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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.

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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.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

1.13   Rule 1.13 Organization as Client

1.13:100   Comparative Analysis of Arizona Rule

1.13:101      Model Rule Comparison

The 2003 amendments to this Rule made only minor, clarifying amendments to the Rule itself, but did add language to paragraph 6 of the accompanying Comment to make clear that a government lawyer may have the authority to represent the "public interest" in circumstances where a private lawyer would not be authorized to do so.

As adopted by the Arizona Supreme Court, AZ-ER 1.13 and its accompanying Comment were substantially identical to what was then MR 1.13 and its accompanying Comment. In fact, the only difference was that paragraph 6 of the Comment to AZ-ER 1.13 contained the following sentence not contained in the corresponding paragraph of the Comment to MR 1.13: "Government lawyers also may have authority to represent the δpublic interest' in circumstances where a private lawyer would not be authorized to do so."

That similarity evaporated as a consequence of the ABA House of Delegates approving, in August 2003, significant amendments to MR 1.13. Those amendments changed the structure of the Rule. Far more significantly, they added provisions that require a lawyer, in most instances, to refer a matter to higher authority when the lawyer knows that a constituent of the organization is taking action, or intends to take action, that is a violation of law or duty to the organization and is likely to result in substantial injury to the organization. In addition, if the highest authority in the organization fails to address the issue in a timely and appropriate manner, the lawyer may reveal information relating to the representation, whether or not MR 1.6 permits such disclosure, to the extent necessary to prevent substantial injury to the organization.

1.13:102      Model Code Comparison

There was no direct counterpart to AZ-ER 1.13 in the Disciplinary Rules of the former Code of Professional Responsibility. DR 5-107(B) merely provided that "a lawyer shall not permit a person who . . . employs . . . him to render legal services for another to direct or regulate his professional judgment in rendering such legal services."

The Ethical Considerations in the former Code, however, did address the issue of representation of an organization. Thus, EC 5-18 provided that: "[A] lawyer employed or retained by a corporation or similar entity owes his allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity. In advising the entity, a lawyer should keep paramount its interests and his professional judgment should not be influenced by the personal desires of any person or organization. Occasionally, a lawyer for an entity is requested by a stockholder, director, officer, employee, representative, or other person connected with the entity to represent him in an individual capacity; in such case the lawyer may serve the individual only if the lawyer is convinced that differing interests are not presented." In addition, EC 5-24 provided that: "[A]lthough a lawyer may be employed by a business corporation with non-lawyers serving as directors or officers, and they necessarily have the right to make decisions of business policy, a lawyer must decline to accept direction of his professional judgment from any layman."

1.13:200   Entity as Client

AZ-ER 1.13(a) states unequivocally that, when a lawyer undertakes representation of "an organization," the lawyer's client is "the organization acting through its duly authorized constituents." The Comment to the Rule makes it clear that, where a lawyer is engaged in representing an organizational client, it is the organization to which the lawyer owes the duties of due care, competence, diligence and confidentiality, and not the individual constituents through which the organization must necessarily act. In Arizona Ethics Opinion No. 84-04, for example, which concerned the provisions of the former Code of Professional Responsibility, for example, the Committee on the Rules of Professional Conduct ("the Committee") ruled that it was not proper for an attorney to supervise lay representatives of a corporate client which represented other employers at hearings before the Unemployment Compensation Division of the Arizona Department of Economic Security, if the attorney had no direct contact with the employers being represented. Similarly, in Arizona Ethics Opinion No. 81-23, the Committee determined that it was not proper for an attorney to assist a collection agency if the attorney retained tactical control over contested collection actions, but allowed direct contact between the collection agency and the defendant debtor for purposes of settlement.

The identity of the lawyer's client may be difficult to ascertain in circumstances where the lawyer is engaged by individuals to form a corporation or other legal entity in which the individuals will be constituents once it is formed. The Committee on the Rules of Professional Conduct ("the Committee") addressed this situation in its Arizona Ethics Opinion No. 02-06, and held that the lawyer in such a situation may properly structure the engagement in one of two alternative ways.

The lawyer can structure the engagement as representation of the yet-to-be-formed entity, provided the incorporators understand and agree that the future entity is the client and that, once the entity is formed, they will have to ratify this action on behalf of the entity. The Committee stressed that, if the engagement is structured in this fashion, this should be made clear at the outset, in the engagement letter, and periodically thereafter. The forming constituents must also be advised that they are not the lawyer's clients, and of the consequences of that for the confidentiality of information they provide to the lawyer.

The alternative way to structure the engagement is to have joint representation of the incorporators in forming the entity. If that alternative is selected, the joint clients must be advised of the consequences of such joint representation for the confidentiality of information, and also of the possible obligation of the lawyer to withdraw if a conflict between the joint clients arises. Finally, once the entity is formed, the clients must determine whether the lawyer will represent just the entity, just the constituents, or both, provided there is no conflict of interest presented by any of those alternatives.

1.13:210      Lawyer with Fiduciary Obligation to Third Person

The issue of whether and, if so, under what circumstances a lawyer may owe a fiduciary obligation to a third paty, i.e., a person or entity that is not the lawyer's client, has generally been discussed in the context of the circumstances under which a third paty, not the attorney's client, may sue an attorney for malpractice. Arizona's position on this issue has had an involved history. The issue was first addressed by Division I of the Arizona Court of Appeals in Chalpin v. Brennan, 114 Ariz. 124, 559 P.2d 680 (1976), which involved a malpractice claim brought against Brennan, whose client was Mobile Gardens Incorporated, by a purchaser of stock in that corporation. The plaintiff purchaser, Chalpin, claimed that the attorney had prepared, on behalf of the corporation, certain documents which contained material misrepresentations of fact upon which Chalpin had relied in making the stock purchases. Although the Court distinguished several California cases which had imposed a requirement or privity between the malpractice plaintiff and the defendant attorney, the Court went on to hold that such a limitation on malpractice claims was appropriate under the circumstances in the case before it:

To impose upon counsel the responsibility of fully representing his client's interests in a contractual situation and at the same time making him liable to a third paty to the transaction for fraud and misrepresentations under a malpractice theory we believe to be unreasonable and unwise. A holding to the contrary could conceivably encourage a party to contractual negotiations to forego personal legal representation and then sue counsel representing the other contracting paty for legal malpractice if the resulting contract later proves disfavorable in some respect.

We believe the soundest rule to be applied to the facts of this case is set forth in a line of cases which refuses to grant a cause of action for malpractice to an individual who is not a client or in privity with the attorney.

Id., 114 Ariz. at 126, 559 P.2d at 682 (citations omitted). See also Wetherill v. Basham, 197 Ariz. 198, 3 P.3d 1118 (App. 2000). Very shortly thereafter, Division 2 of the Court of Appeals reached what seemed to be the precisely opposite result, in Fickett v. Superior Court of Pima County, 27 Ariz.App. 793, 558 P.2d 988 (1976).

Fickett involved an action filed by the prsent conservator of an incompetent's estate against the former guardian and that guardian's attorneys, claiming that Fickett, as the attorney for the former guardian, had been negligent in failing to discover that the guardian had embarked upon a scheme to liquidate the guardianship estate by misappropriation and conversion of funds to his own use, and by making improper investments. The Pima County Superior Court denied summary judgment in favor of Fickett, rejecting the argument that absent a showing of fraud or collusion, the attorney owed no duty to the ward and a cause of action for malpractice could not be maintained. The Court of Appeals affirmed that determination, holding:

The general rule for many years has been that an attorney could not be liable to one other than his client in an action arising out of his professional duties, in the absence of fraud or collusion . . . In denying liability of the attorney to one not in privity of contract for the consequences of professional negligence, the courts have relied principally on two arguments: (1) that to allow such liability would deprive the parties to the contract of control of their own agreement; and (2) that a duty to the general public would impose a huge potential burden of liability on the contracting parties.

* * * * * *

We cannot agree with petitioners that they owed no duty to the ward and that her conservator could not maintain an action because of lack of privity of contract. We are of the opinion that the better view is that the determination of whether, in a specific case, the attorney will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injuries suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.

Id., 27 Ariz. App. at 794-95, 558 P.2d at 989-90. The Court, rather than abolishing a privity requirement entirely, however, allowed the action by the successor conservator to proceed on the basis that when an attorney undertakes to represent the guardian of an incompetent, that attorney assumes a relationship not only with the guardian but also with the ward. That rationale is consistent with a later holding that an attorney for the Special Administrator of an estate has a "derivative fiduciary duty" to the successors of the estate. Matter of Estate of Shano, 177 Ariz. 550, 869 P.2d 1203 (App. 1993). The so-called "Fickett test" was subsequently applied, however, to deny standing to a workmen's compensation carrier to pursue a malpractice claim against the attorney for parties to whom it was paying benefits for his failure to file an action against a potentially liable third party before the expiration of the statute of limitations. Travelers Insurance Company v. Breese, 138 Ariz. 508, 675 P.2d 1327 (App. 1983). The Court's rationale was that the carrier, Travelers, was not intended to be the prime beneficiary of the attorney-client relationship between the attorney and the compensation claimants, and it was not foreseeable that the attorney's failure to file the third-party action on time would prejudice any rights of Travelers.

Subsequently, in Donnelly Construction Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984), the Supreme Court expressly rejected the imposition of any requirement of privity to maintain an action for professional negligence, and disapproved prior decisions, including Chalpin v. Brennan, supra, which had purported to impose one. The only appellate decision dealing with the impact of Donnelly on legal malpractice claims is Franko v. Mitchell, 158 Ariz. 391, 762 P.2d 1345 (App. 1988), which was an appeal from a summary judgment entered in favor of a lawyer, Mitchell, on breach of contract and legal malpractice claims brought by a Ms. Franko. Franko had agreed to loan her boyfriend, Markoff, a sum of money, and Markoff had asked Mitchell to draw up the promissory note evidencing the obligation to Franko. Both Markoff and Franko went to Mitchell's office to review and sign the note. Markoff subsequently defaulted and disappeared. The Court held that there was a genuine issue of material fact as to whether an attorney-client relationship had been formed between Mitchell and Franko, which required the reversal of the summary judgment entered below.

The Court then went on to discuss Franko's contention that she was entitled to bring a legal malpractice action against Mitchell even if she was not his client. Noting that the Supreme Court had in Donnelly abolished any requirement of privity in professional negligence cases, the Court ruled that Franko's ability to pursue malpractice claims against Mitchell would turn on the application of the test announced in Fickett v. Superior Court, supra. The Court then offered the following explanatory comment concerning the "Fickett test:"

We are of the opinion, however, that the test utilized in Fickett does not create a distinct duty of care towards a third paty, as Franko suggests, but instead allows a third party in certain situations to sue an attorney for negligence to his client. That is, under the Fickett test any duty owed by an attorney to a third party is derivative of the duty owed by that attorney to his client.

* * * * * *

In essence, the Fickett test is merely a framework for determining the particular circumstances under which a third party may sue an attorney for malpractice in the place of the client. That is, in some situations, an attorney owes a duty to a third party to use ordinary skill, care and diligence in rendering professional services to his client. Absent even an allegation of negligence between Mitchell and Markoff, Franko's reliance on Fickett to extend liability to Mitchell is inappropriate.

Id., 158 Ariz. at 400-01, 762 P.2d at 1354-56.

Situations in which an attorney may have fiduciary obligations to third parties that conflict with the interests of the attorney's client also arise 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. 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. Id.

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. That "derivative fiduciary duty," on the other hand, may constitute a "material limitation" on the lawyer's ability to discharge obligations to clients the lawyer represents on unrelated matters, but who happen to be involved in the probate proceedings, thereby creating a conflict of interest under AZ-ER 1.7.

There are some circumstances in which lawyers may appropriately serve in fiduciary roles, such as an executor or trustee. In Arizona Ethics Opinion No. 96-07, the Committee held that it was not a violation of AZ-ER 1.8(c) for a lawyer to draft a revocable living trust with a pour-over will for a client, and to be named as a trustee or the client's personal representative, but the lawyer may not recover trustee fees in addition to legal fees for the same work, and the lawyer must be able to exercise independent professional judgment when acting as both trustee and counsel to the estate. A lawyer may also, under certain conditions, acquire obligations to third parties by representing clients in their capacities as fiduciaries. In either instance, i.e., where the lawyer serves as a fiduciary, or represents a client who is a fiduciary, there is a potential for conflict between the lawyer's fiduciary obligations to others, and the lawyer's obligations to the client.

A lawyer also acts as a fiduciary when the lawyer holds funds or property of either the lawyer's client, or of others in connection with the representation. AZ-ER 1.15(a). As the Comment to AZ-ER 1.15 notes: "A lawyer should hold property of others with the care required of a professional fiduciary." Comment, AZ-ER 1.15, š 1.

In Matter of Shannon, 179 Ariz. 52, 876 P.2d 548, modified 181 Ariz. 307, 890 P.2d 602 (1994), the Arizona Supreme Court approved the disbarment of a lawyer for, inter alia, failing to discharge fiduciary obligations to a third party. The lawyer had received a settlement check from opposing counsel, which was to be used to satisfy a judgment against the opposing counsel's clients. The lawyer, however, cashed the check, and refused to provide a satisfaction of judgment to opposing counsel. The Court found that the lawyer had violated AZ-ER 1.15 by failing to act as a fiduciary for the opposing counsel's clients. Id., 179 Ariz. at 65, 876 P.2d at 562. The Court reasoned that the lawyer had violated the opposing lawyer's trust by cashing the settlement check without honoring the opposing lawyer's stated conditions for payment. See also Matter of Secrist, 180 Ariz. 50, 881 P.2d 1155 (1994) (a lawyer disbarred for failing to protect and deliver portions of settlement funds to a health care provider who held a medical lien on them).

In Arizona Ethics Opinion No. 98-06, the Committee on the Rules of Professional Conduct concluded that lawyers are not to "unilaterally assume to arbitrate" matters between the client and third party creditors, and an attorney's obligations under AZ-ER 1.15(b) are triggered only when the attorney has "actual knowledge" of a "matured legal or equitable claim" to all or any part of the funds or other property held by the attorney. Where those conditions are satisfied, however, the attorney holding funds or other property does have fiduciary obligations to third parties who have such a matured claim to them and, once on notice of such a claim, the attorney must:

1. Promptly notify the third party of the attorney's receipt of funds subject to the third party's claim;

2. Promptly deliver to the client and to the third party only funds or property that the party is entitled to receive;

3. If the attorney has any "good faith doubt" as to who is entitled to receive any disputed funds, the attorney must notify the third party, investigate with reasonable diligence and promptness, hold only the disputed funds or other property in trust pending resolution of the dispute, and resolve the dispute by negotiation, arbitration or, if necessary, by filing an interpleader action.

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.

1.13:220      Lawyer Serving as Officer or Director of an Organization

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. The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer's recusal as a director or might require the lawyer and the lawyer's firm to decline representation of the corporation in a matter.

Comment, AZ-ER 1.7, š 34.

There are no other Arizona authorities that specifically address the ethical issues presented, and particularly the manner in which the requirements of AZ-ER 1.13 are to be met, in situations where the lawyer representing an organization also serves as one of the organization's officers and/or directors. The Standing Committee on Ethics and Professional Responsibility of the ABA ("the Standing Committee"), however recently addresses these, and other, related, issues in its Formal Opinion 98-410. Under the Statement of Jurisdictional Policies of the Committee on the Rules of Professional Conduct of the State Bar of Arizona ("the Committee"), the reasoning and conclusions expressed by the Standing Committee in its formal and informal opinions "are not conclusively binding" on the Committee, but will be viewed as "highly persuasive precedent" in the Committee's resolution of identical or analogous ethical questions. Understandably, greater precedential weight will be accorded to Formal Opinions of the Standing Committee than to its Informal Opinions.

In Formal Opinion 98-410, the Standing Committee addressed the issue of the propriety of a lawyer serving on the Board of Directors of a corporation which the lawyer and/or the lawyer's firm also represents as counsel. The Standing Committee's conclusion was that the Model Rules of Professional Conduct do not prohibit a lawyer from serving as a director of a corporation while simultaneously serving as its legal counsel, but that there are ethical concerns and potential ethical problems that the lawyer should consider and address with corporate management before the service as director commences, and on a continuing basis as necessary. The three principal ethical concerns cited by the Standing Committee in the Opinion were: (1) concerns that conflicts of interest will arise, causing reasonable parties to question the lawyer's professional independence and/or requiring the lawyer either to decline representation in a matter or resign as a director, (2) concerns that the lawyer, other directors, and management will be confused whether the lawyer's expressed views on a matter are legal or business advice, and (3) concerns with protecting the confidentiality of client information, especially protecting the attorney-client privilege.

The Standing Committee noted that conflicts of interest, and questions concerning the lawyer's role in a matter, could arise in a variety of situations, including where the lawyer or the lawyer's firm is asked to represent the corporation with respect to corporate action that the lawyer unsuccessfully opposed as a director, where the lawyer and/or the lawyer's firm is requested to render an opinion on the propriety of corporate action in which the lawyer-director participated, and where the lawyer as director is asked to pass upon a matter that will impact upon the corporation's engagement of outside lawyers, and where the corporation desires to have the lawyer's firm defend it in litigation in which individual board members, including the lawyer, are named as defendants.

The Standing Committee also discussed the fact that the lawyer's dual role as director and legal counsel complicates application of the attorney-client privilege. The privilege only attaches to legal advice, not business advice, and there is a risk that other members of the board may not appreciate that distinction. There is also a risk that the fact that the lawyer also serves as director may result in the loss of the privilege even for purely legal advice.

The Standing Committee concluded that, while these concerns were real, potential problems could be cured or ameliorated by full and frank discussion swith the corporation's executives and other board members before the lawyer agrees to serve, and that the lawyer should consider providing the board and corporate executives with a written memorandum in addition to an oral explanation. The Standing Committee also set forth a series of suggestions that lawyers accepting appointment to a client's board of directors should consider following to minimize the potential for problems. Under these suggestions, the lawyer-director should:

1. Reasonably assure that management and the board of directors understand (i) the different responsibilities of legal counsel and director, (ii) that when acting as legal counsel, the lawyer represents only the corporate entity and not its individual officers and directors, and (iii) that at times conflicts of interest may arise under the rules governing the lawyer's professional conduct that may require the lawyer's recusal as a director or require the corporation to retain independent counsel to represent its interests in a particular matter.

2. Reasonably assure that management and the board of directors understand that, depending upon the applicable law, the attorney-client evidentiary privilege may not extend to matters discussed at board meetings when the lawyer-director is not acting in the role of corporate counsel.

3. Recuse herself or himself as a director and from board committee deliberations when the relationship of the corporation with the lawyer or the lawyer's firm is under consideration.

4. Maintain in practice the independent professional judgment required of a competent lawyer, recommending against any course of action that is illegal or likely to result in harm to the corporation.

5. Perform diligently the duties of counsel once a decision is made by the board or management, even if the lawyer-director disagrees with that decision, unless the representation would otherwise violate the Model Rules.

6. Decline any representation of the corporation when the lawyer's interests as a director would conflict with the lawyer's responsibilities of competent and diligent representation, such as, for example, situations where the lawyer's concern over potential personal liability as a director may materially and adversely affect the lawyer's ability to represent the corporation.

The major elements of this Opinion are essentially contained in paragraph 34 of the Comment to AZ-ER 1.7, quoted supra.

1.13:230      Divers Kinds of Entities as Organizations

AZ-ER 1.13 consistently speaks generically in terms of representation of an "organization." The Comment to the Rule generally talks of the organizational client as being a "corporation," but does point out that: "The duties defined in this comment apply equally to unincorporated associations." At another point, the Comment specifically states that: "The duty defined in this rule applies to governmental organizations." See Section 1.13:530, infra. While there are no Arizona authorities that specifically address the point, it seems safe to assume that the Rule will be applicable where a lawyer undertakes representation of one of the novel forms of entity that have recently been authorized, such as limited liability companies, etc.

1.13:300   Preventing Injury to an Entity Client

Under AZ-ER 1.13(b),if a lawyer representing an organization knows that an officer, employee or other person associated with the organization which the lawyer represents 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." The Rule specifies that the lawyer for the entity, in determining how to proceed in such a situation, must give "due consideration to the seriousness of the violation and its consequences, the scope and nature of the lawyer's representation, the responsibility in the organization and the apparent motivation of the person involved, the policies of the organization concerning such matters and any other relevant considerations." The Rule itself lists the following remedial measures that the lawyer can properly consider and/or undertake:

1. Asking reconsideration of the matter;

2. Advising that a separate legal opinion on the matter be sought for presentation to appropriate authority in the organization; and

3. Referring the matter to higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest authority that can act on behalf of the organization as determined by applicable law.

The Comment to this aspect of the Rule provides the following elaboration on the Rule's requirements:

When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer's province. However, different considerations arise when the lawyer knows that the organization may be substantially injured by action of a constituent that is in violation of law. In such a circumstance, it may be reasonably necessary for the lawyer to ask the constituent to reconsider the matter. If that fails, or if the matter is of sufficient seriousness and importance to the organization, it may be reasonably necessary for the lawyer to take steps to have the matter reviewed by a higher authority in the organization. Clear justification should exist for seeking review over the head of the constituent normally responsible for it. The stated policy of the organization may define circumstances and prescribe channels for such review, and a lawyer should encourage formulation of such a policy. Even in the absence of organization policy, however, the lawyer may have an obligation to refer the matter to higher authority, depending on the seriousness of the matter and whether the constituent in question has apparent motives to act at variance with the organization's interest. Review by the chief executive officer or by the board of directors may be required when the matter is of importance commensurate with their authority. At some point it may be useful or essential to obtain an independent legal opinion.

Comment, AZ-ER 1.13, š 3.

Finally, the AZ-ER 1.13(b) itself prescribes that whatever measures the lawyer elects to undertake "shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization."

1.13:310      Resignation Versus Disclosure Outside the Organization

AZ-ER 1.13(c) provides that, if steps taken pursuant to the lawyer's duties under AZ-ER 1.13(b) do not rectify the situation, and the organization's highest authority insists upon action, or inaction, that is clearly a violation of law and is likely to result in substantial injury to the organization, the lawyer may resign in accordance with AZ-ER 1.16. For example, the Court in Samaritan Foundation v. Goodfarb, 176 Ariz. 497, 862 P.2d 870 (1993) suggested that, if an organizational client refused to consent to the disclosure or discovery of relevant information in litigation, "at a minimum the lawyer would have to withdraw." Id., 176 Ariz. at 502, 862 P.2d at 875, fn.1.

The lawyer's resignation in such a situation would ordinarily have to be warranted under the "permissive withdrawal" provisions of AZ-ER 1.16(b). That Rule provides that a lawyer may withdraw from representation, unless ordered to continue in it by a tribunal, if the withdrawal can be accomplished without material adverse effect on the client, under the following circumstances:

1.) where the client persists in a course of action involving the lawyer's services that the lawyer reasonably believes is criminal or fraudulent;

2.) where the client has used the lawyer's services to perpetrate a crime or fraud;

3.) where a client insists upon taking action that the lawyer considers repugnant or imprudent;

4.) where the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled;

5.) where the representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client; or

6.) where other good cause for withdrawal exists.

As the Comment to this aspect of Rule AZ-ER 1.16(b) explains:

A lawyer may withdraw from representation in some circumstances. The lawyer has the option to withdraw if it can be accomplished without material adverse effect on the client's interests. Withdrawal is also justified if the client persists in a course of action that the lawyer reasonably believes is criminal or fraudulent, for a lawyer is not required to be associated with such conduct even if the lawyer does not further it. Withdrawal is also permitted if the lawyer's services were misused in the past even if that would materially prejudice the client. The lawyer also may withdraw where the client insists on taking action that the lawyer considers repugnant or with which the lawyer has a fundamental disagreement.

Comment, AZ-ER 1.16, š 7. See further discussion in Section 1.16:300.

In extreme cases, however, the lawyer may have an obligation to resign under AZ-ER 1.16(a). That Rule provides that, unless a lawyer is directed by a tribunal to continue in a representation, a lawyer shall not either accept or continue in an engagement if:

1.) the representation will result in violation of the Rules of Professional Conduct or other law;

2.) the lawyer's physical or mental condition materially impairs the lawyer's ability to represent the client; or

3.) the lawyer is discharged.

With respect to the first criterion that mandates withdrawal, which would in all likelihood be the basis for an obligation to resign in such a situation, the Comment to this aspect of the Rule observes:

A lawyer ordinarily must decline or withdraw from representation if the client demands that the lawyer engage in conduct that is illegal or violates the Rules of Professional Conduct or other law. The lawyer is not obliged to decline or withdraw simply because the client suggests such a course of conduct; a client may make such a suggestion in the hope that a lawyer will not be constrained by a professional obligation.

Comment, AZ-ER 1.16, š 2.

While AZ-ER 1.13(b) specifies that any remedial measures undertaken must be designed to "minimize . . . the risk of revealing information relating to the representation relating to the representation to persons outside the organization," a lawyer attempting to honor that prescription should keep in mind the fact that AZ-ER 1.6 both requires and permits the disclosure of normally confidential "information relating to the representation" of a client in a broader range of situations than is the case under MR 1.6. Thus, AZ- ER 1.6 itself recognizes several exceptions to the general rule that a lawyer may not reveal information relating to the representation of a client. Initially, AZ-ER 1.6(a) expressly permits a lawyer to reveal such information, without the client's consent, where necessary to carry out the objectives of the representation. That subpart of the Rule also makes the lawyer's duty of confidentiality expressly subject to the lawyer's obligation of candor toward tribunals under AZ-ER 3.3(a)(2). [See discussion under Sections 1.6:101, supra, and 3.3:200, infra.]

AZ-ER 1.6(b) makes it mandatory for a lawyer to reveal information relating to the representation of a client to the extent the lawyer reasonably believes is necessary to prevent the client from committing a criminal act that the lawyer believes is likely to result in death or substantial bodily harm. AZ-ER 1.6(c) permits (but does not require) a lawyer to reveal the intention of a client to commit a crime and the information necessary to prevent that crime. Finally, AZ-ER 1.6(d) permits the lawyer to reveal information relating to the representation of a client to prevent the client from committing a crime or fraud that is reasonably certain to cause substantial injury to the financial interests of another and in furtherance of which the client has used or is using the lawyer's services, or to mitigate or rectify substantial injury that is reasonably certain to result or has resulted from such a crime or fraud.

1.13:400   Fairness to Non-Client Constituents Within an Entity Client

AZ-ER 1.13 as a whole makes clear that, where a lawyer accepts an engagement to represent an organization, it is the organization that is the lawyer's client. As the accompanying Comment notes, however: "An organizational client is a legal entity, but it cannot act except through its officers, directors, employees, shareholders and other constituents." Comment, AZ-ER 1.13, š 1. It is not an uncommon occurrence for those constituents, particularly those charged with the responsibility for interacting with the organization's counsel, to form the impression that the lawyer is their individual lawyer as well. It is incumbent upon the lawyer in such situations to clarify the lawyer's role and to dispel any misunderstandings concerning it.

Thus, AZ-ER 1.13(d) specifically provides that, in dealing with the constituents of an organizational client, "a lawyer shall explain the identity of the client where it is apparent that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing." As the Comment to this aspect of the Rule explains:

There are times when the organization's interests may be or become adverse to those of one or more of its constituents. In such circumstances the lawyer should advise any constituent, whose interest the lawyer finds adverse to that of the organization of the conflict or potential conflict of interest, that the lawyer cannot represent such constituent, and that such person may wish to obtain independent representation. Care must be taken to assure that the individual understands that, when there is such adversity of interest, the lawyer for the organization cannot provide legal representation for that constituent individual, and that discussions between the lawyer for the organization and the individual may not be privileged.

Whether such a warning should be given by the lawyer for the organization to any constituent individual may turn on the facts of each case.

Comment, AZ-ER 1.13, šš 7, 8. There are no other Arizona authorities that elaborate upon these principles.

The scope of the attorney-client privilege where the client is a corporate entity was addressed comprehensively by the Arizona Supreme Court in its decision in Samaritan Foundation v. Goodfarb, 176 Ariz. 497, 862 P.2d 870 (1993). The Court held that, in order to determine whether communications between corporate employees and counsel for the corporation will qualify for the corporation's attorney- client privilege, the relevant inquiry concerns the nature and purpose of the communication rather than the identity or position of the corporate employee involved. Id. All communications initiated by the employee and made in confidence to counsel in which the communicating employee is directly seeking to secure or evaluate legal advice for the corporation, will be privileged. Id. Where someone other than the employee initiates the communication, a factual communication by a corporate employee to corporate counsel will be within the corporation's privilege only if it concerns the employee's own conduct within the scope of his or her own employment and is made to assist the lawyer in assessing or responding to the legal consequences of that conduct for that corporate client. Id. The Court was quite specific that counsel's self-initiated interviews of corporate officers, agents or employes who were mere witnesses to events of legal significance to the corporation, would not qualify for the corporation's attorney-client privilege. Id.

A subsequent legislative amendment to A.R.S. § 12-2234, the statutory codification of the attorney-client privilege in civil cases, however, makes all communications between corporate counsel and a corporate officer, agent or employee privileged if they were (1) for the purpose of providing legal advice to either the corporation or to the employee, or (2) for the purpose of obtaining information in order to provide such legal advice. This legislative redefinition of the scope of the privilege (in civil cases) differs from that adopted by the Court in Samaritan Foundation in its treatment as privileged of the one category of communications which the Court specifically found not to qualify for privileged status μ counsel's interviews of corporate employees or agents who are mere witnesses to events. Significantly, the statute which defines the scope of the privilege in criminal cases, A.R.S. § 13-4062(2), was not similarly amended. Roman Catholic Diocese of Phoenix v. Superior Court (State of Arizona), 204 Ariz. 225, 62 P.3d 970 (App. 2003).

1.13:500   Joint Representation of Entity and Individual Constituents

AZ-ER 1.13(e) permits a lawyer who represents an organization to also accept engagements to represent any of the organization's directors, officers, employees, members, shareholders or constituents, provided the engagement by the individual constituent will not present an impermissible conflict of interest under AZ-ER 1.7. Where AZ-ER 1.7 would require that the organization consent to the dual representation of the organization and one of its constituents by the organization's counsel, the consent must be obtained from "an appropriate official of the organization other than the individual who is to be represented, or by the shareholders." There are no Arizona authorities that elaborate upon those principles.

1.13:510      Corporate Counsel's Role in Shareholder Derivative Actions

The Comment accompanying AZ-ER 1.13 explains:

Under generally prevailing law, the shareholders or members of a corporation may bring suit to compel the directors to perform their legal obligations in the supervision of the organization. Members of unincorporated associations have essentially the same right. Such an action may be brought nominally by the organization, but usually is, in fact, a legal controversy over management of the organization.

The question can arise whether counsel for the organization may defend such an action. The proposition that the organization is the lawyer's client does not alone resolve the issue. Most derivative actions are a normal incident of an organization's affairs, to be defended by the organization's lawyer like any other suit. However, if the claim involves serious charges of wrongdoing by those in control of the organization, a conflict may arise between the lawyer's duty to the organization and the lawyer's relationship with the board. In those circumstances, ER 1.7 governs who should represent the directors and the organization.

Comment, AZ-ER 1.13, šš 10, 11. There are no other Arizona authorities that elaborate upon these principles.

1.13:520      Representing Client with Fiduciary Duties

A lawyer engaged in the representation of a client who has fiduciary duties to others may, under certain circumstances, be subject to obligations to the third parties for whom the lawyer's client has fiduciary responsibilities. Indeed, one of the first decisions to discuss the issue of whether there should be a privity requirement as a predicate for pursuing a legal malpractice claim, Fickett v. Superior Court of Pima County, 27 Ariz.App. 793, 558 P.2d 988 (1976). Fickett involved an action filed by the present conservator of an incompetent's estate against the former guardian and that guardian's attorneys, claiming that Fickett, as the attorney for the former guardian, had been negligent in failing to discover that the guardian had embarked upon a scheme to liquidate the guardianship estate by misappropriation and conversion of funds to his own use, and by making improper investments. The Pima County Superior Court denied summary judgment in favor of Fickett, rejecting the argument that absent a showing of fraud or collusion, the attorney owed no duty to the ward and a cause of action for malpractice could not be maintained. The Court of Appeals affirmed that determination, holding:

The general rule for many years has been that an attorney could not be liable to one other than his client in an action arising out of his professional duties, in the absence of fraud or collusion . . . In denying liability of the attorney to one not in privity of contract for the consequences of professional negligence, the courts have relied principally on two arguments: (1) that to allow such liability would deprive the parties to the contract of control of their own agreement; and (2) that a duty to the general public would impose a huge potential burden of liability on the contracting parties.

* * * * * *

We cannot agree with petitioners that they owed no duty to the ward and that her conservator could not maintain an action because of lack of privity of contract. We are of the opinion that the better view is that the determination of whether, in a specific case, the attorney will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injuries suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.

Id., 27 Ariz.App. at 794-95, 558 P.2d at 989-90. The Court, rather than abolishing a privity requirement entirely, however, allowed the action by the successor conservator to proceed on the basis that when an attorney undertakes to represent the guardian of an incompetent, that attorney assumes a relationship not only with the guardian but also with the ward. But see Wetherill v. Basham, 197 Ariz. 198, 3 P.2d 1118 (App. 2000).

Similarly, 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. Id.

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. That "derivative fiduciary duty," on the other hand, may constitute a "material limitation" on the lawyer's ability to discharge obligations to clients the lawyer represents on unrelated matters, but who happen to be involved in the probate proceedings, thereby creating a conflict of interest under AZ-ER 1.7.

1.13:530      Representing Government Client

The Comment accompanying AZ-ER 1.13 makes clear that the requirements of the Rule apply with equal force to lawyers who represent governmental agencies, but that different considerations must be taken into account in determining what conduct is necessary to comply with those requirements:

The duty defined in this rule applies to governmental organizations. Defining precisely the identity of the client and prescribing the resulting obligations of lawyers may be more difficult in the government context. See Scope [18]. Although in some circumstances the client may be a specific agency, it may also be a branch of government, such as the executive branch, or the government as a whole. For example, if the action or failure to act involves the head of a bureau, either the department of which the bureau is a part or the relevant branch of government may be the client for purposes of this Rule. Moreover, in a matter involving the conduct of government officials, a government lawyer may have authority to question such conduct more extensively than that of a lawyer for a private organization in similar circumstances. Thus, when the client is a governmental organization, a different balance may be appropriate between maintaining confidentiality and assuring that the wrongful act is prevented or rectified, for public business is involved. In addition, duties of lawyers employed by the government or lawyers in military service may be defined by statutes and regulation. This Rule does not limit that authority. See Scope. Government lawyers also may have authority to represent the "public interest" in circumstances where a private lawyer would not be authorized to do so.

Comment, AZ-ER 1.13, š 6. There are no other Arizona authorities that elaborate upon these principles.