I. May's Conflicts of Interest
A. May's Representation of Both IBU and Defendants
May has represented The International Bakers Union for several years. May owed IBU a duty of loyalty. May represented Walter, the vice president of IBU, and Frank, an apprentice, when they faced felony arson charges. It is a violation of both the ABA Model Rules and California standards for a lawyer to represent clients whose interests are adverse to one another.
1. The Conflict of Interest:
Walter and Frank, as criminal defendants, are entitled to expect that their confidences will be kept and that they will be zealously defended by competent counsel. May's loyalty to IBU caused her to go to trial rather than negotiate a deal that would have kept Frank out of prison.
2. Conclusion
This is a severe example of professional misconduct based on a conflict of interest. May even admitted that "IBU's interests would suffer" if she agreed to the prosecutor's offer.
B. IBU's Payment of May's Fees Re: Walter and Frank May accepted payment from IBU for the defense of Walter and Frank.
1. The Conflict of Interest
May's representation of Walter and Frank was rendered ineffective as a result of her relationship with the Union, as discussed above.
The rules provide that a client may consent to a third party paying for his or her counsel, so long as counsel exercises independent legal judgment and represents the client, not the one who is paying. A client may not, however, consent to representation with a conflict of interest that is so severe that a reasonable attorney would counsel against it.
2. Conclusion
It is clear that IBU’s interests are contrary to Frank’s. Thus, even though it is conceivable that May could have represented both IBU and Walter, it is unethical for her to represent both IBU and Frank. Here, probably it would be unethical for May to represent Walter and Frank even if both of them consented, and it is unethical for May to accept payment from IBU for their defense.
C. The Conflict Between Walter and Frank
May will be liable for misconduct for representing both of these defendants.
1. Walter and Frank had adverse interests.
Pete, the prosecutor, explained to May that he had evidence that Walter was a ringleader in a conspiracy to commit the firebombing that resulted in the arson charges - but that Frank was pressured into participation by threats that his apprentice union card would be revoked.
Pete told May that he would offer Frank a deal that would keep him out of prison in return for his testimony against Walter and a misdemeanor plea. This is proof that Walter and Frank had interests that were harshly adverse to one another.
2. Conclusion
May never should have agreed to represent both defendants. Once this conflict became crystal clear, after May's conversation with Pete, she was ethically obligated to withdraw from the case entirely. After hearing confidences from both defendants, she could not represent either one.
D. Mary’s duty of competence
Mary has been IBU’s lawyer for several years. It is unlikely that she had to perform many tasks in criminal court during this time. If she does not have significant experience in criminal court, she is obligated to acquire the appropriate knowledge and skill or to associate other experienced counsel. Mary has a duty to perform legal services competently.
E. Conclusion
May faces professional discipline for her representation of the criminal defendants, because her representation of IBU presented a fatal conflict of interest. Furthermore, Walter and Frank had interests adverse to one another, and May could not represent both of them effectively.
II. Did May tell Walter and Frank about her conversation with Pete, the Prosecutor?
Pete spoke with May shortly after she entered her appearance in the case. She immediately refused to consider Pete's proposal. She called Pete a "union buster." It is apparent that May never told either Walter or Frank about Pete's offer, which is a violation of her duty to communicate.
A. Mary’s Duty of Zealousness
All litigators owe their clients a duty of zealousness. An attorney must not sit on the sidelines while his or her client’s interests are being challenged. In this case, Frank had to face the prosecutor without a zealous advocate on his side. Now he faces a three year prison sentence that he could have avoided, had he been made aware of the prosecutor’s offer.
Pete's offer with regard to Frank's case would have kept Frank out of prison. If May had been a zealous representative of Frank's interests, she would have discussed it with him and perhaps accepted the deal. Instead, she did not consider the offer, in order to protect IBU's interests.
B. Conclusion
As discussed above, Walter and Frank had adverse interests. May never should have agreed to represent both of them. As soon as she learned the prosecution's theory of the case, she had an obligation to leave the case in order to insure that the two men had representation that was not tainted by conflicts of interest.
Mary will be disciplined for her failure to disclose her conversation with the prosecutor.

CONTRACTS / PROFESSIONAL RESPONSIBILITY
I. Is Lab entitled to terminate the contract with Disco?
Lab incurred losses of $9,000 as a result of Disco's failure to pick up Lab's hazardous waste over the Memorial Day holiday weekend in May 1995. Lab wants to terminate the contract.
A. Paragraph 8(d) of the Lab - Disco agreement is at the heart of the dispute.
This part of the contract provides that Disco would remove lab's waste "within 48 hours of being notified that Lab's containment vessel is 80% filled." The conduct of Lab and Disco must be examined to determine whether Lab is entitled to remedies.
B. The Parol Evidence Rule - Integration
Disco's manager claimed that he had mentioned that the 48 hour requirement did not apply over holiday weekends during the contract negotiations in 1991. The parol evidence rule prohibits the use of extrinsic evidence to contradict the terms of a written agreement that is fully integrated.
The Lab - Disco contract appears to be fully integrated. It has at least 8 paragraphs, at least one of which has several subdivisions. The alleged comment by Disco's manager contradicts the writing. No exception to the Parol Evidence Rule applies, so the extrinsic evidence is excluded.
C. Waiver
On May 26, 1995, the Disco manager told Lab that its waste vessel could not be emptied until May 30. The facts suggest that Lab did not object until June 10, 1995, when Lab informed Disco that it was terminating the agreement. The delay between Disco's alleged breach and Lab's response bay constitute a waiver of Paragraph 8(d).
Furthermore, Disco had gone beyond the 48 hour period on at least four holiday weekends over the past three years without complaint from Lab, and twice the Lab waste manager had approved a holiday pickup that was 96 hours after notice. Lab's prior conduct suggests that they do not care about a strict application of Paragraph 8(d). Thus, it would be unfair to allow Lab to terminate the agreement as a result of its present dispute with Disco.
D. Lab did not perform according to the requirements of Paragraph 8(d).
On May 26, 1995, Lab informed Disco that its waste vessel was 90% full. It was supposed to call
Disco when the vessel was at 80%. Since Lab itself has not fulfilled the requirements of Paragraph 8(d), it would be wrong to allow Lab to rescind the contract with Disco.
E. Disco's breach is minor.
Even if a court held that Paragraph 8(d) had not been waived by Lab, Disco's breach is minor. The same facts that suggest a waiver would, at a minimum, prove that Disco did not materially breach the contract. Again, the analysis indicates that lab is not entitled to terminate the contract.
F. Conclusion
The past conduct of the parties suggests that they waived a rigid application of paragraph 8(d). At worst, Disco's breach is minor, and Lab itself did not perform according to Paragraph 8(d).
Lab is not entitled to terminate the contract with Disco.
II. Ethical issues arising from Lab's request that its attorney threaten Disco about its alleged environmental criminal misconduct.
A. The threat of criminal prosecution:
Lab's waste manager told Lab's attorney that Disco has committed criminal violations of environmental laws, and that he expects the attorney to use this information to convince Disco to cancel the contract.
It is not unethical per se for the lawyer to apply this sort of pressure. In order for this tactic to be legitimate, the lawyer must have a good faith belief in the validity of the charge. Otherwise, it would be abuse of process for the lawyer to make this kind of threat.
B. The duty to exercise independent legal judgment:
Lab's attorney cannot allow Lab's waste manager to dictate how the case will be conducted. The lawyer must verify that Disco has indeed committed crimes, and must conclude that making this threat would be helpful to lab's legal interests. Furthermore, lawyer must make sure that Lab itself is not also facing potential liability. Lab could be liable for Disco's conduct if hazardous waste disposal is non-delagable.
C. Conclusion
It would not be unethical for lawyer to use information about Disco's alleged crimes to help Lab get out of its contract with Disco. Lawyer must first independently verify the facts and conclude that taking the action recommended by Lab's waste disposal manager would be in the best interests of Lab.
I . POPPY’S ATTEMPT TO COMPEL PAYMENT OF A DIVIDEND
In general, the directors of a corporation are responsible for the overall management of the corporation and for setting the major policies. Although shareholders must participate and assent to fundamental corporate changes, declarations of dividends are not fundamental changes, and are considered in the full discretion of the directors to decide to declare and pay them.
Any distributions which are made by a corporation, including payments of dividends are determined by the board. A shareholder does not have a right to any distributions. However, in some instances a court may compel the corporation to pay dividends to their shareholders. Plaintiff must establish not only a past failure to pay dividends, but also unfairness by the board in refusing to make the distribution.
Direct Suit
A shareholder derivative suit is a suit brought by a current shareholder, against the board, asserting the corporation's cause of action. Here it appears that Polly's claim for dividends is her own cause of action and, thus, would not reflect a shareholder's derivative suit.
Polly is suing Dan and the directors in her individual capacity as a shareholder, and not derivatively for the corporation, because she will benefit primarily if her suit succeeds.
Directors Declare Dividends
It is the directors' discretionary responsibility to declare and pay dividends out of retained earnings. In general, courts grant directors broad discretion in deciding when and if to declare dividends, since the directors are in the best position to determine corporate policies in the best interest of the corporation. Therefore, Polly has a strong burden to overcome to convince a court to compel corporate directors to pay dividends.
Exception for Looting and Oppression
On the other hand, courts will order directors to declare dividends if the plaintiff can prove that the directors have been benefiting themselves at the expense of the shareholders by paying themselves bonuses or conferring upon themselves benefits out of retained earnings, while not paying dividends to shareholders.
Here, Exco has made considerable profits of 50% of gross sales annually for several years, and has accumulated a large amount of retained earnings. However, Exco has not shared such earnings with shareholders.
Alternatively, there may be a good faith rationale behind Exco's decisions not to pay dividends. The directors may have determined that large retained earnings will increase the value of the company to other companies looking to purchase Exco. If another company were to buy Exco at a good price, all shareholders would benefit, and not just the directors. Further, Dan is a ten percent shareholder, and thus has a considerable stake in making sure that his stocks maximize their value. Additionally, the decision to issue any distributions rests with approval by a majority of the board. The court is unlikely to interfere with the board's decision without a greater showing of unfairness and misconduct of the board.
Polly's attempt to compel the directors to pay dividends is will not succeed, because the directors' decision is based on a seemingly rational judgment that is intended to benefit all shareholders, not just the directors themselves, and Polly has not meet her burden of showing unfairness by the board.
II. CAN EXCO LAWFULLY INDEMNIFY THE DIRECTORS AGAINST POLLY’S LASWUIT
INDEMNIFICATION
A corporation can indemnify directors against litigation costs and judgments arising from the director's duties as director. There are situations in which indemnification is prohibited; others in which it is mandatory; and still others in which it is permissive.
PROHIBITED INDEMNIFICATION
A corporation cannot indemnify its directors where the directors have either been held liable to the corporation or are liable for receiving an improper personal benefit. In this instance, if Polly succeeds in her claim to compel the directors to pay dividends, and further, if the court finds that Dan and the others have improperly benefited, by looting retained earnings through self-dealing, then Exco could not indemnify their legal costs and judgments.
MANDATORY INDEMNIFICATION
On the other hand, Exco must indemnify the directors if the case ends in judgments favorable to the directors, either on the merits or not. Therefore, if Polly's suit to compel fails, which is highly probable, Exco must indemnify Dan and the other directors for all expenses incurred in defending against Polly's action.
PERMISSIVE INDEMNIFICATION
If the case is dismissed or settled then Exco has the option of indemnifying the directors. Exco may legally indemnify the directors if neither of the above scenarios plays out, but the directors have acted in good faith and in a way they believe is in the best interests of the corporation. If Exco ultimately settles Polly's claim against them, then Exco may indemnify the directors for their legal costs, as long as the decision to indemnify was made by a majority of the disinterested directors, disinterested shares, or by an independent legal counsel.
Here, in all likelihood, the directors' actions were in good faith as the sale of a corporation is not, per se, improper as long as the proper percentage approve the transaction. Therefore, a majority of disinterested directors/shares could approve the indemnification. This means that Dan and the directors named in the suit cannot vote on whether Exco will indemnify.
3. ARE THE DIRECTORS LIABLE TO POLLY BECAUSE OF DAN’S QUOTED STATEMENT IN THE STOCK MARKET TIMES
Polly could bring suit against Dan for his statements reported in the Stock Market Report either directly as an Exco shareholder or derivatively for the benefit of the corporation. There may be several claims against Dan and the directors, including (1) common law fraud; (2) 10b-5; (3) duty of care; and (4) duty of loyalty.
STATE SECURITIES LAWS
In a state securities law cause of action, Polly could sue Dan for either misrepresentation or nondisclosure of special facts.
NON-DISCLOSURE OF SPECIAL FACTS
Corporate insiders have a duty to disclose all facts that would be important to a reasonable investor in their investment decision when dealing with them. Here, no privity exists, no sale of securities from Dan to Polly, and Polly's claim will fail.
MISREPRESENTATION
Misrepresentation consists of a misrepresentation of fact by the defendant about which the defendant was aware, for the purpose of inducing action or inaction on the part of the plaintiff, justifiable reliance by the plaintiff upon the defendant's misrepresentation, and damages.
Here Dan told the paper that there "are no pending discussions regarding the sale or merger of Exco." However, Dan had actually started negotiations with the officers of Morcorp to sell Exco to Morcorp. In fact, he hoped to "close the deal" quickly - within the next 45 days. Therefore, Polly can prove that Dan misrepresented facts about Exco's negotiations with Morcorp. However, at common law, Dan must have made the misrepresentation to Polly. In other words, there must be privity. Furthermore, Polly must show that she justifiably relied to her detriment.
Polly must establish that she actually relied on the statements in the newspaper. There are no facts to indicate actual reliance, Polly's claim will not succeed.
FEDERAL SECURITIES
10b-5
In order to establish a 10-b5 situation, Polly must establish (1) a material misstatement or failure of defendants to disclosure material information; (2) sale or purchase of stock; (3) interstate communication.
Here, Polly did not sell or purchase stock in reliance on the statements in the paper. Therefore, there is no 10-b5 liability.
DUTY OF CARE AND LOYALTY.
Corporate insiders have a duty to disclose all facts that would be important to a reasonable investor in their investment decision when dealing with them. Since no privity exists, no sale of securities, from Dan to Polly, Polly's claim will fail.
Here, Polly can argue that the directors / Dan breached their duty of loyalty by making the misstatements to the paper because this was not in good faith but was in fact an affirmative misrepresentation. However, the statements to the paper may have been made in the best interest of the corporation to ensure the highest price for the stock in the event of a sale.
4. RESPONSIBILITY OF DAN AND EXCO DIRECTORS FOR EXPEDITED SALE.
Directors of a corporation owe the corporation the fiduciary duties of care and loyalty. In order to make a sale of Exco to Morcorp, Dan and the directors must (1) ensure sale is not a breach of duty of care; (2) ensure sale is not of an amount to breach the duty of loyalty; (3) obtain approval from a quorum of directors; (4) give notice to shareholders and majority shares entitled to vote approval; (5) respect dissenting shareholders' right to their appraisal; (6) investigate to ensure that Morcorp directors are not looters.
DUTY OF CARE.
BUSINESS JUDGMENT RULE.
A director owes the corporation a duty of care. The director must act as a prudent person, with reasonable care and skill, as he would in the management of his own business. If a director acts unreasonably and causes the corporation losses due to this unreasonableness, the director will be liable to the corporation. Where business decisions and judgments are grounds for a director's liability under the duty of care, a director has fulfilled his duties by using his best business judgment, including using reasonable diligence, inquiry, and investigation.
Therefore to fulfill their duty of care to Exco, the directors must use their best business judgment. Simply because the transaction may be expedited does not necessarily mean the directors are acting unreasonably. Dan and the directors must do the necessary due diligence to insure that the merger with Morcorp is in the best interest of Exco. Dan's failure to submit the proposal to the Exco shareholders is not a breach, because Dan does not need to get shareholder approval until the merger negotiations have been completed and the directors of Exco pass a resolution of merger.
DUTY OF LOYALTY.
A director owes the corporation a duty of loyalty, to act in good faith and to the best interests of the corporation. The facts do not indicate that Dan has acted in bad faith in his decision to merge with Morcorp. As long as the directors continue to act in good faith and refrain from self-dealing or usurping corporate opportunities they will fulfill their duty of loyalty to Exco. The defendant / directors strongest claim that they have not breached their duty of loyalty is that the corporation will benefit.
I.CARS v. BrownA.Damages1.Brown never had a contract with CARS.2.Brown did not commit any tort against CARS.3.ConclusionB.Restitution: Brown has been unjustly enriched by CARS.1.Constructive Trusta.Comminglingb.Lowest Intermediate Balancec.Replenishment2.Equitable LienC.ReplevinD.Injunctive ReliefE.ConclusionII.CARS v. JonesA.Jones is a bona fide purchaser for value.B.Conclusion