Warring Constituents

Warring Constituents

Rule 1.13(a) says that a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.¹ In a united company that sentence works without effort: the board or the president gives an instruction, and the lawyer follows it. In a divided company the word duly carries the whole weight. Two factions may each claim to speak for the company, and a lawyer who accepts either claim without asking whether it rests on real authority has taken a side in a quarrel the entity has not settled.

The lawyer's duty runs to the entity, not to the faction. A faction is a group of constituents with a stake in how the fight ends, and a lawyer who lends the entity's confidences and skill to one faction has stopped protecting the client and started serving some of the people the client is trying to govern. The principle is that a lawyer representing a corporation represents the entity and not its individual shareholders or other constituents, and that remains true when shareholders come into conflict with the entity.² Courts have generally held, as a result, that a corporation's lawyer is not disqualified from representing the corporation in litigation against its constituents.³

Throughout the representation, the interest of the corporation must be paramount, and the lawyer must take care to "remain neutral with respect to the disputes between the present shareholders."⁴ One court borrowed that language from an ethics opinion on quite different facts and held the principle applicable to its own case: a lawyer for an entity cannot represent constituents of the entity when the representation may prejudice the entity's interests, or when it is unclear which constituents represent the entity's interests, so that a dispute between constituents makes it impossible to know what those interests are.⁵ The two strands do different work. The first protects the entity from a lawyer who serves some constituents at its expense. The second is a problem of knowledge: a lawyer who cannot tell what the entity wants cannot serve it faithfully, much less serve it and some of its members at the same moment.

The court's own facts show the second strand at work. A law firm was trying to represent both a partnership and two of its partners, and the partnership agreement gave the partners a veto that made deadlock likely. Because of the veto and the tendency to deadlock, the firm could not tell which positions on partnership issues reflected the partnership's true interest. The court saw two potentially conflicting representations, which might force the firm to withdraw from representing the partnership, and it expressly declined to decide whether the firm would also have to withdraw from representing the partners themselves.⁶

The ethics opinion the court drew on arose from a corporation with a 50 percent shareholder acting as president. The committee said the lawyer could carry on a representation that reflected that shareholder's decisions unless doing so would violate the president's own fiduciary duties to the corporation. In that event, it said, "the lawyer may be forced to seek guidance from the courts as to who is in control of the corporation, there being no higher authority within the corporation to whom the lawyer can turn."⁷ The court did not pass on that conclusion and agreed only with the opinion's general language on the entity's paramount interest and the lawyer's neutrality.⁸

Bar-exam stems build on this setting by giving two owners of equal standing, each demanding that the company's lawyer pursue that owner's plan. If the governing documents give one owner authority over the question, the lawyer follows that authority, because it is the entity's own voice.⁹ If they give neither, the lawyer holds no instruction the entity has actually given, and reporting up the ladder has nowhere to go, because no higher authority sits above two equal factions.¹⁰ What remains is neutrality, a plain statement of whom the lawyer represents, and, if the stalemate leaves no way to serve the entity faithfully, a request for court guidance or withdrawal.

The temptation to make peace is where lawyers go wrong. A lawyer who knows the business and the people may try to calm the feud by meeting each faction alone, offering compromise ideas, and earning each side's trust. The risk comes from the one qualification to the entity-only rule: where shareholders of a closely held corporation reasonably might have believed they had a personal lawyer-client relationship with the corporation's lawyer, a different result, including disqualification, may be required.¹¹ Private meetings, compromise proposals, and expressions of confidence are the conduct from which such a belief forms. The lawyer can drift from facilitating to advising particular owners before anyone notices, and the drift costs the lawyer the neutrality the entity's interest demands.¹²

Had the lawyer opened each meeting by saying whom the lawyer represents, declined to edit the owner's offer, and left the owner to find her own counsel, the same peacemaking would have stayed on the company's side of the line.

When the stalemate holds, the lawyer may leave, or a faction may push the lawyer out, and Rule 1.13(e) governs what the lawyer must do on the way out. If the lawyer reasonably believes she has been discharged because of corrective actions taken in response to unlawful conduct by a constituent that threatens substantial injury to the organization, or if she chooses to withdraw from representing the entity, the rule requires reasonable steps "to ensure that the organization's highest authority is informed of the lawyer's discharge or withdrawal."¹³ The rule is designed to make sure the governing body learns of the state of affairs, or is at least put on notice that something may be awry. And because the lawyer may tell the offending constituents that this duty survives termination of the representation, they are less likely to try to force the lawyer out to silence objections.¹⁴ The notice runs to the highest authority, and between equal factions that authority may not exist. The ethics committee's answer to that gap was to seek guidance from the courts.¹⁵