Attorney Conflicts of Interest in Corporate Disputes

Publication Source: New York Law Journal

Issues concerning attorney conflicts of interest in shareholder disputes have traditionally been a fertile ground for litigation. It has generally been thought that counsel for the corporate entity is prohibited from also representing individual shareholders and/or officers in any action adverse to other shareholders of the same corporation. [FN1] In a number of recent decisions in Nassau and Suffolk counties, however, the courts have scrutinized the actual matters upon which counsel has represented the various parties to determine whether a conflict actually exists or whether confidences are likely to be revealed. This apparent trend has resulted in fewer attorney disqualifications in corporate disputes.

Second Department Rulings

The Second Department has enunciated broad pronouncements in the area of attorney disqualification in shareholder disputes, unequivocally holding that a lawyer is prohibited from representing any of the shareholders against other shareholders where that same attorney represented the corporate entity. In the recent decision of Morris v. Morris, 306 A.D.2d 449, 763 N.Y.S.2d 622 (2d Dept. 2003), for example, a minority shareholder asserted individual and derivative claims against the majority shareholder, alleging misappropriation of corporate funds and diversion of corporate assets and business opportunities.

The Second Department reversed the trial court's denial of the minority shareholder's motion to disqualify defendants' counsel, who had appeared for both the corporation and the majority shareholder. The Second Department ruled: '' 'One who has served as attorney for a corporation may not represent an individual shareholder in a case in which his interests are adverse to other shareholders.' '' Morris, 306 A.D.2d at 452; 763 N.Y.S.2d at 624-25 (quoting Matter of Greenberg, 206 A.D.2d 963, 965, 614 N.Y.S.2d 825, 827 (4th Dept. 1994)). The Second Department in Morris also relied upon its earlier decision in Schmidt v. Magnetic Head Corp., 101 A.D.2d 268, 476 N.Y.S.2d 151 (2d Dept. 1984), in which the court reversed Special Term's refusal to disqualify the same law firm from representing the corporate defendant and the individual shareholders/directors in a shareholder derivative action where the interests of the individual defendants were in potential conflict with the corporation.

Read the full article in the attached PDF.

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Kevin Schlosser is a Shareholder at Meyer, Suozzi, English & Klein, P.C., where he is Chair of the Litigation and Alternative Dispute Resolution Department which has a full roster of available private judges from virtually all disciplines of law. Mr. Schlosser also authors the popular blog, “New York Fraud Claims,” which analyzes the latest developments concerning civil fraud claims under New York law.

Reprinted with permission by the New York Law Journal.