Tuesday, September 1, 2015

Conflicts and the Dissolving Partnership

Coldren v. Hart, King & Coldren, Inc., No. G050202 (D4d3 Aug. 5, 2015)

Departing Partner in a 50/50 two-partner law firm sued his Firm and his Remaining Partner over the terms of his retirement. Firm and Remaining Partner sued back. Remaining Partner and Firm were represented in the litigation by the same Attorney, who had never previously represented Firm or Departing Attorney. Departing Partner brought a DQ motion, claiming that Attorney couldn’t represent both Remaining Partner and the Firm—in which Departing Partner continued to claim his 50 percent stake. After waffling on the tentative, the trial court granted the motion. 

But the court of appeal reverses. The decision rests on two grounds.


First, Departing Partner didn’t have standing to raise any conflict between the Firm and Remaining Partner. Generally, in order to have standing to raise a conflicts issue in a DQ motion, the moving party must show a current or prior relationship with the lawyer to be disqualified. In this case, Attorney had never previously represented Departing Partner.

Departing Partner tried to avoid the general rule by analogizing to stockholder derivative actions, where the same attorney generally can’t represent the company as a nominal plaintiff, while at the same time representing insiders who allegedly harmed the company itself. The problem with that argument is that Departing Partner’s claims aren’t derivative. He’s not suing Remaining Partner in the shoes of Firm. He is, instead, suing both Remaining Partner and Firm for failing to live up to their purported obligations in connection with his erstwhile retirement. That doesn’t misalign Firm and Remaining Partner in any way where Attorney can’t currently represent both of them. And even if a conflict that Departing Partner might have standing to raise might be theoretically possible—perhaps issues regarding valuation if Departing Partner is successful in requiring Firm to be wound up—nothing in the current record suggests that to be the case at this time.


Departing Partner’s argument also fails on the merits. Rule of Professional Conduct 3-600(E) specifically provides that a lawyer representing an entity can also represent its officers or members, so long as they get the informed consent required under Rule 3-310. Relying on a State Bar ethics opinion that is essentially on all fours, the court holds that, so long as Attorney isn’t required to advance antagonistic theories between Firm and Remaining Partner, he can permissibly both of them over Departing Partner’s objection. In representing the Firm, nothing precludes Attorney from being adverse to the interests of a firm shareholder, even one who has a 50 percent interest. So long as Remaining Partner and the Firm
which can agree through its managing agent Remaining Partnerhave given informed mutual consent to the joint representation, Rule 3-600(E) is satisfied, even if Departing Partner won’t consent. As a non-controlling shareholder his consent isnt necessary.

Notably, Departing Partner didn’t identify any concrete opposing interests between Firm and Remaining Partner. The record reflects no legit derivative-type allegations about Remaining Partner’s fraud or self-dealing to the detriment of Firm. Indeed, given that Departing partner sued Remaining Partner and Firm for essentially the same thing, a conflict is difficult to foresee. So disqualification fails on the merits.


Reversed.

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