You know, a LOT of lawyers don't understand basic transactional rules of representing multiple parties jointly. This post arises out of a transactional occurrence in my business life.
I sit on the Board of Trustees of a Creditor's Trust for a business that went bankrupt, filed for Chapter 11 protection, sold off it's assets to a new entity and left it's debts behind, as well as some cash to be divided amongst the creditors. That cash is currently tied up in a holding vehicle (an escrow) with several other non-creditor shareholders funded from the sale of an asset sold several years ago by the Bankrupt company and the other Shareholders.
The holding vehicle is currently in litigation by frivolous plaintiffs attempting to seek a payday. I call them frivolous because they've ALREADY had their suit dismissed 3 times for lack of being able to prove ANY damages (twice by the Supreme Court of Kansas on summary judgement) before finding a judge willing to give them an injunction.
The problem is that one of the other parties (another shareholder), for some reason that has not been disclosed to the rest of the parties, does not want to agree to release some of the funds, even though we are already 1 YEAR past the date when the funds were to be disbursed as detailed in the original agreement.
I asked the attorney for the Creditor's Trust (a shareholder) what the problem was, and got back a response that he didn't know, it was subject to attorney-client privilege. The privilege that he was being claimed was between the Shareholder's Representative's attorney and the reluctant Shareholder.
Privilege, in this instance, doesn't exist.
Model Rule 1.7, Comment [30] of the ABA Model Rules of Professional Conduct (2011) notes the following (in part):
With regard to the attorney-client privilege, the prevailing rule is that, as between commonly represented clients, the privilege does not attach. Hence, it must be assumed that if litigation eventuates between the clients, the privilege will not protect any such communications, and the clients should be so advised.
In Texas, the relevant portion of the Texas Disciplinary Rules of Professional Conduct is Rule 1.7 Comment 6, which states (in part):
In a common representation, the lawyer is still required both to keep each client adequately informed and to maintain confidentiality of information relating to the representation, except as to such clients. See Rules 1.03 and 1.05. Complying with both requirements while acting as intermediary requires a delicate balance. If the balance cannot be maintained, the common representation is improper. With regard to the attorney-client privilege, the general rule is that as between commonly represented clients the privilege does not attach. Hence, it must be assumed that if litigation eventuates between the clients, the privilege will not protect any such communications, and the clients should be so advised.
And, in Kansas, (where the Shareholder Representation is occurring) the Kansas Rules of Professional Conduct Rule 226 (1.7) Comment 30 and 31 state the following even MORE clearly (emphasis mine):
[30] A particularly important factor in determining the appropriateness of common representation is the effect on client-lawyer confidentiality and the attorney-client privilege. With regard to the attorney-client privilege, the prevailing rule is that, as between commonly represented clients, the privilege does not attach. Hence, it must be assumed that if litigation eventuates between the clients, the privilege will not protect any such communications, and the clients should be so advised.
[31] As to the duty of confidentiality, continued common representation will almost certainly be inadequate if one client asks the lawyer not to disclose to the other client information relevant to the common representation. This is so because the lawyer has an equal duty of loyalty to each client, and each client has the right to be informed of anything bearing on the representation that might affect that client's interests and the right to expect that the lawyer will use that information to that client's benefit. See Rule 1.4. The lawyer should, at the outset of the common representation and as part of the process of obtaining each client's informed consent, advise each client that information will be shared and that the lawyer will have to withdraw if one client decides that some matter material to the representation should be kept from the other. In limited circumstances, it may be appropriate for the lawyer to proceed with the representation when the clients have agreed, after being properly informed, that the lawyer will keep certain information confidential. For example, the lawyer may reasonably conclude that failure to disclose one client's trade secrets to another client will not adversely affect representation involving a joint venture between the clients and agree to keep that information confidential with the informed consent of both clients.
So, right now I'm cranky that our attorney (the Creditor's Trust counsel) either doesn't know that the joint shareholder's representative's attorney is blowing smoke at him, or isn't willing to call him out on it.
