Earlier this year, California’s Fourth District Court of Appeal found that a partner’s status as 50% shareholder of a law firm did not give rise to a conflict of interest which would preclude the firm’s counsel from defending the firm and another partner against the departing partner’s lawsuit. (See Coldren v. Hart, King & Coldren (2015) 239 Cal.App.4th 237.) The Court also found that under the facts specific to that case, the departing partner did not have standing to bring a motion to disqualify the firm’s counsel based on an alleged conflict of interest. The Court’s analysis in this matter is helpful in guiding not only attorneys who are considering whether there is a conflict with such dual representations, but for law firm’s handling the transition of departing partners and who want to avoid potential conflicts in representing the firm’s interests in such disputes.
The Coldren case involves a dispute between two law partners, Coldren and Hart, who formed the law firm of Hart, King & Coldren (“HKC.”) Coldren wanted to depart and the partners began executing on a transition plan which was part of the separation agreement Coldren had with the firm. A dispute arose related to the separation agreement and Coldren sued Hart and HKC, for involuntary dissolution, breach of contract, breach of fiduciary duty and other claims. Hart and HKC cross-claimed against Coldren for declaratory relief, breach of contract, breach of fiduciary duty and fraud. Early in the litigation, Coldren brought a motion to disqualify the law firm of Grant, Genovese & Barratta LLP (“Grant Genovese”) from representing both Hart and HKC, claiming it was a conflict of interest for Grant Genovese to represent HKC in claims against Coldren since he was also a 50% shareholder of HKC. The trial court granted the motion to disqualify, but a writ was taken by Hart and HKC and the Court of Appeal ultimately reversed that order.
Although the Court of Appeal reversed the order on two grounds – both due to lack of standing and finding there was no conflict of interest with the dual representation – the conflict of interest analysis is particularly instructive as it relates to partner departures and recurring issues that can arise during shareholder disputes.
As the Court stated, “a conflict of interest exists when a lawyer’s duty on behalf of one client obligates the lawyer to take action prejudicial to the interests of another client; i.e., ‘when, in behalf of one client, it is his duty to contend for that which duty to another client requires him to oppose. ‘” [Citing to Havasu Lakeshore Investments, LLC v. Fleming (2013) 217 Cal.App.4th 770, 778.] In this case, the Court found that no actual conflict existed because Hart’s interests were aligned with HKC’s interests, and that even though Coldren was still a 50% shareholder in the firm, Grant Genovese’s duty was to HKP, not its shareholders and HKC was free to defend Coldren’s lawsuit and assert any relevant counterclaims.
The Court also cited to and analyzed the applications of Cal. Bar Standing COPRAC, Formal Opinion 1999-153 and Cal. Rule of Professional Conduct Rule 3-310 to this fact pattern. The Formal Opinion provides a detailed discussion of the hypotheticals involved when an attorney considers the representation of a corporation and one of its shareholders, “A”, against another shareholder, “B”. In that opinion, the Committee ultimately concluded that an attorney “may ethically represent Corporation and A in B’s lawsuit. Attorney may jointly represent Corporation and A only for so long as the following two conditions are met. First, Attorney can simultaneously represent the two so long as the corporation and A do not have opposing interests in the lawsuit which the attorney would have a duty to advance simultaneously for each. [Citations.] Second, Attorney must conform his representation of the corporation to the requirements of Rule 3–600. As an adversary of Corporation in the lawsuit, B is not entitled to the assistance of Corporation’s counsel in connection with the litigation. At the same time, the rules that allow a corporation’s lawyer to take action on the corporation’s behalf which negatively impact a constituent remain applicable.” (Formal Opinion No.1999–153.)
Although the Coldren case provides a helpful road map in navigating how to identify and avoid potential conflicts with dual representations where shareholders’ rights are at stake, it is important for law firms to have those issues analyzed based their unique facts patterns, prior to, or as part of, selecting counsel to resolve their partnership or shareholder disputes.
Dena M. Roche
O’Rielly & Roche LLP