This Inquiry concerns whether a particular disclosure should be made by an attorney for a corporation to the client's principals.The Facts The facts provided by the Inquirer are these. The Inquirer is the attorney for a corporation that has three principals. 1 The corporate bylaws require the agreement of all three principals before litigation may be brought for the corporation. One of the three has requested that the Inquirer write to the corporation in support of the commencement of a civil fraud action on behalf of the corporation. The Inquirer has reason to believe that one of the principals (not the one requesting support of the suit) was complicit in the fraud. It is not being proposed, however, that this principal be joined as a defendant in the suit.
The Inquirer asks whether she or he may advocate the commencement of the litigation without disclosing the involvement of the complicit principal. It should be noted that the Committee is not asked to opine, and hence it expresses no opinion, whether the letter should be written at all, the suit should be brought, or if it is brought, the complicit principal should be named as a defendant.
In writing the requested letter, the Inquirer must disclose to all three principals" the involvement of the one. The Inquirer must explain to them that her or his client is the corporation, not any (or all) of them individually. The Inquirer should also examine, however, the implications, if any, of the rules governing conflicts of interest and confidentiality, respectively, in the event the Inquirer has represented or currently represents any of the three persons or any other director, officer, or shareholder individually, and depending upon how the Inquirer learned of the single principal's complicity.
The Applicable Rules
The Pennsylvania Rules of Professional Conduct that are directly germane to the inquiry are Rules 1.4(b), 1.13(a), and 1.13(d). These rules provide, in pertinent parts, as follows:
Rule 1.4 Communication
(b) A lawyer shall explain a matter to the extent necessary to permit the client to make informed decisions regarding the representation.
Rule 1.13 Organization as Client
(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
. . .
(d) In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when it is apparent that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.
The rules governing conflicts of interest, Rules 1.7 and 1.9 of the Pennsylvania Rules of Professional Conduct, and the rule governing confidentiality, Rule 1.6, may also be pertinent here. They provide:
Rule 1.6 Confidentiality of Information
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b) and (c).
. . .
(c) A lawyer may reveal such information to the extent that the lawyer reasonably believes necessary:
(2) to prevent or to rectify the consequences of a client's criminal or fraudulent act in the commission of which the lawyer's services are being or had been used; or
(d) The duty not to reveal information relating to representation of a client continues after the client-lawyer relationship has terminated.
Rule 1.7 Conflict of Interest: General Rule
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless
(1) the lawyer reasonably believes representation will not adversely affect the relationship the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after full disclosure and consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
Rule 1.9 Conflict of Interest: Former Client
A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of the circumstances and consultation; or
(b) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 would permit with respect to a client or when the information has become generally known.
Under Rule 1.4(b), the Inquirer is required to explain a matter to the extent necessary to permit the client to make an informed decision regarding the representation. The corporation is clearly the Inquirer's client. This is stated in the facts submitted by the Inquirer, and comports with Rule 1.13(a). The three principals are, under the corporation's bylaws, the duly authorized constituents through whom the corporation is to act in deciding whether to bring the contemplated suit2. Therefore, in making the subject disclosures required by Rule 1.4, the Inquirer must communicate directly with the three principals.
The Committee points out that the Inquirer should consider whether, in light of all the circumstances, disclosure of the implicated principal's involvement is "necessary to permit the client to make informed decisions about the representation." It appears to the Committee that, subject to the assumptions stated below, the disclosure is required under this test, because of the subject information's materiality to the making of an informed decision about bringing suit
In making the subject disclosure to the corporation's principals, the Inquirer should explain that his or her client is the corporation, not the individuals. Given the facts provided by the Inquirer, it is apparent that the corporation's interests are adverse to those of at least one of the principals, the one who is implicated in the fraud. Rule 1.13(d) therefore requires the explanation.
Finally, although beyond the strict limits of the Inquiry, the Committee suggests that the Inquirer consider if he or she knows, after making the recommendation to sue, that one of the principals "is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the corporation." Rule 1.13(b). If so, the Inquirer should refer to Rules 1.13(b) and (c), as appropriate.
The foregoing discussion is based upon the Committee's assumption from the absence of any statement by the Inquirer about the source of the information, that its disclosure is not barred by Rule 1.6(a), relating to the confidentiality of information obtained in representing a client. Such an issue would arise if the Inquirer obtained the information in the course of representing a client other than the corporation.
The Committee has also assumed, based on the Inquirer's silence on the topic, that the Inquirer only represents the corporation and does not represent and has not represented as individuals any of the three principals or other persons who are officers, directors, or shareholders of the corporation. If this assumption is not correct, the Inquirer must also consult Rules 1.7 and 1.9 before sending the requested letter3.
Under the facts provided by the Inquirer, she or he should disclose to the corporation's principals the involvement of the implicated principal if the Inquirer makes any recommendation concerning the contemplated suit.
1. The Committee assumes that this is a closely held corporation and that, by use of the term "principals," the Inquirer intends to convey that the three individuals are controlling shareholders, officers, and/or directors of the corporation.
2. Because the facts presented by the Inquirer expressly state that, under the corporate bylaws, the three individuals must concur in the bringing of litigation, their precise status as directors, officers, controlling shareholders, or otherwise is not significant here.
3. Since there are numerous permutations of such potential conflicts, the Committee merely highlights this concern here. The Inquirer may, if circumstances dictate, submit a further inquiry addressing this concern or that involving Rule 1.6 confidentiality, based upon the specific facts of the case.