Conflicts and the Closely Held Corporation

Beachcomber Mgmt. Crystal Cove, LLC v. Superior Court, No. G054078 (D4d3 Jul. 28, 2017)

This case addresses the interpretation Rule of Professional Conduct 3-310—the rule on client conflicts—in the somewhat unusual context of a stockholder derivative action. 

Attorney represents Company in a litigation. In a later case, a Company Stockholder brings a derivative action against Officers and Directors of Company. The Officers and Directors retain Attorney to defend the suit. A derivative case, however, is nominally brought by the company. So if you read the conflicts rules literally, as a technical matter Attorney is now litigating adversely to a former or perhaps even a current client, which is generally a problem. 

So far as former client conflicts go, at least, that doesn’t always make much sense. The point of former client conflicts rules is to prevent an attorney from using confidential information obtained from a client in one matter against that client in some later matter. But if the successive case entails representing the officers or directors of a closely held company that is also a former client, the insiders typically are the repositories of whatever information the company might have anyway. So there’s generally no reason why retaining the company’s former counsel to represent the insiders would give the attorney access to any confidential information that those insiders won’t otherwise already have. In that case, the rationale of the former client conflicts rule is not implicated. This issue was basically the analysis in the Ontiveros case, decided last year. 

Here, the trial court didn’t address the conflict issue under the derivative case-specific analysis used in Ontiveros and other similar cases. It just more or less mechanically applied Rule 3-310. That was error, and it merits granting a writ. The court here doesn’t pre-ordain a result, but it sends the case back to the superior court for application of the proper test.

Writ granted.