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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


California Legal Ethics

1.13   Rule 1.13 Organization as Client

1.13:100   Comparative Analysis of CA Rule

Primary California References: CRPC 3-600
Background References: ABA Model Rule 1.13, Other Jurisdictions
Commentary:

1.13:101      Model Rule Comparison

CRPC 3-600 addresses the organization as a client in a manner similar to MR 1.13. In CRPC 3-600(A), the general statement that the lawyer for an organization represents the organization, acting through its authorized constituents, is identical to paragraph (a) of MR 1.13, except that it expands the definition of authorized constituents to include the organization's "highest authorized officer, employee, body or constituent overseeing the particular engagement."

Likewise, CRPC 3-600(B), is analogous to MR 1.13(b), providing guidance to the lawyer who "knows that an actual or apparent agent of the organization acts or intends or refuses to act in a manner that is or may be a violation of law reasonably imputable to the organization, or in a manner which is likely to result in substantial injury to the organization." Unlike the Model Rule, however, CRPC 3-600(B) prohibits the lawyer from violating his or her duty of confidentiality pursuant to B&PC 6068(e).

Both CRPC 3-600(B) and MR 1.13(b) suggest various actions which the lawyer may take when faced with the situation described above. CRPC 3-600(B) differs from the Model Rule in that CRPC 3-600(B) provides that the lawyer may inform the organization of the possible consequences associated with his or her representation. In addition, CRPC 3-600(B) does not instruct the lawyer to advise that "a separate legal opinion on the matter be sought for presentation to appropriate authority in the organization."

CRPC 3-600(C) is identical to MR 1.13(c), except that CRPC 3-600(C) limits the lawyer's response to his or her right, and where appropriate, duty to resign.

In dealing with an organization's constituents, CRPC 3-600(D) varies from MR 1.13(d) in that CRPC 3-600(D) specifically prohibits a lawyer from leading constituents to believe that their individual confidences will not be disclosed.

Both Rules permit a lawyer to represent a constituent of the organization provided consent to such dual representation is obtained from an appropriate constituent of the organization, other than the constituent who is to be represented, or from the shareholders or organization members.

1.13:102      Model Code Comparison

The DR did not contain a counterpart to MR 1.13. EC 5-18 was similar to MR 1.13 in admonishing 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 present."

1.13:200   Entity as Client

Primary California References: CRPC 3-600, 3-300, 3-210
Background References: ABA Model Rule 1.13(a), Other Jurisdictions
Commentary: ABA/BNA 91:2001, ALI-LGL 155, 156, Wolfram 8.3

CRPC 3-600 considers the duties of a lawyer who represents an organization as client and in so doing deals with constituents of the organization. Analysis of CRPC 3-600 generally raises an issue as to the identity of the attorney's client. CRPC 3-600(A) counsels that "[i]n representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement." CRPC 3-600(A). Accordingly, because the organization is the client, the lawyer owes his or her obligations to the organization itself and not to the organization's constituents. See Meehan v. Hopps (1st Dist. 1956) 144 Cal.App.2d 284, 301 P.2d 10 (despite counsel's representation of a corporation dominated by an officer whose personal interests were, to a considerable extent coincident with interests of the company, an attorney-client relationship did not exist between attorney and officer).

1.13:210      Lawyer with Fiduciary Obligation to Third Person

A lawyer's service as an executor, trustee, corporate director, corporate officer, or other capacity in which the lawyer owes duties to third persons, can create conflicts between the duties of the lawyer in that capacity and interests of the clients whom the lawyer represents. In Kapelus v. State Bar (1987) 44 Cal.3d 179, 242 Cal.Rptr. 196, 745 P.2d 917, the California Supreme Court concluded that the petitioning lawyer had not violated any ethical duties when he represented the limited partnership of which he was a general partner against certain limited partners. The Court acknowledged that, in his capacity as a general partner, the lawyer owed a fiduciary duty to the limited partners. Nonetheless, the Court found that the fiduciary relationship established between the general and limited partners did not rise to that of lawyer and client, and therefor the lawyer was not in breach of an ethical duty. Similarly, in C.O.P.R.A.C. Op. 1981-63, the Committee refused to find an ethical violation by a lawyer-city council member where the lawyer sought to represent a tort claimant against the city on the basis that the city was not the lawyer's client merely because he served on the city council.

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

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. As a director, an individual is ethically bound to perform his or her fiduciary duties to the corporation, such as participation in board deliberations and voting. C.O.P.R.A.C. Op. 1993-132. However, as corporate counsel the lawyer is subject to the rules of professional conduct. Accordingly, CRPC 3-600(C) imposes upon the lawyer an ethical obligation to resign as both a director and as corporate counsel in the event the corporation insists upon a course of action in violation of the law likely to result in substantial injury to the organization.

In considering whether to accept representation of the corporation, the lawyer director should also anticipate that he or she may be precluded from communicating directly or indirectly with any officer, director or managing agent of the corporation about the subject of his or her representation. C.O.P.R.A.C. 1993-132. As provided by B&PC 6068(e), the lawyer for the corporation has a duty "at every peril to himself or herself to preserve the secrets of his or her client." Protected confidences include all "information conveyed to the attorney as to which the client has an expectation that it will not be disclosed to others nor used against him." See L.A. Op. 1976-358 (addressing disclosure by corporate counsel of unlawful activities by corporate officers or directors).

1.13:230      Diverse Kinds of Entities as Organizations

The identification of a lawyer's client is often complicated by the representation of various entities. For example, when representing a partnership, the question is often raised as to whether the lawyer represents the individual partners as well as the partnership itself. In Responsible Citizens v. Superior Court (5th Dist. 1993) 16 Cal.App.4th 1717, 20 Cal.Rptr.2d 756, the court relied upon individual facts and circumstances to conclude that a partnership should be treated as an "entity," hence representation of the partnership by a lawyer did not imply a lawyer-client relationship with the individual partners of the partnership. The following factors were identified by the Court of Appeal as a means of determining whether a lawyer has established a lawyer-client relationship with the individual partners: (i) the size of the partnership, (ii) the nature and scope of the lawyer's engagement, (iii) the kind and extent of contacts between the lawyer and the individual partners, (iv) the lawyer's access to financial information relating to an individual partner's interests and (v) the extent to which the partnership lawyer has agreed not to accept other representations adverse to an individual partner's personal interests.

In Johnson v. Sheppard, Mullin, Richter & Hampton (4th Dist. 1995) 38 Cal.App.4th 463, 45 Cal.Rptr.2d 312, the court relied upon these same factors to reach a different conclusion. Here, the court concluded that a partnership lawyer had established a lawyer-client relationship with the individual partners. The primary factor guiding the Court to a conclusion of the existence of a lawyer-client relationship was the nature of the lawyer's representation of the partnership as evidenced by the lawyer's failure to assume representation of interests which would have been deemed adverse to the interests of certain individual partners.

Similarly, the existence of a lawyer-client relationship in the context of the representation of corporations and their subsidiaries will be determined on the basis of the facts and circumstances of the particular case. In Brooklyn Navy Yard Cogeneration Partners, L.P. v. Superior Court (4th Dist. 1997) 60 Cal.App.4th 248, 70 Cal.Rptr.2d 419, the court held that the representation of a subsidiary corporation would be deemed to constitute the representation of the parent corporation only if the subsidiary and parent were alter egos. This conclusion applies in the absence of circumstances which would create a direct lawyer-client relationship with the parent (such as the receipt of confidential information from the parent with a reasonable expectation of a duty of confidentiality). See also, C.O.P.R.A.C. Op. 1989-113 (representation of subsidiaries of a corporation and the ethical ramifications inherent in those circumstances).

1.13:300   Preventing Injury to an Entity Client

Primary California References: CRPC 3-600
Background References: ABA Model Rule 1.13(b) & (c), Other Jurisdictions
Commentary: ABA/BNA 91:2001, ALI-LGL 155, Wolfram 13.7

When representing an entity, the lawyer often faces the dilemma of how to proceed when an officer of the entity acts in a way that threatens the entity's legal interests. See FDIC v. O'Melveny & Meyers (9th Cir. 1992) 969 F.2d 744 (duty to protect corporate client against acts of controlling constituents creating corporate liability). See also, e.g. L.A. Op. 1981-1 (lawyer must seek to persuade general partners to stop making improper loans in violation of their fiduciary duty to limited partners). CRPC 3-600(B)(2) provides the following guidance: counsel the officer not to act in a way that does, or may, violate the law; ask the officer to reconsider; go "up the organization" to other officers and ultimately perhaps to the board of directors.

CRPC 3-600(B) is explicit that the reference to higher authority is only "to the highest internal authority that can act on behalf of the organization." Presumably the highest internal authority includes the independent directors but not the shareholders. See Goldstein v. Lees (2nd Dist. 1975) 46 Cal.App. 3d 614, 120 Cal.Rptr. 253 (despite shareholders' apparent rights to corporate information not available to the general public, shareholder status alone does not entitle an individual to unfettered access to corporate confidences and secrets).

1.13:310      Resignation Versus Disclosure Outside the Organization

In the event that a lawyer's admonitions are disregarded, the question is raised as to how the lawyer should proceed. CRPC 3-600(B) makes it clear that the entity's lawyer cannot disclose confidences: the lawyer "shall not violate his or her duty of protecting all confidential information as provided in B&PC 6068(e)." The referenced confidentiality provision, is cast in absolute terms. Accordingly, the lawyer's response is limited to his or her right, and where appropriate, duty to resign in accordance with CRPC 3-700. See L.A. Op. 1982-408 (obligation, or lack thereof, of informing the court of corporation's suspended status for nonpayment of corporate taxes); L.A. Op. 1976-358 (impropriety of disclosure by corporate counsel of unlawful activities by corporate officers or directors).

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

Primary California References: CRPC 3-600
Background References: ABA Model Rule 1.13(d), Other Jurisdictions
Commentary: ABA/BNA 91:2001, ALI-LGL 163, Wolfram 13.7.5

CRPC 3-600(D) contemplates the difficulties which may arise "whenever it is or becomes apparent that the organization's interests are or may become adverse to those of the constituent(s) with whom the member is dealing." The lawyer is obligated to explain to the organization's directors, officers, employees, members, shareholders, or other constituents the identity of the client for whom the lawyer is acting and "shall not mislead such a constituent into believing that the constituent may communicate confidential information to the member in a way that will not be used in the organization's interest if that is or becomes adverse to the constituent." Skarbrevik v. Cohen, England & Whitfield (2nd Dist. 1991) 231 Cal.App.3d 692, 282 Cal.Rptr. 627. See also, e.g. Meehan v. Hopps (1st Dist. 1956) 144 Cal.App.2d 284, 301 P.2d 10 (when a controversy arises between a lawyer's corporate client and one of its officers, the lawyer must be able to use on behalf of his client information which that officer was required by reason of his position with the corporation to give to the lawyer). But see Johnson v. Sheppard, Mullin, Richter & Hampton (4th Dist. 1995) 38 Cal.App.4th 463, 45 Cal.Rptr.2d 312 (a lawyer's undertaking to represent a partnership, generally, imposed upon him an obligation of loyalty to the partnership and to all partners in terms of their entitlement to benefits from the partnership).

1.13:500   Joint Representation of Entity and Individual Constituents

Primary California References: CRPC 3-600
Background References: ABA Model Rule 1.13(e), Other Jurisdictions
Commentary: ABA/BNA 91:2601, ALI-LGL 156, 212, Wolfram 13.7

A lawyer may be asked to represent an entity as well as its individual constituents, as for instance in establishing employee benefit packages for a closely held corporation or other professional partnerships. CRPC 3-600's Drafter's Notes indicate that the rule is not intended to prohibit members from representing both an organization and other parties connected with it. However, other rules of professional conduct require that the lawyer follow certain procedures before accepting such dual representation. For example, CRPC 3-310(C) states that a lawyer who serves multiple clients must fully disclose the potential conflicts of interest to the clients and get their written consent. If a potential conflict becomes actual, the lawyer must make another full disclosure and obtain further written consent. If a reasonable lawyer would have to advise a client not to consent to a conflict, then the consent is nugatory and will not solve the conflict. When a lawyer represents two principals of an organization along with the organization itself, and the principals come into conflict, it is unreasonable for a lawyer to believe that the lawyer's representation of one or the other would not be affected. But see Skarbrevik v. Cohen, England & Whitfield (2nd Dist. 1991) 231 Cal.App. 3d 692, 282 Cal.Rptr. 627 (a lawyer who was longtime counsel to a corporation with four shareholders was held to owe no duties to a 25% shareholder and could assist other shareholders in an attempt to oust that shareholder).

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

In a derivative action, the major issue is who the lawyer should represent, the shareholders or the directors or no one. One court has permitted dual representation of corporate and individual defendants in a derivative action. In Jacuzzi v. Jacuzzi Bros., Inc. (1st Dist. 1963) 218 Cal.App.2d 24, 32 Cal.Rptr. 188, the court held that a former lawyer for a corporation was not disqualified from representing minority stockholders in a derivative action absent a showing that in so doing the lawyer may have been called upon to breach a professional confidence previously entrusted to him by the corporation.

However, both the logic and the result in Jacuzzi has been questioned by recent authority. See, In re Oracle Securities Litigation (N.D. Calif. 1993) 829 F.Supp. 1176 (order disapproving the settlement of a derivative suit between Oracle corporation and its shareholders). Citing a substantial body of authority proscribing dual representation of corporate and individual defendants in a derivative action, the court in Oracle held that if the same counsel represents the corporation as well as the director and officer defendants, the interests of the corporation are likely to receive insufficient protection. Moreover, representation of the corporation's interests by in-house lawyers does not ameliorate this conflict, because in-house lawyers are inevitably subservient to the interests of the defendant directors and officers who they serve. Citing CRPC 3-310 and CRPC 3-600(E), the Oracle court denied the possibility that the corporation could consent to dual representation, noting that an inanimate corporate entity, which is run by directors who are themselves defendants in the derivative litigation, cannot effectively waive a conflict of interest as might an individual under applicable professional rules. See also, e.g., Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (2nd. Dist. 1995) 36 Cal.App.4th 1832, 43 Cal.Rptr.2d 327 (under CRPC 3-600 if an organization's consent is required by CRPC 3-310, the consent must be given by an appropriate constituent of the organization other than the individual or constituent who is to be represented, or by the shareholders or organization's members); Forrest v. Baeza (1st Dist. 1997) 58 Cal.App.4th 65, 67 Cal.Rptr.2d 857 (in a derivative suit, directors/majority shareholders accused of embezzling from corporation and subjecting it to penalties for tax fraud could not consent to lawyer's dual representation of them and the corporation).

1.13:520      Representing Client with Fiduciary Duties [see also, 1.1:400]

When representing a client with fiduciary duties, a lawyer may be held liable by a third-party beneficiary. Liability in such cases is premised on the theory that a lawyer who undertakes to fulfill instructions of the client in actuality assumes a relationship not only with the client but also with the client's intended beneficiaries. Lucas v. Hamm (1961) 56 Cal.2d 583, 15 Cal.Rptr. 821, 364 P.2d 685 (when a lawyer is retained to draft a will, the document's very purpose is to create a benefit for a legatee, and hence a duty is owed to the legatee even though the legatee and the lawyer are not in privity of contract); Morales v. Field, DeGoff, Huppert & MacGowan (1st Dist. 1979) 99 Cal.App.3d 307, 160 Cal.Rptr. 239 (a lawyer representing a trustee assumes a relationship with the beneficiary akin to that between trustee and beneficiary and thus assumes a duty of care toward the beneficiary). Despite the outcome of Lucas and Morales, courts have held that the legal representation of a fiduciary, standing alone, does not impose upon the lawyer a fiduciary obligation to the beneficiary. See Goldberg v. Frye (4th Dist. 1990) 217 Cal.App. 3d 1258, 266 Cal.Rptr. 483. Recent authority for this proposition has distinguished (i) the representation of the fiduciary and his beneficiary when their interests are not in conflict, and (ii) the representation of a fiduciary seeking advice as to actions which will be in conflict with the interests of the beneficiary. See Moeller v. Superior Court (1997) 16 Cal.4th 1124, 69 Cal.Rptr.2d 317, 947 P.2d 279. Here, the California Supreme Court noted the distinction between administrative and defensive legal advice, suggesting a client could avoid violating his or her fiduciary duty by retaining and paying out of his or her own funds separate legal counsel for advice that is personal in nature.

Applying these principles to the representation of a corporation, the court in Skarbrevik v. Cohen, England & Whitfield (2nd Dist. 1991) 231 Cal. App. 3d 692, 282 Cal.Rptr. 627 held that a corporate lawyer had no duty to a minority shareholder, even though the majority shareholders had a fiduciary obligation to the minority shareholder, because the minority's interests were deemed to be adverse to the client the lawyer was advising - the majority. Under California law, it is well recognized that the lawyer's paramount duty is owed to the corporation. See e.g. Meehan v. Hopps (1st Dist. 1956) 144 Cal.App.2d 284, 301 P.2d 10; Skarbrevik v. Cohen, England & Whitfield (2nd Dist. 1991) 231 Cal.App.3d 692, 282 Cal.Rptr. 627. Thus, a lawyer for a corporation does not become a representative of its shareholders, merely because the lawyer's actions on behalf of the corporation concurrently benefit the shareholders. Although shareholders may receive indirect or tangential benefits from legal advise rendered for the corporation, the primary duty of corporate counsel is owed to the corporate entity. See also, e.g. Hoiles v. Superior Court (4th Dist. 1984) 157 Cal.App.3d 1192, 204 Cal.Rptr.111. For privilege rules when an attorney represents a fiduciary, see discussion in section 1.6:640, supra.

1.13:530      Representing Government Client

For government lawyers, the issue of who is the "client" is complicated by the fact that government lawyers owe duties not only to their own agency but to the public as well. Complex issues can arise in this context, such as the prevention or correction of official acts of misconduct conflicting with the need to maintain confidentiality. For example, one court has held that the county counsel's office should be disqualified from representing the county in a lawsuit against a quasi-independent public agency when the county counsel's office had previously given advice to that agency regarding the subject matter of the lawsuit. Civil Service Com'n v. Superior Court (4th Dist. 1984) 163 Cal.App.3d 70, 209 Cal.Rptr. 159. An analogous situation was addressed in People ex rel Deukmejian v. Brown (1991) 29 Cal.3d 150, 172 Cal.Rptr. 478, 624 P.2d 1206. Here the court ruled that although the Attorney General could not be compelled to represent state officers or agencies if he believed them to be acting contrary to law nor would he be prescribed from withdrawing from his statutorily imposed duty to act as their counsel, he may not take a position adverse to those same clients. See Id.

On the obligation of government lawyers in civil litigation, see, e.g. Reid v. U.S. I.N.S. (9th Cir. 1991) 949 F.2d 287 (government lawyer in civil litigation has interest only in law being observed, not in victory or defeat).