Updates on Certain Ethical Issues

November 4, 2008 LSI Commercial Real Estate Leases Conference

Presented By Jonathan W. Hughes, Esq.

Howard Rice Nemerovski Canady Falk & Rabkin A Professional Corporation Three Embarcadero Center, Seventh Floor San Francisco, CA 94111-4024 www.howardrice.com [email protected] 415.434.1600 TABLE OF CONTENTS

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I. BRIEF OVERVIEW OF FIDUCIARY DUTIES...... 1 II. IT IS ESSENTIAL THAT YOU KNOW AND DOCUMENT WHO YOU ARE REPRESENTING—THE “WHO IS YOUR CLIENT” ISSUE...... 1 III. ENTITY THEORY OF REPRESENTATION...... 2 IV. DUTY TO ADVISE CONSTITUENTS WHO YOUR CLIENT IS...... 3 V. REPRESENTING THE CONSTITUENTS OF A CORPORATION AS WELL AS THE CORPORATION...... 3 VI. CONTACTING REPRESENTED PARTIES: CALIFORNIA EX PARTE ETHICS RULES...... 3

- i - I. BRIEF OVERVIEW OF FIDUCIARY DUTIES

A. Attorneys have a continuing duty to spot, disclose and, where appropriate, obtain consent to waive conflicts

B. What is a conflict of interest?

1. In plain terms, a conflict is something that could cause an attorney to breach a fiduciary duty owed to a client

2. Fiduciary duties attorneys owe to their clients: candor; communication; competence; confidentiality; undivided loyalty and zealousness within the bounds of the law

3. In very general terms, a conflict of interest is something that could harm the client because the attorney’s loyalties are (or could be) divided, or because the lawyer’s objectivity or independent judgment is (or could be) impaired, or because the attorney’s zealousness might be diminished

4. A conflict of interest can arise under a variety of circumstances, for example:

a. when an attorney has a relationship with someone else (not necessarily involved in the matter),

b. when an attorney has an interest in the subject matter of the representation, or

c. when there are other circumstances which do or could interfere with that attorney’s duty to act with only his or her client’s best interests in mind

C. California’s Rules of Professional Conduct require conflict disclosures and consents to be in writing

D. Extent of disclosure to make:

1. The relevant circumstances

2. How the actual or potential conflict could harm the client: the “actual and reasonably foreseeable adverse consequences” (Rule 3-310(A))

II. IT IS ESSENTIAL THAT YOU KNOW AND DOCUMENT WHO YOU ARE REPRESENTING—THE “WHO IS YOUR CLIENT” ISSUE

A. Attorneys owe their fiduciary duties to their clients. Therefore, it is essential that you know who your clients are—and are not—in any given matter

B. Make sure that your internal records correctly reflect the identity of your clients

-1- III. ENTITY THEORY OF REPRESENTATION

A. When you represent an entity, your client is the entity, not the officers, directors, shareholders or other constituents associated with it

B. Not even the Board is your client

1. The client is the fictitious corporate entity

2. The Board is just a group charged with managing the entity

3. You advise the Board, but you represent the entity

4. Stay out of corporate control battles — Skarbrevik v. Cohen, England & Whitfield, 231 Cal. App. 3d 692, 703-04 (1991); Goldstein V. Lees, 46 Cal. App. 3d 614, 622 (1975)

C. Key authorities

1. Rule 3-600 of California Rules of Professional Conduct: Rule 3-600(A) provides that, in representing an organization, an attorney “shall conform his or her representation to the concept that the client is the organization itself, acting through its [authorized representatives] overseeing the particular engagement.” (This rule is similar to ABA Model Rule 1.13)

2. Meehan v. Hopps, 144 Cal. App. 2d 284, 293 (1956): former director not allowed to disqualify corporate counsel from being adverse to him, because he was not the attorney’s client

3. Skarbrevik v. Cohen, England & Whitfield, 231 Cal. App. 3d 692 (1991): corporate counsel does not represent corporation’s shareholders (absent an agreement to do so)

D. Associations

1. Representation of homeowners association does not include representation of individual homeowners. Smith v. Laguna Sur Villas Community Ass’n, 79 Cal. App. 4th 639, 644 (2000), homeowners not entitled to obtain privileged communications between association and its attorney

2. However, court may find otherwise depending on the facts. See Benge v. Superior Court, 131 Cal. App. 3d 336, 347-48 (1982) where attorney-client privilege applied to union members based on their expectation

E. With partnerships, you can specify who your client is. If you don’t: whether you represent the partnership or individual partners will be decided on a case-by-case analysis. Responsible Citizens v. Superior Court, 16 Cal. App. 4th 1717, 1731-33 (1993); Buehler v. Sbardellati, 34 Cal. App. 4th 1527 (1995)

-2- F. Identify your client carefully and be clear about who is not your client

1. In your own mind

2. In your dealings with others associated with corporation (Rule 3-600)

3. In your dealings with third parties

4. Create a written record — be sure it gets to the right parties. If the client is the entity, and not the individuals forming it or associated with it, put in writing that you are representing the entity, not the individuals, and give that document to the individuals

IV. DUTY TO ADVISE CONSTITUENTS WHO YOUR CLIENT IS

A. If you are representing solely the corporation, then there are certain circumstances where you may have a duty to advise constituents of the corporation that you are not representing them

B. ABA Model Rule 1.13(f): “In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”

C. California Rule 3-600(D): In dealing with an organization’s directors, officers, employees, members, shareholders, or other constituents, an attorney for the corporation “shall explain the identity of the client for whom the member acts, whenever it is or becomes apparent that the organization’s interests are or may become adverse to those of the constituent(s) with whom the [attorney] is dealing.”

D. California’s triggers for warning the constituent are broader than in the ABA Model Rule

V. REPRESENTING THE CONSTITUENTS OF A CORPORATION AS WELL AS THE CORPORATION

A. Rule 3-600(E) allows an attorney for an organization to also represent any of its constituents, but if there are conflicts, they need to be dealt with appropriately. (This rule is similar to ABA Model Rule 1.13(g))

B. Rule 3-310 sets out the basic conflicts rules

C. If the organization’s consent is needed to waive a conflict, the consent must be given by an appropriate constituent other than the constituent who is to be represented, or by the shareholders(s) or organization members (Rule 3-600(E))

-3- VI. CONTACTING REPRESENTED PARTIES: CALIFORNIA EX PARTE ETHICS RULES

A. California Rules of Professional Conduct, Rule 2-100(A): “While representing a client, a member shall not communicate directly or indirectly about the subject of the representation with a party the member knows to be represented by another lawyer in the matter, unless the member has the consent of the other lawyer.” (ABA Model Rule 4.2 is similar)

B. Purpose of Rule

1. Generally, to prevent an attorney from taking advantage of an opposing party in the absence of that party’s counsel

2. Comment [1] to ABA Rule 4.2 sets out specific purposes: “This rule contributes to the proper functioning of the legal system by protecting a person who has chosen to be represented by a lawyer in a matter against possible overreaching by other lawyers who are participating in the matter, interference by those lawyers with the client-lawyer relationship and the uncounselled disclosure of information relating to the representation.”

3. California Supreme Court noted an important additional purpose: to give lawyers the opportunity to correct any errors by the other lawyer and, if appropriate, to raise countervailing arguments in response. Mitton v. State Bar, 71 Cal. 2d 525, 534 (1969)

C. Rule is not limited to litigation. (Rule 2-100, Discussion)

D. Consent of other lawyer is required; consent of opposing party is not enough

E. Every kind of direct or indirect communication is prohibited

F. Actual knowledge required

1. Rule 2-100 not triggered unless attorney has actual knowledge that the contacted party is represented. Snider v. Superior Court, 113 Cal. App. 4th 1187, 1213-15 (2003)

2. However, if attorney has “reason to believe” party is represented, actual knowledge may be established by circumstantial evidence. Id. at 1215-16

3. If reason to believe:

a. Conduct discovery, or

b. Communicate with opposing counsel re employee’s status before contacting employee. Id.

-4- 4. If no reason to believe, no duty to inquire

G. “Party” is defined in Rule 2-100(B) to include:

1. Officer, director or managing agent of corporation

2. Partner or managing agent of partnership

3. Association member or employee of entity:

a. Where subject of communication is act or omission by person that may be binding on or imputed to entity, or

b. Whose statement may constitute an admission on behalf of the corporation

H. Current corporate officers and directors of adverse corporate party

1. Contact improper:

(i) Even if not in control group

(ii) Even if in dispute with corporation. See Mills Land & Water Co. v. Golden West Refining Co., 186 Cal. App. 3d 116, 127-29 (1986) (decided under former rule)

2. However, contact with dissident is permissible if represented by separate counsel who consents; consent by corporate counsel not required, but “advisable and prudent” to obtain. La Jolla Cove Motel & Hotel Apts., Inc. v. Superior Court, 121 Cal. App. 4th 773, 789-90 (2004)

I. “Managing Agent” refers to employees who “exercise substantial discretionary authority over decisions that determine organizational policy.” Snider, 113 Cal. App. 4th at 1209

J. Current employees of opposing party

1. Contact improper:

a. If the “subject of the communication is any act or omission of such person in connection with the matter which may be binding upon or imputed to the organization for purposes of civil or criminal liability (Rule 2-100(B)), or

b. If the employee’s “statement may constitute an admission on the part of the organization” (Rule 2-100(B))

c. If employee is separately represented

-5- (i) Mere fact that corporation has in-house counsel not enough to constitute “actual knowledge,” prohibiting contact

d. If employee is an officer, director, or managing agent

K. Former officers and employees

1. Rule 2-100 is intended to apply only to persons employed at the time of the communication. (Rule 2-100, Discussion)

2. Therefore, it is permissible to communicate with unrepresented former employees of a corporation without the consent of the attorney representing the corporation. Continental Ins. Co. v. Superior Court, 32 Cal. App. 4th 94, 118- 19 (1995)

3. However, it is not permissible to inquire about privileged communications. State Farm Fire & Casualty Co. v. Superior Court, 54 Cal. App. 4th 625, 652 (1997)

L. Experts hired by opposing party

1. Experts are not a “party” under Rule 2-100

2. But not permissible to contact them without counsel’s permission, even if expert was only interviewed — and not retained — by opposing counsel. See Shadow Traffic Network v. Superior Court, 24 Cal. App. 4th 1067, 1084-85 (1994)

M. Party-to-party communications

1. “Rule 2-100 is not intended to prevent the parties themselves from communicating with respect to the subject matter of the representation, and nothing in the rule prevents a member from advising the client that such communication can be made.” (California Rule 2-100, Discussion)

2. Counsel permitted to give guidance to their clients for such communications, but should not “script” those communications. See Cal. State Bar Form. Opn. 1993-131 (“[A]n attorney may confer with the client as to the strategy to be pursued in, the goals to be achieved by, and the general nature of the communication the client intends to initiate with the opposing party as long as the communication itself originates with and is directed by the client and not the attorney.”)

N. Exceptions: Rule 2-100(C) permits communications with an opposing represented party if:

1. With a public officer, board, committee, or body

-6- 2. Initiated by a party seeking advice or representation from an independent lawyer of the party's choice; or

3. Otherwise authorized by law

O. Consequences of violating Rule 2-100

1. State Bar discipline. See Levin v. State Bar, 47 Cal. 3d 1140, 1150 (1989) (decided under former rule)

2. Possible disqualification of offending attorney

a. Within the court’s discretion. Chronometrics, Inc. v. Sysgen, Inc., 110 Cal. App. 3d 597, 607-08 (1980).

b. Court “question[s] whether a protective or suppression order is warranted by showing only a violation of rule 2-100, without an additional showing that the violation led to the disclosure of confidential communications protected by the attorney-client privilege, [citation] or created an unfair advantage, or impacted the fairness of the trial or the integrity of the judicial system.” La Jolla Cove Motel & Hotel Apartments, Inc. v. Superior Court, 121 Cal. App. 4th 773, 791 (2004), quoting Continental Ins. Co. v. Superior Court, 32 Cal. App. 4th 94, 111 n.5 (1995)

3. Usually not vicarious disqualification of entire law firm

a. Court balances the competing interests between the potential prejudice to the moving party and the client’s interest in being represented by counsel of its own choosing. See Mills Land & Water Co. v. Golden West Refining Co., 186 Cal. App. 3d 116 (1986)

b. A court should disqualify an offending attorney’s entire law firm only where the moving party establishes that the law firm’s continued representation “will have a continuing effect in the litigation prejudicial to [the moving party].” Mills Land, supra, 186 Cal. App. 3d at 134-35

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