When Clients Clash: Abrano, Hot Potato and the Duty of Loyalty

lannon_paulwoolf_jeffreyby Paul Lannon and Jeffrey D. Woolf

Case Focus

Attorneys who advise closely-held corporations face recurring ethical challenges when conflicts develop among owners and managers of the business.  The Supreme Judicial Court recently issued a unanimous decision, Bryan Corp. v. Abrano, 474 Mass. 504 (June 14, 2016), http://scholar.google.com/scholar_case?case=10526802548823881243&hl=en&as_sdt=6&as_vis=1&oi=scholarr that provides much needed guidance to attorneys practicing in this area and that has broader implications for attorney-client relationships generally.  The decision addresses, among other important ethical concerns, how to assess conflicts of interest and obtain informed consent, how to properly terminate a client relationship, to whom in a close corporation do attorneys owe a duty of loyalty, and under what circumstances, if any, are attorneys permitted to drop one client like a “hot potato” for another, presumably more lucrative, opportunity.

Law Firm Disqualified

In Abrano, a law firm was advising certain officials of Byran Corp., a closely held corporation, and representing the corporation in litigation against another company.  The law firm did not have an agreement with the client limiting the scope of the engagement or addressing conflict or withdrawal situations.  A dispute arose over the company’s compensation of its shareholders.  The law firm advised one of the shareholders on the pay dispute, sent a demand letter to Bryan Corp. on behalf of a group of shareholders, and subsequently withdrew from its representation of Bryan Corp. in the pending litigation.  The law firm terminated its representation of the company by sending a notice to a Bryan Corp. officer whom the law firm was representing in the pay dispute.  When lawsuits erupted over the pay dispute, Bryan Corp. moved to disqualify its former law firm from representing adverse parties.

The SJC upheld the trial court’s order disqualifying the law firm.  Notably, there was no finding of actual prejudice, nor were there any findings of fact supporting the order.  The SJC’s holding rested on violations of both the common law duty of loyalty that attorneys owe clients and Massachusetts Rule of Professional Conduct 1.7, governing concurrent and successive representation of clients.  The SJC reasoned that the compensation dispute with current shareholders created a potential conflict that made it improper for the corporation’s law firm to represent those individual shareholders as concurrent clients without first obtaining the company’s informed consent.  By accepting the new representation without first obtaining such a waiver, the law firm breached its duty of loyalty to Bryan Corp. and violated the prohibition in Rule 1.7 against concurrent representation of clients whose interests are materially adverse.  The decision also confirmed that disqualification can be a proper remedy for ethical violations even without a showing of actual prejudice.

The court also held that law firm’s termination of the client engagement was improper.  Consent to terminate an engagement with an organizational must be given by an authorized representative of the organization who has no conflict of interest in the decision.  Moreover, the development of the conflict between Bryan Corp. and certain shareholders did not, by itself, justify the firm’s withdrawal as counsel for the company in the pending but unrelated litigation.

The law firm argued that initially there was no adversity between the shareholders and the company and no showing of actual prejudice.  The SJC rejected those arguments as overly narrow readings of Rule 1.7, which encompasses the duty to anticipate potential conflicts, and Rule 1.13, the comments to which instruct that when an organizational client’s interests may be or become adverse to those of a constituent, the lawyer should advise the constituent of the conflict or potential conflict of interest and that the lawyer cannot then represent the constituent.  The law firm had a duty to use “reasonable measures” to ascertain whether an actual conflict of interest was likely to occur, and, in this case, the law firm “should have known” that the interests of their concurrent clients were likely to become adverse in the near future, given the structure of the small board, the compensation dispute, and prior advice the law firm had given the shareholders about likely conflicts occurring if the board membership changed.

Fulfilling the Duty of Loyalty

Abrano illuminates the breadth and depth of the duty of loyalty that Massachusetts attorneys owe their clients.  To fulfill that duty, attorneys must maintain undivided loyalty to the client during the term of the engagement.  The SJC explains that such undivided loyalty means taking no actions adverse to a current client and declining likely adverse representations without the client’s informed consent.  The duty of loyalty also obligates attorneys to complete their engagements, unless the client relationship is terminated with informed consent by an unconflicted representative.

Anticipating Conflicts

Abrano clarifies that attorneys representing corporate clients cannot also represent individual shareholders without the corporate client’s consent if it is reasonably foreseeable that a conflict will arise.  Nor can attorneys accept the individual representation and then withdraw as corporate counsel when the conflict develops:  “a firm may not undertake representation of a new client where the firm can reasonably anticipate that a conflict will develop with an existing client, and then choose between the two clients when the conflict materializes.”

Abrano puts the burden on attorneys to assess the likelihood of a conflict when considering concurrent representation.  Attorneys must undertake “reasonable measures” to anticipate conflicts and will be held to professional negligence standards in doing so.  Precisely what measures are reasonable under different circumstances is unclear, and Abrano gives no further guidance beyond the facts specific to that case.

Hot Potato Doctrine Not Adopted

The SJC expressly declined to decide whether to adopt the so-called Hot Potato doctrine, which limits a firm’s ability to drop a client “like a hot potato” so that it may accept or continue representation of another client in a matter adverse to the first client.  The SJC found that the duty of loyalty and professional rules were sufficiently broad to address the situation in Abrano, where the law firm started a new, potentially adverse engagement before terminating the existing client relationship.  What is left unanswered is whether an attorney may terminate a client relationship and shortly afterwards engage a new client adverse to the former client.  Is the Hot Potato doctrine needed to regulate such situations where the matters are unrelated, or is Rule 1.9 sufficient?

Engagement Letters

Abrano highlights the importance of carefully crafted engagement letters to avoid ethical as well as practical problems in the attorney-client relationship.  An engagement letter should (i) identify who is the client, (ii) explain what will happen if a potential conflict arises among concurrent clients, including which client (if any) the attorney will continue to represent after the conflict arises, (iii) limit the scope of engagement; (iv) explain how the engagement may terminate before its completion, and (v) discuss business concerns, including representation of competitors or other adverse parties on unrelated matters.  Done correctly, engagement letters should encourage ethical conduct, avoid misunderstandings, and simplify decision-making for attorneys and clients.

Conclusion

The Abrano decision brings much needed guidance for attorneys representing closely-held businesses and for all attorneys facing questions about how to begin and end client relationships properly.  Several questions remain unanswered, including whether the SJC might apply the Hot Potato doctrine to situations where attorneys end one client relationship for the purpose of engaging a new client adverse to the former client.  For now, what is clear from Abrano is that Massachusetts attorneys must be mindful of and responsibly fulfill their duty of loyalty and professional conduct obligations when commencing and terminating client relationships.

Paul Lannon is a litigation partner at Holland & Knight LLP and Co-Chair of the Ethics Committee of the Boston Bar Association.

Jeffrey D. Woolf is an Assistant General Counsel to the Board of Bar Overseers and is a member of the BBA Ethics Committee.

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