I formed a close corporation for two clients and served as its counsel; can I now represent one shareholder against the other in their dispute?

Plain-English summary

A and B hired the inquiring attorney to form a corporation for a new business. The attorney had previously represented A in various unrelated matters but had no prior client-lawyer relationship with B. He prepared the documentation to form a close corporation of which A and B are the only shareholders, with A holding a majority of the stock. For two years after incorporation the attorney served as legal counsel to the corporation, with fees paid by the corporation, while contemporaneously representing A in other unrelated matters for which A paid personally. After A and B fell into a dispute over the corporation's operation, the attorney asked whether he may represent A in the dispute with B and whether he may represent A if B sues to dissolve the corporation.

The opinion first applies Rule 2.2 ("Lawyer as Intermediary"), whose Comment gives helping to organize a business among client-entrepreneurs as an example of intermediation. The Panel finds it unclear whether the attorney acted as intermediary and whether he consulted with each client about the implications of common representation as Rule 2.2(a) requires. Regardless, it opines that intermediation may no longer be possible because the paragraph (a) conditions may no longer be satisfied, and concludes that if the attorney acted as intermediary he must withdraw under Rule 2.2(c) and may not continue to represent A in the matter that was the subject of the intermediation.

The opinion then applies Rule 1.13 ("Organization as Client"), because the attorney also acted as lawyer to the corporation. Rule 1.13(e) permits representing both an organization and a constituent subject to Rule 1.7, and requires the organization's consent, when Rule 1.7 requires it, to be given by an appropriate official other than the individual to be represented, or by the shareholders. The Panel finds a Rule 1.7(b) conflict may exist because the attorney's responsibilities to the corporation may be materially limited by representing A. It concludes client consent is therefore required, that A cannot give it because A is the individual to be represented, and that the attorney must obtain consent from B -- for himself and for the corporation -- in order to represent A and/or the corporation.

In practice

Under this opinion, the attorney's dual role -- possible intermediary in forming the corporation and ongoing corporate counsel -- controls the analysis. If he acted as intermediary, Rule 2.2(c) requires withdrawal and bars continued representation of A in the intermediation's subject matter. Separately, as corporate counsel, representing A against B implicates a Rule 1.7(b) conflict; the opinion holds the required consent cannot come from A (the person to be represented) and must instead be obtained from B, both individually and on the corporation's behalf.

Common questions

Q: Can the lawyer just keep representing A because A was his client first?

A: Not without more. If the attorney acted as intermediary, the opinion says Rule 2.2(c) requires him to withdraw and not continue to represent A in the matter that was the subject of the intermediation.

Q: Why is there a conflict if the lawyer represented the corporation, not B personally?

A: The opinion finds that under Rule 1.7(b) the attorney's responsibilities to the corporation may materially limit his representation of A, creating a conflict that requires consent.

Q: Whose consent is needed for the lawyer to represent A?

A: The opinion concludes A cannot consent because A is the individual to be represented, so the attorney must obtain consent from B, for himself and for the corporation.

Q: Does the answer change if B sues to dissolve the corporation?

A: The opinion addresses both scenarios together, applying the same intermediary-withdrawal and Rule 1.7(b) consent analysis to the attorney's proposed representation of A.

Background and rules framework

The opinion interprets Rhode Island Rules of Professional Conduct 2.2 (lawyer as intermediary), 1.13 (organization as client), and 1.7 (conflict of interest), analogs of the corresponding Model Rules. Rule 2.2(a) sets conditions for acting as intermediary between clients and Rule 2.2(c) requires withdrawal when a client requests it or a paragraph (a) condition fails. Rule 1.13(e) allows representing both an organization and a constituent subject to Rule 1.7 and specifies who gives the organization's consent. Rule 1.7(b) bars representation materially limited by the lawyer's responsibilities to another client or third person absent the reasonable-belief and consent conditions.

Citations and references

Rules of Professional Conduct:

• MR 2.2 / RI RPC 2.2 (lawyer as intermediary; withdrawal under 2.2(c))
• MR 1.13 / RI RPC 1.13(e) (organization as client; consent to dual representation)
• MR 1.7 / RI RPC 1.7(b) (conflict of interest; material limitation and consent)

See also

• RI EAP Opinion 93-44: may not represent a shareholder against a current corporate client without consent under 1.7
• RI EAP Opinion 93-51: may represent a former client's employer before the same board with consent under 1.7

Source

• Landing page: https://www.courts.ri.gov/attorney-resources/Pages/Ethics-Advisory-Panel-default.aspx
• Original PDF: https://www.courts.ri.gov/Opinions/EAP%2093-58.pdf

Original opinion text

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

(FINAL)
ETHICS ADVISORY PANEL
OPINION #93-58, REQUEST #374
Issued October 5, 1993

A and B hired the inquiring attorney to form a corporation for the operation of a new business. The inquiring attorney previously represented A in various unrelated matters, but had no prior client-lawyer relationship with B. The inquiring attorney prepared all of the documentation necessary to form a close corporation; A and B are the only shareholders. A holds a majority of the stock. For two (2) years following incorporation, the inquiring attorney served as legal counsel to the corporation. The inquiring attorney's fees were paid by the corporation. Contemporaneously, the inquiring attorney represented A in other unrelated matters for which A personally paid the attorney's legal fees. Subsequently, A and B had a dispute with respect to the operation of the corporation. The attorney asks whether he/she may represent A in the dispute with B and whether he/she may represent A in the event that B sues to dissolve the corporation.

Rule 2.2 entitled "Lawyer as Intermediary" applies to this inquiry. The comment to the Rule states that a lawyer acts as intermediary in seeking to establish a relationship between clients, and gives as an example helping to organize a business in which two or more clients are entrepreneurs. Rule 2.2 states in part:

(a) A lawyer may act as intermediary between clients if:
(1) the lawyer consults with each client concerning the implications of the common representation, including the advantages and risks involved, and the effect on the attorney-client privileges, and obtains each client's consent to the common representation;
(2) the lawyer reasonably believes that the matter can be resolved on terms compatible with the clients' best interests, that each client will be able to make adequately informed decisions in the matter and that there is little risk of material prejudice to the interests of any of the clients if the contemplated resolution is unsuccessful; and
(3) the lawyer reasonably believes that the common representation can be undertaken impartially and without improper effect on other responsibilities the lawyer has to any of the clients.

(c) A lawyer shall withdraw as intermediary if any of the clients so requests, or if any of the conditions stated in paragraph (a) is no longer satisfied. Upon withdrawal, the lawyer shall not continue to represent any of the clients in the matter that was the subject of the intermediation.

The Panel believes that under the circumstances of this inquiry, it is unclear whether the attorney acted as intermediary in helping to organize the corporation in which A and B were entrepreneurs. Further, it is unclear whether the inquiring attorney consulted with each client concerning the implications of common representation as required by subsection (a). That notwithstanding, the Panel opines that intermediation may no longer be possible inasmuch as the conditions listed in subsection (a) may no longer be satisfied. The Panel concludes that if the inquiring attorney acted as intermediary, the inquiring attorney must withdraw as intermediary pursuant to subsection (c) and shall not continue to represent A in matters involving the subject of the intermediation.

Under these facts it is apparent that the inquiring attorney also acted as lawyer to the corporation. Rule 1.13 entitled "Organization as Client" therefore applies to this inquiry. Subsection (e) of the Rule states:

A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.

Subsection (e) permits a lawyer to represent both an organization and one (1) or more of its constituents subject to Rule 1.7 governing conflict of interest. Further, subsection (e) mandates that when a conflict of interest arises, the lawyer must obtain the consent of an appropriate individual seeking representation.

The Panel believes that under these facts a conflict of interest may exist pursuant to Rule 1.7(b). That Rule states as follows:

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

It appears to the Panel that the inquiring attorney's responsibilities to the corporation may be materially limited if he/she undertakes representation of A. Client consent is therefore required in order to permit representation. The Panel notes, however, that in this instance consent may not be given by A as he/she is the individual who is to be represented. The inquiring attorney must therefore obtain client consent by B for him/herself and for the corporation in order to represent A and/or the corporation.