7ASR3d133

FIASILI

HALECK, RAYMOND M. McMOORE,

as

SESE McMOORE on behalf of themselves and

as

shareholders of TRT, Inc., Plaintiffs,

 

v.

 

TRT,

Inc., AMERICAN SAMOA 2002, Inc.,

AGAOLEATU

C. TAUTOLO, AGAESE ACE TAGO,

MURRAY

R. DRAKE, RAYMIE P. SNOW,

and

DOES I-XX, Defendants.

 

High

Court of American Samoa

Trial

Division

CA

No. 20-02

 

June

27, 2003

 

 

[1] Conduct of

attorneys is governed by the American Bar Association Model Rules of

Professional Conduct.

 

[2] Rule

1.13(e) of the Model Rules of Professional Conduct addresses representation of

corporations in lawsuits by third parties, not shareholder derivative

suits. 

 

[3] Derivative

actions are actions brought by shareholders on behalf of the corporation where

the corporation, although named a defendant, is essentially the real party in

interest and the stockholder is best described as the nominal plaintiff.

 

[4] When

determining whether a conflict of interest exists between a corporate

attorney’s duty to the corporate and duty to the board, Rule 1.7 of the Model

Rules governs.

 

[5] One

possible exception to the disqualification of an attorney for conflict of

interest arises when a case is patently frivolous.

 

[6] While some

jurisdictions have held that non-client litigants only have standing to

disqualify opposing counsel in narrow circumstances, shareholders in a

derivative suit are technically clients of corporate counsel and cannot be

classified as non-clients. 

 

[7] A suit

brought which objects to the use of corporate funds to pay for the defense of

individual defendants whose conduct is allegedly contrary to the best interests

of the corporation is credible and will not be classified as a tactical motion

brought solely to harass. 

 

[8] When the

court ordered counsel of record to withdraw based on a conflict of interest,

the court would not take it upon itself to appoint new counsel and instead left

that task to the corporations. 

 

Before

RICHMOND, Associate Justice, LOGOAI, Chief Associate Judge, and SAGAPOLUTELE,

Associate Judge.

 

Counsel: For Plaintiffs, Charles V.

Ala’ ilima

For Defendants,

William H. Reardon, Dean Hansell and Devin A. McRae, Pro Hac Vice

 

ORDER

GRANTING MOTION TO DISQUALIFY

COUNSEL

FROM REPRESENTING BOTH

CORPORATE

AND INDIVIDUAL DEFENDANTS

 

The Plaintiffs,

shareholders of Defendant TRT, Inc. (“TRT”), brought a shareholder’s derivative

suit alleging, inter alia, that Defendant Agaoleatu Tautolo

(“Agaoleatu”), a director of both TRT and Defendant American Samoa 2000, Inc.

(“AS2000”), breached his fiduciary duty to the corporations.[1]  They now move to disqualify the attorneys

from representing both the corporations and the individual defendants, as

directors of the corporations.

 

I.

BACKGROUND

 

For purposes of

this motion a little background is needed. 

Count four in Plaintiffs’ complaint is directed to Agaoleatu, for

alleged breach of his fiduciary duty as a director of TRT and AS2000 and as the

controlling officer of TRT.  Defendants

themselves concede, perhaps unintentionally, that count four alleges that

Agaoleatu “engaged in self-dealing, which implicates [his] duty of loyalty.”  (See Defs.’ Mot. for J. on the

Pleadings at 4) (emphasis added). 

Furthermore, the same attorneys represent all Defendants: the two

corporations, TRT and AS2000, and the four individual directors, Agaoleatu,

Agaese Ace Tago, Murray R. Drake, and Raymie P. Snow.

 

II.

DISCUSSION

 

Plaintiffs assert

that the attorneys of record should be disqualified from representing the

corporations because the interests of the corporations and the individual

Defendants are inherently adverse.  They

do not object, however, to the attorneys continuing representation of the

individual directors.  Defendants counter

that there is no conflict of interest and that their attorneys should be

allowed to stay on the case.  They make

other arguments, which we will address below.

 

[1-2] In

American Samoa, the conduct of attorneys is governed by the American Bar

Association Model Rules of Professional Conduct.  See H.C.R.      104.  We must look to

those rules to determine whether a conflict exists.  Representation of corporations is dealt with

in Rule 1.13, which states, inter alia, “[a] lawyer representing an

organization may also represent any of its directors, officers; employees,

members, shareholders or other constituents, subject to the provisions of rule

1.7.”  Model

Rules of Prof’l Conduct R. 1.13(e). 

This section, however, addresses lawsuits by third parties against the

listed individuals.  Derivative actions

present a more complicated matter.

 

[3-4] Derivative

actions are actions brought by shareholders on behalf of the corporation, not

individually.  See In re Oracle Secs.

Litigations, 829 F. Supp. 1176, 1188 (N.D. Cal. 1993).  The corporation, “[a]lthough named a

defendant, . . . is the real party in interest, the stockholder being at best

the nominal plaintiff.”  Ross v.

Bernhard, 396 U.S. 531, 538 (1970). 

In some cases, shareholders will seek relief for minor corporate

violations, such as mismanagement.  See,

e.g., Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1316 (3d Cir.

1993).  On the other hand, at times,

shareholders may level serious charges against directors of the corporation

such as fraud or self-dealing.  See

id.  An attorney’s role in such

situations is contemplated by the Model Rules:

 

The

question can arise whether counsel for the organization may defend [an action

to compel the directors to perform their legal obligations-otherwise known as a

derivative action].  The proposition that

the organization is the lawyer’s client does not alone resolve the issue.  Most derivative actions are a normal incident

of an organization’s affairs, to be defended by the organization’s lawyer like

any other suit.  However, if the claim

involves serious charges of wrongdoing by those in control of the organization,

a conflict may arise between the lawyer’s duty to the organization and the

lawyer’s relationship with the board.  In

those circumstances, Rule 1.7 governs who should represent the directors and

the organization.

 

Model Rules of Prof’l Conduct R. 1.13(e), cmt.

12 (emphasis added).

 

Rule 1.7, in

turn, provides:

 

(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 the representation will not adversely affect the

relationship with 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 consultation

 

Model Rules of Prof’l Conduct R. 1.7.

 

The

overwhelming majority of courts which have analyzed this issue have taken the commentary

of Rule 1.13 to heart, and have required disqualification under Rule 1.7, where

at the very least, the shareholders put forth a claim of serious

wrongdoing.  See generally Bell Atl.

Corp., 2 F.3d 1304; Musheno v. Gensemer, 897 F. Supp. 833 (M.D. Pa.

1995); In re 0racle, 829 F. Supp. 1176; Messing v. FDI, Inc., 439

F. Supp. 776, 782 (D.N.J. 1977); Cannon v. U.S. Acoustics Co., 398 F.

Supp. 209 (N. D. Ill. 1975); Lewis v. Shaffer Stores Co., 218 F. Supp.

238 (S.D.N.Y. 1963); Rogers v. Virgin Land, Inc., 1996 W.L. 493174

(D.V.I.); Forrest v. Baeza, 67 Cal. Rptr. 2d 857 (1997); Rowen v. Le

Mars Mutual Insurance Co. of Iowa, 230 N.W.2d 905 (Iowa 1975); Tydings

v. Berk Enterprises, 565 A.2d 390 (Md. App. 1989); Garlen v. Green

Mansions, Inc., 193 N.Y.S.2d 116 (1959).[2]

 

[5] As

the defendants concede, count four of the complaint puts forth a serious charge

of self-dealing and breach of duty of loyalty, raising the concerns of conflict

and warranting disqualification.  One

possible exception to this disqualification arises when a case is “patently

frivolous.” See, e.g., Bell Atl. Corp., 2 F.3d at 1317.  At this stage, however, having already denied

Defendants’ motion to dismiss, it is clear that the lawsuit is not frivolous.

 

Defendants have

cited only two cases in support of their position.  The first is an unpublished appellate

decision from Hawaii, Retotal v. Hawaii Ballroom Dance Ass’n, 2002 Haw.

App. LEXIS 34, which relies wholly on Defendants’ second case, Robinson v.

Snell’s Limbs and Braces of New Orleans, Inc., 538 So. 2d 1045 (La. App.

1989).  Such dearth of authority is not

convincing.  Moreover, in Retotal,

the derivative action sought only an accounting, which standing alone does not

constitute a “serious” allegation warranting dismissal under even the majority

rule. 

 

Defendants

argue three other points of contention. 

First, they claim that Plaintiffs’ motion is untimely, and they have

thus waived their right to object. At most, Plaintiffs have been aware of

counsels’ dual representation of the two corporations and Agaleatu for over a

year, when counsel Reardon filed a motion to dismiss on behalf of all these

Defendants on April 9, 2002.  Plaintiffs’

motion to disqualify was not submitted until April 10, 2003.  But, because conflict is not an issue in

cases where the lawsuits are “patently frivolous,” it was in everyone’s

interest to await a decision on the motion to dismiss.  See Clark v. Lomas & Nettleton Fin.

Corp., 79 F.R.D. 658, 661 (N.D. Tex. 1978) (no conflict before motion to

dismiss is decided), contrast Musheno, 897 F. Supp. at 838.  Now that we have ruled, counsel and the

corporation can take the appropriate steps to comply with the Model Rules.  In any event, we do not deem the delay to be inexcusable,

i.e., “extreme in terms of time and consequence.”  Forrest, 67 Cal. Rptr. 2d at 865.

 

[6] Next,

Defendants’ argue that Plaintiffs’ lack standing to move to disqualify.  Specifically, once again relying on Retotal,

they argue that Plaintiffs are non-client litigants and “only under certain,

narrowly defined, circumstances would a non-client litigant have standing to

move to disqualify opposing counsel.”  Retotal,

at 58 (quoting Decaview Distribution Co., Inc.v. Decaview Asia Corp.,

2000 W.L. 1175583, at *8 (N. D. Cal. 2000)). 

But Plaintiffs, as shareholders, are technically clients of corporate

counsel.  Indeed, all the parties to this

litigation are–that is part of the problem. 

Defendants’ classification of Plaintiffs as non-clients is inaccurate.

 

[7] Finally,

Defendants argue that the motion is tactical, and brought solely to

harass.  But we find Plaintiffs’ reasons

to be credible: they object to the use of corporate funds to pay for the

defense of individual Defendants when the conduct alleged is contrary to the

corporation’s best interest.  We impute

no improper purpose to their motion.

 

III.

CONCLUSION AND ORDER

 

[8] All

counsel of record for Defendants will withdraw as counsel for TRT and

AS2000.  However, we will not take it

upon ourselves to appoint new counsel. 

This task we leave to the corporations. 

See Musheao, 897 F. Supp at 838-39; Tydings, 565 A.2d

390.  But see Rowen, 230 N.W.2d at

916 (appointing counsel).

 

It is so

ordered.

 

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