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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Delaware Legal Ethics

Rule 1.13 Organization as Client

1.13:100 Comparative Analysis of Delaware Rule

1.13:101 Model Rule Comparison

The text of Delaware’s Rule 1.13 differs significantly from Model Rule 1.13. The major difference is in the steps open to a lawyer representing an organization where constituents of that organization (i.e. officers) are acting, or intend to act, in a manner that will bring substantial injury to the organization.

The Model Rules create a more concrete path that the lawyer must follow when dealing with organizational constituents taking steps that would result in substantial injury to the organization. These steps include taking the matter to the highest authority of the organization (i.e. the board of the directors). The Delaware Rules have a similar path, but it is an optional one and gives the lawyer other options to follow, such as suggesting to the individual to reconsider, rather than just reporting it to a higher authority.

The Model Rule, in comments [4] & [5], discusses the various options and considerations of a lawyer faced with a matter that would result in substantial injury to the organization. It gives the lawyer the option to go directly to a higher authority when the matter is of “sufficient seriousness and importance or urgency.” The Delaware rule also discusses options and considerations, but includes them within the rule itself rather than in the comments. Neither DLRPC Rule 1.13 nor its comments talk of going directly to the highest authority. Rather, the Delaware rule and its comments discuss taking steps that are “designed to minimize disruption” and follow the organization’s policy for review.

Model Rule 1.13 talks of what a lawyer “knows” and what the lawyer feels is “reasonably necessary for the best interest of the organization.” The comments to Delaware’s rule use the language “clear justification” when referring to when a lawyer may go over the head of the “constituent normally responsible for” the matter involving the potential for substantial injury to the organization.

Another difference is the ultimate step open to a lawyer when the lawyer feels an action or inaction by a constituent will substantially injure the organization. Under the Model Rules, the lawyer may reveal information to those outside the organization (i.e. governmental regulators) when such a revelation does not violate Rule 1.6. DLRPC Rule 1.6 does not present this option to the lawyer. Rather, when an informed higher authority has not acted to prevent an injury to the organization, the only option left to the lawyer under Delaware’s rules is to resign.

Section (d) of the Model Rule makes it clear that revealing information to those outside the organization does not apply when the lawyer was hired by the organization to investigate or defend against any possible violation of law. Since DLRPC Rule 1.13 does not include disclosure options outside the organization, there is no corresponding section.

The Comments to Model Rule 1.13, in the section labeled “Relation to Other Rules,” is more involved than the Delaware Rule since Model Rule 1.13 includes the potential for disclosure outside the organization and the possible conflicts with other rules that might result. Since the Delaware Rules have no similar provision, this language is not found in the comments to DLRPC Rule 1.13.

The Model Rule also contains language under (e) to allow organizational lawyers to inform the highest authority of the organization when they feel they have been subject to retaliation for action taken to prevent substantial injury to the organization. The Delaware Rule has no such provision (although there is Delaware case history on this point discussed below).

Sections (f) & (g) in the Model Rule is the same as sections (d) & (e) in the Delaware Rule, dealing with disclosure of adverse interests and duel client representation. Also, Model Rule 1.13’s comments at [1], [2], [5] & [9-14] are the same as DLRPC Rule 1.13’s comments at [1], [2], [4] & [6-11].

1.13:102 Model Code Comparison

There is no direct counterpart to DLRPC Rule 1.13 in the Model Code. Model Code EC 5-18 is similar to DLRPC Rule 1.13(a) & (e), in that the organization, not its constituents, is the client and a lawyer may simultaneously represent the organization and its constituents. There are no analogous sections dealing with constituent action and inaction potentially resulting in substantial injury to the organization and outside disclosure verses resignation.

1.13:200 Entity as Client

Comments [1], [2] & [7] note that an organization’s lawyer represents the organization through its constituents, but not the constituents as individuals (unless through separate representation talked about below in 1.13:500).

In Shearin v. The E. F. Hutton Group, Inc., the Court found that there is “an implicit [condition] of every lawyer’s contract of retention or of employment,” even “at will” employment, that the employer will not retaliate for actions taken by the lawyer that the lawyer was required to do (or prohibited from doing) by established rules of professional responsibility. Shearin v. The E.F. Hutton Group, Inc., 652 A.2d 578, 588 (Del. Ch.1994).

In Fasciana v. Electronic Data Systems Corp., the Court found that the definition of “agent” [in § 145 of 8 Delaware General Corporate Law] follows the narrow common law definition of one who “acts on behalf of another (principal) in relations with third parties” and not the broad definition that would include all outside contracted lawyers. Fasciana v. Electronic Data Systems Corp., 892 A.2d 160, 163 (Del. Ch. Feb. 27, 2003). Thus, in order to determine whether a contracting corporation whose bylaws contain the indemnification language of § 145 must indemnify a contracted lawyer, one must look at what the lawyer did for the corporation that resulted in the need for indemnification. Only when the lawyer’s action was done “as an arm of the corporation vis-à-vis the outside world,” does the § 145 provision apply. Id.

1.13:210 Lawyer with Fiduciary Obligation to Third Person

DLRPC Rule 1.13 discusses various considerations a lawyer shall keep in mind when deciding how to proceed when that lawyer feels that an organization’s constituent is about to take action or inaction that will substantially injure the organization. Although third persons are not listed explicitly in these considerations, section (b) of the rule states that the lawyer shall take into consideration “any other relevant considerations.” It is unclear whether this could include relevant third persons.

A duty can exist between a lawyer and a non-client third person, if the lawyer gratuitously agrees to an action. Once a lawyer so agrees, the lawyer must take action with reasonable care. Burke v. Frabizzio, No. 80L-MR-21, 1982 Del. Super. LEXIS 811, at *1-2 (Del. Super. Ct. Nov. 3, 1982).

A lawyer for a testator can also owe a duty to recipients of an estate who are not in privity. This occurs when the intent of the testator is clear on the face of the instrument, and that intent fails due to the drafting of the lawyer. Pinckney v. Tigani, C.A. No. 02C-08-129 FSS, 2004 Del. Super. LEXIS 386, at *27 (Del. Super. Ct. Nov. 30, 2004).

But in Layfield v. Hastings, the Court of Chancery of Delaware found that baring extreme circumstances, a town council’s attorney only owes a duty to the town and not to those with whom the town may interact. Layfield v. Hastings, Civ. A. No. 1673, 1995 Del. Ch. LEXIS 82, at *5 (Del. Ch. July 10, 1995).

See also 1.6:740 Invoking Work-Product Immunity and Its Exceptions, Exceptions – Fiduciaries, under Rule 1.6.

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

In Steiner v. Meyerson, a lawyer in a derivative suit is also a shareholder and director of the corporation (corp. A) that brings suit on behalf of another corporation (corp. B). Steiner v. Meyerson, C.A. No. 13139, 1997 Del. Ch. LEXIS 88, at *1-2 (Del. Ch. June 13, 1997). The defendants in the derivative suit sought to force the lawyer to resign but the Court held that the attorney did not have to resign from the case. Although the lawyer was a shareholder and director of the suing corporation, the lawyer did not exercise “sole managerial control” and there were no allegation that the lawyer “would not vigorously pursue the interest of his client [corp. A], or that his interests [were], in terms of substance, adverse to those of [corp. B] or its other shareholders.” Id. at *5-7.

See also 1.6:410 Privileged Communications under Rule 1.6 for when communication between an officer/ counsel or director/ counsel and the organization would or would not be considered to fall under attorney-client privilege protection.

1.13:230 Diverse Kinds of Entities as Organizations

Mother African Union First Colored Methodist Protestant Church v. The Conference of African Union First Colored Methodist Protestant Church, C.A. No. 12055, 1998 Del. Ch. LEXIS 239 (Del. Ch. Dec. 11, 1998) addresses one stage in a protracted legal battle which resulted in fines and civil contempt penalties being levied against the attorney for the Conference’s Bishop. The attorney took inconsistent positions before the court in violation of Civil Rule of Procedure Rule 11, and the attorney failed to comply with numerous court orders while representing the Bishop and the Conference.

Attorney-client privilege of a Homeowners’ Association does not extend to all the property owners within the Association, but rather to the Association itself through its officers. Cove on Herring Creek Homeowners’ Association, Inc. v. Riggs, 2001 Del. Ch. LEXIS 157, at *4-5 (Del. Ch. Dec. 28, 2001) (summary judgment granted, Cove on Herring Creek Homeowners' Ass'n v. Riggs, 2003 Del. Ch. LEXIS 36 (Del. Ch. Apr. 9, 2003), aff’d, Riggs v. Cove on Herring Creek Homeowners Ass'n, 832 A.2d 1252, 2003 Del. LEXIS 472 (Del. 2003)).

1.13:300 Preventing Injury to an Entity Client

1.13:310 Resignation Versus Disclosure Outside the Organization

DLRPC Rule 1.13 (c) states that when the highest authority of the organization fails to act, “the lawyer may resign in accordance with Rule 1.16.” The rule does not give an attorney the option of disclosure to those outside the organization. It should be noted, however, that comment 14 to DLRPC 1.6 states that “Paragraph (b) [of Rule 1.6] permits disclosure only to the extent the lawyer reasonably believes the disclosure is necessary to accomplish one of the purposes specified. . . . . If the disclosure will be made in connection with a judicial proceeding, the disclosure should be made in a manner that limits access to the information to the tribunal or other persons having a need to know it and appropriate protective orders or other arrangements should be sought by the lawyer to the fullest extent practicable.” DLRPC 1.6 cmt. 14.

In Shearin v. The E. F. Hutton Group, Inc., the Court found that there is “an implicit [condition] of every lawyer’s contract of retention or of employment,” even “at will” employment, that the employer will not exercise the power of termination in retaliation for actions taken by the lawyer that the lawyer was required to do (or prohibited from doing) by established rules of professional responsibility. Shearin v. The E.F. Hutton Group, Inc., 652 A.2d 578, 588 (Del. Ch. 1994).

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

For more examples of non-client constituents within an entity see 1.6:470 Privilege for Organizational Clients, 1.6:640 Exception for Fiduciary-Lawyer Communications, 1.6:650 Exception for Organizational Fiduciaries under DLRPC Rule 1.6.

1.13:500 Joint Representation of Entity and Individual Constituents

DLRPC Rule 1.13 recognizes that lawyers may represent the organization as well as constituents within the organization (i.e. principle officers). Section (e) and comment [9] of the Delaware rule allows for such dual representation, subject to Rule 1.7. The Model Rules have a similar provision.

When a lawyer represents both an organization and its constituents, a potential for conflict of interests exists if the interests of the individual(s) and the organization diverge. In Unanue v. Unanue, C.A. No. 204-4, 2004 Del. Ch. LEXIS 37 (Del. Ch. March 25, 2004), a law firm represented several family members and the family run corporation in several unrelated matters. A few of these family members began to consult with the firm “regarding their duties as corporate officers in connection with disputes within [the company’s] Board of Directors”, while the firm was representing the company on other matters. Id. at *7. These family members were eventually removed from their corporate offices and board seats, and they sued the corporation to regain those positions and hired the firm to represent them. Id. *8-9. The company sought to remove the firm on grounds that the representation violated Rules 1.7 and 1.9. The Court concluded that the firm’s dealings with the company were not the “same or substantially similar,” nor did they create a “material adverse effect” on the company. Id. at *30. The Court further held that the firm had taken appropriate steps so that the representation of the dislodged family members did not result in a “concurrent conflict of interest,” by informing the corporation that they were concluding their representation of the company. Id.

In Sisson v. Szeto, the Court of Chancery of Delaware held that a stockholder, who has engaged in a derivative suit on behalf of the corporation, does not have standing to challenge the representation of individual directors by a lawyer who had previously represented the corporation. Sisson v. Szeto, C.A. No. 13502, 1994 Del. Ch. LEXIS 230, at *5 (Del. Ch. Oct. 28, 1994). In this case, the corporation had obtained independent counsel and the directors had specifically waived any theoretical conflicts with their lawyer who had also represented the corporation in the past. Id. at *2.

For more examples of non-client constituents within an entity see 1.6:470 Privilege for Organizational Clients under Rule 1.6.

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

Comment [10] “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.” DLRPC Rule 1.13 cmt. 10. Comment [11] “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, Rule 1.7 governs who should represent the directors and the organization.” DLRPC Rule 1.13 cmt. 11.

In Sisson v. Szeto, the Court of Chancery of Delaware held that a stockholder, involved in a derivative suit on behalf of the corporation, does not have standing to challenge the representation of individual directors by a lawyer who had previously represented the corporation. Sisson v. Szeto, C.A. No. 13502, 1994 Del. Ch. LEXIS 230, at *5 (Del. Ch. Oct. 28, 1994). In this case, the corporation had obtained independent counsel and the directors had specifically waived any theoretical conflicts existing with the lawyer who had also represented the corporation in the past. Id. at *2.

Whether shareholders in a derivative suit can obtain corporate information that would otherwise be protected by attorney-client privilege depends on whether the shareholder(s) can show “good cause.” Cole v. Wilmington Materials, Inc., C.A. No. 12649, 1993 Del. Ch. LEXIS 106, at *5-6 (Del. Ch. July 1, 1993). Factors to be considered when determining if good cause exists include: “1) The number of shareholder plaintiffs and the percentage of stock they represent; 2) the bonafides of the shareholders; 3) the nature of the shareholders; 4) the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; 5) whether the communications related to past or prospective actions; 6) whether communications are advice concerning the litigation itself; and 7) the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.” Id. at *6. The Court held that the shareholders could access “all papers available to the corporation or its officers relating to the negotiation, structuring and implementation of the sale transaction,” but not those “documents relating primarily to the defense of [the] lawsuit.” Id. at *8. For a more detailed examination of attorney-client privilege in a derivative suit, see also 1.6:650 Exception for Organizational Fiduciaries under DLRPC Rule 1.6.

Steiner v. Meyerson is a case where corporation A, a shareholder in corporation B, was contemplating intervening in a derivative suit after the original plaintiff sold his shares in corporation B. Steiner v. Meyerson, C.A. No. 13139, 1997 Del. Ch. LEXIS 88, at *1-2 (Del. Ch. June 13, 1997). The attorney for corporation A was also a shareholder and director of corporation A, and the defendants sought the attorney’s resignation from the case. Id. The Court held that the attorney did not have to resign. Although a shareholder and director of corporation A, the attorney did not exercise “sole managerial control” of corporation A and there were no allegation that the attorney “would not vigorously pursue the interest of his client, [corporation A], or that his interests [were], in terms of substance, adverse to those of [corporation B] or its other shareholders.” Id. at *5-7.

1.13:520 Representing Client with Fiduciary Duties

See 1.6:740 Invoking Work-Product Immunity and Its Exceptions, Exceptions – Fiduciaries, under DLRPC Rule 1.6.

1.13:530 Representing Government Client

In Layfield v. Hastings, the Court of Chancery of Delaware found that baring extreme circumstances, a town council’s attorney only owes a duty to the town and not those with whom the town may interact. Layfield v. Hastings, Civ. A. No. 1673, 1995 Del. Ch. LEXIS 82, at *5 (Del. Ch. July 10, 1995).

See also 1.6:475 Privilege for Governmental Clients under DLRPC Rule 1.6.