Opinion ID: 628604
Heading Depth: 1
Heading Rank: 5

Heading: representation of individual defendants

Text: 49 Lazar impugns the settlement agreement as resulting from conflicts of interest. He attacks Dechert, Price & Rhoads's joint representation of Bell Atlantic (nominal defendant but real party in interest) and the individual defendants. The district court found no disqualifying conflict, relying on Otis & Co. v. Pennsylvania R. Co., 57 F.Supp. 680, 684 (E.D.Pa.1944), aff'd per curiam, 155 F.2d 522 (3d Cir.1946), and Hornsby v. Lohmeyer, 364 Pa. 271, 279, 72 A.2d 294, 299 (1950). Both cases rejected plaintiffs' challenges to counsels' dual representation of corporate and individual defendants. 50 More recent cases perceive problems with this form of dual representation. For example, Messing v. FDI, Inc., 439 F.Supp. 776 (D.N.J.1977), involved a derivative action charging certain inside directors in a merger with fraud which resulted in their being overcompensated for stock they owned in the acquired corporation. The outside directors were charged with negligence in connection with this merger. The same counsel initially represented the corporation, two of the outside directors, and all of the inside directors. Messing observed some courts have allowed directors in the corporation to be represented by the same counsel in cases that do not involve any allegations of breach of confidence or trust or fraud. 439 F.Supp. at 781. Yet Messing nonetheless found that irrespective of the allegation against the director, be it fraud or negligence, the interests of the two will always be diverse. Id. at 782. Messing required the corporation to retain independent counsel other than the attorney who represented the individual defendants. 51 Other courts have required independent counsel where directors are alleged to have defrauded the corporation. See Cannon v. U.S. Acoustics Co., 398 F.Supp. 209 (N.D.Ill.1975), aff'd in relevant part per curiam, 532 F.2d 1118, 1119 (7th Cir.1976) (district court disqualified counsel from simultaneously representing the corporation and the individual directors accused of fraud; conflict of interests among defendants and risk that confidences obtained from one client would be used against another); Lewis v. Shaffer Stores Co., 218 F.Supp. 238 (S.D.N.Y.1963) (corporation could not share counsel with individual directors accused of defrauding the corporation). 52 Thus, as a general matter, the case law is not uniform on the issue of joint representation of the corporation and individual defendants. Commentators are more certain. In a representative observation, one commentator says, 53 There is some conflict as to the propriety of an attorney or law firm simultaneously representing a corporation and its officers and directors in a stockholders' derivative action. But the modern view is that it is generally improper due to conflict of interests for counsel to attempt to represent the corporation, on whose behalf the action has been instituted, while also representing the individuals charged with harming the corporation for their wrongful conduct. 54 13 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations Sec. 6025, at 442 (perm. ed. rev. vol. 1991); see also Harry G. Henn & John R. Alexander, Laws of Corporations Sec. 370, at 1082 (1983). But these commentators recognize that even under the modern rule, independent counsel may not be required if the derivative claim is obviously or patently frivolous. Fletcher, Fletcher Cyclopedia Sec. 6025, at 443. 55 The ethical standards imposed upon attorneys in federal court are a matter of federal law. County of Suffolk v. Long Island Lighting Co., 710 F.Supp. 1407, 1413 (E.D.N.Y.1989), aff'd, 907 F.2d 1295 (2d Cir.1990). We look to the Model Rules of Professional Conduct to furnish the appropriate ethical standard. Id. at 1414. Under Rule 1.13(a), a lawyer's obligation runs to the entity. The commentary to Rule 1.13 provides: 56 The question can arise whether counsel for the organization may defend [a derivative] action. The proposition that the organization is the lawyer's client does not alone resolve the issue. Most derivative actions are a normal incident of an organization's affairs, to be defended by the organization's lawyer like any other suit. However, if the claim involves serious charges of wrongdoing by those in control of the organization, a conflict may arise between the lawyer's duty to the organization and the lawyer's relationship with the board. In those circumstances, Rule 1.7 governs who should represent the directors and the organization. 57 American Bar Ass'n, Annotated Model Rules of Professional Conduct (2d ed. 1992). 58 We believe serious charges of wrongdoing have not been levelled against the individual defendants. We say this because plaintiffs have alleged only mismanagement, a breach of the fiduciary duty of care. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del.1985) (duty of care requires directors to keep themselves informed and to act with requisite care). But we do not understand plaintiffs to have accused defendants of breaching their duty of loyalty which requires a director to act in good faith and in the honest belief that the action taken is in the corporation's best interests. See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del.1983). There are no allegations of self-dealing, stealing, fraud, intentional misconduct, conflicts of interest, or usurpation of corporate opportunities by defendant directors. Indeed the district court found the directors acted in good faith in investigating plaintiffs' demands. As noted, Bell Atlantic's board charged a special committee along with independent counsel to investigate the shareholder plaintiffs' demands. The special committee and independent counsel found prosecution of these demands not in Bell Atlantic's interest. This suggests a relative (though not complete) convergence of individual and corporate interests in defending and settling the litigation. Although not dispositive, it is important that early in the litigation, independent counsel, after undertaking an exhaustive investigation, determined the corporation's interests were more in line with those of the defendants than plaintiffs. Of greater significance, however, is the absence of allegations of fraud, intentional misconduct, or self-dealing. 59 We have no hesitation in holding that--except in patently frivolous cases--allegations of directors' fraud, intentional misconduct, or self-dealing require separate counsel. We recognize that corporate law has traditionally distinguished between breach of the duty of care and breach of the duty of loyalty, the latter being more grave. See Del.Code Ann. tit. 8 Sec. 102(b)(7) (charter amendment provision allowed to limit director liability for breaches of duty of care but such provision shall not eliminate or limit the liability of a director: ... [f]or any breach of the director's duty of loyalty); William A. Klein & John C. Coffee, Jr., Business Organization and Finance 138-43, 152-58, 182 & n. 97 (1990) (discussing distinction between duties of care and loyalty). But drawing the line between breaches of care and loyalty may be difficult in many cases. See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 103 (1991) (Ultimately, though, there is no sharp line between the duty of care and the duty of loyalty.). We do not believe the district court abused its discretion in allowing common counsel here. We note, however, that in cases where the line is blurred between duties of care and loyalty, the better practice is to obtain separate counsel for individual and corporate defendants. 17