Law Tips: Ethics is Business Representation Part 2

Another Everyday Scenario: Ethics in Business Representation

Welcome back to our Law Tips discussion on Ethics in Business Representation. Last week our Advanced Business Law ethics panel, Arend Abel, Geoff Grodner, Chuck Kidd and Pat Olmstead,  presented a situation where a lawyer could “…step on a legal land mine the lawyer placed years before.” That scenario involved Walter and Jennifer’s initial business setup. (Click here to review that discussion.) Now, let’s look at an additional scenario that addresses ethics and professional responsibility situations that a business lawyer may face in everyday practice. 

Scenario:

Walter and Jennifer have a falling-out. Walter has used his voting control to have the company pay him a large salary as President, and to pay Jennifer a much smaller salary. Together, the salaries eat up enough of the company’s revenue that there is little left for distributions to owners. The situation has become sufficiently acrimonious that Walter now wants Jennifer out of the company and he comes to you for help in accomplishing that goal. What issues must you consider, and can you help him push Jennifer out?

Issues to Consider:

Rule 1.13 again comes into play. (Noted in last week’s blog.) At a minimum, the clarification obligation under comment 10 arises, and you must make clear to Jennifer that you do not and cannot represent her.

In addition, your activities to help one officer against another officer may raise conflict of interest issues. See, e.g., Matter of Strutz, 652 N.E.2d 41 (Ind. 1995) (entering into business transactions with clients without making full disclosure, preparing complaint for president of corporate client to file against the client, and entering appearance for plaintiff in derivative action against client after being terminated from his position as general counsel to corporate client warranted 2-year suspension).

Also relevant is Matter of Shirley, 930 N.E.2d 1135 (Ind. 2010). In Shirley, an attorney received a 30-day suspension for his representation of a family-owned company and one of its officers. The lawyer helped the officer to wrest sole control of the corporation from the officer’s mother and six siblings. The lawyer then charged the company to defend it against subsequent suits by the siblings who were fired. The attorney belatedly agreed that his fees were unreasonable because he (1) did not obtain the consent of the necessary principals, and (2) the corporation paid for legal work that inured solely to his individual client’s benefit. The court found that a mitigating factor was Shirley’s repayment of fees to the corporation when the corporation sued Shirley.

Under the Rules of Professional Responsibility, another issue the lawyer faces is whether Walter’s desire to force Jennifer out has created a situation where Walter’s interest is adverse to the entity’s (assuming that the lawyer took appropriate steps to avoid the formation of a client or prospective client relationship with Jennifer). However, given the potential for claims for breach of fiduciary duty or corporate waste created by Walter’s salary decisions, the better course is probably for the lawyer to recommend that Walter retain his own counsel.

We are appreciative of the generous input by Mr. Abel, Mr. Grodner, Mr. Kidd and Mr. Olmstead. To gain further insights from their Ethics in Business Representation CLE presentation, along with the array of topics discussed in ICLEF’s Advanced Business Law On-Demand seminar, Click Here. This CLE is available online at your convenience.

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Thank you to our Law Tips Faculty Contributors:

  • Charles M. Kidd, Deputy Executive Secretary, Indiana Supreme Court Disciplinary Commission, Indianapolis
  • Geoffrey M. Grodner, Mallor Grodner LLP, Bloomington
  • Arend J. Abel, Cohen & Malad, LLP, Indianapolis
  • Patrick J. Olmstead, Jr., Center Grove Law Office, Greenwood

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.

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