SJC Case Review Part I – Hot Potato Doctrine

Last week was a big one for our coverage of the SJC, first because the Governor, as we reported last week, announced his three nominees to fill forthcoming vacancies on that court, and second because of the decisions they released, including Bryan Corp. v. Bryan Abrano (SJC-12003), and Commonwealth v. Moore (SJC-11582).  Both cases were considered thoroughly by the BBA’s Amicus Committee which ultimately recommended not taking part in briefs.  Here we will discuss the Abrano case, and in Part II we look at Moore.  In case you weren’t aware, the BBA has an extremely active Amicus Committee which reviews requests for amici and can sign onto or write and submit its own briefs at all jurisdictional levels in cases related to BBA’s mission, such as on the practice of law and access to justice. Here are samples of some of our biggest cases.  If you have a case you think is appropriate for our consideration, please reach out!

On June 14, the SJC released its decision in Bryan Corp. v. Bryan Abrano. The case deals with ethical issues related to representation of a closely held corporation and the minority shareholders of that same corporation in a suit against the majority shareholder.  The SJC requested amici about:

Whether the judge erred in disqualifying counsel for the defendant because of his earlier representation of the plaintiff in a separate action, where counsel began his representation of the defendant before he withdrew from his representation of the plaintiff in the earlier action, but where, allegedly, there would be no harm to the plaintiff; whether, and if so in what circumstances, Massachusetts recognizes the so-called “hot potato” doctrine, which precludes an attorney from resolving a disqualifying conflict by dropping one client in favor of the other.

Background – Case Facts

There are substantial case facts that are in question regarding events within the corporation and the family directors/shareholders, but in briefest terms, here is a timeline of important dates:

  • Late 2013 to early 2014 – the law firm, Yurko, Salvesen, and Remz (YSR) began representing Bryan Corporation (the corporation) in a case (the Waldman litigation). Later that year, YSR began representing the minority shareholders of the corporation after their ouster from the board, and at some point (also in question) YSR withdrew its representation of the corporation in Waldman.
  • June 30, 2014 – the husband of one minority shareholder reached out to YSR to discuss concerns about the continued involvement with the corporation of a former majority shareholder who had been barred from exercising any corporate control as a result of a 2008 criminal settlement.
  • July 1, 2014 – the corporation’s purported outside general counsel and two YSR lawyers participated in a conference call regarding the same issue, as well as the majority shareholder’s decision to withhold end of year compensation checks to the two minority shareholders, whom she accused of wrongdoing, including making unauthorized payments to themselves.
  • July 15, 2014 – the majority shareholder ousted the two minority shareholders from the corporation’s board of directors.
  • July 16 or 17, 2014 (the exact date is unclear in the case facts) – YSR advised the corporation that the majority shareholder’s actions resulted in a conflict of interest and the firm could no longer represent the corporation in the Waldman litigation.
  • July 21, 2014 – YSR sent a demand letter to the corporation on behalf of the ousted minority shareholders alleging a breach of fiduciary duty and a violation of the Massachusetts Wage Act for withholding their end of year compensation checks.
  • July 23, 2014 – YSR sent a letter to the corporation, indicating that it would withdraw its representation of the corporation because of a conflict, and stating that it would resolve a discovery matter in the case.
  • July 31, 2014 – YSR filed a formal notice of withdrawal from representing the corporation.
  • November 7, 2014 – YSR filed a complaint on behalf of the ousted minority shareholders against the majority shareholders for breach of a fiduciary duty and the Wage Act.
  • March 2015 – The corporation filed an action against the minority shareholders alleging that they violated their fiduciary duties while in control of the company by making unauthorized payments to themselves.
  • April 8, 2015 – YSR filed a motion to consolidate the two suits.
  • April 9, 2015 – The corporation served a motion to disqualify YSR as counsel for ousted minority shareholder Bryan Abrano. The corporation alleged that it was improper for YSR to represent the Abrano because YSR had previously been hired by the corporation for the Waldman case that was still currently pending.  The corporation argued that the conflict of interest was not thrust upon YSR because of a merger or transfer issue, but rather was based entirely on YSR’s decision to enter into a conflicted dual representation.  The corporation also argued that the conflict would be at issue in this case because YSR had developed many of its arguments during its dual representation, and the minority shareholders’ retention of YSR formed part of the basis of the corporation’s breach of fiduciary duty claim against the minority shareholders  Finally, the corporation alleged that YSR violated Rule 1.9(c) by using the corporation’s own confidential financial, tax, accounting, and other information it had provided to YSR, when it was represented by YSR, in its representation of Abrano.  YSR argued that it withdrew from its representation of the corporation before there was any conflict of interest and continued to represent Abrano without wrongdoing.
  • May 11, 2015 – The Court consolidated the two suits.
  • August 5, 2015 – At a hearing on the motion to disqualify held on in Suffolk Superior Court, Judge Janet L. Sanders allowed the motion “for the reasons set forth… in the motion itself” without making any findings of facts or explanation.
  • November 12, 2015 – SJC took the case on direct appellate review.

What’s at stake?

One of the most interesting elements of this case is its potential implication of the so-called “hot potato” doctrine. The “doctrine,” has never formally been recognized in the Commonwealth.  It arises because of a gap in the Massachusetts Rules of Professional Conduct (MRPC) between Rules 1.7 and 1.9. Rule 1.7 provides that a lawyer shall not represent a client if there is a concurrent conflict of interest without informed consent from both clients.  This rule applies even if the lawyer is not on both sides of the adversity.  In other words, if a lawyer represents company A in real estate matters and another lawyer at the firm represents company B in corporate matters and A sues B over some other matter, the law firm cannot represent A or B in the litigation — there is direct adversity and that conflict can be overcome only with informed consent.  For purposes of the Rule it does not matter that the representation of A or B is different from, i.e., not substantially similar to, the litigation.  The heart of this obligation stems from the duty of loyalty to current clients.  You cannot have a duty of loyalty to A and be adverse to A in some other respect.

Rule 1.9 deals with former clients.  It says a lawyer cannot represent a client adverse to a former client “in the same or a substantially related matter.”  That limitation is a lower hurdle to representation than contained in Rule 1.7.  The heart of this obligation is to protect the attorney-client privilege.  Lawyers have privileged information from former clients, and if they represent a new client adverse to the old client in the same or a similar matter, the firm runs the risk of violating the privilege of the former client.

The hot potato doctrine can arise in two ways.  In the aforementioned scenario, the “hot potato” doctrine would bar the law firm from taking client B and dropping client A because it violates the duty of loyalty to client A under Rule 1.7.  The hot potato doctrine also bars a lawyer or law firm from either taking on a second client that is adverse to a pre-existing client or dropping the pre-existing client in favor of taking on the new client under Rule 1.7, regardless of the size or import of either client.

Oral Argument

On March 8, 2016, the SJC held oral argument in the case.  YSR argued that the two representations at issue here – the corporation in the Waldman case and the minority shareholders– were completely unrelated.  According to the firm, its representation of the minority shareholders on July 1, 2014, was solely for the purpose of addressing interference by a former director, representation that was not adverse to the corporation.  Based on this understanding, YSR was representing the corporation in the Waldman action while at the same time advising two individuals who happened to be minority shareholders of the corporation, about board interference by a former director.  Advising the minority shareholders as of July 1 was not adverse to the corporation and presented no conflict in the Waldman action.  YSR argued that a conflict arose only on July 15, when the majority shareholder took action to oust the two minority shareholders.  Thus, adversity was driven by the actions of the corporation, and the firm withdrew from its representation of the corporation within two days after the conflict emerged.

Opposing counsel argued that the conflict arose on June 30, 2014, when the majority shareholder stopped payment on checks to the minority shareholders who were consulting with YSR.  Thus, between July 1 and July 15, YSR violated both Rule 1.7 and Rule 1.9.

SJC Decision

On June 14, the SJC released its decision affirming the order of disqualification under Rule 1.7 only, meaning it did not need to reach the parties’ arguments under Rule 1.9 or the “hot potato” doctrine.  The holding extensively references another recent SJC case, Maling v. Finnegan, explaining that Rule 1.7 serves a dual purpose as both a prophylactic measure to protect confidences that a client may have shared with his or her attorney and as a safeguard of loyalty in the attorney-client relationship.

As applied to the case at hand, the Court found that the disqualified attorney failed his duty as a reasonable lawyer to anticipate potential conflicts, and decline representation of a party adverse to one he currently represented – here the minority shareholder who was adverse to the corporation.  The Court concluded, that “a firm may not undertake representation of a new client where the firm can reasonably anticipate that a conflict will develop with an existing client, and then choose between the two clients when the conflict materializes.  Both the duty of loyalty and the rules clearly forbid such conduct.”  The Court found that sanctioning the attorney by disqualification was not an abuse of discretion in this case and furthered the policy rationale underlying the rules of professional conduct by upholding the principle that a client is entitled to the undivided loyalty of his or her lawyer.

The holding also noted that the absence of oral or written findings by the motion judge made the SJC’s task on appeal more difficult.

– Jonathan Schreiber
Legislative and Public Policy Manager
Boston Bar Association

Filed under: SJC