Concurrent conflicts of interest and the duty of loyalty after ’Bryan Corp. v. Abrano’

Issue November/December 2017 December 2017 By Euripides Dalmanieras
Complex Commercial Litigation Section Review

No lawyer would dispute that “[l]oyalty and independent judgment are essential elements in the lawyer’s relationship to a client,” Mass. R. Prof. C. 1.7, cmt. 1; or that a lawyer owes every client “the full panoply of duties that attend the lawyer-client relationship, chief among which is a duty of undivided loyalty.” Bryan Corp. v. Abrano, 474 Mass. 504, 516 (2016). But these tenets raise the following question: What obligations does a lawyer’s duty of undivided loyalty actually entail?

As codified in Massachusetts Rule of Professional Conduct 1.7, the duty of loyalty certainly prohibits lawyers, absent informed written consent, from simultaneous representations of clients with directly adverse interests and from representations that may be materially limited by the lawyer’s responsibilities to other clients or non-clients. But the duty of loyalty is not necessarily satisfied only by compliance with the rules, and Rule 1.7 does not represent the outer bounds of the duty of loyalty where a concurrent conflict exists. The Supreme Judicial Court’s decision in Bryan Corp. v. Abrano shows that the undivided duty of loyalty requires lawyers facing actual and potential conflicts to refrain from any conduct that would undermine the “sense of trust between the lawyer and client that promotes the lawyer’s ability to competently represent the client’s interest.” 474 Mass. at 511.

The Bryan Corp. case presents a vivid illustration of the pitfalls that face business litigators who attempt to negotiate concurrent conflicts. In affirming the disqualification of a law firm for the “violation of both its duty of loyalty to the [client] and rule 1.7’s prohibition against the simultaneous representation of clients whose interests are adverse,” the SJC held that before agreeing to an engagement, firms must identify actual and potential conflicts and, where appropriate, decline representation. 474 Mass. at 515. The court has put the bar on notice that the ways in which lawyers and firms address concurrent conflicts involving organizational clients will be closely scrutinized.

Facts: In March 2014, Bryan Corporation engaged the law firm to defend it in a lawsuit brought by one of the company’s former consultants. While this litigation was pending, the same lawyers from the firm agreed to represent the company’s two minority shareholders, who were also two of the company’s three directors, as well as the husband of one of those shareholders, in a dispute with the company and its majority shareholder over the payment of the company’s 2014 year-end profits. The husband worked for the company.

During the initial consultation, the lawyers stated that they could represent the two minority shareholders as long as they constituted a majority of the board of directors. If they left the board, the lawyers said that a conflict might arise warranting their withdrawal as the company’s counsel in the lawsuit with the former consultant. The law firm did not disclose to the majority shareholder (who was the third director) that it had been engaged by the minority shareholders or that the firm may withdraw from representing the company. On the day that this representation began, July 1, the minority shareholders began demanding that the company pay them their share of the 2014 year-end profits in the form of wages.

On July 15, 2014, a shareholders meeting was held to elect new directors. The minority shareholders “did not renominate themselves to the board, instead nominating three other people.” 474 Mass. at 507. On July 21, the law firm, while still representing the company in the suit by the former consultant, sent a demand letter to the company’s president and the majority shareholder, asserting claims on behalf of the minority shareholders against the company and the majority shareholder, among others.

On July 23, 2014, the law firm sent a letter to the husband of one of the minority shareholders (who, with his spouse and brother-in-law, were now the firm’s clients) stating that a conflict had developed and it was resigning as the company’s counsel. The firm had foreseen this scenario during the initial consultation. The shareholder’s husband gave the firm permission to withdraw and the firm withdrew as the company’s counsel eight days later.

In November 2014, the minority shareholders sued the majority shareholder alleging, among other claims, violations of the Wage Act and breach of fiduciary duty. The law firm represented one of the minority shareholders in this lawsuit. The other minority shareholder and her husband retained new counsel to represent them in the lawsuit filed in November 2014. The company was not formally named as a party to the action, but the complaint referred to the company as a “defendant” four times. The complaint also alleged that the “company had the legal obligation to pay” the wages that the plaintiffs were seeking.

The company filed a separate action against the minority shareholders seeking to recover excessive year-end profit distributions that they had received between 2008 and 2013 in the form of wages. After the law firm appeared on behalf of one of the minority shareholders, the company moved to disqualify the firm arguing that the dual representation of the company and the minority shareholder violated Rule 1.7 or, alternatively, Rule 1.9. The minority shareholder moved successfully to consolidate the actions, contending that they presented “mirror image” claims. After consolidation, the trial court disqualified the firm.

The SJC’s decision: The SJC affirmed the disqualification order and held that the law firm “acting as a reasonable lawyer, should have known at the time it agreed to represent [the minority shareholders] that their interests were adverse to, or were likely soon to become adverse to, those of the company, and, in these circumstances, both the duty of loyalty and rule 1.7 required it to decline representation, or at least seek the informed consent of the company.” 474 Mass. at 510. The SJC identified violations of Rule 1.7 and the duty of loyalty as independent, albeit related, grounds for disqualification. In this respect, Rule 1.7 “function[s] in furthering the lawyer’s duty of loyalty, which forms the bedrock of the attorney-client relationship.”

The SJC catalogued the law firm’s violations of the ethical rules and the duty of loyalty. The court held that the law firm violated Rule 1.7 “which encompasses a lawyer’s duty to anticipate potential conflicts and, where appropriate, decline representation.” Citing to the allegations in the minority shareholders’ own complaint, the court found that they were directly adverse to the company as of the date on which the law firm agreed to represent them, which was also the date on which the minority shareholders began demanding that the company pay them alleged wages.

Further, the court ruled that even if the parties were not directly adverse on July 1, 2014, the law firm should have declined the representation because it was aware of the potential for a conflict and it even advised the minority shareholders that if a conflict were to arise, the firm would terminate its pre-existing representation of the company.

At that point, the SJC could have ended its analysis. Instead, in a section of its opinion titled “other considerations” the court identified three additional ethical violations.

First, the court stated that the manner in which the law firm terminated its engagement with the company was “largely improper” because it communicated the termination decision to the husband of one of the minority shareholders (who was also its client), and not to a disinterested company official. The court cited comment 10 of Rule 1.13, which states in part that where there is a conflict between an organization and a constituent, the organization’s law firm “cannot provide legal representation for that constituent individual.” The law firm’s failure to do so, and its communication terminating its role as company counsel to another of its clients whose interests were adverse to the company, were held to be breaches of the duty of loyalty.

Second, the firm violated Rule 1.7 by continuing to represent the company after July 15, 2014, without obtaining the company’s informed written consent, as required by Rule 1.13(g).

Third, the SJC found that “it was improper for [the law firm] to withdraw prior to the completion of the [consultant’s] action, and the development of the conflict does not justify the firm’s actions.” 474 Mass. at 515. The court held that “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.” Id. at 516. Notably, the court rejected the law firm’s argument that once it acknowledged the conflict of interest, Rule 1.16(b) allowed it to withdraw from representing the company while continuing to represent the minority shareholders so long as “withdrawal c[ould] be accomplished without material adverse effect on the interests of the [company].” Mass. R. Prof. C. 1.16(b)(1). This means that a lawyer or firm may not enter into a new engagement that risks creating a conflict with an existing client, and then use the resulting conflict as a cover to terminate the less favorable client.

Bryan Corp. is a reminder that “in cases of doubt, counsel must resolve all questions against the acceptance of employment whenever such acceptance may impinge upon the interests of [their] present and former clients.” Mailer v. Mailer, 390 Mass. 371, 375 (1983). This is especially true in disputes where the line between an organization and an adverse constituent is not clear. In these circumstances, lawyers should take care to avoid taking any actions that would undermine the sense of trust between the lawyer and an existing client.   

This article previously appeared in the Summer 2017 edition of the ComCom Quarterly, the newsletter of the Complex Commercial Litigation Section.