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BOBBITT v. VICTORIAN HOUSE

August 23, 1982

RICHARD A. BOBBITT, PLAINTIFF,
v.
VICTORIAN HOUSE, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Richard A. Bobbitt ("Bobbitt") sues Victorian House, Inc. ("Victorian House") and its President Albert Morlock ("Morlock"), primarily seeking dissolution of Victorian House and an accounting of corporate funds allegedly misapplied by Morlock. Bobbitt has moved to disqualify defendants' attorney John C. Stiefel ("Stiefel") and his law firm (Solomon, Rosenfeld, Elliott, Stiefel & Abrams, Ltd.) from representing defendants. For the reasons stated in this memorandum opinion and order that motion is denied.

Bobbitt has owned one-half of Victorian House's outstanding shares since its inception and has been a member of its board of directors since at least July 27, 1978. Stiefel has represented Victorian House since about December 1976. Although not articulated in precisely these terms, Bobbitt's claim is dual in nature:

    1. Stiefel assertedly represented the Victorian
  House incorporators (including Bobbitt) before the
  corporation was formed.
    2. Bobbitt contends he later gave confidential
  information to Stiefel in his capacity as counsel to
  Victorian House.

As a result Stiefel's presence in this action allegedly constitutes a conflict of interest.

During the past several years our Court of Appeals has dealt with a number of variations on the theme of lawyer disqualification. In doing so it has stated this test for determining if a conflict of interest exists in the face of prior representation, Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186, 195 (7th Cir. 1979) (quoting Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir. 1976)):

  Initially, the trial judge must make a factual
  reconstruction of the scope of the prior legal
  representation. Second, it must be determined whether
  it is reasonable to infer that the confidential
  information allegedly given would have been given to
  a lawyer representing a client in those matters.
  Finally, it must be determined whether that
  information is relevant to the issues raised in the
  litigation pending against the former client.

First, however, it must be decided whether "prior legal representation" of Bobbitt was present at all.

As to the undisputed Stiefel representation — that involving Victorian House itself — the problem is relatively straightforward. Normally a corporate director talking to corporate counsel should understand anything he told that attorney was "known by the corporation." Thus there should normally be no conflict of interest when a director sues a corporation represented by its general corporate counsel, because anything the director would previously have told that attorney would ordinarily have been communicated to him as lawyer for the corporation. In other words, no conflict exists simply because there was no prior representation of the individual. As EC 5-18 of the Code of Professional Responsibility states:

  A lawyer employed or retained by a corporation or
  similar entity owes his allegiance to the entity and
  not to a stockholder, director, officer, employee,
  representative, or other person connected with the
  entity. In advising the entity, a lawyer should keep
  paramount its interests and his professional judgment
  should not be influenced by the personal desires of
  any person or organization. Occasionally a lawyer for
  an entity is requested by a stockholder, director,
  officer, employee, representative, or other person
  connected with the entity to represent him in an
  individual capacity; in such case the lawyer may
  serve the individual only if the lawyer is convinced
  that differing interests are not present.

Analysis is somewhat more complex as to a small close corporation with only a few shareholders and directors. There it may be more difficult to draw the line between individual and corporate representation. But representing such a corporation does not inherently mean also acting as counsel to the individual director-shareholders. Rather the question must be determined on the individual facts of each case.*fn1

This Court has found only a single case dealing with closely parallel facts. In Wayland v. Shore Lobster & Shrimp Corp., 537 F. Supp. 1220, 1223 (S.D.N.Y. 1982) the court rejected a like disqualification claim in these terms:

  However, Wayland has presented no support, and we
  have found none, for the proposition that a law firm
  which acts as counsel to a close corporation acts as
  counsel to individual shareholders simply by
  suggesting amendments to a shareholder agreement or
  by drafting and negotiating on behalf of the
  corporation severance agreement with departing
  shareholders. To the contrary, it appears that the
  Proskauer firm has always represented the
  shareholders as a group, as an alter-ego of the
  corporation. Wayland has pointed to no instance where
  the firm has represented any shareholder as an
  individual. Furthermore, Wayland's argument that the
  firm must be disqualified because it may have been
  exposed to confidential information from Wayland
  while he was employed at Shore is unpersuasive since,
  in the circumstances of Proskauer's representation,
  it is clear that the firm was representing the
  corporation and thus Wayland could not have
  reasonably believed or expected that any information
  given to the firm would be kept confidential from the
  shareholders or from the corporation as an entity.
  See Allegaert v. Perot, 434 F. Supp. 790 (S.D.N.Y.),
  aff'd, 565 F.2d 246 (2d Cir. 1977). It is undisputed
  that the firm ...

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