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August 6, 2015

Coldren v. Hart, King & Coldren, Inc. (2015)239 Cal.App.4th 237

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The Fourth District holds a shareholder in a non-derivative suit against a corporation does not have standing to disqualify an attorney representing another shareholder and the corporation, and there was no actual conflict of interest between the shareholder and the corporation being represented by the same attorney.

Hart, King & Coldren, Inc. (HKC) had two equal shareholders, Robert Coldren and William Hart. The parties operated under a shareholders’ agreement, and, when Coldren retired, a dissolution agreement.  Disputes arose and Coldren sued HKC and Hart asserting causes of action arising out of Coldren’s departure, including an action for involuntary dissolution, and causes of action seeking damages.

After HKC and Hart filed a cross-complaint against Coldren, he obtained an order preventing HKC’s and Hart’s counsel, Grant, Genovese & Barratta LLP (Grant Genovese), from representing HKC based on a conflict of interest. The trial court reasoned it was improper for Hart to direct HKC to sue Coldren, a 50 percent shareholder.  The court allowed Grant Genovese to continue representing Hart, but ordered he parties to meet and confer on a neutral attorney for HKC.

The Court of Appeal noted that the trial court made only one factual determination — that Coldren had resigned as a director and officer from HKC. The Court held that Coldren’s shareholder status did not give him standing to disqualify HKC’s attorney, because he was not its client. The Court distinguished cases where a shareholder in a two-shareholder company files a derivative action on behalf of a corporation.  In that limited circumstance the shareholder has standing to disqualify a law firm from representing the corporation and a rival shareholder.  If the suing shareholder did not have standing, no one would because the only parties with standing would be the shareholder defendant flouting the rule and the company the defendant controls.

A dissolution cause of action does not produce the same conflict a derivative action creates. Corporations Code § 2000(a), permits HKC to buy out Coldren’s shares at Hart’s election. By filing a dissolution action, Coldren forfeited his interest in HKC’s future, leaving Hart in control.  If Hart declined to purchase Coldren’s shares, the effect is the shareholders’ unanimous agreement to dissolve HKC, which no longer has a protectable interest.

If, during the pendency of the dissolution, Hart directs HKC to act to benefits himself and harm HKC, Coldren may meet the requirements to disqualify HKC’s counsel under derivative action rules. But there was no evidence this had occurred, and the concern was too vague and speculative to amount to even a potential conflict.

Hart’s assertion of a derivative claim in the cross-complaint was probably improper, and legally irrelevant. The standing exception in derivative actions was developed to give the plaintiff standing to prevent a defendant wrongdoer from flouting the rule prohibiting dual representation in a derivative action. In the cross-complaint Hart was the plaintiff and Coldren the wrongdoing defendant — Hart and HKC were aligned wanting that claim to prevail.  The conflict would be between Coldren and HKC, but they were not jointly represented by the same attorney.

The Court also distinguished another case where a shareholder alleged facts that would have supported a derivative action, although it was not pled. Where a plaintiff’s allegations are derivative, failing to label them could prohibit dual representation of the corporation and defendant shareholder. Coldren’s lawsuit was not derivative.

Potential conflicts can be waived by an organization. A conflict of interest occurs when a lawyer’s duty on behalf of one client obligates the lawyer to take action prejudicial to the interests of another client.  An attorney must, under Rule 3–310(C), of the California State Bar Rules of Professional Conduct, obtain each client’s informed written consent to dual representation due to potential conflicts.

Under rule 3–600(E) an organization’s attorney must obtain this consent from a constituent of the organization other than the individual or constituent to be jointly represented, or by the shareholders or members of the organization.  Shareholders or members of the organization who are not adverse to the organization can give consent.  Here, Hart was the only shareholder who could consent, because Coldren was adverse.

Joint representation of an organization and an individual officer is proper if they do not have opposing interests which the attorney would have a duty to advance simultaneously for each, and the attorney conforms the representation of the corporation to the requirements of rule 3–600. Since the corporation’s counsel has no duty to assist an adversary shareholder, the attorney may take action on the corporation’s behalf that would negatively affect a shareholder.

The Court concluded Coldren failed to identify opposing interests of Hart and HKC Grant Genovese would have a duty to advance simultaneously. Grant Genovese’s duty was to HKC, not its shareholders, and HKC could defend Coldren’s lawsuit and assert counterclaims against him.

Comment: This case illustrates the importance of careful examination of the pleadings when evaluating actual or potential conflicts.

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