a client. Concurrent conflicts of interest can arise from the lawyer's responsibilities to another client, a former client or a third person or from the lawyer's own interests. For specific Rules regarding certain concurrent conflicts of interest, see ER 1.8. For former client conflicts of interest, see ER 1.9. For conflicts of interest involving prospective clients, see ER 1.18. For definitions of "informed consent" and "confirmed in writing, see ER 1.0(e) and (b).

* * * * * * *

Loyalty to a current client prohibits undertaking representation directly adverse to that client without that client's informed consent. Thus, absent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated. The client as to whom the representation is directly adverse is likely to feel betrayed, and the resulting damage to the client-lawyer relationship is likely to impair the lawyer's ability to represent the client effectively. In addition, the client on whose behalf the adverse representation is undertaken reasonably may fear that the lawyer will pursue that client's case less effectively out of deference to the other client, i.e., that the representation may be materially limited by the lawyer's interest in retaining the current client. Similarly, a lawyer acts directly adversely to a client if it will be necessary for the lawyer to cross-examine a client who appears as a witness in a lawsuit involving another client. On the other hand, simultaneous representation in unrelated matters of clients whose interests are only economically adverse, such as representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest and thus may not require consent of the respective clients.

Comment, AZ-ER 1.7, šš 1,6; see also In the Matter of the Estate of Fogelman, 197 Ariz. 252, 3 P.3d 1172 (App. 2000).

Thus, although the County Attorney is responsible for providing legal advice and representation to Justices of the Peace in the particular County involved, when the County Attorney files a special action on behalf of the County Sheriff, the County Attorney's Office cannot also represent the Justice of the Peace who is named as the respondent in that proceeding. Riley, Hogatt & Suagee, P.C. v. English, 177 Ariz. 10, 864 P.2d 1042 (Ariz. 1993). It is an impermissible conflict of interest to simultaneously represent both the husband and wife in a divorce or dissolution proceeding. Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993). In a situation involving independent sets of adoptive parents and only one available child, one set of prospective adoptive parents will be disappointed, and an attorney cannot simultaneously represent both sets of adoptive parents without compromising the representation of one of them. In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987). Similarly, the interests of the natural parents may be adverse to the interests of the prospective adoptive parents, and the same attorney cannot ordinarily represent both sets of parents. Id. It may be possible for the same attorney to represent multiple parties to an adoption, but only if it is obvious that the attorney can adequately represent all of them, and only after full disclosure to, and the consent of, all the parties involved. Id.

In Arizona Ethics Opinion No. 90-17, the State Bar's Committee on the Rules of Professional Conduct (hereinafter "the Committee") held that a lawyer in a firm that represents a workers' compensation carrier may ethically represent an injured worker whose employer is covered by that carrier, if the lawyer reasonably believes that (1) representation of the compensation carrier will not adversely affect the interests of the injured worker, (2) representation of the injured worker will not adversely affect the compensation carrier's interests, and (3) both clients consent to the dual representation after full disclosure. The Committee pointed out, however, that the concurrent representation of both a workers' compensation carrier and an injured worker who brings a civil action against a third-party wrongdoer will result in a conflict of interest in virtually every case where the firm represents the carrier in the underlying compensation case.

In Arizona Ethics Opinion No. 2000-03, the State Bar's Committee on the Rules of Professional Conduct (hereinafter "the Committee") held that it is a conflict of interest and unethical for an attorney, while representing a client in litigation, to file a separate suit against that client for unpaid fees and costs. In Arizona Ethics Opinion No. 99-12, the Committee held that a lawyer employed by an architectural firm may not provide legal services to the firm's clients, where the firm pays the attorney a salary, but charges the clients an hourly rate for the lawyer's services, both because of possible conflicts of interest between the clients and the architectural firm, and because the arrangement would constitute impermissible fee-sharing with non-lawyers.

AZ-ER 1.7(a)(2) contains a general prohibition on representation of a client where that representation may be materially limited by the lawyer's responsibilities to another client, a former client or to a third person, or by the lawyer's own interests. As the portion of the Comment to AZ-ER 1.7 which discusses this aspect of the Rule explains:

Even where there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer's ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer's other responsibilities or interests. . . The conflict in effect forecloses alternatives that would otherwise be available to the client.... The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.

Comment, AZ-ER 1.7, š 8. The focus of AZ-ER 1.7(a)(2), thus, is on potential, rather than actual, conflict of interests and issues concerning the application of this portion of the Rule arise most frequently, but not exclusively, where a lawyer undertakes to represent multiple clients involved in a single matter. Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987).

Where there is simultaneous representation of one or more co-parties in a matter, the first step in the analysis required by AZ-ER 1.7(b) is whether the attorney's representation of either client will be materially limited by the attorney's responsibilities to the other client(s). Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994). That will be the case where there is a substantial discrepancy between the testimony of the clients concerning a material issue, or where there are substantially different possibilities of settlement of the claims and liabilities of the clients involved. Id.; Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). Once it is determined that a conflict exists, the question then becomes whether the attorney reasonably believes that the conflict will not adversely affect the representation of any client and whether the clients consent to the joint representation after a full explanation of the implications, advantages and risks of the common representation. Id.

In Arizona Ethics Opinion No. 03-04, the Committee on the Rules of Professional Conduct ("the Committee") pointed out that simultaneous representation of parties in litigation whose interests only potentially conflict, such as co-plaintiffs or co-defendants, may present a situation where a lawyer cannot consider, recommend or carry out an appropriate course of action for one client because of the lawyer's responsibilities to the other client(s). While co-defendants share a common goal of defeating the plaintiff, they may also individually have an interest in deflecting any possible liability to another co-defendant. If there is such a potential conflict so that the lawyer's representation of either client, or both, may be materially and adversely affected, the lawyer can only proceed if the affected clients consent after consultation, and the lawyer first determines that the clients will not be adversely affected and that it is reasonable for the clients to consent to such an arrangement.

That Opinion specifically addresses the conflict issues presented where a lawyer involved in the representation of one client in a civil case governed by principles of comparative fault may have to identify another client as a potential nonparty at fault under Rule 26(b)(5), Ariz.R.Civ.P. A person or entity named as such a nonparty at fault does not thereby become a party to the litigation and is not subject to liability in that action, but the plaintiff or another party could seek to join that nonparty in the case, and the naming of the nonparty operates as an invitation for another party to do so. The Committee concluded that, if the statute of limitations has run on claims against the nonparty, then the naming of a client as such a nonparty at fault on behalf of another client would serve to reduce the liability of the latter client without causing a detriment to the client to be named. In that situation, accordingly, a conflict of interest is not presented, but the lawyer must carefully assess whether there is substantial risk of detriment to the interests of the client in the litigation because of the lawyer's relationship with the client to be named as a nonparty at fault. In any event, the informed consent of the client being represented in the litigation must be obtained.

Where the statute of limitations has not run on claims against the client to be named as a nonparty at fault, then it does create a conflict to name that other client as such a nonparty. Whether the conflict can be waived or consented to will depend upon the circumstances, such as the relative sophistication of the clients and the impact upon the lawyer's relationship with the clients involved.

Conflict of interest issues may also arise where an attorney is retained to represent a minor for whom a guardian ad litem has previously been appointed. In Arizona Ethics Opinion No. 86-13, the Committee held that, in such a situation, the attorney should follow the wishes of the child whenever possible. If a conflict arises, however, where the guardian believes that what the child desires is not in the child's best interests, the matter should be taken up with the court involved.

Under the Rule, a conflict also exists if representation of a client might be materially limited by the lawyer's own interests. Thus, it was found to be an impermissible conflict of interest for an attorney to be an investor in an enterprise while that attorney's firm represented other investors with respect to the same enterprise. Matter of Murphy, 188 Ariz. 375, 936 P.2d 1269 (1997). Similarly, the Committee recently ruled that a lawyer cannot ethically enter into an arrangement pursuant to which the lawyer was to receive a referral fee for referring clients of the lawyer to an investment adviser. Arizona Ethics Opinion No. 98-09. In an earlier opinion, the Committee had held that, while it was permissible for a lawyer who was also an accountant to engage in both professions simultaneously, the businesses had to be kept separate and clients that were referred to the lawyer's accounting business had to be advised of the lawyer's interest in it. Arizona Ethics Opinion No. 97-08.

In Arizona Ethics Opinion No. 2001-10, the Committee addressed the question of what ethical guidelines must be followed where a member of a prosecutor's office and a member of the public defender's office are either married or cohabiting. The Committee held that, where the individuals involved in the relationship are working opposite each other on the same case, that would be proper only if both attorneys believe that their respective representations will not be materially limited and both obtain informed consent of the clients involved. Where the individuals involved in the relationship are not opposed to each other on the same case, whether the relationship needs to be disclosed, and whether the relationship will have a material adverse effect on either lawyer's ability to represent a client are questions that have to be assessed and answered on a case-by-case basis. In any event, the conflict, if any, is personal to the individuals involved and will not be imputed to other members of their respective offices.

In Arizona Ethics Opinion No. 2001-12, the Committee addressed the ethical guidelines to follow where an Assistant Public Defender is involved in a romantic relationship with a law enforcement officer who is frequently an arresting or investigating officer in cases involving clients of the Public Defender's Office. The Committee held that, in cases where the officer is a testifying witness, it probably constitutes a non-waivable conflict of interest for the Assistant Public Defender to represent the defendant. I cases where the officer is a testifying witness, but other lawyers from the Public Defender's Office are defending it, the potential for conflict is less great and the Office will have to evaluate on a case-by-case basis whether the relationship will materially limit the defense of the client. If the officer and the Assistant Public Defender are both involved in a case, then disclosure of their relationship is mandatory. Where neither is involved, then disclosure is not required. Where only one is involved, whether to disclose the relationship to the client must be evaluated on a case-by-case basis.

For conflict of interest purposes, an attorney who works on a contract basis for more than one law firm will be considered an associate of each firm for which the attorney works, unless (1) there is a written agreement that limits the scope of the contract attorney's work to a particular client for a particular project, and the agreement specifies that the relationship will terminate at the end of the project or at a particular time or upon the occurrence of a particular vent, and (2) the contract attorney will not have access to information concerning other clients. Arizona Ethics Opinion No. 97-09. Similarly, an attorney who lists another firm or attorney as "Of Counsel" on the attorney's letterhead and other communications must take into account the possibility that conflict of interest issues might arise by reason of that relationship. Arizona Ethics Opinion No. 87-24. An attorney who has a contract to serve as a public defender in Superior Court may also serve as a Judge pro tempore for civil and domestic relations matters in that Court, provided there is a full disclosure to all parties in each case assigned to the attorney in that capacity and there are no persons involved in those cases who have an interest in matters being handled by the attorney under the public defender contract. Arizona Ethics Opinion No. 87-21. That attorney may not, however, serve in that Court as a Judge pro tempore in criminal or juvenile proceedings. Id.

In Arizona Ethics Opinion No. 94-13, the Committee addressed an inquiry from an attorney who had previously represented, on an unrelated matter, an individual who had been appointed by the court as a mental health expert in a matter the attorney was currently handling. The Committee concluded that the lawyer was not required to disclose the prior representation absent some showing that the lawyer's former relationship with the witness would predispose the expert to favor the attorney's current client, and that the attorney need not withdraw from the current matter unless there was some unusual bias on the expert's part or the lawyer would be restricted from cross-examining the expert due to the prior relationship.

As earlier noted, where a conflict arises after an attorney has accepted an engagement, and it cannot be "cured" by client consent, then AZ-ER 1.16 requires that the attorney withdraw. Where counsel avows to the trial court that counsel has a conflict of interest that necessitates withdrawal, the trial court should not ordinarily require counsel to disclose confidential information as a condition of permitting such withdrawal. Maricopa County Public Defender's Office v. Superior Court, 187 Ariz. 162, 927 P.2d 822 (App. 1996).

Although the Model Rules of Professional Conduct did not retain the prohibition on the appearance of impropriety contained in Canon 9 of the Code of Professional Responsibility, the Arizona Supreme Court has held that the "appearance of impropriety" standard survives as part of any analysis of a possible conflict of interest. Gomez v. Superior Court, 149 Ariz. 223, 717 P.2d 902 (1986); State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). An appearance of impropriety should be enough to cause an attorney to closely scrutinize whether to proceed with the engagement that gives rise to the conflict, but it is generally "too slender a reed" on which to rest an order requiring the attorney's disqualification, except in the rarest of cases. Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 289, 742 P.2d 292, 299 (App. 1987).

1.7:220      Material Adverse Effect on Representation

AZ-ER 1.7(a)(1) establishes the general rule that a lawyer may not accept an engagement by a client if the representation of that client will be directly adverse to the interests of another client. Such directly adverse representation may be undertaken only if the lawyer reasonably believes that it will not adversely affect the relationship with the other client, and each client provides informed consent, confirmed in writing. As the Comment to the Rule points out, "absent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated." Comment, AZ-ER 1.7, š 6. See In the Matter of the Estate of Fogelman, 197 Ariz. 252, 3 P.3d 1172 (App. 2000). Where a lawyer is asked to undertake representation that is directly adverse to the interests of a client the lawyer is representing in an unrelated matter, it is theoretically possible for the lawyer to reasonably believe that the relationship with the other client will not be adversely affected by the new engagement. Where the proffered representation is directly adverse to the interests of a client the lawyer is representing in the same or a related matter, however, a material adverse affect on the relationship is almost presumed.

Thus, although the County Attorney is responsible for providing legal advice and representation to Justices of the Peace in the particular County involved, when the County Attorney files a special action on behalf of the County Sheriff, the County Attorney's Office cannot also represent the Justice of the Peace who is named as the respondent in that proceeding. Riley, Hogatt & Suagee, P.C. v. English, 177 Ariz. 10, 864 P.2d 1042 (Ariz. 1993). It is an impermissible conflict of interest to simultaneously represent both the husband and wife in a divorce or dissolution proceeding. Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993). In a situation involving independent sets of adoptive parents and only one available child, one set of prospective adoptive parents will be disappointed, and an attorney cannot simultaneously represent both sets of adoptive parents without compromising the representation of one of them. In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987). Similarly, the interests of the natural parents may be adverse to the interests of the prospective adoptive parents, and the same attorney cannot ordinarily represent both sets of parents. Id. It may be possible for the same attorney to represent multiple parties to an adoption, but only if it is obvious that the attorney can adequately represent all of them, and only after full disclosure to, and the consent of, all the parties involved. Id.

In Arizona Ethics Opinion No. 2000-03, the Committee on the Rules of Professional Conduct ("the Committee") held that it was unethical for an attorney representing a client in pending litigation to file suit against the client, while the representation was continuing, for the collection of unpaid attorneys' fees and costs. In Arizona Ethics Opinion No. 99-12, the Committee held that a lawyer employed by an architectural firm could not provide legal services to the architectural firm's clients, where the firm paid the attorney a salary, but charged the clients an hourly rate for the lawyer's services, not only because the arrangement would constitute impermissible fee-sharing with non-lawyers, but also because of possible conflicts of interests between the clients and the architectural firm.

Similarly, AZ-ER 1.7 permits an attorney to accept an engagement in which representation of the client may be materially limited by the attorney's responsibilities to another client or to a third person, or by the lawyer's interests, but only if the attorney reasonably believes the representation will not be adversely affected, and the client consults gives informed consent, confirmed in writing. The focus of AZ-ER 1.7(a)(2), thus, is on potential, rather than actual, conflict of interests and issues concerning the application of this portion of the Rule arise most frequently, but not exclusively, where a lawyer undertakes to represent multiple clients involved in a single matter. Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987).

In Arizona Ethics Opinion No. 2001-12, the Committee addressed the issue of what ethical guidelines should be applied in a situation where an Assistant Public Defender was involved in a romantic relationship with a law enforcement officer who was frequently an arresting or investigating officer in cases involving clients of the Public Defender's Office. The Committee held that, in cases where the officer was a testifying witness, it would probably constitute a non-waivable conflict of interest for the Assistant Public Defender to represent the defendant, and disclosure of the relationship was mandatory. In cases where the officer was a testifying witness, but a different Public Defender was conducting the defense, whether the relationship would represent a material limitation on the ability to conduct the client's defense, and whether the relationship need be disclosed to the client would have to be evaluated on a case-by-case basis.

A similar question was addressed by the Committee in Arizona Ethics Opinion No. 2001-10, which involved a member of a prosecutor's office and a member of the public defender's office who were cohabiting and/or married. Again, the Committee concluded that, where the individuals involved in the relationship were working opposite each other on the same case, that would be permissible only if both attorneys believed that their respective representations would not be materially limited and both obtained informed consent from the clients involved. Where the individuals involved in the relationship were not opposite each other on the same case, whether the relationship should be disclosed, and whether it would have a material adverse effect on another lawyer's ability to represent a client, would have to be evaluated on a case-by-case basis.

In both the foregoing Opinions, the Committee noted that the conflict presented was personal to the lawyers involved in the relationship, and would not be automatically imputed to other members of their offices.

Where there is simultaneous representation of one or more co-parties in a matter, the first step in the analysis required by AZ-ER 1.7(a)(2) is whether the attorney's representation of either client will be materially limited by the attorney's responsibilities to the other client(s). Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994). That will be the case where there is a substantial discrepancy between the testimony of the clients concerning a material issue, or where there are substantially different possibilities of settlement of the claims and liabilities of the clients involved. Id.; Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). Once it is determined that a conflict exists, the question then becomes whether the attorney reasonably believes that the conflict will not adversely affect the representation of any client and whether the clients consent to the joint representation after a full explanation of the implications, advantages and risks of the common representation. Id.

In determining whether a potential conflict will have a material adverse effect on the representation of one or more clients, the "critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client." Comment, AZ-ER 1.7, š 8. Thus, an attorney may not act as a special city prosecutor and simultaneously handle criminal cases in the same city's court. Arizona Ethics Opinion No. 87-20. In that same Opinion, however, the Committee held that an attorney who represents a judge in a civil matter may appear as criminal defense counsel before that same judge, provided the representation of the judge is disclosed to opposing counsel, and the client's permission is obtained before proceeding.

In Arizona Ethics Opinion No. 03-04, the Committee on the Rules of Professional Conduct ("the Committee") pointed out that simultaneous representation of parties in litigation whose interests only potentially conflict, such as co-plaintiffs or co-defendants, may present a situation where a lawyer cannot consider, recommend or carry out an appropriate course of action for one client because of the lawyer's responsibilities to the other client(s). While co-defendants share a common goal of defeating the plaintiff, they may also individually have an interest in deflecting any possible liability to another co-defendant. If there is such a potential conflict so that the lawyer's representation of either client, or both, may be materially and adversely affected, the lawyer can only proceed if the affected clients consent after consultation, and the lawyer first determines that the clients will not be adversely affected and that it is reasonable for the clients to consent to such an arrangement.

That Opinion specifically addresses the conflict issues presented where a lawyer involved in the representation of one client in a civil case governed by principles of comparative fault may have to identify another client as a potential nonparty at fault under Rule 26(b)(5), Ariz.R.Civ.P. A person or entity named as such a nonparty at fault does not thereby become a party to the litigation and is not subject to liability in that action, but the plaintiff or another party could seek to join that nonparty in the case, and the naming of the nonparty operates as an invitation for another party to do so. The Committee concluded that, if the statute of limitations has run on claims against the nonparty, then the naming of a client as such a nonparty at fault on behalf of another client would serve to reduce the liability of the latter client without causing a detriment to the client to be named. In that situation, accordingly, a conflict of interest is not presented, but the lawyer must carefully assess whether there is substantial risk of detriment to the interests of the client in the litigation because of the lawyer's relationship with the client to be named as a nonparty at fault. In any event, the informed consent of the client being represented in the litigation must be obtained.

Where the statute of limitations has not run on claims against the client to be named as a nonparty at fault, then it does create a conflict to name that other client as such a nonparty. Whether the conflict can be waived or consented to will depend upon the circumstances, such as the relative sophistication of the clients and the impact upon the lawyer's relationship with the clients involved.

In Arizona Ethics Opinion No. 88-03, the Committee held that, although there is a potential conflict of interest presented when an attorney representing a criminal defendant simultaneously seeks the office of County Attorney, the potential conflict does not automatically disqualify the attorney from the representation of the criminal defendant. The Committee concluded that the representation may be permitted if the attorney has reason to believe that the defendant's case will not be adversely affected and the defendant client consents after consultation. In Arizona Ethics Opinion No. 88-02, the Committee ruled that, when a health care provider requests an attorney to sign a medical lien against the proceeds of a client's personal injury claim, the attorney must first determine whether the imposition of the lien will impose upon the attorney any obligation to the provider. If so, the attorney may only sign the lien if the attorney reasonably believes that the representation of the personal injury claimant will not be adversely affected, and that client consents after consultation.

In Arizona Ethics Opinion No. 03-05, the Committee concluded that an attorney for a plaintiff or claimant could not ethically enter into any settlement agreement that would require the attorney to indemnify the settling parties from any lien claims against the settlement proceeds. The principal basis for this conclusion was that AZ-ER 1.8 precludes attorneys from providing financial assistance to a client by paying or advancing medical expenses, and would similarly preclude the attorney from guaranteeing, or accepting ultimate liability for, the payment of such expenses. The Committee went on to note that, while AZ-ER 1.2 generally requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement that would require the attorney to hold settling parties harmless violates AZ-ER 1.8, and the attorney cannot agree to such a condition. If the client insists that the attorney do so, then the attorney would be required to withdraw.

In Arizona Ethics Opinion No. 87-15, the Committee responded to an inquiry concerning the propriety of two lawyers in the same firm representing clients with opposing interests in unrelated actions. The Committee concluded that the lawyers could continue with the two representations after the clients had been given full disclosure of the facts and had consented after consultation with disinterested outside counsel, even though the two unrelated actions involved were based on similar facts.

1.7:230      Perspective for Determining Conflict of Interest

While there are no Arizona authorities that address this issue directly, it would seem logical to assume that the issues of whether an engagement represents an actual or potential conflict with the interests of another client and whether the lawyer's belief that the relationship with the clients involved and/or the representation will not be adversely affected is reasonable, should be viewed from the perspective of a disinterested outside lawyer for the clients involved. Thus, on the issue of consent, when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent. See In re Bentley, 141 Ariz. 593, 688 P.2d 601 (1984); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). In response to an inquiry from attorneys in the same firm as to the propriety of representing clients with opposing interests in unrelated actions based on similar facts, the Committee ruled that such representation would be proper only if there was full disclosure of the facts to the clients, and the clients consented after consulting with disinterested outside counsel. Arizona Ethics Opinion No. 87-15.

1.7:240      Client Consent to a Conflict of Interest; Non-Consentable Conflicts

AZ-ER 1.7(b) permits a lawyer to continue with a representation that constitutes an actual or potential conflict of interest if "each affected client gives informed consent, confirmed in writing," and the conditions of AZ-ER 1.7(b)(1), (2) and (3) are all satisfied as well. The requirement of "informed consent" is a substitute for the prior requirement that the consent of the client be "after consultation," but it is not materially different. "Informed consent" is defined in AZ-ER 1.0(e) as "agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct." As the Comment to AZ-ER 1.7 applies that concept:

Informed consent requires that each affected client be aware of the relevant circumstances and of the material and reasonably foreseeable ways that the conflict could have adverse effects on the interests of that client. See ER 1.0(e) (informed consent). The information required depends on the nature of the conflict and the nature of the risks involved. When representation of multiple clients in a single matter is undertaken, the information must include the implications of the common representation, including possible effects on loyalty, confidentiality and the attorney-client privilege and the advantages and risks involved. See Comments [29] and [30] (effect of common representation on confidentiality).

Comment, AZ-ER 1.7, š 18. This is wholly consistent with prior interpretations of the former "consultation" requirement:

To satisfy the requirement of full disclosure by a lawyer before undertaking to represent two conflicting interests, it is not sufficient that both parties be informed of the fact that the lawyer is undertaking to represent both of them, but he must explain the nature of the conflict of interest in such detail so that they can understand the reasons why it may be desirable for each to have independent counsel, with undivided loyalty to the interests of each of them.

Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 286, 742 P.2d 292, 297 (App. 1987). See also Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994). The consent of the client must be freely given, and cannot be extracted through the imposition of financial pressures or any other form of coercion. Matter of Murphy, 188 Ariz. 375, 936 P.2d 1269 (1997). The burden of establishing that there was an appropriate disclosure and a fully informed consent is on the lawyer, and any doubts or ambiguities on the issue will be resolved against the lawyer. In re Neville, 147 Ariz. 106, 115, 708 P.2d 1297, 1306 (1985).

The requirement that the "informed consent" be "confirmed in writing" is new, added by the 2003 amendments to the Rule. The Comment explaining this change makes clear that confirming a client's consent to a lawyer's conflict of interest is not to be treated as a mere formality:

Paragraph (b) requires the lawyer to obtain the informed consent of each client, confirmed in writing. Such a writing may consist of a document executed by the client or oral consent that the lawyer promptly records and transmits to the client. See ER 1.0(b). See also ER 1.0(n) (writing includes electronic transmission). If it is not feasible to obtain or transmit the writing at the time the client gives informed consent, then the lawyer must obtain or transmit it within a reasonable time thereafter. The requirement of a writing does not supplant the need in most cases for the lawyer to talk with the client, to explain the risks and advantages, if any, of representation burdened with a conflict of interest, as well as reasonably available alternatives, and to afford the client a reasonable opportunity to consider the risks and alternatives and to raise questions and concerns. Rather, the writing is required in order to impress upon clients the seriousness of the decision the client is being asked to make and to avoid disputes or ambiguities that might later occur in the absence of a writing. The writing need not take any particular form; it should, however, include disclosure of the relevant circumstances and reasonably foreseeable risks of the conflict of interest, as well as the client's agreement to the representation despite such risks.

Comment, AZ-ER 1.7, š 20.

Assuming these standards and requirements are satisfied, client consent will "cure" most actual or potential conflicts of interest. Thus, in In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987), the Supreme Court noted that it might be possible for an attorney to represent multiple parties to an adoption, but only if it is obvious that the attorney can adequately represent all of them, and only after full disclosure to and consent of all of them.

In Arizona Ethics Opinion No. 88-03, the Committee held that, although there is a potential conflict of interest presented when an attorney representing a criminal defendant simultaneously seeks the office of County Attorney, the potential conflict does not automatically disqualify the attorney from the representation of the criminal defendant. The Committee concluded that the representation may be permitted if the attorney has reason to believe that the defendant's case will not be adversely affected and the defendant client consents after consultation.

In Arizona Ethics Opinion No. 88-02, the Committee ruled that, when a health care provider requests an attorney to sign a medical lien against the proceeds of a client's personal injury claim, the attorney must first determine whether the imposition of the lien will impose upon the attorney any obligation to the provider. If so, the attorney may only sign the lien if the attorney reasonably believes that the representation of the personal injury claimant will not be adversely affected, and that client consents after consultation. In Arizona Ethics Opinion No. 03-05, the Committee concluded that an attorney for a plaintiff or claimant could not ethically enter into any settlement agreement that would require the attorney to indemnify the settling parties from any lien claims against the settlement proceeds. The principal basis for this conclusion was that AZ-ER 1.8 precludes attorneys from providing financial assistance to a client by paying or advancing medical expenses, and would similarly preclude the attorney from guaranteeing, or accepting ultimate liability for, the payment of such expenses. The Committee went on to note that, while AZ-ER 1.2 generally requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement that would require the attorney to hold settling parties harmless violates AZ-ER 1.8, and the attorney cannot agree to such a condition. If the client insists that the attorney do so, then the attorney would be required to withdraw.

In Arizona Ethics Opinion No. 87-15, the Committee responded to an inquiry concerning the propriety of two lawyers in the same firm representing clients with opposing interests in unrelated actions. The Committee concluded that the lawyers could continue with the two representations after the clients had been given full disclosure of the facts and had consented after consultation with disinterested outside counsel, even though the two unrelated actions involved were based on similar facts.

Not all conflicts can be cured, however, by client consent. A lawyer cannot properly ask for consent or represent a client on the basis of consent, if a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances. In re Bentley, 141 Ariz. 593, 688 P.2d 601 (1984); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). In addition, as the Comment to the Rule also points out:

Under some circumstances, it may be impossible to make the disclosure necessary to obtain consent. For example, when the lawyer represents different clients in related matters and one of the clients refuses to consent to the disclosure necessary to permit the other client to make an informed decision, the lawyer cannot properly ask the latter to consent.

Comment, AZ-ER 1.7, š 19.

In Arizona Ethics Opinion No. 96-04, the Committee considered the issues presented when a law firm initially represents both a driver and a passenger in a personal injury case against another driver, and eventually refers the passenger to another firm for separate representation. The Committee concluded that if, in that situation, the firm continues to represent the driver but retains an interest in recovering, as its fee, a portion of any award in favor of the passenger, a conflict is presented which cannot be cured by client consent.

In instances where a lawyer is initially justified in representing multiple clients in a single matter because their interests are generally aligned and all clients consent, the lawyer must nevertheless withdraw if it becomes evident that the lawyer cannot continue to adequately represent the interests of each client or if any client revokes the consent previously given. The conflict cannot be cured by simply dropping one of the clients. Margulies by Margulies v. Upchurch, 696 P.2d 1195 (Utah 1985).

Prospective Client Consents to or Waiver of Conflicts

It is becoming much more common practice for lawyers, and particularly lawyers in large firms, to seek at the outset of an engagement a client's consent to or waiver of conflicts of interest that may arise or become known only after the engagement has commenced. The Comment to AZ-ER 1.7 itself recognizes that conflicts can arise only after a representation has been undertaken, and can eventuate from circumstances that were entirely unforeseeable at the commencement of the engagement. See Comment, AZ-ER 1.7, šš 4, 5. Whether and to what extent such "prospective client consents" will be effective and enforceable is very much dependent upon the circumstances, and may turn on the extent of the disclosures made by the lawyer at the time they are secured:

Whether a lawyer may properly request a client to waive conflicts that might arise in the future is subject to the test of paragraph (b). The effectiveness of such waivers is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails. The more comprehensive the explanation of the types of future representations that might arise and the actual and reasonably foreseeable adverse consequences of those representations, the greater the likelihood that the client will have the requisite understanding. Thus, if the client agrees to consent to a particular type of conflict with which the client is already familiar, then the consent ordinarily will be effective with regard to that type of conflict. If the consent is general and open-ended, then the consent ordinarily will be ineffective, because it is not reasonably likely that the client will have understood the material risks involved. On the other hand, if the client is an experienced user of the legal services involved and is reasonably informed regarding the risk that an unforeseeable conflict might arise, such consent is more likely to be effective, particularly if the client is independently represented by other counsel in giving consent and the consent is limited to future conflicts unrelated to the representation. In any case, advance consent cannot be effective if the circumstances that materialize in the future are such as would make the conflict nonconsentable under paragraph (b).

Comment, AZ-ER 1.7, š 21.

1.7:250      Imputation of Conflict of Interest to Affiliated Lawyers [see 1.10:200]

When lawyers are associated in a firm, none of them may knowingly represent a client when any of them practicing alone would be prohibited from doing so due to a conflict of interest, unless the affected client grants informed consent. AZ-ER 1.10(a) and (c); Matter of Murphy, 188 Ariz. 375, 936 P.2d 1269 (1997). The fact that some partners in a law firm may not even know the names of the clients of other partners provides no escape from this "infectious disqualification" regime. In the Matter of the Estate of Fogelman, 197 Ariz. 252, 3 P.3d 1172 (App. 2000).

Thus, in Okeani v. Superior Court In and For Maricopa County, 178 Ariz. 180, 871 P.2d 727 (App. 1993), the Court found that the Public Defender's Office's representation of a criminal defendant was "directly adverse" to its simultaneous representation of the alleged victim on an unrelated matter, because one of its duties might include attempting to impeach the credibility of the victim as a witness. The Court went on to note that the conflict could not be alleviated by the fact that the defendant and the victim would be represented by different lawyers in the Office because, under AZ-ER 1.10(a), while lawyers are associated in a firm, none of them can knowingly represent a client when any one of them practicing alone would be prohibited from doing so by AZ-ER 1.7. Lawyers must also take into account potential conflicts of interest and the imputed disqualification rules when entering into "Of Counsel" relationships. Arizona Ethics Opinion No. 87-24.

When a lawyer moves from one firm to another, the new firm may not knowingly represent a person in the same or a substantially related matter, if the moving lawyer or the moving lawyer's former firm previously represented a client whose interests are materially adverse and about whom the moving lawyer acquired material information protected by AZ-ER 1.6. AZ-ER 1.9(b). Prior to the 2003 amendments to the Rules, building a so-called "ethical wall" around the lawyer, and screening that lawyer from any involvement in or knowledge of the matter that gives rise to the conflict would not be effective to cure it. Towne Development of Chandler, Inc. v. Superior Court In and For Maricopa County, 173 Ariz. 364, 842 P.2d 1377 (App. 1992). The 2003 amendments added new AZ-ER 1.10(d)(2) which permits a firm to avoid imputed or "infectious" disqualification by timely screening the personally disqualified lawyer from any participation in the matter, and giving notice that it has done so. Even this option is not available, however, where the matter in question involves "a proceeding before a tribunal in which the personally disqualified lawyer had a substantial role." AZ-ER 1.10(d)(1).

In Arizona Ethics Opinion No. 91-24, the Committee addressed an inquiry concerning the operations of the Volunteer Lawyers Project, which is a joint project of the Maricopa County Bar Association and Community Legal Services. The specific inquiry was whether it would be a conflict of interest for a lawyer participating in the Volunteer Lawyers Program to accept an assignment to represent a client whose interests were adverse to an individual whom the lawyer had previously interviewed to determine eligibility for assistance or to an individual that had previously been represented by Community Legal Services ("CLS"). On the first question, the Committee ruled that there would be no conflict because the CLS intake interview process did not normally create an attorney-client relationship between the lawyer conducting the interview and the applicant. On the second issue, the Committee concluded that the Volunteer Lawyers Program and Community Legal Services would not be considered analogous to a single law firm, so that it would be permissible for the Volunteer Lawyers Program to accept and to refer to a volunteer lawyer a client whose interests were adverse to a person previously assisted by Community Legal Services, provided adequate safeguards were put in place to insure that no confidential information learned by Community Legal Services was shared with or disclosed to the volunteer lawyer.

The foregoing rules apply to attorneys in private practice. The special provisions of AZ-ER 1.11, and not the imputed disqualification rule of AZ-ER 1.10, apply when a government lawyer leaves the government to enter private practice. A former government lawyer may not represent a private client in connection with a matter in which the lawyer "personally and substantially participated" while employed by the government. AZ-ER 1.11(a). The former government lawyer's new firm, however, is not disqualified from such representation if (1) the former government lawyer is screened from any participation in the representation, (2) the former government lawyer does not share in any portion of the fees generated by the representation, and (3) written notice is provided to the lawyer's former agency employer so that it may verify compliance with the rule. Id. Neither the former government lawyer nor the lawyer's present firm is prohibited from undertaking or continuing a representation if the former government lawyer was not involved to a material degree in the investigative or deliberative process regarding the transactions in question. Security General Life Insurance v. Superior Court, 149 Ariz. 332, 718 P.2d 985 (1986).

Similarly, a former government lawyer cannot represent a private client whose interests are adverse to a person concerning whom the lawyer actually acquired confidential government information while in the government's employ, in a mater in which the information could be used to the material disadvantage of that person. Rule AZ-ER 1.11(b). The former government lawyer's firm, however, may undertake or continue such a representation if the former government lawyer is screened from any participation in the representation and does not share in the fees resulting from the representation. Id.

In Arizona Ethics Opinion No. 86-08, the Committee held that it was not a conflict of interest for an attorney who served on a Board of Adjustment prior to becoming a lawyer, to represent clients in proceedings to set aside earlier decisions of the Board as arbitrary or illegal. In that same Opinion, however, the Committee ruled that an attorney who had been a clerk in the civil division of a County Attorney's office prior to admission to the bar should decline the representation of clients in cases seeking to set aside decisions of that County's Board of Adjustment, where the cases involved facts that the attorney had learned during the clerkship.

In Arizona Ethics Opinion No. 2001-12, the Committee addressed the issue of what ethical guidelines should be applied in a situation where an Assistant Public Defender was involved in a romantic relationship with a law enforcement officer who was frequently an arresting or investigating officer in cases involving clients of the Public Defender's Office. The Committee held that, in cases where the officer was a testifying witness, it would probably constitute a non-waivable conflict of interest for the Assistant Public Defender to represent the defendant, and disclosure of the relationship was mandatory. In cases where the officer was a testifying witness, but a different Public Defender was conducting the defense, whether the relationship would represent a material limitation on the ability to conduct the client's defense, and whether the relationship need be disclosed to the client would have to be evaluated on a case-by-case basis.

A similar question was addressed by the Committee in Arizona Ethics Opinion No. 2001-10, which involved a member of a prosecutor's office and a member of the public defender's office who were cohabiting and/or married. Again, the Committee concluded that, where the individuals involved in the relationship were working opposite each other on the same case, that would be permissible only if both attorneys believed that their respective representations would not be materially limited and both obtained informed consent from the clients involved. Where the individuals involved in the relationship were not opposite each other on the same case, whether the relationship should be disclosed, and whether it would have a material adverse effect on another lawyer's ability to represent a client, would have to be evaluated on a case-by-case basis.

1.7:260      Sanctions and Remedies for Conflicts of Interest

One of the remedies for conflicts of interests, sanctioned in AZ-ER 1.7 itself, is to secure the fully informed consent of the clients affected, in instances where the lawyer reasonably believes the relationship with and representation of the clients involved will not be adversely affected by the conflict, and the conflict is one to which a fully informed client may consent. See discussion in Section 1.7:240, supra. Where an engagement represents a conflict of interest proscribed by AZ-ER 1.7, and the consent of the clients involved cannot be obtained, the engagement cannot be accepted. Where a conflict is discovered, or a potential conflict becomes actual, after an attorney has accepted an engagement, then AZ-ER 1.16 requires that the attorney withdraw. Thus, in Arizona Ethics Opinion No. 96-03, the Committee ruled that a public defender must withdraw from representation of a criminal defendant who has a "colorable" claim of ineffective assistance of counsel against another member of the public defender's office, and the timing of the withdrawal must be determined by the facts of each case. Where counsel avows to the trial court that counsel has a conflict of interest that necessitates withdrawal, the trial court should not ordinarily require counsel to disclose confidential information as a condition of permitting such withdrawal. Maricopa County Public Defender's Office v. Superior Court, 187 Ariz. 162, 927 P.2d 822 (App. 1996).

In large firms and/or large governmental offices, it is not a cure for a conflict of interest to have the matters giving rise to the conflict handled by different lawyers and/or to screen a lawyer with a disqualifying conflict from participation in the matter that creates the conflict. Thus, in Okeani v. Superior Court In and For Maricopa County, 178 Ariz. 180, 871 P.2d 727 (App. 1993), the Court found that the Public Defender's Office's representation of a criminal defendant was "directly adverse" to its simultaneous representation of the alleged victim on an unrelated matter, because one of its duties might include attempting to impeach the credibility of the victim as a witness. The Court went on to note that the conflict could not be alleviated by the fact that the defendant and the victim would be represented by different lawyers in the Office because, under AZ-ER 1.10(a), while lawyers are associated in a firm, none of them can knowingly represent a client when any one of them practicing alone would be prohibited from doing so by AZ-ER 1.7.

When a lawyer moves from one firm to another, the new firm may not knowingly represent a person in the same or a substantially related matter, if the moving lawyer or the moving lawyer's former firm previously represented a client whose interests are materially adverse and about whom the moving lawyer acquired material information protected by AZ-ER 1.6. AZ-ER 1.10(b). In that situation, building a so-called "ethical wall" around the lawyer, and screening that lawyer from any involvement in or knowledge of the matter that gives rise to the conflict will not be effective to cure it. Towne Development of Chandler, Inc. v. Superior Court In and For Maricopa County, 173 Ariz. 364, 842 P.2d 1377 (App. 1992). The 2003 amendments added new AZ-ER 1.10(d)(2) which permits a firm to avoid imputed or "infectious" disqualification by timely screening the personally disqualified lawyer from any participation in the matter, and giving notice that it has done so. Even this option is not available, however, where the matter in question involves "a proceeding before a tribunal in which the personally disqualified lawyer had a substantial role." AZ-ER 1.10(d)(1).

In a litigation context, acceptance of an engagement, or continuing a representation, which represents an impermissible conflict of interest under AZ-ER 1.7 may be grounds for disqualification of the lawyer and the firm with which the lawyer is associated. See Matter of Estate of Shano, 177 Ariz. 550, 869 P.2d 1203 (App. 1993); Towne Development of Chandler, Inc. v. Superior Court In and For County of Maricopa, 173 Ariz. 364, 842 P.2d 1377 (App. 1992). As a general rule, only a current or former client has standing to challenge legal representation, and seek a lawyer's disqualification, on the grounds of a conflict of interest. State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995). Because motions to disqualify opposing counsel as a tactical maneuver are disfavored, the courts approach such motions with caution and it is only in extreme circumstances that opposing parties should be permitted to interfere with the lawyer-client relationship of their opponents. Alexander v. Superior Court, 141 Ariz. 157, 161, 685 P.2d 1309, 1313. (1984). The burden is on the moving party to show sufficient grounds to disqualify the opponent's lawyer, and the court will consider the following factors in ruling on such a motion: (1) whether it appears that the motion is being made simply to harass the moving party's opponent, (2) whether the moving party will suffer any damage if the motion is denied, (3) whether there are less drastic alternatives to disqualification, and (4) whether public suspicion outweighs the benefits of continued representation. Id., 141 Ariz. at 165, 685 P.2d at 1317.

Although the Model Rules of Professional Conduct did not retain the prohibition on the appearance of impropriety contained in Canon 9 of the Code of Professional Responsibility, the Arizona Supreme Court has held that the "appearance of impropriety" standard survives as part of any analysis of a possible conflict of interest. Gomez v. Superior Court, 149 Ariz. 223, 717 P.2d 902 (1986); State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). An appearance of impropriety should be enough to cause an attorney to closely scrutinize whether to proceed with the engagement that gives rise to the conflict, but it is generally "too slender a reed" on which to rest an order requiring the attorney's disqualification, except in the rarest of cases. Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 289, 742 P.2d 292, 299 (App. 1987).

The issue of whether an entire office should be disqualified because of an appearance of impropriety was first addressed in State v. Latique, 108 Ariz. 521, 502 P.2d 1340 (1972), which arose under the former Code of Professional Responsibility. In that case, the Court approved the disqualification of the entire Maricopa County Attorney's Office because a deputy public defender who had acted as the defendant's co-counsel had accepted a position as the chief deputy county attorney while the prosecution of the defendant was still pending, even though the individual involved took no part in the prosecution. The Court held in part that the "office would have to divorce itself from the prosecution . . . because the appearance of unfairness cannot be permitted." Id., 108 Ariz. at 523.

The issue arose again in Turbin v. Superior Court, 165 Ariz. 195, 797 P.2d 734 (App. 1990), where the defendant sought to disqualify the entire Navajo County Attorney's Office after his defense counsel left to join that office. The County Attorney's Office relied heavily on the fact that the new Rules of Professional Conduct had been adopted since the decision in Latique, and they did not contain the prohibition on the appearance of impropriety on which the Latique Court had based its decision. The Court of Appeals disagreed and held that "the appearance of impropriety, which was so throughly discussed in Latique, still has a definite place in the balancing test the trial court must apply in resolving the question of disqualification." 165 Ariz. at 199. The Court ruled that the trial court should consider the four factors articulated in Alexander v. Superior Court, 141 Ariz. 157, 685 P.2d 1309 (1984), and in addition whether there had been a showing of prejudice or the lack thereof. Applying all these considerations to the facts before it, the Court found that the disqualification of the entire Navajo County Attorney's Office was appropriate, in part because of the public perception of impropriety that would result were disqualification denied. But see State ex rel. Romley v. Gottsfield, 171 Ariz. 195, 829 P.2d 1241 (App. 1992), where precisely the opposite result was reached, under similar facts, with respect to the Maricopa County Attorney's Office.

Even if disqualification is not ordered, continued representation may nevertheless violate the Arizona Rules of Professional Conduct. See Alexander v. Superior Court, 141 Ariz. 157, 166, 685 P.2d 1309, 1318 (1984); Nichols v. Elkins, 2 Ariz.App. 272, 48 P.2d 34 (1965). That will certainly be the case in transactional settings where the option of seeking disqualification is not available. The lawyer who accepts or persists in a representation that is impermissible under the standards of AZ-ER 1.7 subjects himself or herself to possible disciplinary action, and the imposition of one of the sanctions available to the disciplinary authorities, which include disbarment, suspension, probation, public censure or an informal reprimand, depending upon the gravity of the offense. See Rule 52(a), Rules of the Arizona Supreme Court. See also Matter of Piatt, 191 Ariz. 24, 951 P.2d 889 (1997); Matter of Murphy, 188 Ariz. 375, 936 P.2d 1269 (1997); Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993); In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987); In re Neville, 147 Ariz. 106, 708 P.2d 1297 (1985).

1.7:270      Positional Conflicts

The Comment to AZ-ER 1.7(a) states the following position concerning "positional conflicts":

Ordinarily a lawyer may take inconsistent legal positions in different tribunals at different times on behalf of different clients. the mere fact that advocating a legal position on behalf of one client might create precedent adverse to the interests of a client represented by the lawyer in an unrelated matter does not create a conflict of interest. A conflict of interest exists, however, if there is a significant risk that a lawyer's action on behalf of one client will materially limit the lawyer's effectiveness in representing another client in a different case; for example, when a decision favoring one client will create a precedent likely to seriously weaken the position taken on behalf of the other client. Factors relevant in determining whether the clients need to be advised of the risk include: where the cases are pending, whether the issue is substantive or procedural, the temporal relationship between the matters, the significance of the issue to the immediate and long-term interests of the clients involved and the clients' reasonable expectations in retaining the lawyer. If there is significant risk of material limitation, then absent informed consent of the affected clients, the lawyer must refuse one of the representations or withdraw from one or both matters.

Comment, AZ-ER 1.7, š 23.

In Arizona Ethics Opinion No. 87-15, the Committee on the Rules of Professional Conduct addressed a situation where different lawyers in the same firm were handling employment cases for different clients, both of which were resolved on summary judgment and then appealed to the U ited States Court of Appeals for the Ninth Circuit. On the appeal, only a single legal issue was presented, and the two attorneys were now in the situation where they were taking directly different positions concerning how it should be resolved. Both clients, one of whom had in-house counsel, had been advised of the situation and consulted, and both had voiced no objection to the firm continuing to handle both cases. The Committee held, on the facts presented, the consent of both clients was sufficient to cure the conflict involved.

The Court of Appeals, however, appears to have taken a much more restrictive position on this subject. In Canon School District No. 50 v. W.E.S. Construction Company, Inc., 177 Ariz. 431, 868 P.2d 1014 (App. 1993), vacated on other grounds 180 Ariz. 148, 882 P.2d 1274 (1994), the Court stated that if a lawyer, in representing one client, must make arguments that are contrary to the interests of another client, the lawyer cannot ethically continue to represent the first client.

1.7:280      Relationship to Other Rules (e.g., MRs 1.13, 2.2, 5.7, 6.3, 6.4)

Among the various provisions in the Arizona Rules of Professional Conduct that address the subject of conflicts of interest, AZ-ERs 1.7 and 1.8 deal directly with conflicts with the interests of current clients. The subject matter covered by AZ-ER 1.9 is conflicts with the interests of former clients, and AZ-ERs 1.10 and 1.11 deal with the issue of whether an individual lawyer's conflict of interest will be imputed to other lawyers with whom that lawyer is associated. Of the two provisions that deal with conflicts with the interests of current clients, AZ-ER 1.7 states the general rules that govern that subject; AZ-ER 1.8 deals with certain specific conflict situations, or transactions with current clients, that are prohibited except under the circumstances specified in that Rule. There are other provisions in the Arizona Rules of Professional Conduct, however, that either impose obligations upon lawyers that may be the basis for a conflict of interest, or permit, under certain conditions, representation that would otherwise raise conflict of interest issues.

For example, AZ-ER 1.13(a) makes clear that, when a lawyer undertakes representation of an organization (which may include both corporations and unincorporated entities), the client is "the organization acting through its duly authorized constituents." Conflict of interest issues arising out of the representation of an organization arise most frequently in one of two situations: (1) where the lawyer representing the organization also undertakes to represents officers, directors or employees of the organization on other matters, and (2) where the lawyer representing the organization also sits on the organization's Board of Directors.

Under AZ-ER 1.13(b), if a lawyer representing an organization knows that an officer, employee or other person associated with the organization is acting illegally or intends to do so, and the likely result is "substantial injury to the organization," the lawyer has an obligation to "proceed as is reasonably necessary in the best interest of the organization." This may include reporting the conduct involved to a higher authority within the organization. If the lawyer has also represented, or is currently representing, the officer, employee or other person in question on personal matters, discharge of the lawyer's obligations under AZ-ER 1.13(b) may conflict with the lawyer's obligations to the officer or employee involved and who is also the lawyer's client. Serving on an organization's Board of Directors, while simultaneously acting as counsel for that organization, also poses the potential for conflicts of interest. See the discussion of this issue in Section 1.7:340, infra.

In certain circumstances, AZ-ER 1.15 may impose upon a lawyer an obligation to a third party that, absent that provision, would conflict with the interests of the lawyer's client. The provisions of AZ-ERs 1.7 and 1.15 are implicated, and must be reconciled, in situations where the attorney is aware that a third party has an interest in, or claim to, funds which the attorney is holding for, or expects to receive on behalf of, a client. In Arizona Ethics Opinion No. 98-06, the Committee considered the issue of how lawyers should deal with claims from medical providers who seek compensation from the proceeds of personal injury settlements or recoveries obtained by the lawyer for clients. The Committee concluded that lawyers have an obligation to notify such providers of the receipt of funds when the lawyers have actual knowledge of a provider's matured legal or equitable claim to all or part of the proceeds. In an earlier Opinion, Arizona Ethics Opinion No. 97-02, the Committee had addressed the issue of a lawyer's obligations both to a client and to third parties when faced with a federal health insurance contract that had a right of recovery and/or subrogation against a personal injury settlement. The Committee reasoned that the policy's right of subrogation created an "interest" in the proceeds within the meaning of AZ-ER 1.15(b), so that the lawyer could not counsel the client to sign a release that might extinguish the insurer's claim unless the attorney intended to honor that claim. The Committee also held that the lawyer could not disburse the settlement proceeds to the client, without first notifying the health insurance plan and delivering to the insurer any portion of the proceeds to which it was entitled.

In Arizona Ethics Opinion No. 88-02, the Committee ruled that, when a health care provider requests an attorney to sign a medical lien against the proceeds of a client's personal injury claim, the attorney must first determine whether the imposition of the lien will impose upon the attorney any obligation to the provider. If so, the attorney may only sign the lien if the attorney reasonably believes that the representation of the personal injury claimant will not be adversely affected, and that client consents after consultation. In Arizona Ethics Opinion No. 03-05, the Committee on the Rules of Professional Conduct ("the Committee") concluded that an attorney for a plaintiff or claimant could not ethically enter into any settlement agreement that would require the attorney to indemnify the settling parties from any lien claims against the settlement proceeds. The principal basis for this conclusion was that AZ-ER 1.8 precludes attorneys from providing financial assistance to a client by paying or advancing medical expenses, and would similarly preclude the attorney from guaranteeing, or accepting ultimate liability for, the payment of such expenses. The Committee went on to note that, while AZ-ER 1.2 generally requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement that would require the attorney to hold settling parties harmless violates AZ-ER 1.8, and the attorney cannot agree to such a condition. If the client insists that the attorney do so, then the attorney would be required to withdraw.

AZ-ER 6.3 permits a lawyer in a private firm to serve as a director, officer or member of a legal services organization, even if that organization serves persons whose interests are adverse to a client of the lawyer. The lawyer, however, may not knowingly participate in a decision or action of the organization, if to do so would be incompatible with the lawyer's obligations to a client under AZ-ER 1.7, or where the decision could have a material adverse effect on the representation of a client of the organization whose interests are adverse to those of a client of the lawyer.

Finally, AZ-ER 6.4 permits a lawyer to serve as a director, officer or member of an organization involved in reform of the law or its administration, even if the reform sought may affect the interests of a client of the lawyer. If the lawyer knows, while serving in such a capacity, that the interests of a client may be materially benefitted by a decision of the organization in which the lawyer participates, the lawyer must disclose that fact, but need not reveal the identity of the client involved.

1.7:300   Conflict of Interest Among Current Clients (Concurrent Conflicts)

Among the various provisions in the Arizona Rules of Professional Conduct that address the subject of conflicts of interest, AZ-ERs 1.7 and 1.8 deal directly with conflicts with the interests of current clients. The subject matter covered by AZ-ER 1.9 is conflicts with the interests of former clients, and AZ-ERs 1.10 and 1.11 deal with the issue of whether an individual lawyer's conflict of interest will be imputed to other lawyers with whom that lawyer is associated. Of the two provisions that deal with conflicts with the interests of current clients, AZ-ER 1.7 states the general rules that govern that subject; AZ-ER 1.8 deals with certain specific conflict situations, or transactions with current clients, that are prohibited except under the circumstances specified in that Rule.

AZ-ER 1.7(a)(1) establishes the general rule that a lawyer may not accept an engagement by a client if the representation of that client will be directly adverse to the interests of another client. AZ-ER 1.7(a)(2) provides that a lawyer may not represent a client if the representation may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's interests. In both cases, the conflict may be cured if the lawyer reasonably believes that the engagement will not adversely affect the relationship with, and the representation of, the clients involved, and both clients consult after consultation, unless the conflict in question is one to which the client cannot properly consent. The conflict of interest rules are based on three basic considerations: (1) a concern that, where a conflict is present, the lawyer's representation of one or both clients will suffer, (2) the expectation of each client that the lawyer owes them a duty of loyalty, and (3) the concern that representation of conflicting interests will lead to the compromise of information that the lawyer has a duty to maintain in confidence, under Rule ER 1.6. See Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993); In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987); Maricopa County Public Defender's Office v. Superior Court, 187 Ariz. 162, 927 P.2d 822 (App. 1996).

1.7:310      Representing Parties with Conflicting Interests in Civil Litigation

As noted earlier, AZ-ER 1.7(a)(1) generally prohibits the acceptance of engagements to represent a client in a matter where that client's interests will be directly adverse to those of another, current client. In the litigation context, this prohibition quite obviously precludes a lawyer from simultaneously representing both sides to a single controversy. It may also preclude the representation of a client in a litigation matter whose interests are directly adverse in that matter to those of a client that the lawyer is currently representing in an unrelated matter. As the Comment to AZ-ER 1.7 explains:

Loyalty to a current client prohibits undertaking representation directly adverse to that client without that client's informed consent. Thus, absent consent, a lawyer may not act as advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated.

Comment, AZ-ER 1.7, š 6; see also In the Matter of the Estate of Fogelman, 197 Ariz. 252, 3 P.3d 1172 (App. 2000).

Thus, although the County Attorney is responsible for providing legal advice and representation to Justices of the Peace in the particular County involved, when the County Attorney files a special action on behalf of the County Sheriff, the County Attorney's Office cannot also represent the Justice of the Peace who is named as the respondent in that proceeding. Riley, Hogatt & Suagee, P.C. v. English, 177 Ariz. 10, 864 P.2d 1042 (Ariz. 1993). It is an impermissible conflict of interest to simultaneously represent both the husband and wife in a divorce or dissolution proceeding. Matter of Soelter, 175 Ariz. 139, 854 P.2d 773 (1993). In a situation involving independent sets of adoptive parents and only one available child, one set of prospective adoptive parents will be disappointed, and an attorney cannot simultaneously represent both sets of adoptive parents without compromising the representation of one of them. In re Petrie, 154 Ariz. 295, 742 P.2d 796 (1987). Similarly, the interests of the natural parents may be adverse to the interests of the prospective adoptive parents, and the same attorney cannot ordinarily represent both sets of parents. Id. It may be possible for the same attorney to represent multiple parties to an adoption, but only if it is obvious that the attorney can adequately represent all of them, and only after full disclosure to, and the consent of, all the parties involved. Id.

In Arizona Ethics Opinion No. 90-17, the State Bar's Committee on the Rules of Professional Conduct (hereinafter "the Committee") held that a lawyer in a firm that represents a workers' compensation carrier may ethically represent an injured worker whose employer is covered by that carrier, if the lawyer reasonably believes that (1) representation of the compensation carrier will not adversely affect the interests of the injured worker, (2) representation of the injured worker will not adversely affect the compensation carrier's interests, and (3) both clients consent to the dual representation after full disclosure. The Committee pointed out, however, that the concurrent representation of both a workers' compensation carrier and an injured worker who brings a civil action against a third-party wrongdoer will result in a conflict of interest in virtually every case where the firm represents the carrier in the underlying compensation case.

AZ-ER 1.7(a)(2) contains a general prohibition on representation of a client where that representation may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests. As the portion of the Comment to AZ-ER 1.7 which discusses this aspect of the Rule explains:

Even when there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer's ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer's other responsibilities or interests. . .The conflict in effect forecloses alternatives that would otherwise be available to the client. The mere possibility of subsequent harm does not itself preclude the representation. The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.

Comment, AZ-ER 1.7, š 8. The focus of AZ-ER 1.7(a)(2), thus, is on potential or indirect, rather than actual and direct, conflicts of interests. Issues concerning the application of this portion of the Rule arise most frequently, but not exclusively, where a lawyer undertakes to represent multiple clients involved in a single matter. Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987).

Where there is simultaneous representation of one or more co-parties in a litigation matter, the first step in the analysis required by AZ-ER 1.7(a)(2) is whether the attorney's representation of either client will be materially limited by the attorney's responsibilities to the other client(s). Matter of Shannon, 179 Ariz. 52, 876 P.2d 548 (1994). That will be the case where there is a substantial discrepancy between the testimony of the clients concerning a material issue, or where there are substantially different possibilities of settlement of the claims and liabilities of the clients involved. Id.; Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). Once it is determined that a conflict exists, the question then becomes whether the attorney reasonably believes that the conflict will not adversely affect the representation of any client and whether the clients consent to the joint representation after a full explanation of the implications, advantages and risks of the common representation. Id.

In Arizona Ethics Opinion No. 03-04, the Committee on the Rules of Professional Conduct ("the Committee") pointed out that simultaneous representation of parties in litigation whose interests only potentially conflict, such as co-plaintiffs or co-defendants, may present a situation where a lawyer cannot consider, recommend or carry out an appropriate course of action for one client because of the lawyer's responsibilities to the other client(s). While co-defendants share a common goal of defeating the plaintiff, they may also individually have an interest in deflecting any possible liability to another co-defendant. If there is such a potential conflict so that the lawyer's representation of either client, or both, may be materially and adversely affected, the lawyer can only proceed if the affected clients consent after consultation, and the lawyer first determines that the clients will not be adversely affected and that it is reasonable for the clients to consent to such an arrangement.

That Opinion specifically addresses the conflict issues presented where a lawyer involved in the representation of one client in a civil case governed by principles of comparative fault may have to identify another client as a potential nonparty at fault under Rule 26(b)(5), Ariz.R.Civ.P. A person or entity named as such a nonparty at fault does not thereby become a party to the litigation and is not subject to liability in that action, but the plaintiff or another party could seek to join that nonparty in the case, and the naming of the nonparty operates as an invitation for another party to do so. The Committee concluded that, if the statute of limitations has run on claims against the nonparty, then the naming of a client as such a nonparty at fault on behalf of another client would serve to reduce the liability of the latter client without causing a detriment to the client to be named. In that situation, accordingly, a conflict of interest is not presented, but the lawyer must carefully assess whether there is substantial risk of detriment to the interests of the client in the litigation because of the lawyer's relationship with the client to be named as a nonparty at fault. In any event, the informed consent of the client being represented in the litigation must be obtained.

Where the statute of limitations has not run on claims against the client to be named as a nonparty at fault, then it does create a conflict to name that other client as such a nonparty. Whether the conflict can be waived or consented to will depend upon the circumstances, such as the relative sophistication of the clients and the impact upon the lawyer's relationship with the clients involved.

For conflict of interest purposes, an attorney who works on a contract basis for more than one law firm will be considered an associate of each firm for which the attorney works, unless (1) there is a written agreement that limits the scope of the contract attorney's work to a particular client for a particular project, and the agreement specifies that the relationship will terminate at the end of the project or at a particular time or upon the occurrence of a particular vent, and (2) the contract attorney will not have access to information concerning other clients. Arizona Ethics Opinion No. 97-09. Similarly, an attorney who lists another firm or attorney as "Of Counsel" on the attorney's letterhead and other communications must take into account the possibility that conflict of interest issues might arise by reason of that relationship. Arizona Ethics Opinion No. 87-24. An attorney who has a contract to serve as a public defender in Superior Court may also serve as a Judge pro tempore for civil and domestic relations matters in that Court, provided there is a full disclosure to all parties in each case assigned to the attorney in that capacity and there are no persons involved in those cases who have an interest in matters being handled by the attorney under the public defender contract. Arizona Ethics Opinion No. 87-21. That attorney may not, however, serve in that Court as a Judge pro tempore in criminal or juvenile proceedings. Id.

Where a conflict arises after an attorney has accepted an engagement, and it cannot be "cured" by client consent, then AZ-ER 1.16 requires that the attorney withdraw. Where counsel avows to the trial court that counsel has a conflict of interest that necessitates withdrawal, the trial court should not ordinarily require counsel to disclose confidential information as a condition of permitting such withdrawal. Maricopa County Public Defender's Office v. Superior Court, 187 Ariz. 162, 927 P.2d 822 (App. 1996).

Although the Model Rules of Professional Conduct did not retain the prohibition on the appearance of impropriety contained in Canon 9 of the Code of Professional Responsibility, the Arizona Supreme Court has held that the "appearance of impropriety" standard survives as part of any analysis of a possible conflict of interest. Gomez v. Superior Court, 149 Ariz. 223, 717 P.2d 902 (1986); State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995); Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 742 P.2d 292 (App. 1987). An appearance of impropriety should be enough to cause an attorney to closely scrutinize whether to proceed with the engagement that gives rise to the conflict, but it is generally "too slender a reed" on which to rest an order requiring the attorney's disqualification, except in the rarest of cases. Sellers v. Superior Court In and For Maricopa County, 154 Ariz. 281, 289, 742 P.2d 292, 299 (App. 1987).

Finally, where a lawyer undertakes representation of multiple plaintiffs or claimants in a single matter, the lawyer may not make an aggregate settlement of all of the claims asserted unless each of the clients involved consents, after being advised of (1) the existence and nature of all claims involved, (2) the total amount of the settlement, and (3) the participation of each plaintiff or claimant in the aggregate settlement. AZ-ER 1.8(g).

1.7:315      Insured-Insurer Conflicts [see also 1.8:720]

Where an insurance carrier retains a lawyer to defend its insured pursuant to its obligation to provide a defense to claims asserted against the insured which are covered by a liability insurance policy issued by the carrier, difficult conflict of interest issues may, and frequently do, arise. (Where the carrier at the outset denies coverage for all claims asserted, ordinarily no conflict issues arise, because it is the insured who retains and pays counsel in that circumstance.) Even where the insurance carrier accepts coverage for all claims that are asserted against its insured, conflicts can arise where the carrier attempts to place limitations on the activities that the retained lawyer may undertake in the defense of the insured. Conflict of interest issues arise more frequently, and obviously, where the insurer accepts coverage for certain claims that have been made against the insured but denies coverage as to others, or where the carrier provides the insured with a defense subject to a reservation of its rights to subsequently deny coverage for some or all of the claims asserted. In either of those circumstances, the insured, whom the lawyer represents, has an interest in having any resultant liability that is imposed be with respect to one of the claims for which there is insurance coverage, while the insurance carrier, which has selected and is paying defense counsel, has an interest in having any resultant liability of the insured be based on one of the claims for which the carrier has denied, or can deny, coverage.

In Paradigm Insurance Co. v. Langerman Law Offices, P.A., 200 Ariz. 146, 24 P.3d 593 (2001), the Supreme Court noted that the potential conflict between insurer and insured exists in every case in which the insurer retains counsel to represent the insured, but the interests of insurer and insured also frequently coincide. If at the time of the engagement, the potential for future conflict is great, or an actual conflict subsequently arises, then this might restrict the ability of the lawyer to serve the interests of both. Regardless, the Court held, the lawyer's primary allegiance and obligation must be to the insured. Id. See also State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422, 86 Cal.Rptr.2d 20 (1999). In Arizona, it is also established that, where a liability insurer retains a lawyer to defend its insured, and there is an actual or potential divergence between the interests of the insurer and the insured, it is the insured to whom the lawyer owes a duty of loyalty. Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976); Arizona Ethics Opinion No. 94-03. In that setting, the attorney owes the insured undeviating and single allegiance, whether compensated by the insurer or the insured. Id. In the course of representing an insured, a lawyer must be careful not to reveal to the insurer information obtained during the defense of the insured-client which might lead to a denial of insurance coverage, without the client-insured's fully informed consent.

In Arizona Ethics Opinion No. 99-08, the Committee on the Rules of Professional Conduct ("the Committee") held that insurance defense lawyers could not participate in an audit review program conducted by an insurance company's outside auditor where the program requires (1) the disclosure of confidential information about the client/insured (without the client's informed consent), (2) restricts the lawyer's independent professional judgment by limiting the services the lawyer may perform, and (3) grants the auditor permission to review client files. The Committee stressed that, when an insurer engages a lawyer to defend an insured, the insured is the lawyer's client to whom the lawyer owes a duty of undeviating allegiance and loyalty. The lawyer is prohibited from revealing, without the client/insured's consent, information relating to the representation, and the disclosures which would occur during the course of an audit of the attorney's client files cannot be justified as being impliedly authorized to carry out the objectives of the representation. The Committee also cautioned insurance defense practitioners to be careful in submitting bills to carriers not to make unnecessary disclosures of information relating to the representation, and not to disclose at all information which could prove detrimental to the insured/client.

The potential for difficult conflict issues where counsel is retained by an insurance carrier is heightened in Arizona by the line of cases concerning options available to the insured where the carrier denies coverage or defends under a reservation of rights, that originated with the Supreme Court's decision in Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). That case initially arose out of a personal injury claim resulting from an automobile accident against both the driver and the owner of the vehicle, who had separate insurance coverage. The carriers involved retained separate counsel to represent both the driver and the owner. The carrier for the driver subsequently determined that there was no coverage for the claim under its policy and withdrew coverage. The attorneys whom the carrier had retained to defend the driver withdrew, and the driver, Sledge, was thereafter represented by personal counsel at Sledge's expense. Eventually, the driver entered into a settlement with the plaintiff pursuant to which Sledge agreed to assign to the plaintiff whatever claim Sledge had against the insurance companies involved, and the plaintiff agreed not to execute against the driver's personal assets for any judgment the plaintiff might obtain, but to look only to the assigned claim against the insurers to satisfy any such judgment. The Supreme Court essentially held that an arrangement of this nature was neither in bad faith nor collusive. There was no conflict of interest issue confronting the attorney who negotiated this settlement arrangement for the driver, however, because that attorney had been retained and paid from the outset by the driver, and not the insurance carriers involved.

The Supreme Court, however, subsequently extended the "Damron doctrine" to situations where the carrier had not denied coverage of the insured, but had rather advised the insured that it would provide the insured with a defense, while reserving its rights to subsequently deny that there was coverage for some or all of the claims asserted against the insured, thereby creating the possibility of thorny conflict of interest questions for carrier-appointed defense counsel. United Services Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). In Morris, the carrier elected to defend two of its insureds for claims arising out of a shooting incident, subject to a reservation of its right to determine that the incident fell within the "intentional acts" exclusion of its policy, and retained counsel to conduct the defense. During the course of discovery, that defense counsel came into possession of information indicating that the shooting was in fact intentional, and requested that the carrier retain separate counsel to represent its interests, which it apparently did. Counsel retained to represent the insured defendants then advised counsel retained by the carrier that he was negotiating a settlement with the plaintiff, and was warned that the carrier would consider any such settlement a violation of the policy's "cooperation clause," and thereby release the carrier of any obligation to indemnify. Notwithstanding this warning, counsel proceeded to negotiate and agree to a settlement pursuant to which the insured defendants assigned to the plaintiff their rights as against the insurance carrier and agreed to stipulate to the entry of a judgment, in the amount of the policy limits, against them. In return, the plaintiff agreed to seek to collect that judgment only from the insurance carrier, and not to execute on any personal assets of the defendants. The Supreme Court held that such a settlement did not violate the insureds' duty to cooperate with their insurer, and was not necessarily collusive.

The Morris Court itself noted that, where an insurance carrier defends under a "reservation of rights," defense counsel appointed to conduct the defense is faced with a conflict between the interests of the carrier and the insureds the attorney has been retained to defend. As the Comment to AZ-ER 1.7 makes clear, "when an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel's professional independence." That approach - the appointment of special counsel for the insured - has been followed in California, but not in Arizona.

Where the interests of the carrier and the insured conflict, then the insured is considered the client of the lawyer, and it is to the insured that the retained lawyer owes a duty of loyalty. Paradigm Insurance Company v. The Langerman Law Offices, P.A., 200 Ariz. 146, 24 P.3d 593 (2001); Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976); Arizona Ethics Opinion No. 94-03. Where defense counsel is appointed to defend subject to a reservation of the carrier's rights to subsequently deny coverage, the insured has a clear interest in entering into a settlement, if possible, similar to that sanctioned in the Morris decision, that protects the personal assets of the insured against a subsequent adverse judgment and denial of coverage. Defense counsel at least has an obligation to advise the insured-client that such a settlement might be possible, and to pursue that possibility if the insured instructs counsel to do so. On the other hand, having the insured enter into such a settlement is clearly adverse to the interests of the carrier involved, whose preference normally is that the matter be litigated to judgment. If that judgment is in favor of the insured, the carrier has simply incurred defense costs; if the judgment is against the insured, the carrier still has the option to deny coverage and litigate that issue with the insured.

It is frequently the case that defense counsel appointed in such situations have an ongoing business relationship with the carrier involved pursuant to which that counsel is regularly retained to defend the carrier's insureds. Where that is the case, there is an understandable reluctance on the part of that lawyer to advised the insured of the possible availability of what is called a "Damron-Morris" settlement, and then to negotiate it if instructed to do so, which is adverse to the interests of the carrier with whom the lawyer has an ongoing business relationship. There is no Arizona authority which specifically addresses how that conflict ought to be resolved. Many lawyers follow the approach taken by defense counsel in Morris, and advise the carrier that it ought to retain separate counsel to protect its interests; other lawyers simply advise the insured to retain separate counsel at the insured's expense to negotiate the terms of such a settlement. The former approach seems to be the one more consistent with the Rules of Professional Conduct.

1.7:320      Conflicts of Interest in Criminal Litigation

The Comment to AZ-ER 1.7 notes that conflicts of interest are not limited to civil cases, but can, and frequently do, arise in criminal cases. Indeed, the consequences of ignoring conflicts of interest in criminal matters is particularly grave, because it can adversely impact upon an accused's Sixth Amendment right to the effective assistance of counsel. The Comment to AZ-ER 1.7 specifically points out that "[T]he potential for conflict of interest in representing multiple defendants in a criminal case is so grave that ordinarily a lawyer should decline to represent more than one co-defendant."

In State v. Martinez-Serna, 166 Ariz. 423, 803 P.2d 416 (1990), the Court noted that a conflict exists whenever "a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer's other responsibilities or interests." 166 Ariz. at 425, 803 P.2d at 418. That is almost certain to occur where a lawyer undertakes representation of multiple defendants in the same criminal matter. State v. Padilla, 176 Ariz. 81, 859 P.2d 191 (App. 1993). The existence of a conflict of interest on the part of criminal defense counsel is not, however, dispositive on the question whether the defendant received ineffective assistance of counsel. State v. Jenkins, 148 Ariz. 463, 715 P.2d 716 (1986). To prevail on a claim of ineffective assistance of counsel, the defendant must show (1) that an actual conflict existed, and (2) that the conflict actually adversely affected the representation. State v. Padilla, supra.

The representation of multiple defendants is not the only situation giving rise to disqualifying conflicts of interest in criminal matters. In Arizona Ethics Opinion No. 92-07, the Committee ruled that a public defender cannot ethically represent one criminal defendant when one of the trial witnesses against that defendant will be an individual that the Public Defender's Office is representing on a crime nearly identical to the one with which the criminal defendant is charged, and the Office must withdraw from the representation of both. In Arizona Ethics Opinion No. 92-06, the Committee dealt with an inquiry from a public defender who had been appointed to represent one (A) of two defendants (A & B) who were charged with burglary. In that matter, B was represented by a private attorney who negotiated a plea bargain on behalf of B. Subsequently, the Public Defender's Office was appointed to represent B at a probation revocation hearing and on a new charge of burglary. The probation revocation petition had been withdrawn, however, and B failed to appear at the preliminary hearing on the burglary charge. The Committee ruled that, because the Public Defender's Office had never really commenced the representation of B due to these peculiar circumstances, it was not precluded from representing A at the upcoming burglary trial at which A intended to shift the blame to B. The Committee cautioned, however, that such a withdrawal would be necessary if, in the interim period, the Public Defender's Office actually commenced representation of B and/or secured from B information relevant to the charge against A that was protected by AZ-ER 1.6.

In Okeani v. Superior Court In and For Maricopa County, 178 Ariz. 180, 871 P.2d 727 (App. 1993), the Court found that the Public Defender's Office's representation of a criminal defendant was "directly adverse" to its simultaneous representation of the alleged victim on an unrelated matter, because one of its duties might include attempting to impeach the credibility of the victim as a witness. The Court went on to note that the conflict could not be alleviated by the fact that the defendant and the victim would be represented by different lawyers in the Office because, under AZ-ER 1.10(a), while lawyers are associated in a firm, none of them can knowingly represent a client when any one of them practicing alone would be prohibited from doing so by AZ-ER 1.7. By contrast, in State ex rel. Romley v. Superior Court, 181 Ariz. 378, 891 P.2d 246 (App. 1995), the Court ruled that, absent extraordinary circumstances, the prosecutor in a criminal matter does not have a conflict of interest that requires withdrawal or disqualification when the prosecutor's office is simultaneously prosecuting criminal charges against the victim in a separate and unrelated criminal matter. The Court's rationale was that a prosecutor does not "represent" the victim of a crime as a client in a way that would implicate the conflict of interest provisions of the Rules of Professional Conduct.

In Arizona Ethics Opinion No. 93-07, the Committee ruled that a public defender elected to serve on a City Council ordinarily may not represent defendants in criminal cases where police officers employed by that City had arrested the defendant(s) or were to testify at trial against them. In Arizona Ethics Opinion No. 87-10, the Committee ruled that an attorney defending a client on a DWI charge, who had previously represented the same client on a prior DWI charge, must seek to withdraw if subpoenaed to testify about the client's prior conviction.

1.7:330      Multiple Representation in Non-Litigated Matters

Although the majority of Arizona authorities that discuss conflict of interest issues concern situations where a lawyer is representing clients whose interests are actually or potentially adverse in a litigation setting, the conflict of interest rules of the Arizona Rules of Professional Conduct, by their very terms, apply to transactional matters as well. As the Comment to AZ-ER 1.7 notes:

Conflicts of interest under paragraphs (a)(1) and (a)(2) arise in contexts other than litigation . . . Relevant factors in determining whether there is significant potential for material limitation include the duration and intimacy of the lawyer's relationship with the client or clients involved, the functions being performed by the lawyer, the likelihood that disagreements will arise and the likely prejudice to the client from the conflict. . .

For example, conflict questions may arise in estate planning and estate administration. A lawyer may be called upon to prepare wills for several family members, such as husband and wife, and, depending upon the circumstances, a conflict of interest may be present, as when one spouse owns significantly more property than the other or has children by a prior marriage. In estate administration the identity of the client may be unclear under the law of a particular jurisdiction. Under one view, the client is the fiduciary; under another view, the client is the estate or trust, including its beneficiaries. In order to comply with conflict of interest rules, the lawyer should make clear the lawyer's relationship to the parties involved.

Whether a conflict is consentable depends on the circumstances. For example, a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference of interest among them. Thus, a lawyer may seek to establish or adjust a relationship between clients on an amicable and mutually advantageous basis; for example, in helping to organize a business in which two or more clients are entrepreneurs, working out the financial reorganization of an enterprise in which two or more clients have an interest or arranging a property distribution in settlement of an estate. The lawyer seeks to resolve potentially adverse interests by developing the parties' mutual interests. Otherwise, each party might have to obtain separate representation, with the possibility of incurring additional cost, complication or even litigation. Given these and other relevant factors, the clients may prefer that the lawyer act for all of them.

Comment, AZ-ER 1.7, šš 25, 26, 27.

Thus, the simultaneous representation of both buyers and sellers in real estate or similar transactions clearly poses the potential for conflict of interest problems. Similarly, multiple representation of partners or joint venturers in creating contracts or other business transactions may raise conflict of interest issues. See In re Pappas, 159 Ariz. 516, 768 P.2d 1161 (1988); In re Ireland, 146 Ariz. 340, 706 P.2d 352 (1985).

1.7:340      Conflicts of Interest in Representing Organizations

AZ-ER 1.13(a) makes clear that, when a lawyer undertakes representation of an organization (which may include both corporations and unincorporated entities), the client is "the organization acting through its duly authorized constituents." Conflict of interest issues arising out of the representation of an organization arise most frequently in one of two situations: (1) where the lawyer representing the organization also undertakes to represents officers, directors or employees of the organization on other matters, and (2) where the lawyer representing the organization also sits on the organization's Board of Directors.

Under AZ-ER 1.13(b), if a lawyer representing an organization knows that an officer, employee or other person associated with the organization is acting illegally or intends to do so, and the likely result is "substantial injury to the organization," the lawyer has an obligation to "proceed as is reasonably necessary in the best interest of the organization." This may include reporting the conduct involved to a higher authority within the organization. If the lawyer has also represented, or is currently representing, the officer, employee or other person in question on personal matters, discharge of the lawyer's obligations under AZ-ER 1.13(b) may conflict with the lawyer's obligations to the officer or employee involved and who is also the lawyer's client.

Serving on an organization's Board of Directors, while simultaneously acting as counsel for that organization, also poses the potential for conflicts of interest. As the Comment to AZ-ER 1.7 notes:

A lawyer for a corporation or other organization who is also a member of its board of directors should determine whether the responsibilities of the two roles may conflict. The lawyer may be called upon to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer's resignation from the board and the possibility of the corporation's obtaining legal advice from another lawyer in such situations. If there is material risk that the dual role will compromise the lawyer's independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation's lawyer when conflicts of interest arise.

Comment, AZ-ER 1.7, š 34; see also ABA Formal Ethics Opinion No. 98-410.

1.7:400   Conflict of Interest Between Current Client and Third-Party Payor

Where a third party is paying the lawyer's fees for representing a client, the potential for conflict arises if and when the third party attempts to control or dictate the actions that the lawyer takes on behalf of the client involved. As the Comment to AZ-ER 1.7 explains:

A lawyer may be paid from a source other than the client, including a co-client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer's duty of loyalty or independent judgment to the client. See ER 1.8(f). If acceptance of the payment from any other source presents a significant risk that the lawyer's representation of the client will be materially limited by the lawyer's own interest in accommodating the person paying the lawyer's fee or by the lawyer's responsibilities to a payer who is also a co-client, then the lawyer must comply with the requirements of paragraph (b) before accepting the representation, including determining whether the conflict is consentable and, if so, that the client has adequate information about the material risks of the representation.

Comment, AZ-ER 1.7, š 13.

In fact, AZ-ER 1.8(f), cited in the Comment to AZ-ER 1.7, addresses this situation specifically. That Rule provides that a lawyer must not accept compensation for representing a client from someone other than the client unless: " (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the lawyer-client relationship; and (3) information relating to representation of a client is protected as required by ER 1.6."

Thus, in Arizona Ethics Opinion No. 90-18, the Committee held that a County Attorney may not enter into a contract with the Department of Economic Security ("DES") to provide legal services in child support or paternity matters if the clients will be the individuals involved rather than the DES, and the provisions in the proposed contract direct the County Attorney to take certain actions on the individuals' behalf that may not be in their best interests. Similarly, in Arizona Ethics Opinion No. 87-13, the Committee held that the acting director of a public defender agency may not follow the directives of the manager of the governing body which funds the agency, if doing so would violate any of the Rules of Professional Conduct.

Similarly, in Arizona Ethics Opinion No. 2001-06, the Committee held that a lawyer may not enter into a criminal defense contract to provide legal services paid by a third party if the contract might induce the lawyer to curtail necessary services or to perform them in a way contrary to the client's interests because of insufficient funding and/or the need to secure authorization from non-lawyer third parties.

1.7:410      Insured-Insurer Conflicts [see 1.7:315 and 1.8:720]

Where an insurance carrier retains a lawyer to defend its insured pursuant to its obligation to provide a defense to claims asserted against the insured which are covered by a liability insurance policy issued by the carrier, difficult conflict of interest issues may, and frequently do, arise. (Where the carrier at the outset denies coverage for all claims asserted, ordinarily no conflict issues arise, because it is the insured who retains and pays counsel in that circumstance.) Even where the insurance carrier accepts coverage for all claims that are asserted against its insured, conflicts can arise where the carrier attempts to place limitations on the activities that the retained lawyer may undertake in the defense of the insured. Conflict of interest issues arise more frequently, and obviously, where the insurer accepts coverage for certain claims that have been made against the insured but denies coverage as to others, or where the carrier provides the insured with a defense subject to a reservation of its rights to subsequently deny coverage for some or all of the claims asserted. In either of those circumstances, the insured, whom the lawyer represents, has an interest in having any resultant liability that is imposed be with respect to one of the claims for which there is insurance coverage, while the insurance carrier, which has selected and is paying defense counsel, has an interest in having any resultant liability of the insured be based on one of the claims for which the carrier has denied, or can deny, coverage.

In Paradigm Insurance Co. v. Langerman Law Offices, P.A., 200 Ariz. 146, 24 P.3d 593 (2001), the Supreme Court noted that the potential conflict between insurer and insured exists in every case in which the insurer retains counsel to represent the insured, but the interests of insurer and insured also frequently coincide. If at the time of the engagement, the potential for future conflict is great, or an actual conflict subsequently arises, then this might restrict the ability of the lawyer to serve the interests of both. Regardless, the Court held, the lawyer's primary allegiance and obligation must be to the insured. Id. See also State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422, 86 Cal.Rptr.2d 20 (1999). In Arizona, it is also established that, where a liability insurer retains a lawyer to defend its insured, and there is an actual or potential divergence between the interests of the insurer and the insured, it is the insured to whom the lawyer owes a duty of loyalty. Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976); Arizona Ethics Opinion No. 94-03. In that setting, the attorney owes the insured undeviating and single allegiance, whether compensated by the insurer or the insured. Id. In the course of representing an insured, a lawyer must be careful not to reveal to the insurer information obtained during the defense of the insured-client which might lead to a denial of insurance coverage, without the client-insured's fully informed consent.

In Arizona Ethics Opinion No. 99-08, the Committee held that insurance defense lawyers could not participate in an audit review program conducted by an insurance company's outside auditor where the program requires (1) the disclosure of confidential information about the client/insured (without the client's informed consent), (2) restricts the lawyer's independent professional judgment by limiting the services the lawyer may perform, and (3) grants the auditor permission to review client files. The Committee stressed that, when an insurer engages a lawyer to defend an insured, the insured is the lawyer's client to whom the lawyer owes a duty of undeviating allegiance and loyalty. The lawyer is prohibited from revealing, without the client/insured's consent, information relating to the representation, and the disclosures which would occur during the course of an audit of the attorney's client files cannot be justified as being impliedly authorized to carry out the objectives of the representation. The Committee also cautioned insurance defense practitioners to be careful in submitting bills to carriers not to make unnecessary disclosures of information relating to the representation, and not to disclose at all information which could prove detrimental to the insured/client.

The potential for difficult conflict issues where counsel is retained by an insurance carrier is heightened in Arizona by the line of cases, concerning options available to the insured where the carrier denies coverage or defends under a reservation of rights, that originated with the Supreme Court's decision in Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). That case originated as a personal injury claim arising out of an automobile accident against both the driver and the owner of the vehicle, who had separate insurance coverage. The carriers involved retained separate counsel to represent both the driver and the owner. The carrier for the driver subsequently determined that there was no coverage for the claim under its policy and withdrew coverage. The attorneys whom the carrier had retained to defend the driver withdrew, and the driver was thereafter represented by personal counsel at the driver's expense. Eventually, the driver entered into a settlement with the plaintiff pursuant to which the driver agreed to assign to the plaintiff whatever claim the driver had against the insurance companies involved, and the plaintiff agreed not to execute against the driver's personal assets for any judgment the plaintiff might obtain, but to look only to the assigned claim against the insurers to satisfy any such judgment. The Supreme Court essentially held that an arrangement of this nature was neither in bad faith nor collusive. There was no conflict of interest issue confronting the attorney who negotiated this settlement arrangement for the driver, however, because that attorney had been retained and paid from the outset by the driver, and not the insurance carriers involved.

The Supreme Court, however, subsequently extended the "Damron doctrine" to situations where the carrier had not denied coverage of the insured, but had rather advised the insured that it would provide the insured with a defense, while reserving its rights to subsequently deny that there was coverage for some or all of the claims asserted against the insured, thereby creating the possibility of thorny conflict of interest questions for carrier-appointed defense counsel. United Services Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). In Morris, the carrier elected to defend two of its insureds for claims arising out of a shooting incident, subject to a reservation of its right to determine that the incident fell within the "intentional acts" exclusion of its policy, and retained counsel to conduct the defense. During the course of discovery, that defense counsel came into possession of information indicating that the shooting was in fact intentional, and requested that the carrier retain separate counsel to represent its interests, which it apparently did. Counsel retained to represent the insured defendants then advised counsel retained by the carrier that he was negotiating a settlement with the plaintiff, and was warned that the carrier would consider any such settlement a violation of the policy's "cooperation clause," and thereby release the carrier of any obligation to indemnify. Notwithstanding this warning, counsel proceeded to negotiate and agree to a settlement pursuant to which the insured defendants assigned to the plaintiff their rights as against the insurance carrier and agreed to stipulate to the entry of a judgment, in the amount of the policy limits, against them. In return, the plaintiff agreed to seek to collect that judgment only from the insurance carrier, and not to execute on any personal assets of the defendants. The Supreme Court held that such a settlement did not violate the insureds' duty to cooperate with their insurer, and was not necessarily collusive.

The Morris Court itself noted that, where an insurance carrier defends under a "reservation of rights," defense counsel appointed to conduct the defense is faced with a conflict between the interests of the carrier and the insureds the attorney has been retained to defend. As the Comment to AZ-ER 1.7 makes clear, "when an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel's professional independence." That approach - the appointment of special counsel for the insured - has been followed in California, but not in Arizona.

Where there is an actual or potential divergence between the interests of the carrier and its insured, then the insured is considered the client of the lawyer, and it is to the insured that the retained lawyer owes a duty of loyalty. Paradigm Insurance Company v. The Langerman Law Offices, P.A., 200 Ariz. 146, 24 P.3d 593 (2001); Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976); Arizona Ethics Opinion No. 94-03. Where defense counsel is appointed to defend subject to a reservation of the carrier's rights to subsequently deny coverage, the insured has a clear interest in entering into a settlement, if possible, similar to that sanctioned in the Morris decision, that protects the personal assets of the insured against a subsequent adverse judgment and denial of coverage. Defense counsel at least has an obligation to advise the insured-client that such a settlement might be possible, and to pursue that possibility if the insured instructs counsel to do so. On the other hand, the insured entering into such a settlement is clearly adverse to the interests of the carrier involved, whose preference normally is that the matter be litigated to judgment. If that judgment is in favor of the insured, the carrier has simply incurred defense costs; if the judgment is against the insured, the carrier still has the option to deny coverage and litigate that issue with the insured.

It is frequently the case that defense counsel appointed in such situations have an ongoing business relationship with the carrier involved pursuant to which that counsel is regularly retained to defend the carrier's insureds. Where that is the case, there is an understandable reluctance on the part of that lawyer to advised the insured of the possible availability of what is called a "Damron-Morris" settlement, and then to negotiate it if instructed to do so, which is adverse to the interests of the carrier with whom the lawyer has an ongoing business relationship. There is no Arizona authority which specifically addresses how that conflict ought to be resolved. Many lawyers follow the approach taken by defense counsel in Morris, and advise the carrier that it ought to retain separate counsel to protect its interests; other lawyers simply advise the insured to retain separate counsel at the insured's expense to negotiate the terms of such a settlement. The former approach seems to be the one more consistent with the Rules of Professional Conduct.

1.7:420      Lawyer with Fiduciary Obligations to Third Person [see 1.13:520]

Situations in which an attorney may have fiduciary obligations to third parties that conflict with the interests of the attorney's client arise most frequently in the estate administration area. As the Comment to AZ-ER 1.7 explains:

For example, conflict questions may also arise in estate planning and estate administration. A lawyer may be called upon to prepare wills for several family members, such as husband and wife, and, depending upon the circumstances, a conflict of interest may be present, as when one spouse owns significantly more property than the other or has children by a prior marriage. In estate administration the identity of the client may be unclear under the law of a particular jurisdiction. Under one view, the client is the fiduciary; under another view, the client is the estate or trust, including its beneficiaries. In order to comply with conflict of interest rules, the lawyer should make clear the relationship to the parties involved.

Comment, AZ-ER 1.7, š 26. In Matter of Estate of Shano, 177 Ariz. 550, 869 P.2d 1203 (App. 1993), the Court approved the disqualification of an attorney who was simultaneously acting as co-counsel for the appointed special administrator of an estate, and the proponent of and beneficiary under a holographic will of the decedent which was being contested in the proceedings involved. The Court noted that the attorney for a special administrator of an estate, or a personal representative, has a derivative fiduciary duty to the successors to the estate, including the surviving spouse. Id. The Court concluded that the attorney's simultaneous representation of a personal representative and of the beneficiary under a separate, and contested, will violated that derivative fiduciary duty, and was a conflict of interest that impaired the attorney's ability to represent the beneficiary client, because the latter representation would be materially limited by the attorney's fiduciary responsibilities to the other prospective beneficiaries.

The Court of Appeals recently had the opportunity to clarify the apparent breadth of the holding in Shano in its decision in In the Matter of the Estate of Fogelman, 197 Ariz. 252, 3 P.3d 1172 (App. 2000). In Fogelman, the Court reiterated that the attorney representing the personal representative or administrator of an estate owes a "derivative fiduciary duty" of fairness and impartiality to beneficiaries and successors, but explained that such duty was one imposed by Arizona's Probate Code, and not the Arizona Rules of Professional Conduct. The Court specifically held that successors and beneficiaries of an estate are not clients of the lawyer representing the personal representative. On the other hand, the "derivative fiduciary duty" imposed by the Probate Code on that lawyer may represent a "material limitation" on the lawyer's ability to discharge obligations to clients that the lawyer represents on unrelated matters, but who are also involved in the probate proceedings.

A somewhat related situation is where the attorney is aware that a third party has an interest in, or claim to, funds which the attorney is holding for, or expects to receive on behalf of, a client. In Arizona Ethics Opinion No. 98-06, the Committee considered the issue of how lawyers should deal with claims from medical providers who seek compensation from the proceeds of personal injury settlements or recoveries obtained by the lawyer for clients. The Committee concluded that lawyers have an obligation to notify such providers of the receipt of funds when the lawyers have actual knowledge of a provider's matured legal or equitable claim to all or part of the proceeds. In an earlier Opinion, Arizona Ethics Opinion No. 97-02, the Committee had addressed the issue of a lawyer's obligations both to a client and to third parties when faced with a federal health insurance contract that had a right of recovery and/or subrogation against a personal injury settlement. The Committee reasoned that the policy's right of subrogation created an "interest" in the proceeds within the meaning of AZ-ER 1.15(b), so that the lawyer could not counsel the client to sign a release that might extinguish the insurer's claim unless the attorney intended to honor that claim. The Committee also held that the lawyer could not disburse the settlement proceeds to the client, without first notifying the health insurance plan and delivering to the insurer any portion of the proceeds to which it was entitled. In Arizona Ethics Opinion No. 88-02, the Committee ruled that, when a health care provider requests an attorney to sign a medical lien against the proceeds of a client's personal injury claim, the attorney must first determine whether the imposition of the lien will impose upon the attorney any obligation to the provider. If so, the attorney may only sign the lien if the attorney reasonably believes that the representation of the personal injury claimant will not be adversely affected, and that client consents after consultation.

In Arizona Ethics Opinion No. 93-09, the Committee addressed the issue whether it represented a conflict of interest for a lawyer who was also a legislator, or members of that lawyer-legislator's firm, to engage in lobbying activities on behalf of clients before the legislature. The Committee held that there was no per se prohibition on a lawyer-legislator also engaging in lobbying activities on behalf of clients, but noted that the lawyer-legislator's duties to the public or to constituents might in certain circumstances represent a responsibility that might materially limit the lawyer's ability to lobby for a client. If the lawyer-lobbyist concludes that representation of a client for lobbying purposes will be adversely affected by the fact that the lawyer is also a legislator, then neither the lawyer involved nor any member of the firm with which that lawyer is associated may accept that engagement.

1.7:500   Conflict of Interest Between Current Client and Lawyer's Interest [see also 1.8:200]

Under AZ-ER 1.7(a)(2), a potential conflict of interest is also presented if representation of a client might be materially limited by the lawyer's own interests. Thus, it was found to be an impermissible conflict of interest for an attorney to be an investor in an enterprise while that attorney's firm represented other investors with respect to the same enterprise. Matter of Murphy, 188 Ariz. 375, 936 P.2d 1269 (1997). In Matter of Piatt, 191 Ariz. 24, 951 P.2d 889 (1997), the Court held that it was a violation of Arizona ER 1.7(b), and grounds for the imposition of discipline, for a lawyer to make sexual advances and/or propositions to a client. See also In re Walker, 200 Ariz. 155, 24 P.3d 602 (2001).

The Committee on the Rules of Professional Conduct (δthe Committee") recently ruled that a lawyer cannot ethically enter into an arrangement pursuant to which the lawyer was to receive a referral fee for referring clients of the lawyer to an investment adviser. Arizona Ethics Opinion No. 98-09. In an earlier opinion, the Committee had held that, while it was permissible for a lawyer who was also an accountant to engage in both professions simultaneously, the businesses had to be kept separate and clients that were referred to the lawyer's accounting business had to be advised of the lawyer's interest in it. Arizona Ethics Opinion No. 97-08. Consistently with these Opinions, the Committee has held that it is impermissible, under Arizona ER 1.7(b), for a lawyer to refer clients to a chiropractic clinic in which the lawyer has an ownership interest, and for a lawyer to accept referral fees from medical providers for referring clients to them. Arizona Ethics Opinions Nos. 96-05, 95-10.

In Arizona Ethics Opinion No. 90-15, the Committee held that an attorney who represents a client in a personal injury action proceeding on both strict liability and negligence theories, and who failed to file the strict liability claim within the applicable statute of limitations, may not continue with the representation of the client unless the client consults after consultation. In Arizona Ethics Opinion No. 87-09, the Committee ruled that an attorney who has represented a trustee in the course of preparing for a trustee's sale under a Deed of Trust may not bid on the property that is the subject of the sale, unless all the requirements of both AZ-ER 1.7(b) and AZ-ER 1.8(a) have been satisfied.

In Arizona Ethics Opinion No. 2001-12, the Committee addressed the issue of what ethical guidelines should be applied in a situation where an Assistant Public Defender was involved in a romantic relationship with a law enforcement officer who was frequently an arresting or investigating officer in cases involving clients of the Public Defender's Office. The Committee held that, in cases where the officer was a testifying witness, it would probably constitute a non-waivable conflict of interest for the Assistant Public Defender to represent the defendant, and disclosure of the relationship was mandatory. In cases where the officer was a testifying witness, but a different Public Defender was conducting the defense, whether the relationship would represent a material limitation on the ability to conduct the client's defense, and whether the relationship need be disclosed to the client would have to be evaluated on a case-by-case basis.

A similar question was addressed by the Committee in Arizona Ethics Opinion No. 2001-10, which involved a member of a prosecutor's office and a member of the public defender's office who were cohabiting and/or married. Again, the Committee concluded that, where the individuals involved in the relationship were working opposite each other on the same case, that would be permissible only if both attorneys believed that their respective representations would not be materially limited and both obtained informed consent from the clients involved. Where the individuals involved in the relationship were not opposite each other on the same case, whether the relationship should be disclosed, and whether it would have a material adverse effect on another lawyer's ability to represent a client, would have to be evaluated on a case-by-case basis.

The Committee has also held that an attorney may not act as a special city prosecutor and simultaneously handle criminal cases in the same city's court. Arizona Ethics Opinion No. 87-20. In that same Opinion, however, the Committee held that an attorney who represents a judge in a civil matter may appear as criminal defense counsel before that same judge, provided the representation of the judge is disclosed to opposing counsel, and the client's permission is obtained before proceeding.

In Arizona Ethics Opinion No. 88-03, the Committee held that, although there is a potential conflict of interest presented when an attorney representing a criminal defendant simultaneously seeks the office of County Attorney, the potential conflict does not automatically disqualify the attorney from the representation of the criminal defendant. The Committee concluded that the representation may be permitted if the attorney has reason to believe that the defendant's case will not be adversely affected and the defendant client consents after consultation.