Can a corporation's lawyer keep representing the company in litigation against one of its own 50% shareholders?

Plain-English summary

Opinion 216 (adopted January 15, 1991) considered A and B, who each owned 50% of C, a Maryland close corporation doing business in the District. The bank U had a banking relationship with C and personal loans to A and B, who defaulted. C sued U for wrongful termination of the banking relationship. U then obtained a judgment against A and, through a sheriff's sale, became the owner of A's 50% interest in C. A claimed he remained President because the two shareholders, B's successor and U, were deadlocked, and U sued in Maryland to dissolve C for deadlock. B's widow, who had succeeded to B's interest, wanted to maintain C's action; U wanted to drop it. The question was whether C's lawyer could keep representing C against U, now a 50% shareholder, and in U's dissolution action.

Applying Rule 1.13(a), the committee explained that a lawyer retained by a corporation represents the entity, not its shareholders, even when shareholders come into conflict with the entity, so the corporation's lawyer is generally not disqualified from representing it in litigation against its constituents. The committee distinguished cases in which the shareholders of a closely held corporation reasonably might have believed they had a personal lawyer-client relationship with the corporation's lawyer, finding that U, the bank, could not reasonably believe it had such a relationship.

On carrying out the representation, the committee explained that the lawyer owes a duty of loyalty to the corporation as an entity but must normally follow the direction of those duly authorized to act for it. Because President A held office only because of the deadlock and had his own dispute with U, the situation was difficult, but the lawyer could continue to take direction from A until the dispute over control was resolved by the courts or the parties. If the lawyer became convinced A's decisions clearly violated A's fiduciary duties to the corporation, the lawyer might be forced to seek the courts' guidance on who controlled the corporation, there being no higher authority within it; throughout, the lawyer had to keep the corporation's interests paramount and remain neutral among the shareholder factions.

Currency note

This opinion was issued in 1991, before the District of Columbia's adoption of the 2007 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could the corporation's lawyer sue a 50% shareholder on the company's behalf?

A: Yes. The committee concluded that, because the lawyer represents the entity and not its shareholders, the lawyer was not disqualified from representing the corporation in litigation against a 50% shareholder.

Q: Did it matter that the shareholder was a bank that acquired its stake at a sheriff's sale?

A: No. The committee concluded the bank could not reasonably believe it had a personal lawyer-client relationship with the corporation's lawyer, so the usual entity-representation rule applied.

Q: Whose instructions should the lawyer follow during the shareholder deadlock?

A: The duly authorized constituents'. The committee concluded the lawyer could take direction from the President until the control dispute was resolved, while keeping the corporation's interests paramount and staying neutral among the factions.

Q: What if the President's decisions harmed the corporation?

A: The committee concluded that if the lawyer became convinced the President's decisions clearly violated his fiduciary duties to the corporation, the lawyer might have to seek the courts' guidance on who controlled the corporation.

Background and rules framework

The opinion interpreted D.C. Rule 1.13(a), under which a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. The committee tied the rule to the well-established principle, echoed in the former Code's EC 5-18, that a corporation's lawyer owes allegiance to the entity and not to any shareholder, director, or officer, and read Comment [4] to require the lawyer ordinarily to accept the decisions of those making decisions for the organization, even if their prudence is doubtful.

Citations and references

Rules of Professional Conduct:

• D.C. RPC 1.13(a) / Model Rule 1.13 (organization as client)

Cases:

• Egan v. McNamara, 467 A.2d 733 (D.C. 1983), a corporation's lawyer represents the entity, not its constituents
• Financial General Bankshares, Inc. v. Metzger, 523 F. Supp. 744 (D.D.C. 1981), corporate counsel represents the interests articulated by those in current control
• Bobbitt v. Victorian House, Inc., 545 F. Supp. 1124 (N.D. Ill. 1982), corporate counsel may represent the entity against its constituents

Other opinions cited:

• ABA Informal Op. 1056 (1968) and ABA Op. 86 (1932): a corporate lawyer represents the entity and stays out of intra-shareholder controversies
• D.C. Opinions 159 (1985) and 186 (1987): the entity-representation principle

See also

• ABA Formal Op. 91-361: Representation of a Partnership
• DC Ethics Op. 299: Confidentiality to a Corporate Client That Ceased Operations
• DC Ethics Op. 240: Corporation Counsel Conflicts in Title IV-D Child-Support Cases

Source

• Landing page: https://www.dcbar.org/for-lawyers/legal-ethics/ethics-opinions-210-present/ethics-opinion-216