Freivogel on Conflicts
Derivative Actions

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In the typical shareholders' derivative action, disgruntled shareholders demand that the corporation take action against directors, officers, or others for wrongdoing that has harmed the corporation.  When the corporation refuses, the shareholders bring a derivative action against the alleged wrongdoers and join the corporation as a defendant.  Invariably, the corporation is eventually recast as a plaintiff, because the action is brought to benefit the corporation.  An issue that recurs repeatedly is the extent to which a lawyer or law firm can represent the corporation, the alleged wrongdoers, both the corporation and the alleged wrongdoers, or some other combination of parties.  The cases collected below stand for the proposition that where the plaintiffs are making a serious claim that directors or officers have harmed the corporation, the corporation needs counsel separate from the directors and officers.  In a few cases the court approved joint representation in the early stages of the proceeding or where the allegations against the insiders were not serious.  The cases are grouped into federal and state. 

        The Federal Court Cases.  Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3d Cir. 1993); KD Gretna Props., LLC v. Decatur Realty Corp., 2013 U.S. Dist. LEXIS 42382 (E.D. La. March 26, 2013) (may represent both in some cases); Natomas Gardens Invest. Group LLC v. Sinadinos, 2009 U.S. Dist. LEXIS 83391 (E.D. Cal. Sept. 14, 2009) (clarification as to who could select new counsel, 2009 U.S. Dist. LEXIS 110063 (E.D. Cal. Nov. 25, 2009)); Musheno v. Gensemer, 897 F. Supp. 833 (M.D. Pa. 1995); In Re Oracle Securities Lit., 829 F. Supp. 1176 (N.D. Cal. 1993); Clark v. Lomas & Nettleton Fin. Corp., 79 F.R.D. 658 (N.D. Tex. 1978); Messing v. FDI, Inc., 439 F. Supp. 776 (D.N.J. 1977); Cannon v. U.S. Acoustics Corp., 398 F. Supp. 209 (N.D. Ill. 1975), aff'd in part and rev'd in part, 532 F.2d 1118 (7th Cir. 1976); Yablonski v. United Mine Workers of Am., 448 F.2d 1175 (D.C. Cir. 1971) (ordinarily, if lawyer withdraws from representing individual defendants, lawyer may continue for entity); Selama-Dindings Plantations, Ltd. v. Durham, 216 F. Supp. 104 (S.D. Ohio 1963), aff’d sub nom. Selama-Dindings Plantations, Ltd. v. Cincinnati Union Stock Yard, 337 F.2d 949 (6th Cir. 1964) (joint representation approved where no serious allegations against insiders); Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963); and Otis & Co. v. Pa. R. Co., 57 F. Supp. 680 (E.D. Pa. 1944) (no serious misconduct alleged against insiders).

        The State Court CasesSarkis v. Angels Gun Club, 2019 WL 2754767 (Cal. App. Unpub. July 2, 2019) (lengthy discussion of conflicts in derivative actions); Third Wave Tech. Servs., Inc. v. Marcato, 2018 WL 2408980 (Cal. App. Unpub. May 29, 2018); Deitch v. Wizard Gaming, Inc., 2010 Cal. App. Unpub. LEXIS 612 (Cal. App. Jan. 27, 2010); Electro K, Inc. v. Karpeles, 2002 Cal. App. Unpub. LEXIS 10238 (Cal. App. November 6, 2002); Forrest v. Baeza, 67 Cal. Rptr. 2d 857 (Cal. App. 1997); Hart v. Gilbert, 2002 Cal. App. Unpub. LEXIS 78 (Cal. App. April 15, 2002) (two-person limited partnership); Jacuzzi v. Jacuzzi Bros., Inc., 52 Cal. Rptr. 147 (Cal. App. 1966); Ontiveros v. Constable, 2016 WL 659723 (Cal. App. Unpub. Feb. 18, 2016); Scattered Corp. v. Chicago Stock Exchange, Inc., 1997 WL 187316 (Del. Ch. 1997) (joint representation approved through motion to dismiss stage); Scott v. New Drug Services, Inc., 1990 WL 135932 (Del. Ch. Sept. 6, 1990) (court did not disqualify law firm “at this time“); Campellone v. Cragan, 910 So. 2d 363 (Fla. App. 2005); Lower v. Lanark Mut. Fire Ins. Co., 448 N.E.2d 940 (Ill. App. 1983);  Rowen v. Le Mars Mut. Ins. Co. of Iowa, 230 N.W.2d 905 (Iowa 1975); Robinson v. Snell's Limbs and Braces of New Orleans, Inc., 538 So. 2d 1045 (La. App. 1989) (may represent both in some cases); Osterberg v. Giovanis, 2006 Me. Super. LEXIS 196 (Me. Super. Sept. 19, 2006) (unclear whether action was derivative or "individual"); Tydings v. Berk Enterprises, 565 A.2d 390 (Md. App. 1989; Hallal v. Vicis Capital Master Fund Ltd., 2013 U.S. Dist. LEXIS 39449 (D. Mass. Feb. 25, 2013) (former lawyer for corporation can represent plaintiffs); Horowitz v. Horowitz, 542 N.Y.S.2d 708 (N.Y. App. 1989; Schmidt v. Magnetic Head Corp., 476 N.Y.S.2d 151 (N.Y. App. 1984); Garlen v. Green Mansions, Inc., 193 N.Y.S.2d 116 (N.Y. App. 1959);  Evans v. Perl, 2008 N.Y. Misc. LEXIS 2105 (N.Y. Misc. April 9, 2008) (separate counsel not required in certain closely held situations); Dukas v. Davis Aircraft Prod. Co., Inc., 494 N.Y.S.2d 632 (N.Y. Misc. 1985); and In Re Kinsey, 660 P.2d 660 (not a typo) (Ore. 1983); and Hicks v. Edwards, 876 P.2d 953 (Wash. App. 1994).

        Ethics Opinion.  Pa. Op. 2005-21 (2005).

        Model Rules.  Comments [10]-[11] to Rule 1.13 discuss derivative actions but give little guidance.

        Restatement, §131, cmt. g.

        Treatises.  Hazard, Hodes, & Jarvis § 17.10; Rotunda & Dzienkowski        § 1.13-6.

       Law Reviews. Joan C. Rogers, Authorities Illuminate Propriety of Joint Representation in Corporate Context, 30 Law. Man. Prof. Conduct 329 (May 21, 2014); Robert J. Riccio, Conflicts of Interest in Derivative Litigation Involving Closely Held Corporations: An All or Nothing Approach to the Requirement of Independent Corporate Counsel, 63 Bus. Law. 183 (2008)  Elizabeth Dunshee, Multiple Representation in Shareholder Derivative Suits: Do the Current Rules Do Enough to Promote Informed Consent?, 9 Del. L. Rev. 213 (Winter 2007); Robert J. Landry III, Joint Representation of a Corporation and Director/Officer Defendants in Stockholder Derivative Suit: Is It Permissible?, 18 J. Legal Prof. 365 (1993). Note, Multiple Representation in Shareholder Derivative Suits: A Case-by-Case Approach, 16 Loy. U. Chi. L.J. 613 (1985); Note, Independent Representation for Corporate Defendants in Derivative Suits, 74 Yale L.J. 524 (1965).

Special Committees

       It is not uncommon for the board to appoint a special committee to evaluate the merits of a derivative action, either after a demand has been made, or after the suit is filed.  This is sometimes called the "special litigation committee."  In some jurisdictions, the committee's finding that the suit is not warranted is grounds for dismissal of the action.  One issue raised by the appointment of such a committee is the extent to which the committee should have counsel separate from the corporation and the parties to the suit.   In Stepak v. Addison, 20 F.3d 398 (11th Cir. 1994), the court held that a derivative action could not be dismissed when the law firm conducting the investigation on behalf of the outside directors was the General Counsel for the corporation.  In Cutshall v. Barker, 733 N.E.2d 973 (Ind. App. 2000), the court held that the  law firm hired to represent the corporation after the suit was commenced could also represent the corporation and a special litigation committee of the board set up to evaluate the case.  The corporation's regular outside law firm was representing only the individual directors in the derivative action, and not the corporation. In Par Pharmaceutical, Inc., 750 F. Supp. 641 (S.D.N.Y. 1990), the court denied a motion to dismiss a derivative action, in part because the special board committee was not represented by independent counsel.  Additional cases that address the representation of special committees, but in a less direct way are: In Re Consumers Power Co., 132 F.R.D. 455, 479-480 (E.D. Mich. 1990); Kaplan v. Wyatt, 484 A.2d 501 (Del. Ch. 1984), aff'd, 499 A.2d 1184 (Del. 1985); Byers v. Baxter, 419 N.Y.S.2d 497 (N.Y. App. 1979); and  Einhorn v. Culea, 612 N.W.2d 78  (Wis. 2000).  The gist of all these cases is that special committees should hire independent counsel.

        Klein v. FPL Group, Inc., 2004 U.S. Dist. LEXIS 919 (S.D. Fla. Jan. 20, 2004).  FPL shareholders voted to merge with another company.  Pursuant to the change-of-control provisions of a company incentive plan, FPL paid $62 million to certain highly compensated executives.  The merger was abandoned, but the executives kept the money.  In this derivative action the plaintiffs seek to recover the money on behalf of FPL.  The FPL board formed an “Evaluation Committee” of outside directors to assess the merits of the claim.  The committee recommended dismissal of the case, and the full board voted to seek a dismissal.  FPL then moved to dismiss.  The court denied the motion.  Part of the reason was the selection of Steel Hector & Davis to advise the Evaluation Committee.  Steel Hector had helped design the incentive plan.  The General Counsel of FPL had participated in the decision to hire Steel Hector, yet he personally had received $6 million under the plan.  Moreover, he was a former partner of  the firm.  Lastly, Steel Hector had sought dismissal of the action on behalf of certain parties even before the Evaluation Committee had made its report to the FPL board.

        Goldstein v. Wells, 2009 Ga. App. LEXIS 102 (Ga. App. Feb. 9, 2009).  This is a derivative action challenging a decision by the board to restructure management.  Evidently, a special committee of the board ("demand committee") determined that the suit was without merit, and the trial court dismissed the action.  Some members of the demand committee had evidently also served on the committee that had approved the restructuring of management ("restructuring committee").  The law firm that advised the demand committee had also advised those directors while they served on the restructuring committee.  The plaintiffs claimed in this appeal that the law firm had a conflict of interest and that this conflict was, in part, grounds for reversing the trial court.  In this very brief opinion the appellate court affirmed the trial court, saying:

The firm in question has never represented any party having an interest in or obtaining a direct benefit from that transaction, and the Trust retained its own counsel in the matter.

Other Cases

        Privilege and Work Product in Derivative Actions. Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), is the leading case on the ability, in some cases, of plaintiffs in derivative actions to obtain the files of lawyers representing the entity relating to the conduct leading to the claim.  In In re International Systems & Controls Corporation Securities Litigation, 693 F.2d 1235 (5th Cir. 1982), the Fifth Circuit held that Garner applied to privilege but not to work product.  Sigma Delta, LLC v. George, 2007 U.S. Dist. LEXIS 94213 (E.D. La. Dec. 20, 2007) discusses both cases.

        Follows Garner. In Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 2014 Del. LEXIS 336 (Del. July 23, 2014), a shareholder case, the court adopted the holding in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), and upheld an order for production of documents withheld under the attorney-client privilege and documents for which work product protection was sought.

       Privilege issues prevent derivative action against corporation's general counsel.  McDermott, Will & Emory v. Superior Court, 99 Cal. Rptr. 2d 622 (Cal. App. 2000).  Shareholders brought a derivative against the corporation's general counsel.  The court held that the shareholders could not waive the corporation's attorney-client privilege.  The court further held that the action must be dismissed because the law firm could not muster a defense and maintain the privilege at the same time.  In Padgett v. Mitchell, 2002 Cal. App. Unpub. LEXIS 1156 (Cal. App. May 15, 2002), the court held that it would be premature to dismiss the claims against the law firm.  The court held that if the majority shareholders waive the privilege, then the law firm can defend itself and should remain in the suit.

        Bringing Derivative Action and Personal Action at the Same Time.  Tuscano v. Tuscano, 403 F. Supp. 2d 214 (E.D.N.Y. 2005).  This is a derivative action filed against several persons associated with the corporations in question.  In the same action the plaintiff, on his own behalf, sued a law firm for damages and disgorgement of fees.  The court granted a motion to dismiss, in part because a plaintiff in a derivative action, who also sues on his own behalf, has an impermissible conflict of interest.  Other cases on combining derivative and direct claims: Tatintsian v. Vorotyntsev, 2018 WL 2324998 (S.D.N.Y. May 22, 2018); (good discussion); Feiliks Int’l Logistics Hong Kong Ltd. v. Feiliks Global Logistics Corp., 2016 WL 1069069 (E.D.N.Y. March 17, 2016) (citing Tuscano); Priestley v. Comrie, 2007 U.S. Dist. LEXIS 87386 (S.D.N.Y. Nov. 27, 2007); St. Clair Shores Gen. Employees Retire. System v. Eibeler, 2006 U.S. Dist. LEXIS 72316 (S.D.N.Y. Oct. 4, 2006); and Shoregood Water Co., Inc. v. U.S. Bottling Co., 2009 U.S. Dist. LEXIS 69624 (D. Md. Aug. 10, 2009).  However, in Field Turf Builders, LLC v. Fieldturf USA, Inc., 2010 U.S. Dist. LEXIS 19741 (D. Ore. March 4, 2010), Srebnik v. Dean, 2006 U.S. Dist. LEXIS 59232 (D. Colo. Aug. 22, 2006), and Angel Investors, LLC v. Garrity, 2009 Utah LEXIS 119 (Utah June 9, 2009), the courts held that a plaintiff in a derivative action can, at the same time, maintain his own direct action against the company in the same case.

        In Ruggiero v. Am. Bioculture, Inc., 56 F.R.D. 93 (S.D.N.Y. 1972), the court held that individuals bringing a derivative action cannot, at the same time, maintain a securities class action against the corporation.

        In re Ebix, Inc., 2014 Del. Ch. LEXIS 132 (Del. Ch. July 24, 2014). In this opinion the vice chancellor noted that a lawyer handling both a direct action and a derivative action arising out of the same facts would not have a conflict if the claims were not “internally inconsistent,” which was the case here. Thus, the court allowed the case to proceed without bifurcating the claims or dismissing either, of both, of them.

        Chih Teh Shen v. Miller, 150 Cal. Rptr. 3d 783 (Cal. App. 2012).  The court held that a lawyer could bring a derivative action on behalf of a corporation while opposing the corporation in another matter.  The court relied in part on In re Dayco Corp. Deriv. Sec. Litig., 102 F.R.D. 624 (S.D. Ohio 1984).  In Simms v. Super. Ct., 2014 Ariz. App. LEXIS 1 (Ariz. App. Jan. 2, 2014), relying primarily upon Chih Teh Shen and Dayco, the court held that a law firm could represent the plaintiff in a derivative action on behalf of a corporation and defend that same plaintiff in a claim brought by the corporation.  The court held that a law firm in a derivative action is not, ipso facto, lawyer for the corporation. The court cited, but distinguished Ruggiero.

        Gonzalez v. Chillura, 892 So. 2d 1075 (Fla. App. 2004).  The lawyer representing the plaintiff in the derivative action also represented the same plaintiff in a personal action against the corporation.  The defendants moved to disqualify the lawyer claiming that representing a plaintiff in a derivative action creates a lawyer-client relationship with the corporation.  The trial judge agreed and disqualified the lawyer.  The appellate court reversed, holding that the plaintiff’s lawyer in a derivative action does not have a lawyer-client relationship with the corporation.

        Deleo v. Swirsky, 2002 U.S. Dist. LEXIS 8493 (N.D. Ill. May 14, 2002).  Court ruled that plaintiffs' lawyer should be disqualified, because he was handling another case in which he was taking positions adverse to the plaintiff/shareholders in this case.

        Second Ave. Realty Corp. v. Salzman & Salzman, 737 N.Y.S.2d 88 (N.Y. App. Div. 2002).  This involved the dismissal of a malpractice action against a law firm.  The plaintiff was an unsuccessful plaintiff in an earlier derivative action.  Part of her malpractice claim was that the law firm had a conflict in representing both the individual defendants and the corporation.  The court denied the claim explaining that the firm’s representation of the corporation was never more than "nominal" and in no way affected the outcome of the derivative action.  Another case where the court allowed a law firm to "represent" the company as well as the individual defendants is Retotal v. Hawaii Ballroom Dance Association, 44 P.3d 293 (Haw. App. 2002).

        Strategic Dev. Concepts v. Whitman & Ransom, 731 N.Y.S.2d 26 (N.Y. App. Div. 2001).  Family squabble over control of closely-held corporation.  In this case, the law firm for one faction is claiming fees.  In the course of resolving the claim the court held that the corporation had not needed independent counsel because all shareholders and the corporation were before the court, and no one else’s interests needed to be protected.

        Stilwell Value Partners IV, L.P. v. Cavanaugh, 2014 WL 7372651 (N.Y. App. Div. Dec. 30, 2014). This is a derivative action brought on behalf of Corp. Corp. is a defendant along with alleged wrong-doers. Law Firm appeared for all the defendants, including Corp. Plaintiff moved to disqualify Law Firm. The trial court denied the motion. In this opinion the Appellate Division affirmed. The court noted that Corp.’s interests were not adverse to the other defendants, there were no relevant cross claims or counterclaims, and Corp. was a “passive litigant.” As a separate ground the court held that the plaintiff’s waiting two years to bring the motion waived the objection.

        Knudstrup v. Superior Court, 2004 Cal. App. Unpub. LEXIS 2522 (Cal. App. March 19, 2004).  Minority shareholders of 2K, Inc. filed this derivative action on behalf of 2K, Inc. against the majority shareholders.  For a period of time before the suit Kenneth Ingber was in-house General Counsel for 2K.  After the suit was filed, Ingber left 2K and rejoined his old law firm, Richman, Mann, which happened to be representing the majority shareholders in the suit.  The plaintiffs moved to disqualify Ingber and Richman, Mann, and in this opinion the court held that the motion should have been granted.  The court said that although the derivative action names 2K as a defendant, it was really a plaintiff because the suit was brought on its behalf.  In opposing the motion Richman, Mann clumsily submitted an undated and unsigned declaration of 2K’s CEO waiving the conflict.  The court, concluding the declaration was evidently signed after the conflict arose, brushed it aside.  Among other things, the court noted that the defendant had made no showing that the CEO had authority to make such a waiver absent a vote by the Board of Directors.

       Dollens v. Zionts, 2001 U.S. Dist. LEXIS 19966 (N.D. Ill. 2001).  The issue was whether a law firm could be lead counsel for plaintiffs in a derivative action when they had represented plaintiffs in a class action involving the same matters.  The court said that they could.

       In re Continental Illinois Securities Litigation, 750 F. Supp. 868 (N.D. Ill. 1990).  In an opinion on fees the court noted that it had ruled six years earlier that the same lawyers could not represent plaintiffs in both a derivative action and a class action, particularly with respect to settlement, because the funds available to pay both were "limited."

        What Is a Good Waiver?  In re Cerberus Capital Management, L.P., 164 S.W.3d 379 (Tex. 2005).  Derivative action against members of management.  Law Firm A had drafted an asset purchase agreement for the corporation in question.  The deal never went through.  Shareholders brought a derivative action against certain members of management involving the asset purchase agreement.  Certain of the defendants sought to retain Lawyer B who had been at Law Firm A when the asset purchase agreement was prepared, but who is now with another firm.  Lawyer B called the corporation’s General Counsel and asked for a waiver.  The General Counsel orally agreed.  Lawyer B then confirmed the waiver in a letter to the General Counsel, relating the circumstances in some detail.  In this opinion the Texas Supreme Court held that the waiver was effective and that the trial court should not have disqualified Lawyer B.  While the court was not comfortable with the oral waiver, it held that, on balance, the waiver was effective.

        In re Cybergenics Corp., 330 F.3d 548 (3rd Cir. 2003), is not a conflicts case.  But, it is an interesting bankruptcy matter.  A creditors' committee tried to get the debtor-in-possession to sue someone for fraudulent conveyances.  When the debtor-in-possession refused, the creditors' committee obtained an order authorizing it to do so "derivatively."

       McRedmond v. Est. of Marianelli, 2006 Tenn. App. LEXIS 634 (Tenn. App. Sept. 29, 2006).  Minority shareholders of Elk Brand Manufacturing (“Elk”) brought a shareholders’ derivative action against the majority shareholder and others for diverting Elk funds to another company controlled by the individual defendants.  The case was tried, and the plaintiffs were awarded a jury verdict.  The court awarded fees to the plaintiffs.  After securing the verdict, and while the post-trial motions were pending, the plaintiffs, represented by the same law firm as in this case, filed a suit in Kentucky to dissolve Elk.  Because of a perceived conflict the defendants objected to the attorney fee award.  Both the trial court and the appellate court, in this opinion, overruled defendants’ objections.  The appellate court based its ruling upon the fact that the plaintiffs’ lawyers had never represented Elk, and, thus, did not have a conflict.  [We do not understand why the plaintiffs sought to dissolve Elk.  Nor do we fully understand how the same plaintiffs and their lawyers can fight for Elk in the derivative action while seeking its dissolution in another action.  Nevertheless, we thought we would flag the case in the event a reader finds something useful in it.]

        "Corporate Neutrality" Rule.  Domanus v.Lewicki, 2012 U.S. Dist. 73557 (N.D. Ill. May 29, 2012).  Two shareholders in Co. filed this derivative suit on behalf of Co. against other shareholders and directors.  They alleged that the defendants were guilty of racketeering, fraud, and other misconduct harming Co.  Law Firm showed up as lawyers for Co. in this case.  The plaintiffs moved to disqualify Law Firm.  In this opinion the court granted the motion.  The court noted that Law Firm took a number of positions favoring the defendants without helping Co.  The court also noted that there was "substantial evidence" that the plaintiffs' claims were true.  Thus, Law Firm was in violation of the "corporate neutrality rule."

        Yip v. Zia, 2007 Cal. App. Unpub. LEXIS 3243 (Cal. App. April 24, 2007).  The only point worth making about this unpublished opinion is that an appellate court can reverse a trial court’s approval of a derivative action if the plaintiff had a serious enough conflict of interest in the trial court.

        Party Sues Executor of Estate when Others Won't -- not Deemed Lawyer for Estate. Haffenreffer v. Coleman, 2007 U.S. Dist. LEXIS 75432 (D.R.I. Oct. 10, 2007).  A decedent’s estate owns several parcels of real estate.  The estate has three executors, individuals A, B, and C.  A and B are brothers, and they appear to be feuding.  This case (“This Case”) is one of two cases relating to the estate.  The other case (“Other Case“), brought by A in state court (not This Case), claims that B is taking unjustified positions about how B is to purchase property from the estate.  B and C declined to be plaintiffs in the Other Case.  In This Case B is suing the Coleman  family (no relations to A and B) to invalidate options the Colemans claim to have on the estate parcels.  If B is successful in This Case, arguably the value of the estate would be enhanced.  A and C declined to join in This Case.  Law Firm represents the Colemans in This Case and represents A in the Other Case.  B moved to disqualify Law Firm in This Case, arguing that This Case seeks to benefit the estate while Law Firm represents the estate in the Other Case.  The court, in this opinion, denied the motion, holding that Law Firm’s representation of A in the Other Case was not representation of the estate.  This was so because a majority of executors, B and C, refused to authorize the Other Case.  Thus, the court held, the Other Case was not brought by the estate, but just by A pursuant to a Rhode Island statute that allows interested parties to sue when the fiduciaries refuse to do so.  [Note: This Case is just like a shareholders’ derivative action.  The result is consistent with a handful of derivative cases, cited above, that say that a lawyer for a plaintiff in a derivative action can be adverse to the corporation in other matters.]

        Sigma Delta, LLC v. George, 2007 U.S. Dist. LEXIS 94213 (E.D. La. Dec. 20, 2007).  Plaintiffs are also owners and officers of Omega Hospital, LLC (“Omega”).  Plaintiffs have sued various defendants derivatively and they have sued the defendants, including Omega, for securities fraud.  Lawyer represents Omega only.  This opinion is in response to Omega’s “Motion to Determine Representation and Privilege.”  Taking the second issue first, the court determined that Lawyer could, for the time being, continue to represent Omega even though there was a potential that in taking directions from one of the individual defendants Lawyer could act contrary to Omega’s interests.  As to privilege the court ordered that Plaintiffs were not entitled to review Lawyer’s files relating to this case, either in connection with the derivative or in connection with the direct securities claims.  The opinion included the applicability of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), to discovery of privileged material (discovery sometimes allowed), and the applicability of In re International Systems & Controls Corporation Securities Lit., 693 F.2d 1235 (5th Cir. 1982), to discovery of work product (discovery almost never allowed).

        Dissolution Action May Be Different from Derivative Action.  Frank Settelmeyer & Sons, Inc. v. Smith & Harmer, Ltd., 2008 Nev. LEXIS 116 (Nev. Dec. 24, 2008).  A minority shareholder brought an action against a corporation and its majority shareholder to dissolve the corporation and for appointment of a receiver (not this case).  Law Firm represented both the corporation and the majority shareholder.  When Law Firm was joined as a defendant, it withdrew from its representation in the dissolution action.  Law Firm brought this action to recover its fees from the earlier representation.  The corporation objected to the fees because Law Firm had a conflict of interest in representing both the corporation and the majority shareholder.  The trial court allowed the fees, and, in this opinion, the Nevada Supreme Court affirmed.  The supreme court agreed with the trial court that a dissolution action should be distinguished from a derivative action.  In a derivative action the interests of the corporation are usually different from the shareholders.  The court specifically relied upon Bottoms v. Stapleton, 706 N.W.2d 411, 417 (Ia. 2005), in which the court concluded that a lawyer should not be disqualified from representing the corporation and its majority shareholder in a dissolution action.

        California Service Employees Health & Welfare Trust Fund v. Advance Building Maintenance, 2009 U.S. Dist. LEXIS 21858 (N.D. Cal. Mr. 4, 2009).  This suit was not originally a derivative action, and Lawyer represented both the defendant company and its principal owner.  At some point a derivative claim was added, so that the plaintiffs' lawyers began, in effect, advocating on behalf of the company against the principal owner.  The plaintiffs moved to disqualify Lawyer from representing both the company and the principal owner.  In this opinion the court ordered that Lawyer could not represent the company, but that Lawyer could continue to represent the principal owner.  This was because there would be no company confidences that the principal owner would not already know.

        Futility.  Sommers v. Lewis, 2009 U.S. Dist. LEXIS 29776 (D. Ore. Apr. 8, 2009).  Derivative action involving Corp.  The claims involved option back-dating among other things.  One of the director-defendants ("Lawyer") was a named partner in the law firm ("Law Firm") that did Corp.'s securities work during the period when the wrongful conduct occurred.  In this opinion the court granted, in full, a motion to dismiss.  As to the current directors, including Lawyer, the plaintiff in this case claimed that she did not have to make a demand because of the doctrine of futility.  The court ruled that because another plaintiff in a closely related case had made a demand, the doctrine of futility was no longer available to any plaintiff.  As to Lawyer, that should have ended the matter.  For reasons not clear to us, the court went on to find that had futility been an issue, there was a reasonable doubt that Lawyer was independent and disinterested.  The court noted earlier authorities that had held that a partner in a law firm doing work for the corporation in question was not ipso facto "interested." However, Lawyer's close relationship with Corp. and its officers, and Lawyer's share of Law Firm's revenues from work for Corp. created sufficient doubt regarding Lawyer's interest.

        Futility.  Morrone v. Erlich, 2011 U.S. Dist. LEXIS 36473 (E.D.N.Y. March 31, 2011).  Not a lawyer conflict issue, but interesting anyway.  The plaintiff brought this derivative action against all the company directors and claimed that a demand to file suit would have been futile.  The court noted that two of the directors were not even on the board at the time of the transaction in question.  Thus, the court held the plaintiff should have made the demand.

        Deitch v. Wizard Gaming, Inc., 2010 Cal. App. Unpub. LEXIS 612 (Cal. App. Jan. 27, 2010).  Derivative action.  Law Firm was representing both the corporation and several defendants.  The plaintiff moved to disqualify Law Firm.  The trial court disqualified Law Firm from representing the corporation, but allowed Law Firm to continue representing the defendants.  In this 2-1 "unpublished" opinion the appellate court affirmed.  The dissenting judge thought the result was silly (our word) and would have reversed.

        Kovac v. Opus Bldg. Corp., 2010 ABQB 366 (CanLII) (Ct. Q.B. Alberta May 27, 2010).  The facts are too complex to merit a complete description here.  Basically, the court found that counsel for both sides of this corporate control dispute had conflicts.  First, the court held that the same law firm ("Firm X") could not represent a minority shareholder in a derivative action on behalf of a corporation ("Corp. A") and at the same time oppose Corp. A in claims for "declaratory relief regarding oppression, a valuation of shares, and a liquidation order."  Second, the court found that the other side's counsel ("Firm Y") could not represent Corp. A's majority shareholder ("Corp. B") in defending the foregoing claims brought by Firm X against Corp. A and Corp. B, while at the same time representing Corp. B in its claim against the minority shareholder.  (We think we have all that right.)

        Freedom Financial Group, Inc. v. Woolley, 2010 Neb. LEXIS 134 (Neb. Nov. 12, 2010).  Corporate parent prevented from bringing a direct action against a lawyer who allegedly committed malpractice for a wholly-owned subsidiary under a receivership.

        Enerex Botanicals Ltd. v. Humet - PBC North America Inc., 2010 BCSC 1719 (S. Ct. B.C. Dec. 2, 2010).  A minority shareholder ("MS") is prosecuting this derivative action.  MS is also suing the corporation for wrongful dismissal and oppression of minority shareholders.  Lawyer represents MS in this action and in the other actions.  The defendant moved to disqualify Lawyer in this case because of the potential for misuse of confidential information in this case in the other cases.  In this opinion the court denied the motion, stating that the defendant had not yet shown a specific occasion where this might occur.  The court left the door open for such a showing in the future.

        In re Bank of America, 2010 U.S. Dist. LEXIS 134134 (S.D.N.Y. Dec. 14, 2010).  The plaintiff in this derivative action on behalf of Bank had earlier filed a securities fraud case on his own behalf against Bank.  Both actions arose out of the same transactions.  In dismissing this action the court said simply:

Under the text of [FRCP Rule 23.1(a)] and the prevailing interpretations of it, a plaintiff who maintains a direct claim against a corporation is not a fair and adequate representative of other shareholders in enforcing a right of the corporation derivatively.
        Sweet v. Bermingham, 65 F.R.D. 551 (S.D.N.Y. 1975).  In this derivative action the court denied a motion to dismiss even though the plaintiff shareholder was the wife of a partner of the firm representing her.  The court distinguished class action decisions refusing to certify a class because the class representative was married to a partner of the class counsel firm.

        Blue Water Sunset, LLC v. Markowitz, 2011 Cal. App. LEXIS 122 (Cal. App. Feb. 2, 2011).  Blue Water, an LLC, and Markowitz, an individual, each owned 50% of several related LLCs ("the LLCs").  Believing that Markowitz was looting the LLCs' property and committing other wrongs against the LLCs, Blue Water filed a derivative action against Markowitz on behalf of the LLCs.  Under California procedure, the LLCs were designated defendants.  At one point the lawyer for Markowitz ("Kurtz") appeared at a demurrer hearing on behalf of Markowitz and the LLCs.  The court in this opinion characterized Kurtz' representation of the LLCs as "fleeting."  Because of this brief representation, Blue Water filed a motion to disqualify Kurtz, seeking his total removal from the case.  The trial court denied the motion.  In this opinion the appellate court reversed in part and affirmed in part, ruling that Kurtz could not represent the LLCs but could continue on behalf of Markowitz.  One holding was that Blue Water, although never Kurtz' client, had sufficient standing to bring the motion because of the unique nature of derivative actions.  The other holding was that because Kurtz had a current client conflict at the demurrer hearing, his disqualification from representing the LLCs was "automatic."  [Comment: this brief write-up, which does tell what happened, does not do justice to the opinion, which is an exposition on California holdings in the conflict and derivative action arenas.  Included are such mainstays as Forrest v. Baeza, Flatt, SpeeDee Oil, Truck Insurance, and the like.  Lawyers practicing mainly in California should read the opinion.]

      Zutrau v. Ice Systems, Inc., 2011 N.Y. Misc. LEXIS 5126 (N.Y. Sup. Ct. Oct. 28, 2011).  In this action Plaintiff brought multiple employment-related claims against Corporation.  She also pleaded derivative counts on behalf of Corporation.  In this opinion the judge dismissed the derivative counts based upon the fact that they conflicted with the direct liability counts.  In the latter she sought recover for Corporation; in the former she sought to recover from Corporation.

        Oppression Action.  Amack v. AW Holdings Corp., 2011 ABQB 376 (Q.B. Alberta June 14, 2011).  This is an action by a minority shareholder against the corporation and the majority shareholder for oppression.  In this opinion the court held that the same law firm could not act for the corporation and the majority shareholder where conflicts between the corporation and majority shareholder are likely.

        Office of Strategic Services v. Sadeghian, 2011 U.S. Dist. LEXIS 137870 (E.D. Va. Nov. 29, 2011).  Convoluted fact situation.  The one point relevant to this audience is that, in the words of the court, "entity owners with interests antagonistic to their entity cannot simultaneously represent it in a derivative action."  (citing Jennings v. Kay Family Partnership, 659 S.E.2 283 (Va. 2008)).

        In re Prosser, 2012 U.S. Dist. LEXIS 1366 (D.V.I. Jan. 6, 2012).  Law Firm sought to bring a derivative claim against Bankrupt to avoid certain alleged preferential transfers.  Because Law Firm had represented Bankrupt on matters related to this proceeding, the bankruptcy judge held that Law Firm had a conflict and could not bring the derivative action.  In this opinion the district judge affirmed.

        Shen v. Miller, 2012 Cal. App. LEXIS 1279 (Cal. App. Dec. 18, 2012).  Shen and Miller were co-presidents and 50% owners of Corp.  Pursuant to a falling-out, Shen, represented by Lawyer, has filed four related lawsuits against Miller and others related to Miller.  One of the cases names Corp. as a defendant.  Another case states a derivative claim on behalf of Corp. against Miller.  Claiming that Lawyer is representing Corp. in the derivative action while suing Corp. in one of the other cases, Miller moved to disqualify Lawyer.  The trial court denied Miller's motion.  In this opinion the appellate court affirmed.  In a lengthy analysis of California cases and non-California cases the court concluded that merely bringing a derivative action that would benefit the entity, but not appearing for the entity or being paid by the entity, is not the same as representing the entity.  [Note: without reading all the cases discussed by the court, we are not 100% certain of the opinion's correctness; however, the opinion appears to be a marvelous research source.]

        Averhart v. Commc'ns Workers of Am., 2013 U.S. Dist. LEXIS 50789 (D.N.J. April 9, 2013).  Suit by union member against national union, local union, and individuals.  This is largely about conflicts that might result from the Labor Management Reporting and Disclosure Act (LMRDA) and of little interest to all but a sliver of this audience.  One aspect of some interest is the court's consideration of this action as a derivative action.  Following Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3d Cir. 1993), the court held that it is not a conflict for the same firm to represent the organizational defendants and the individuals as long as the individuals, although accused of mismanagement, are not alleged to have engaged in "self-dealing or intentional misconduct."

        Simms v. Super. Ct., 316 P.3d 1235 (Ariz. App. 2014). The court held that a law firm could bring a derivative action on behalf of a limited partnership while, at the same time, defending the limited partner in action brought by the limited partnership.

        Palkon v. Holmes, 2014 U.S. Dist. LEXIS 148799 (D.N.J. Oct. 20, 2014). Plaintiff in this derivative action made a demand of Co.’s board to sue officers allegedly responsible for poor customer financial data security. Law Firm opined that such a suit was not appropriate, and Board declined to bring it. Plaintiff then filed this action, claiming that Board’s action was, in part, tainted because Law Firm had a conflict of interest. The conflict claim was that Law Firm represented Co. in an FTC proceeding dealing with the same subject. In this opinion, sustaining Defendant’s motion to dismiss, the court held that, because Law Firm was not representing individual officers in the FTC proceeding, it had no conflict.

        Early Stages. Voss v. Sutardja, 2015 WL 349444 (N.D. Cal. Jan. 26, 2015). There is a lot going on in this derivative action not related to conflicts of interest. However, the plaintiffs did object to the fact that a law firm represented the corporation in question as well as the individual director defendants. The court rejected that objection because the case was only at the motion to dismiss stage, citing Respler ex re. Magnum Hunter Res. Corp. v. Evans, 2014 WL 631668 (D. Del. Feb. 18, 2014). The court did say that the corporation “would be advised to obtain independent counsel in the future.”

        Nineteen Twenty-Four, Inc. v. Parachini, 2015 WL 682814 (N.Y. Sup. Ct. Feb. 17, 2015). This is a dispute about control of a closely-held restaurant corporation, which was formed in 2007. Law Firm became “General Counsel” of the corporation in June 2014. Law Firm brought this action on behalf of several owners and the corporation against another owner. The defendant counterclaimed derivatively, alleging that individual plaintiffs had harmed the corporation. The defendant moved to disqualify Law Firm. In this opinion the court granted the motion, primarily because the “counterclaims plausibly allege” that the individual plaintiffs wronged the corporation. Thus, Law Firm would be for and against the corporation in the same action.

        Beachcomber Mgmt. Crystal Cove, LLC v. Superior Court, 2017 WL 2823001 (Cal. App. Unpub. June 28, 2017). Law Firm had represented LLC on various matters. When Plaintiffs brought this derivative action against top management insiders, Law Firm appeared for the insiders, while LLC hired independent counsel. Plaintiffs moved to disqualify Law Firm, and the trial court granted the motion. In this opinion the appellate court vacated the disqualification order and remanded so the trial court could determine whether the insiders were, in fact, privy to all of LLC's information. The court noted that the usual rules of former client conflicts do not apply in derivative actions because confidentiality concerns are ameliorated by insiders' having the information during the normal course of operations.

        Miesen v. Hawley Troxell Ennis & Hawley LLP, 2018 WL 1369909 (D. Ida. March 16, 2018). Derivative action. Lawyer represents Plaintiff. Several defendants filed a third-party action against Taylor. Initially, Lawyer appeared for Taylor. Several defendants moved to disqualify Lawyer in late 2017. In February 2018 Taylor replaced Lawyer with another lawyer. In this opinion the court denied the motion, with the proviso that Lawyer 1 not represent Taylor. Applying the "Weaver test," a concoction of the Idaho Appellate Court, the court found that the defendants had standing to bring the motion. However, the court held that Taylor's substituting lawyers cured the conflict. The court rejected the argument that the substitution somehow violated the "hot potato" rule. The court said that Taylor dropped Lawyer, not the other way around.

        In re Westech Cap. Corp., 2018 WL 1605171 (W.D. Tex. March 29, 2018). "So why are we here?" Up front, that was a question posed by the bankruptcy judge and author of this opinion. Two director factions fought for control of Westech. Much litigation, including this bankruptcy, ensued. One piece of this litigation was a derivative action brought on behalf of Westech against Law Firm, which was transferred to the bankruptcy court (here). Law Firm moved to dismiss. In this opinion, the bankruptcy judge granted the motion. The analysis was very fact-specific. Because we believe lawyer malpractice litigation generally provides poor guidance in analyzing conflicts of interest, we will merely point out several interesting aspects. First, because the court felt that the interests of one board faction was aligned with Westech in underlying matters, Law Firm's representation of both was not a conflict. Second, the court held that a law firm doing only legal work for an entity cannot be charged with a breach of fiduciary duty. One comment was that Delaware courts refer to lawyers as fiduciaries only "colloquially." What is unsatisfying about such statements is the failure to recognize conflicts of interest as breaches of fiduciary duty. Plus, we have always thought that a lawyer's fiduciary duty to a client was something more than "colloquial." But, the court found no conflict, so that was that. Also interesting is a rather lengthy analysis of what is required to charge a law firm for aiding and abetting a breach of fiduciary duty by board-member clients. The court focused on the knowledge requirement and found that Law Firm did not have enough knowledge to be held an aider and abettor.

        Conroy v. Amos, 2018 WL 4208855 (M.D. Ga. Aug. 31, 2018). Shareholders brought this derivative action on behalf of Company against various directors and officers of Company. After Shareholders requested Company to pursue those claims, Company's board created a special litigation committee ("SLC") consisting of outside directors. The SLC, represented by independent counsel, conducted the investigation and concluded that the requested action would not be in the best interests of company. In this opinion, analyzing the adequacy of the SLC and its work, the court granted a motion to dismiss the case. One issue raised by Plaintiffs involved Law Firm, which represents the board of Company and at least one individual board member. Law Firm assisted the SLC and its independent counsel by providing Company documents, thus controlling the "flow of information to the SLC." In a fact-intensive analysis of this activity, the court concluded that Law Firm's role did not "render the SLC's investigation unreasonable."

        Fanning v. The John A Sheppard Mem'l Ecol. Reserv. Inc., 2018 U.S. Dist. LEXIS 183715 (S.D. W. Va. Oct. 26, 2018). A group of directors of CorpA sued another group of directors of CorpA for harming CorpA, naming CorpA as a defendant. The plaintiffs also sued CorpB because CorpB had a lease that was disadvantageous to CorpA. Law Firm appeared for all the defendants. The plaintiffs moved to disqualify Law Firm. In this opinion the court granted the motion, relying primarily on Rule 1.7(a)(2). First, the court ruled that as between CorpA and the defendant directors, the engagement letter failed to inform the parties adequately of the risks of joint representation. Moreover, the engagement agreement was signed for CorpA by one of the defendants, in violation of Rule 1.13(f). As between CorpA and CorpB, again the disclosures were inadequate. Further, the court held that attempts to cure the disclosure problem after the case had commenced were too late. [Our comment: Other than a footnote (No. 1) reference to Rule 1.13, Comment 14, for some reason the court does not refer to this action as a derivative one - although to us it sure looks like one.]

        Who can waive conflict? In re Luecke, 2019 WL 693074 (Tex. App. Feb. 20, 2019). A limited partner of a family partnership ("Fred") brought a derivative action against the general partner ("Jimmie") for mishandling property belonging to the partnership ("Property"). Jimmie moved to disqualify Fred's lawyer ("Lawyer") because Lawyer was involved in other, related litigation involving Property. Fred waived the conflict. Nevertheless, the trial court disqualified Lawyer. In this opinion the appellate court reversed (granted mandamus). The key issue was whether Fred, as a derivative action plaintiff, had a right to waive the conflict. The appellate court ruled that he did. We will not spell out the nature of Lawyer's alleged conflict because that would add nothing here. (The court said that Lawyer did not yet have an "actual conflict.")

        Kleeberg v. Uber, 2019 WL 2284724 (S.D.N.Y. May 29, 2019). This derivative action involves two closely-held entities, No. 1 and No. 2. Law Firm appeared for the individual defendants and for No. 1 and No. 2. The plaintiffs moved to disqualify Law Firm from representing No. 1 and No. 2. In this opinion the magistrate judge denied the motion. The court stated, as a general matter, the Second Circuit and New York courts "reject the routine disqualification" of lawyers representing both companies and their officers in derivative actions. This is particularly true where the entities are closely-held and remain "passive litigants," the case here. [Our note: The facts are too complex to rehearse here. But, the opinion is an extensive review of Second Circuit and New York authority on lawyer conflicts in derivative actions.]
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