The Legal Intelligencer 

In representing lawyers and law firms of all sizes, there are many issues that present themselves with great frequency. Among those issues are the challenges of representing closely held corporate entities and the conflicts that may arise from actual or perceived representation of the organization’s constituent members. A typical situation involves a lawyer being asked by a client to form an entity, and then at some future point, being asked to represent either the company or the member in a dispute with other equity holders. These situations are fraught with peril that can easily lead to disqualification, disciplinary action or potential malpractice liability. This article examines conflicts of interest in the organizational setting and discusses potential consequences from a failure to spot and adequately address such conflicts.

The Organizational Client—Know Who You Represent!

ABA Model Rule 1.13(a) provides that “a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” The lawyer’s primary duty, therefore, is to the corporate entity and not to its directors, officers, employees or other constituents. See Brooklyn Navy Yard Cogeneration Partners v. Superior Court, 60 Cal. App. 4th 248, 254 (Cal. App. 1997) (“The attorney owes undivided allegiance only to the corporate entity which he or she represents rather than any affiliated persons or entities.”). Depending on the type of business entity and the jurisdiction, the representation of an organization itself may per se constitute representation of the individual constituents. This has increasingly been the case with respect to unincorporated business partnerships. See e.g., Wortham & Van Liew v. Superior Court, 188 Cal. App. 3d 927, 932 (Cal. App. 1987) (“the attorney for the partnership represents all the partners as to matters of partnership business”); Pucci v. Santi, 711 F. Supp. 916, 927 (N.D. Ill. 1989)(holding that a limited partnership’s attorney also represents the limited partners); but see, Richter v. Van Amberg, 97 F. Supp. 2d 1255, 1264 (D.N.M. 2000) (“Mere representation of a partnership does not, in and of itself, constitute representation of the individual partners.”).

The best defense in situations that present these potential conflicts is to be clear from the outset about who you do and do not represent, both with the client and others who may mistakenly assume they are a client. If approached by a client to assist in the creation of a business entity, the lawyer should be clear in his engagement agreement about who is the client. Is it the individual who approached the lawyer? Or is it the entity to be created? Clarifying this issue will assist in resolving conflicts down the road. For example, if you are representing one of several potential equity holders in the creation of a new entity and are preparing the operational documents on his behalf, be clear in providing drafts of the document to other stakeholders about who you represent. Those other individuals should be advised to obtain their own independent advice concerning the agreement and its terms, and that communications with these other stakeholders are not confidential or privileged with respect to the individual you represent. It is paramount to void the creation of an implicit attorney-client relationship with other stakeholders who may mistakenly assume you are protecting their individual interests in preparing the agreement. Being clear about these issues will also help avoid future conflicts in the event you are asked to represent the individual member in a dispute with the company and its members.

Representing Both the Organization and Constituents

Although a lawyer who has represented an individual stakeholder in an entity is not per se precluded from later representing the company in litigation or other business transactions, considerations of actual and potential conflicts must be continuously assessed.

The general prohibition against concurrent conflicts of interest is grounded in the concept that “no man can serve two masters.” See Comando v. Nugiel, 436 N.J. Super. 203, 215 (App. Div. 2014) (citations omitted). A concurrent conflict exists where the “representation of one client will be directly adverse to another client” or “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.” See ABA Model Rule 1.7(a). An example of conflicts arising from prior representation of individual stakeholders is illustrated in Comando v. Nugiel, where the plaintiff asserted both individual and derivative claims on behalf of an LLC jointly owned with the defendant and sought to disqualify defendant’s counsel on the basis that the law firm had a concurrent conflict of interest. In granting the disqualification motion, the court concluded that the law firm had, at various points, represented both the plaintiff LLC and the defendant entity in various transactional matters, served as counsel to both corporate entities as of the commencement of litigation, and failed to obtain the necessary informed written consent to waive the conflict of interest. The direct adversity of both corporate entities in litigation prohibited the law firm from representing one client to the detriment of the other.

A second form of concurrent conflict arises from the material limitation of a representation due to a lawyer’s duties to another party or client. These more common conflict issues are often more subtle and require a nuanced analysis compared to the “direct adversity” standard. The lawyer must evaluate “whether it is likely a difference of interests will occur between the clients and, if so, whether that difference in interests will interfere with the lawyer’s ability to offer independent, professional judgment to each client.” See Iowa Supreme Court Attorney Disciplinary Board v. Willey, 889 N.W. 2d 647, 653–654 (Iowa 2017).

Using the example of an attorney that had prepared operational documents on behalf of an individual client and who is then asked to represent the organization in litigation filed by a third party, the following, among other things, should be kept in mind: Will the representation of the entity implicate a conflict or perceived divided loyalty with the original client? Perhaps it would if the lawsuit arises from the original client’s conduct. But if the lawsuit presents a simple contract dispute with a customer, the risk is substantially less. Does the lawsuit present issues that would place the individual constituents at odds with one another? Under such circumstances, representation of the entity should likely be declined.

While such circumstances may seem overly hypothetical, the potential exposure is real. Violation of the concurrent conflict of interest rules is a frequent basis for disciplinary action. When conflict violations are found, the level of discipline imposed is rarely insignificant and frequently involves a period of suspension. If disqualified from representing a party to litigation, the lawyer may face claims for the recovery of attorney fees and the disgorgement of fees that had been paid to the attorney while the conflict existed.

Given the stakes, careful consideration of the potential conflicts arising from the representation of a closely held corporation must be taken in all instances. An opinion from ethics counsel can assist in determining the appropriate course of action and identifying potential circumstances that may require later withdrawal, the necessity and form of potential conflict waivers or other disclosures, and appropriately drawn engagement agreements.

The Bottom Line

Situations implicating the conflict of interest rules arise on a daily basis. Ignoring them at the outset is a ticking time bomb from both a disciplinary and financial perspective. Know who you represent; make sure those involved know who you represent; and take care to monitor conflicts as matters progress.

Reprinted with permission from the January 27, 2023 edition of the The Legal Intelligencer © 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or

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