When a firm sues the sole shareholder of a corporation that a newly hired lawyer once represented, is that a disqualifying conflict?

Plain-English summary

Firm XYZ represented Bank C and was proceeding against Defendant A. Three months later Attorney B joined XYZ. B had previously represented GHI, Inc., a corporation of which A was sole shareholder; that representation had ended three years earlier and was an unrelated matter, and B never represented A individually. A claimed B learned personal financial information; B did not recall any and said he would not share it, and B had never spoken with the XYZ lawyer handling the case. The question was whether XYZ's representation against A is a conflict.

The committee said the threshold question is whether A, as an individual, was B's client in the GHI matter. Under Rule 1.13(a), a lawyer retained by an organization represents the organization acting through its constituents, and representing a corporation does not necessarily create a lawyer-client relationship with individual stockholders. But courts may look beyond legal form, especially with a sole shareholder, to ask whether that shareholder could reasonably believe the lawyer was acting for his interests as well as the entity's. The committee cited Marguilies v. Upchurch, 696 P.2d 1195 (1985) (representing a limited partnership does not automatically make counsel for the individual limited partners, though direct involvement of their individual interests may imply an attorney-client relationship), and McCarthy v. John T. Henderson, Inc., 587 A.2d 280 (1991) (asking whether an ordinary knowledgeable citizen would view the individual shareholders as former clients, whether personal legal services were performed, and whether the lawyers gained insight usable to the individuals' disadvantage; finding no impermissible conflict where no such information was obtained). Applying this, the committee said legal form does not control: if B's representation of GHI is construed as representation of A, Rule 1.9 may make a subsequent action directly against A an impermissible conflict, a conclusion strengthened if B received personal financial information, and Rule 1.9(b)(2) addresses information acquired about a former firm's client. The isolated (rather than ongoing) nature of the corporate representation makes it less likely A relied on B beyond the entity's matter. If no true attorney-client relationship with A existed, the new adverse representation appears permissible, with Rule 1.9(c) (use of previously acquired information) still to be observed.

Currency note

This opinion was issued in 1992, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. 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: Does representing a corporation make its sole shareholder a client too?

A: Not automatically. The committee cited Rule 1.13(a) and case law that representing the entity does not by itself create a relationship with individual stockholders, though a sole shareholder may sometimes reasonably believe the lawyer also acted for him.

Q: What decides whether the firm's adverse case is a conflict?

A: The committee said it turns on whether the past corporate representation effectively made the shareholder a client. If so, Rule 1.9 may bar an action directly against him, especially if the lawyer received the individual's personal financial information.

Q: What factors did the committee weigh?

A: Whether the shareholder could reasonably believe the lawyer acted for his personal interests, whether the relationship was ongoing or isolated, whether the matters are substantially related, and whether any financial information could be used to the shareholder's disadvantage.

Q: If the shareholder was never the lawyer's client, can the firm proceed?

A: The committee said the adverse representation then appears permissible, but the lawyer must still observe Rule 1.9(c) on the use of information previously acquired.

Background and rules framework

The opinion applied Rule 1.13(a) (organization as client), Rule 1.9 (duties to former clients, including 1.9(b)(2) and 1.9(c)), and Rule 1.10 (imputed disqualification), each matching the like-numbered Model Rule. The analysis turned on whether the corporate representation created an attorney-client relationship with the sole shareholder, applying a "reasonable belief" and substantial-relationship test drawn from out-of-state case law.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.13(a) / Model Rule 1.13: a lawyer retained by an organization represents the organization acting through its constituents.
• South Carolina RPC 1.9 / Model Rule 1.9: duties to former clients, including information acquired about a former firm's client (1.9(b)(2)) and use of previously acquired information (1.9(c)).
• South Carolina RPC 1.10 / Model Rule 1.10: imputed disqualification.

Cases:

• Marguilies v. Upchurch, 696 P.2d 1195 (1985), counsel for a limited partnership is not automatically counsel for the individual limited partners.
• McCarthy v. John T. Henderson, Inc., 587 A.2d 280 (N.J. 1991), whether shareholders of a closely held corporation are former clients.

See also

• SC Bar Ethics Op. 92-23: When Opposing Counsel Join the Same Firm
• SC Bar Ethics Op. 02-03: Former Prosecutor's Conflict in a Related Civil Claim

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-92-24/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 92-24

Law Firm XYZ represents Bank C who asked that the firm proceed legally against Defendant A.

Three months later, Attorney B joined the XYZ Law Firm. Previously, B had represented GHI, Inc., a corporation in which A was a sole shareholder. This representation had ended three years previously. Attorney B never represented A individually.

A states that Attorney B was made aware of certain personal financial information and that he would be prejudiced if the information were used by Firm XYZ. Attorney B states that he does not recall any such information and that if he does, he will not share it. Attorney B has never spoken with the attorney in Firm XYZ who is handling this case.

B's representation of the corporation dealt with a matter which would not be related.

Question:
Is it a conflict of interest for Law Firm XYZ to undertake this representation against Defendant A?

Summary:
In determining whether it is a conflict of interest for Law Firm XYZ to continue representation adverse to Defendant A, the law firm should consider the nature of Attorney B's representation of GHI, Inc. The attorneys should consider whether A may reasonably believe that Attorney B was acting for his personal interest as well as those of the entity. Also, to be considered are whether the relationship was ongoing or isolated, whether the law case is a substantially related matter, and whether the financial information is to the disadvantage of A.

Opinion:
On question to consider is whether A as an individual was B's client in the GHI, Inc. matter. Rule 1.13(a) states "a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." Certainly, a lawyer may represent an incorporated entity without necessarily creating a lawyer-client relationship between himself and individual stockholders. On the other hand, courts may look beyond legal form to ascertain in a situation as this one, where there is a sole shareholder, whether that individual shareholder A may reasonably believe that the lawyer is acting for his interests as well as those of the entity.

In Marguilies v. Upchurch, 696 P.2d 1195 (1985), a law firm represented a limited partnership in one matter while representing another client in a separate action against three of the limited partners. The Court found that a lawyer who represents a limited partnership does not automatically become counsel for the individual limited partners. Of significance, however, is the Court's statement that when the individual interests of the limited partners are directly involved, then there may be sufficient grounds for implying the existence of an attorney-client relationship.

If in the situation at issue, Attorney B's representation of GHI, Inc. is construed as a representation of Client A, Rule 1.9 may apply. Rule 1.9(a) states "a lawyer who has formally represented a client in a matter shall not thereafter represent another person in the same or substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents." Further, Rule 1.9(b)(2) states that if the lawyer's former firm had previously represented a client about whom the lawyer had acquired protected information, the lawyer shall not knowingly represent a person in a substantially related matter unless the former client consents.

In McCarthy v. John T. Henderson, Inc., 587 A.2d 280 (1991), the New Jersey Supreme Court considered whether a law firm could not represent one closely held corporation and then represent a client adverse to a second closely held corporation which had the same principle shareholder and officers. The Court determined the relevant issue as being whether the first representation would lead "an ordinary knowledgeable citizen acquainted with the facts" to conclude that the individual shareholders of the corporation, and not just the entity, should be considered former clients. The Court went on to consider whether the lawyers had performed personal legal services for individuals during the first representation and whether the lawyers may have gained relevant insight into the personal attitudes of the shareholders toward litigation strategy. The Court found that the lawyers had not obtained information that could be used to the disadvantage of the individuals in the second case and thereby found no impermissible conflict.

It would appear that the legal form of the parties does not necessarily control the disposition of this issue. Specifically, we must determine whether Attorney B's representation of GHI, Inc. might reasonably be perceived by the sole shareholder A as also representing A's interests.

It is also relevant that the representation of the corporation was an isolated relationship, rather than an ongoing one. This makes it less likely that the shareholder relied upon the lawyer's expertise for matters beyond the scope of the representation of the entity.

If the attorney-client relationship has been established between Attorney B and Client A, then according to Rule 1.9, a subsequent action directly against Client A may be impermissible conflict. This determination is strengthened if Attorney B did receive personal financial information. It may be worthwhile to investigate whether Client A does differentiate between his personal interests and those of GHI Inc. and the extent of such differentiation.

On the other hand, if no true attorney-client relationship was established in the past between Lawyer B and Client A, then the new adverse relationship would appear to be permissible. Rule 1.9(c) regarding information previously acquired must be observed.