Can a firm bringing a shareholder derivative action on behalf of a corporation also represent a landlord suing that same corporation for back rent?

Plain-English summary

Two minority shareholders, later elected officers and directors, used Law Firm B in a dispute with a corporation and its president. After the board (controlled by the president) defeated a motion to sue the president for mismanagement, Law Firm B filed a counterclaim seeking independent relief for the shareholders and derivative relief for the corporation. The president then admitted owing the corporation over $50,000 in unauthorized loans, and the minority shareholders learned of the landlord's claim for back rent. The landlord retained Law Firm B to sue the corporation for the rent. Full disclosure was made to the landlord and the shareholders, and all wanted Law Firm B to continue. The inquiry asked whether Law Firm B could ethically represent both the landlord and the minority shareholders.

The opinion concluded no. Law Firm B is effectively representing the corporation in the derivative action while also representing the landlord in a claim against the corporation; Rule 5.10 and its comment establish that the firm's obligation in the derivative action runs to the corporation, not merely the minority shareholders who hired it. While informed consent ordinarily permits representing multiple parties with conflicting interests, it does not override the conflict unless the lawyer reasonably believes representation of each client will not be adversely affected (Rule 5.1(a), (b)). Because the firm effectively acts for the corporation and the back-rent issue appears entangled with the claims and counterclaims, there is serious doubt about the effectiveness of the shareholders' consent, and representation of both clients cannot reasonably be undertaken without threatening one client's interests and the confidential communications protected by Rule 4. Which party, if any, Law Firm B may continue to represent depends on the availability of informed consent, the relevance of confidential information received in each representation, and the court's exercise of its inherent authority.

Currency note

This opinion was issued in 1987, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. The provisions it applies (Rule 5.10 on representing an organization, Rule 5.1 on conflicts, and Rule 4 on confidentiality) have since been renumbered and revised (the corresponding Model Rules are 1.13, 1.7, and 1.6). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: In a derivative action, who is the firm's client?

A: The corporation. The opinion concluded that under Rule 5.10 the firm's obligation in the derivative action runs to the corporation, not merely the minority shareholders who hired it.

Q: Can the firm also sue that corporation on behalf of a landlord?

A: No. The opinion concluded the firm cannot effectively represent the corporation in one suit while representing the landlord against it in another, where the issues are entangled.

Q: Does the clients' informed consent cure the conflict?

A: Not necessarily. The opinion concluded that consent does not override the conflict unless the lawyer reasonably believes each representation will not be adversely affected, and here that belief was doubtful (Rule 5.1(a), (b); Rule 4).

Background and rules framework

The opinion applied North Carolina Rule 5.10 on representing an organization (corresponding to Model Rule 1.13), Rule 5.1(a), (b) on conflicts of interest (corresponding to Model Rule 1.7), and Rule 4 on confidentiality (corresponding to Model Rule 1.6). The analysis turned on the firm's effective representation of the corporation in the derivative action and the entanglement of the landlord's claim with the derivative and direct claims, which undermined the effectiveness of consent.

Citations and references

Rules of Professional Conduct:

• North Carolina Rule 5.10 (representing an organization)
• North Carolina Rule 5.1(a), (b) (conflicts of interest)
• North Carolina Rule 4 (confidentiality)
• MR 1.13 (organization as client); MR 1.7 (concurrent conflicts); MR 1.6 (confidentiality)

Cases:

• Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279 (1978), cert. denied and appeal dismissed, 296 N.C. 740, 254 S.E.2d 181 (1979), cited on derivative-action representation

Statutes:

• G.S. Section 55-55 (shareholder derivative actions, as cited in the opinion)

See also

• NC Ethics Op. RPC 22: estate administratrix in two capacities
• NC Ethics Op. RPC 27: adverse to a current vs. former client

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-18/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Two minority shareholders and an attorney from Law Firm B went to the principal place of business of a corporation to review corporate records. Law Firm A, on behalf of the corporation and its president, brought suit against the two minority shareholders for trespass and invasion of privacy. It is undisputed that one of the two minority shareholders was an officer and director of the corporation at the time of the inspection. Prior to answering the Complaint filed by Law Firm A, the two minority shareholders were elected as officers and directors of the corporation by a unanimous vote at the annual meeting of shareholders and directors. In addition, at that meeting the minority shareholders moved that the corporation sue its president for mismanagement, but that motion was defeated by a majority vote of the directors, who were controlled by the president. Law Firm B filed a counterclaim against the corporation and its president, praying for independent relief for the minority shareholders and derivative relief for the corporation. Thereafter, the president called a special meeting of the shareholders and directors to vote on a salary increase for himself and to consider disposition of a claim for back rent from the landlord of the corporate premises. The two minority shareholders and directors voted against a salary increase on the ground that the president admitted owing in excess of $50,000 to the corporation for unauthorized loans. Additionally, at that special meeting the minority shareholders were told for the first time of the landlord's claim for back rent. Subsequently, the landlord retained Law Firm B to file an action against the corporation for the rent arrearage. Full disclosure was made to the landlord and the minority shareholders, and all desired continued representation by Law Firm B. Since the filing of the Reply to the counterclaim, the Court has ordered that all the other directors and officers of the corporation be brought in as additional party defendants. Law Firm A has entered an appearance for a number of the other directors and officers. May Law Firm B ethically represent both the landlord and the minority shareholders under the facts stated?

Opinion:

No. Law Firm B may not ethically continue to represent both the minority shareholders on behalf of the corporation in the derivative action and also continue to represent the landlord in the landlord's action for back rent. Law firm B is effectively representing the corporation in the derivative action and, at the same time, representing the landlord in that claim against the corporation. Rule 5.10 and the comment clearly establish that Law Firm B's obligation is to the corporation in the derivative action, not simply to the minority shareholders who employed it to bring the derivative action.

While informed consent in the ordinary situation will permit representation of multiple parties with conflicting interests, it will not override the conflict unless the attorney in question reasonably believes representation of the other client, in each instance, will not be adversely affected. See Rule 5.1(a), (b). Since Law Firm B is effectively acting on behalf of the corporation in the derivative action, and since the issue of back rent claimed by the landlord appears to be entangled with the issues involved in the claims and counterclaims in the suit between the minority shareholders on the one hand in the derivative action and between the corporation and its president on the other hand, there is serious doubt as to the effectiveness of the consent of the minority shareholders to permit representation of the otherwise conflicting interests, and it does not appear that representation of both clients may reasonably be undertaken without a threat to the interest of one of the other clients and to the sanctity of confidential communications protected by Rule 4. Which, if any, party Law Firm B may continue to represent will depend upon the availability of informed consent from any of the parties, the relevance of confidential information, within the meaning of Rule 4, received by Law Firm B in its current representation of the minority shareholders and effectively of the corporation in the derivative action and in its representation of the landlord, and on the Court's judgment in the exercise of its inherent authority. See Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d. 279 (1978), cert. denied and appeal dismissed, 296 NC 740, 254 S.E.2d 181 (1979); G.S. §55-55.