Can a North Carolina lawyer reveal a client's confidential information in a suit to collect an unpaid fee, including to support a claim to pierce the corporate veil?

Plain-English summary

A lawyer represented a corporation in several matters at the request of the husband whose wife is the corporation's sole shareholder. The corporation did not pay the fee, the firm sent the Rule 1.5(f) notice of the right to use the State Bar's fee dispute resolution program, and the client did not respond within 30 days. The lawyer now wants to sue the corporation and add a claim to pierce the corporate veil and reach the wife's assets, relying on information learned during the representation: that the husband titled most of his assets in the wife's name and that the corporation did not follow corporate formalities.

The opinion analyzes Rule 1.6(b)(6), which allows a lawyer to disclose confidential client information "to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client." It points to Comment [12], which states that a lawyer entitled to a fee may prove the services rendered in an action to collect it, reflecting the principle that the beneficiary of a fiduciary relationship may not exploit it to the detriment of the fiduciary.

The opinion balances that against Comment [15], which directs that any disclosure adverse to the client be no greater than reasonably necessary, and that disclosures made in a judicial proceeding be made in a manner limiting access to the information, with protective orders or other arrangements sought to the fullest extent practicable. On those terms, the opinion concludes the lawyer may disclose the information necessary to establish the veil-piercing claim, conditioned on a good-faith belief that the claim is warranted by the law and facts and on appropriate protective measures.

In practice

Under the North Carolina rule as it stood at the time of the opinion, the analysis turns on the self-defense exception in Rule 1.6(b)(6). The opinion holds that a lawyer collecting a fee may reveal confidential information to establish the basis for a veil-piercing claim, but only the information necessary for that claim and only with a good-faith belief that the claim is warranted.

Per the opinion, the disclosure must be paired with appropriate protective orders or other actions to limit access to the information, consistent with Comment [15]'s limit that the disclosure be no greater than reasonably necessary.

Common questions

Q: Can a lawyer use a client's confidences to sue for an unpaid fee?

A: Yes. The opinion applies Rule 1.6(b)(6), which permits disclosure to establish a claim in a controversy between the lawyer and the client, and Comment [12], which lets a lawyer entitled to a fee prove the services rendered to collect it.

Q: Does that extend to information supporting a claim to pierce the corporate veil?

A: Yes, where the lawyer has a good-faith belief that the piercing claim is warranted by the law and the facts. The opinion treats the veil-piercing claim as part of establishing the fee claim against those liable.

Q: Are there limits on what the lawyer may reveal?

A: Yes. The opinion holds the disclosure must be limited to what is necessary and, per Comment [15], must be made in a way that limits access to the information, with protective orders or other arrangements sought to the fullest extent practicable.

Q: Did the lawyer have to try the fee dispute program first?

A: The inquiry notes the firm sent the Rule 1.5(f) notice of the right to participate in the State Bar's fee dispute resolution program and the client did not respond within 30 days. The opinion's holding addresses disclosure once the lawyer proceeds to suit.

Background and rules framework

The opinion interprets Rule 1.6(b)(6) (the self-defense exception permitting disclosure of confidential information in a controversy between lawyer and client, corresponding to Model Rule 1.6), read with Comments [12] and [15]. It also references Rule 1.5(f) (the prepaid notice of the right to participate in fee dispute resolution, corresponding to Model Rule 1.5).

Citations and references

Rules of Professional Conduct:

• MR 1.6 / NC Rule 1.6(b)(6) (disclosure to establish a claim in a controversy between lawyer and client), cmts. [12], [15]
• MR 1.5 / NC Rule 1.5(f) (notice of the right to fee dispute resolution)

See also

• NC State Bar 2016 FEO 4: Confidences to Execute on a Fee Judgment
• ABA Formal Op. 476: Confidentiality When Withdrawing for Nonpayment of Fees
• ABA Formal Op. 08-450: Confidentiality With Multiple Clients in the Same Matter

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2004-formal-ethics-opinion-6/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Attorney was engaged by Husband to represent a corporation in several matters. Husband's wife (Wife) is the corporation's sole shareholder. Husband and the corporation failed to pay the fee for Attorney's services. Pursuant to Rule 1.5(f), Attorney's firm sent the necessary notice of right to participate in the State Bar's fee dispute resolution program to the client. The client did not respond to the notice within the requisite 30 days. Attorney would now like to sue the corporation to collect the fee, and he would like to include a claim in the complaint that the corporate veil should be pierced in order to impose personal liability on Wife and gain access to her assets.

During his representation of the corporation, Attorney learned that Husband has experienced legal trouble before and, therefore, titled most of his assets in Wife's name. By reason of the representation of the corporation, Attorney is also aware that the corporation does not follow the corporate formalities.

In the litigation, may Attorney reveal the information that he learned during the representation of the corporation in order to establish the basis for asking the court to pierce the corporate veil?

Opinion:

Rule 1.6(b)(6) allows a lawyer to disclose confidential client information, "to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client…." Comment [12] to the rule specifies that "[a] lawyer entitled to a fee is permitted by paragraph (b)(6) to prove the services rendered in an action to collect it. This aspect of the rule expresses the principle that the beneficiary of a fiduciary relationship may not exploit it to the detriment of the fiduciary." Nevertheless, Comment [15] cautions that disclosures under paragraph (b) of the rule must be limited:

…a disclosure adverse to the client's interest should be no greater than the lawyer reasonably believes necessary to accomplish the purpose. If the disclosure will be made in connection with a judicial proceeding, the disclosure should be made in a manner that limits access to the information to the tribunal or other persons having a need to know it and appropriate protective orders or other arrangements should be sought by the lawyer to the fullest extent practicable.

In light of limited nature of the disclosure allowed under Rule 1.6(b)(6), Attorney may disclose the information necessary to establish the claim that the corporate veil should be pierced, provided Attorney has a good-faith belief that the piercing claim is warranted by the law and the facts and, further provided, appropriate protective orders or actions are undertaken to limit access to the information.