Opinion ID: 1137013
Heading Depth: 1
Heading Rank: 4

Heading: the award of fees for services of smith and taylor

Text: Attorneys Smith and Taylor were retained by the shareholders to file suit against Aleut. Subsequently, this court held that they could not represent the shareholders because of a conflict of interest. See Aleut Corporation v. McGarvey, 573 P.2d 473 (Alaska 1978). Before their disqualification, the pair devoted a substantial amount of time to the present litigation. In awarding full attorney's fees to the shareholders, the trial court included the services rendered by Smith and Taylor minus the portion allocable to the litigation of the conflict of interest dispute. Moses contends that it was error to award any amount for their services because such an award violates public policy. Initially we find no merit in Aleut's contention that we should overrule our holding in McGarvey that Smith and Taylor had a conflict of interest. Cited are two cases, George v. LeBlanc, 78 F.R.D. 281 (N.D. Tex.), aff'd, 565 F.2d 1213 (1977), and Jacuzzi v. Jacuzzi Bros., 218 Cal. App.2d 24, 32 Cal. Rptr. 188 (1963), which indicate that a former corporate counsel may represent minority shareholders of the corporation in a derivative suit brought against the former directors of the corporation. The courts noted that derivative actions are brought for the benefit of the corporation and, thus, theoretically counsel is not acting adversely to his former client, the corporation, when he later represents minority shareholders against the corporation, which is only nominally a defendant. In both cases, however, there was a factual inquiry as to whether there existed any possibility that confidential information acquired from the corporation during the previous relationship could have subsequently been used to the corporation's disadvantage. Both courts concluded there was not. In Goldstein v. Lees, 46 Cal. App.3d 614, 120 Cal. Rptr. 253, 256 n. 4 (1975), the court distinguished Jacuzzi because, unlike Jacuzzi, the former corporate attorney had obtained confidential information relating to the subject of the action while acting as attorney for the corporation. [20] Thus, the Goldstein court held that the former corporate counsel could not represent minority shareholders. This court has already found that there is a strong likelihood that during the course of his representation of [Aleut], Smith acquired knowledge ... of the corporation [which] will aid him in the prosecution of this lawsuit against it. McGarvey, 573 P.2d at 475. Nothing presented to us on this appeal has altered that conclusion. It follows from Goldstein that there was a conflict of interest and that McGarvey should not be overruled. It is well established that an attorney, disqualified on conflict-of-interest grounds, generally is barred as a matter of public policy from receiving any fee from either of the opposed interests. [21] Although there is no indication that Smith and Taylor acted with improper motives, see McGarvey, 573 P.2d at 476, in representing the shareholders, they are, nevertheless, barred from recovery. [22] Aleut argues that this case is not within the general rule that attorneys, disqualified on conflict-of-interest grounds, cannot recover fees, for two reasons. First, it argues that there is a distinction between this type of shareholder suit and suits inter partes. Second, it contends that the rule denying recovery of fees is inapplicable when the common benefit theory applies. In support of its first contention, Aleut relies on Silbiger v. Prudence Bonds Corp., 180 F.2d 917 (2d Cir.), cert. denied, 340 U.S. 813, 71 S.Ct. 40, 95 L.Ed. 597 (1950). In Silbiger, the court recognized a distinction in corporate reorganizations which justified an exception to the rule that an attorney who represents opposing interests is barred from attorney's fees. The court stated: [We] think that in a corporate reorganization proceeding it is reasonable not to impose an entire forfeiture of the [fee] allowance, when it comes in no part out of any group that can have been prejudiced by the attorney's divided allegiance. Id. at 921 (emphasis added). It is clear that Silbiger does not support the broad proposition that shareholder suits are exceptions to the general rule regarding forfeiture of attorney's fees. The reasons the court created the exception were twofold: (1) the unique characteristics of reorganization allowed the court to approve representation of conflicting interests, [23] and (2) a finding of no actual prejudice. [24] This court has already noted that if Smith represented the shareholders, the corporation would be prejudiced. [25] Moreover, the exception has not, as Aleut asserts, been extended to shareholders' suits against a corporation. [26] Alternatively, Aleut argues that full attorney's fees are justified under the common benefit doctrine even if the attorneys had a conflict of interest. As we have previously indicated, however, the common benefit doctrine is inapplicable to the award of fees against Moses. Moreover, neither of the two cases cited by Aleut, Magida v. Continental Can Co., 176 F. Supp. 781 (S.D.N.Y. 1956), and Watkins v. Sedberry, 261 U.S. 571, 43 S.Ct. 411, 67 L.Ed. 802 (1923), support its position that an attorney, disqualified on conflict-of-interest grounds, can recover attorney's fees. [27] We conclude that it was error for the trial court to award any attorney's fees for the services of Smith and Taylor. [28]