Freivogel on Conflicts
 
 
 Board Positions

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Comment [35] to Model Rule 1.7 discusses in the most general way lawyers sitting on boards of clients.  It concludes with the following:

If there is a material risk that the dual role will compromise the lawyer's independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation's lawyer when conflicts of interest arise.

        We are not aware of any state ethics rule that is more restrictive than the Model Rules on the practice of lawyers sitting on boards of clients.  The Restatement does not purport to condemn the practice either, § 135, cmts. d and e.  Nor, does the ABA Committee in its treatment of the subject at Op. 98-410 (1998).  The following state and local ethics opinions also recognize the propriety of lawyers sitting on boards of clients, but urge caution: Ill. Op. 86-14 (1986); Md. Op. 87-29 (1987); N.H. Op. 7(A) (1982); and N.Y. City Op. 1988-5.  Interestingly, the Code of Professional Conduct of the American Institute of CPAs declares that a member's independence is "impaired" if the member sits on the board of a client.  See Interpretation 101-1(B)(1). 

        Susan Kostal, Board to Pieces, A.B.A.J. 12 (June 2006).  This article suggests that law firms are more strictly controlling the practice of their lawyers serving on boards.

        Malpractice Coverage.  While malpractice insurance policies have become increasingly less restrictive, a lawyer serving on a board of a client may have reduced coverage, or no coverage at all, in some cases.  In Continental Casualty Co. v. Smith, 243 F. Supp. 2d 576 (E.D. La. 2003), the policy had exclusions for certain non-law businesses, and the court held the lawyer had no coverage, even for legal work done in connection with those businesses.

        Attorney/Client Privilege.  When is the lawyer rendering legal services or giving legal advice versus acting as a board member?  In the latter capacity, there is no privilege.  N.Y. Op. 589 (1988) provides that a lawyer in that position must advise the client of the danger that the privilege may not cover some communications.  Cases in which certain lawyer/director's communications were deemed not privileged include the following:  Securities and Exchange Commission v. Gulf & Western Ind., Inc., 518 F. Supp. 675 (D.D.C. 1981); Federal Savings and Loan Ins. Corp. v. Fielding, 343 F. Supp. 537 (D. Nev. 1972); and United States v. Vehicular Parking, Ltd., 52 F. Supp. 751 (D. Del. 1943).  In Deutsch v. Cogan, 580 A.2d 100 (Del. Ch. 1990), the court held that a law firm with a lawyer on the board of a client had fiduciary duties to certain shareholders.  As a result there was no privilege as to certain communications between the law firm and the corporation.  To a similar effect is Valente v. PepsiCo, Inc., 68 F.R.D. 361 (D. Del. 1975).  A case in which a lawyer's serving on a board undercut indirectly the ability of the company to claim privilege is AOC Ltd. Partnership v. Horsham Corp., 1992 Del. Ch. LEXIS 110 (Del. Ch. 1992). 

        Analogous Non-Lawyer Privilege Cases.  Cases pointing out that a lawyer's  communication may not be privileged if the lawyer is acting in a non-legal capacity are American Cyanamid Co. v. Hercules Powder Co., 211 F. Supp. 85 (D. Del. 1962); In re Robinson, 125 N.Y.S. 193 (N.Y. App. 1910).  In the following case, the court held that a lawyer's report, which was revealed in the public minutes of a labor union, was not privileged, United States v. Silverman, 430 F.2d 106 (2d Cir. 1970), modified on other grounds, 439 F.2d 1198 (2d Cir. 1970), cert. denied, 402 U.S. 953 (1971). 

        Lawyer/Director Liability Issues. Escott v. Barchris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968), was a securities class action brought  under § 11 of the Securities Act of 1933.  The court, holding a lawyer/director/drafter of registration statement liable, noted that such a person occupied a special position and should have investigated clues that something was wrong.  Another case stating that a lawyer/director should be held to a higher disclosure standard is Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544 (E.D.N.Y. 1971).  In Blakely v. Lisac, 357 F. Supp. 255 (D. Ore. 1972), the court held a lawyer/director to a higher standard under SEC Rule 10b-5 to discover fraudulent statements in a prospectus.  Another case where the court held a lawyer/director to a higher standard is In re Emerging Communications, Inc. Shareholders Litig., 2004 Del. Ch. LEXIS 70 (Del. Ch. June 4, 2004) (judgment for $75 million).  A lawyer/director was deemed a "controlling person" for purposes of § 20(a) of the Securities Exchange Act of 1934 in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989). 

        Liability/Failure to Comply with Version of Model Rule 1.8(a). In Waitt v. Speed Control, Inc., 2002 U.S. Dist. LEXIS 11869 (N.D. Iowa June 28, 2002), the court denied summary judgment to a lawyer because he had failed to comply with California Rule 3-300, California's version of Model Rule 1.8(a).

       Cannot Try Case.  In Harrison v. Keystone Coca-Cola Bottling Co., 428 F. Supp. 149 (M.D. Pa. 1977), the court held that a lawyer who was a director for a client could not try a case in which he might have to testify as a director.   Cottonwood Estates, Inc. v. Paradise Builders, Inc., 624 P.2d 296 (Ariz. 1981), involved not a director but a lawyer/officer.  The court held that he could not try the case for his client.

       Litigator/Board Member Cannot See Documents. Norbrook Laboratories, Ltd. v. G.C. Hanford Mfg. Co., 2003 U.S. Dist. LEXIS 6851 (N.D.N.Y. April 24, 2003) Trade secret case.  Court held that one of defendant’s lawyers should be barred from seeing plaintiff’s documents marked “Confidential, Attorney’s Eyes Only,” because he was also corporate secretary and member of defendant’s board.  The court said that the danger of the lawyer/board member making an inadvertent disclosure of the confidential information was too great to allow him access to it.

        Cannot Sue Corporation.  In the following cases the courts held that a law firm could not be adverse to an entity if a lawyer in the firm was a current or former member of the board of the entity: Allen v. Academic Games Leagues of America, Inc., 831 F. Supp. 785 (C.D. Cal. 1993); Berry v. Saline Mem. Hosp., 907 S.W.2d 736 (Ark. 1995); Raley v. Superior Court, 197 Cal. Rptr. 232 (Cal. App. 1983); and Graf v. Frame, 352 S.E.2d 31 (W. Va. 1986).  The following ethics opinions are to the same effect: Ohio Op. 2008-2 (June 6, 2008) (waiver will not work); Va. Op 1821; Ill. Op. 02-01; Mo. Op. 970171.  But, in Trivedi v. Slawecki, 2012 U.S. Dist. LEXIS 101890 (M.D. Pa. July 23, 2012), the court allowed a lawyer to be adverse to a foundation upon whose board he sat for several months two years prior to the suit.

        Cannot Draft Wills.  Md. Op. 2003-08 (Sept. 22, 2003).  (We learned of this opinion in the October 8, 2003, online edition of the Current Report of the ABA/BNA Law. Man. Prof. Conduct.  What follows is a summary of the ABA/BNA description.  Maryland opinions are not available online.)  The committee ruled that a lawyer/church-board member could not draft wills for parishioners, in which the parishioners left money or property to the church.  Consultation and waivers would not cure the conflict.

        What about Governmental Board Position?  Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150 (Tex. 2004).  A lawyer (Joe) was the member of the city council.  His partner represented a local real estate developer.  Joe sponsored an ordinance that imposed a moratorium on apartment development.  Because of the moratorium the developer was unable to develop some of his property as he wished.  He sued Joe and his law firm.  The trial court granted the defendants summary judgment.  The appellate court reversed, essentially calling this a conflict of interest, Two Thirty Nine Joint Venture v. Joe, 60 S.W.3d 896 (Tex. App. 2001).  Among other things the court said more should have been disclosed to the developer so that he could have adopted a strategy to avoid the effects of the moratorium.  In this opinion the Texas Supreme Court reversed.  The court held that the lawyer/legislator was immune from liability for a conflict of interest.  The court also held that his law firm could not, therefore, be vicariously liable.  As to the failure of the firm to alert the client about the upcoming meeting, the court held that such an alert was not within the scope of the firm’s representation.  The firm was not representing the client in connection with the moratorium proceeding.  Moreover, the court noted (somewhat gratuitously) that the scheduling of the meeting at which the moratorium was adopted was public record.

        Marriage to Board Member.  DCH Health Services. Corp. v. Waite, 115 Cal. Rptr. 2d 847 (Cal. App. 2002).  A lawyer married a former member of a hospital foundation board.  Later he became counsel against the foundation in a lawsuit.  His wife was privy to confidential foundation information relating to the action.  The appellate court held, part, that the lawyer could only be disqualified if a showing could be made that the wife gave him confidential foundation information relating to the action.

        Board Position Affecting Arbitration Award.  1199 SEIU United Healthcare Workers East v. Lily Pond Nursing Home, 2008 U.S. Dist. LEXIS 74481(S.D.N.Y. Sept. 29, 2008).  The court held that a board position with an organization affiliated with other side would not, alone, invalidate an arbitration award.  To read more about the case, go to “Arbitration” above.

        Derivative Action - No Need for Pre-Suit Board Demand.  Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95 (Del. Ch. 1995).  The court held that a pre-suit demand would have been futile, in part because an influential member of the board was a member of a small law firm that received $1 million a year in fees.

        Rare Case Involving Lawyer as Fiduciary.  Shirley v. Katz (In re Estate of Klarner), 98 P.3d 892 (Col. App. 2003).  A law firm was co-trustee of two related family trusts, Trust A and Trust B.  It filed a petition on behalf of the co-trustee of Trust A the effect of which would be that certain expenses be paid out of Trust B, instead of Trust A.  The court held that the law firm had a conflict because of its fiduciary duty to the beneficiaries of Trust B.

        Gouda v. Harcum Jr. Coll., 2015 WL 3528251 (E.D. Pa. June 4, 2015). Student was dismissed from nursing school. She filed this action against the school, its in-house lawyer, and another employee. Her claim against the lawyer was that the lawyer had a conflict of interest in representing the school and being on the school board at the same time. She specifically cited Pennsylvania Rule 1.7. In this opinion the court dismissed that claim because violation of an ethics rule does not give rise to a civil cause of action. [We have often wondered whether a plaintiff could avoid this result by alleging that the conflict was a common-law breach of fiduciary duty and not mention the ethics rule in the complaint.]

        Ill. Op. 13-4 (May 2013).  Lawyer owns 8% of Bank and is Chairman of Bank's board.  Lawyer represents Municipality, which does business with Bank.  This opinion explores Lawyer's obligations under Rules 1.8(a) and 1.7(a)(2) (material limitation).  The opinion says that the the relationship is probably "nonconsentable" under Rule 1.7(a)(2).  The opinion is not clear whether Lawyer can avoid a violation by not representing Municipality in dealings with Bank, while representing the Municipality on other matters.

        Law Reviews.  Bethany Smith, Note, Sitting on vs. not Sitting on your Client’s Board of Directors, 15 Geo. J. Legal Ethics 597 (2002); The Lawyer as Director of a Client, 57 Bus. Law. 387 (November 2001); Stephen M. Zaloom, Legal Status of the Lawyer-Director: Avoiding Ethical Misconduct, 8 U. Miami Bus. L. Rev. 229 (2000); Craig C. Albert, The Lawyer-Director: An Oxymoron?, 9 Geo. J. Legal Ethics 413 (1996); Micalyn S. Harris and Karen L. Valihura, Outside Counsel as Director: The Pros and Potential Pitfalls of Dual Service, 53 Bus. Law. 479 (1988); Carolyn T. Thurston, Corporate Counsel on the Board of Directors: An Overview, 10 Cumb. L. Rev. 791 (1980); William E. Knepper, Liability of Lawyer-Directors, 40 Ohio St. L.J. 341 (1979).

        ABA Director's Guidebook.  See, also, ABA Committee on Corporate Laws, Corporate Director's Guidebook (3d ed. 2001), reprinted in 56 Bus. Law. 1575 (2001)

        Treatise.  Rotunda & Dzienkowski § 1.7-6(l).

        Suggested Form Letter for Lawyer Seeking to Serve.

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