CORPORATIONS / PROFESSIONAL RESPONSIBILITY
I. Liability of Al, Bob and Ed as Rentco directors
Al, Bob and Ed are three Rentco directors. Carl, a holder of one-third of the outstanding Rentco shares, has brought a derivative action against the directors on behalf of Rentco. Carl alleges the directors breached their fiduciary duties to Rentco in a real estate transaction involving a property called The Plaza. Each director owes the corporation duties of loyalty and care. Carl’s derivative action is ripe for review because the directors rejected Carl’s earlier demand.
A. Al
Al is an attorney, in addition to being a director of Rentco and a one-third shareholder. Al also is Rentco’s general counsel. His misconduct as a lawyer is the subject of Part II below. Here we examine Al’s possible loyalty to Rentco.
1. Duty of Loyalty
Al owes a duty of loyalty to Rentco as a director. He must not place his personal interests ahead of Rentco’s. In this case, Al did the legal work for Bob’s bank to foreclose the mortgage on The Plaza. Al also formed a close corporation, Diverco, of which Bob was the sole shareholder. Diverco bought The Plaza at the foreclosure sale for $300,000, about half of the fair market value, and then sold the property to Rentco for $600,000.
Although Al did not know that Bob planned to have Diverco purchase The Plaza at Bank’s foreclosure sale, he had to know that Bob was lying when Bob reported to the directors that he had negotiated a $600,000 purchase of The Plaza by Rentco. Al voted with the other directors to approve the transaction. Al’s disloyalty did not stop there. After the meeting in which the purchase was approved, Al drew up the real estate purchase agreement between Rentco and Bob’s company Diverco.
Al breached his duty of loyalty to Rentco. He should not have helped Bob double his money at the expense of Rentco.
2. Duty of Care
Al also owes a duty of care to handle the business of Rentco as a Rentco director. Al must exercise reasonable business judgment. At a minimum, he should have questioned Bob about the transaction at the directors meeting, but he failed to do so. Here, it appears Al’s conduct was willfully disloyal.
This behavior falls far short of what one would expect of a corporate director, particularly one with legal training and a license to practice law.
3. Conclusion
Carl’s derivative action against Al will succeed. Al breached his fiduciary duties to Rentco and will face personal liability to Rentco.
B. Bob
Bob was a director of Rentco and a one-third shareholder. Al and Carl held the other two-thirds. Bob also owes fiduciary duties to Rentco.
1. Duty of Loyalty
Bob’s breach of this duty is even worse than Al’s. Bob also is president of Bank. Bob discovered that Bank held the mortgage to The Plaza, and, in the transaction discussed above, got Al to foreclose on Bank’s mortgage and form Diverco. Bob usurped an opportunity that should have gone to Rentco. Bob personally profited by about $300,000. That profit should have gone to Rentco.
2. Duty of Care
Bob did nothing careless; his conduct was willful. Bob’s usurpation of a corporate opportunity also is a breach of his duty of care.
3. Conclusion
Carl’s derivative action against Bob will succeed. Bob will have to disgorge his huge wrongful profit to Rentco.
C. Ed
Ed is a director of Rentco but he is not a shareholder. Ed owes fiduciary duties to Rentco.
1. Duty of Loyalty
Ed did not breach this fiduciary duty. At no time did Ed act out of self-interest. He did not profit from any of the misconduct discussed above.
2. Duty of Care
Ed failed to ask any questions about Rentco’s proposed purchase of The Plaza. Ed’s liability will depend on whether or not he should have inquired further. The Plaza is an office building with highly marketable office space. Rentco’s proposed purchase price was at the property’s fair market value. Nothing in these facts would put a reasonable director on notice that there was anything wrong with this transaction. It does not seem reasonable to expect Ed to suspect that Al and Bob had decided to cheat Rentco out of $300,000. Furthermore, given the established pattern of dishonesty by Al and Bob, there is no reason to expect Ed to have uncovered Al and Bob’s misconduct by inquiring at the meeting of the directors.
3. Conclusion
Carl’s derivative action against Ed will fail.
II Al’s conduct and ethical duties
Al is Rentco’s general counsel. Carl filed a complaint about Al’s conduct with the appropriate state bar disciplinary body. Al’s liability to Rentco has been established. Now it is time to examine Al’s ethical duties as an attorney.
A. Duty of Loyalty
As general counsel, Al had a duty to put Rentco’s interests ahead of his own. Al also had a duty to avoid conflicts of interests between his work for Rentco and his other clients. In this case, Al’s work for Bob directly conflicted with the interests of Rentco. As discussed at length above, Al helped Bob usurp a $300,000 corporate opportunity from Rentco. This is an outrageous breach of his duty of loyalty.
B. Duty of Competence
Al’s representation of Rentco was incompetent. Al’s misconduct with Bob and Al’s failure to ask any questions about the transaction at the Rentco’s directors meeting fall far short of what one would expect of competent general counsel.
C. Duty of Zealousness
An attorney must vigorously advocate for the client’s interests. Here, Al’s silence at the board meeting is a breach of this duty.
D. Duty of Confidentiality
Al never should have worked for Bob. His duties to Rentco required him to question Bob at the directors’ meeting. Al’s duty to maintain client confidences did not allow Al to remain silent and thereby help Bob cheat Rentco in violation of Bob’s fiduciary duties.
E. Conclusion
Al will be subject to professional discipline for his many ethical violations.
I. Criminal Liability of Al, Bob and Charlie
A. Conspiracy to Violate the Tariff Act
To win convictions against Al, Bob and Charlie for conspiracy, the prosecutor will have to show an
agreement between two or more of them to commit the target offense, made with the intent to agree.
Modern jurisdictions also require an overt act toward the criminal objective.
1. Al
Al had Bob and Charlie over to his house on Monday, and the three of them agreed to smuggle in
whiskey they believed to have been produced abroad, thereby avoiding paying the import duty. Even
though Bob called Charlie and told Charlie he couldn’t participate, Al was resolved to commit the
crime without him, and in fact brought the whiskey ashore and stole a truck to transport it.
These facts show clearly that Al made an agreement to commit a crime, both with the intent to carry
it out and with many overt acts in furtherance of the criminal objective. Unless he has a good
defense, Al will be convicted of Conspiracy to Violate the Tariff Act.
a. Impossibility
Al’s first defense is that it was legally impossible for him to commit conspiracy, since the whiskey
was not made abroad and thus was not subject to the tax. This defense is more relevant to the charge
of attempt to import dutiable goods without payment of duty, discussed below in section II. This
defense will not be helpful to Al in defense of his conspiracy charge, because his mental state shows
criminal intent.
b. Mistake
Al’s mistake defense is based on the same fact as his impossibility defense: Al was mistaken when
he thought the whiskey had been produced abroad. Again, Al’s mistake defense suffers from the
same fatal flaw: it does not mitigate his criminal intent to agree to commit a crime.
Al is guilty of Conspiracy to Violate the Tariff Act.
2. Bob - Withdrawal
Bob met with Al and Charlie at Al’s house and agreed to help bring the whiskey ashore four nights
later. Two nights after the meeting, however, Bob called Al and said he couldn’t participate because
he and his wife were going to visit relatives. Al said that was all right, indicating his acceptance of
Bob’s withdrawal.
Although Bob had the requisite intent at the time of the meeting, it appears he pulled out of the
conspiracy before any overt act had taken place. Unless this occurred in one of the minority
jurisdictions that do not require an overt act, Bob will escape criminal liability for conspiracy.
3. Charlie - Withdrawal plus Thwarting the Crime
Charlie became apprehensive when Al told him Bob had withdrawn, but said nothing. Charlie was
afraid of what Al might do to him if he tried to back out. Although there are not enough facts to
establish a duress defense for Charlie, his other conduct should be defense enough. Charlie notified
the police of Al’s plan. Charlie did not show up to help Al the night of the crime, and Al was
arrested alone.
Although it is true that Charlie did not withdraw until the night before the crime, it is likely his
efforts would be adequate to relieve him of liability for conspiracy. If the phone call between Bob
an Al, when Bob withdrew, qualifies as an overt act, it is possible that Charlie’s withdrawal could
be deemed too late, but this would seem an unjust, harsh result. Charlie did nothing to further the
crime, and in fact thwarted it. He should not be convicted of conspiracy.
B. Theft of the Truck
Theft is the intentional taking and carrying away of the property of another with the intent to
permanently deprive the owner of possession. Al will face this charge directly; Bob and Charlie will
face it based on co-conspirator liability.
1. Al: Direct Liability
We are told Al stole the truck from a nearby Coast Guard parking lot, and that he was caught loading
whiskey into the truck at the time he was arrested. The plain meaning of the word “stolen” suggests
that Al is guilty of theft, however his true intent may have been merely to “borrow” the truck without
permission long enough to complete his smuggling operation. If Al’s intent was not to permanently
deprive the owner of the truck, he should not be convicted of theft.
2. Bob: Co-Conspirator
As discussed above, Bob effectively withdrew from the conspiracy a couple of nights after the three
men met. Bob would be entitled to use whatever defenses were available to Al. Because he was not
a co-conspirator, Bob cannot be guilty of the theft of the truck based on a co-conspirator liability
Scott Pearce’s Master Essay Method - Criminal Law - July 1999
theory. If the case is heard in a jurisdiction that does not require an overt act to convict a defendant
of conspiracy, Bob could be convicted of this offense as well. That would seem an unjust result.
3. Charlie
Charlie also withdrew from the conspiracy, as discussed above. Unless this case is heard in a
jurisdiction that does not have an “overt act” requirement for conspiracy, Charlie will escape
criminal liability for theft of the truck for the same reasons that apply to Bob.
II. Liability of Al for Attempt to Violate the Tariff Act
To be convicted of Attempt, Al must be shown to have the specific intent to commit the crime and
then take a substantial step towards committing the crime.
A. Impossibility
Al will argue that it was legally impossible for him to commit the target offense, because the
whiskey involved was not manufactured abroad. The trouble with this argument is that there is in
fact a law on the books requiring imported alcohol to be taxed. Here, the target crime was factually
impossible, not legally impossible. Thus, the impossibility defense does is not available to Al.
B. Conclusion
Al intended to violate the Tariff Act and took several substantial steps toward committing the crime.
He is guilty of Attempt to Violate the Tariff Act.
III. Len’s Actions if Al Insists on Testifying Falsely
Al has told Len, his lawyer, that he plans to testify falsely that he knew all along that the whiskey
was produced in the United States. Len must take care to remain true to some contradictory ethical
duties.
A. Duty of Zealousness
Len has a duty to represent zealously his client. This duty is particularly important in criminal cases,
where the defense lawyer is the only barrier between the client and the government. This duty does
not extend to allow the attorney to present evidence he knows to be false. In no jurisdiction may Len
argue the false testimony, thereby giving it more legitimacy.
B. Attorney / Client Privilege
Lawyers must not become informants against their clients. The American Bar Association indicates
that a criminal defense lawyer may inform a court when a criminal defendant client is about to lie
on the stand. California forbids that practice, but refuses to allow an attorney to discuss the
testimony in argument.
C. Duty of Candor
Len owes the tribunal and his adversary a duty of honesty and truthfulness. By presenting testimony
he knows to be false, Len violates this duty in a very basic and troubling way.
D. Conclusion
In California, Len cannot prevent Al from testifying, nor is he allowed to inform the court of his
client’s perjury, but Len cannot argue any of the testimony he knows to be false. Thus, the duty of
zealousness and the attorney-client privilege are seen to triumph over the duty of candor.
3. LARRY ETHICAL BREACHES DUTY OF COMPETENCY: An attorney owes a duty of competency to this client. This duty requires that an attorney exercise the standard of care of a competent attorney in his field. Here, Larry gave advice concerning the WestTel/CodeCo contract. Larry breached this duty if he was not sufficiently familiar with contract law and drafting principles to advise Susan. Furthermore, Larry breached his duty of care by advising Susan that the clause would be effective. Although it is possible that Susan may prevail on the contract, the language of the contract is clearly ambiguous. Given the absolute clarity of Susan's intent with regard to an exclusive license and the likelihood that such a provision would be litigated, Larry is liable to Susan if a competent lawyer would have advised her to make the language more clear by including the word “exclusive” and would have advised her about the effects of the parol evidence rule.
DUTY OF CONFIDENTIALITY: A lawyer owes a duty to keep any communications with his client in absolute confidence unless the communications involve a future crime or fraud or unless they relate to a malpractice claim. Not of the exceptions apply in this situation. The facts indicate that Larry may have disclosed information to NewCom about the contract negotiations. Such as disclosure would be malpractice and would subject Larry to discipline. Furthermore, Larry owed WestTel a continuing duty of confidentiality not to disclose confidential information even after he began to work for NewCom. Therefore, he will be liable to WestTel and subject to discipline for any disclosure after working for NewCom.
DUTY OF LOYALTY: An attorney owes a duty of loyalty to his client. An attorney must not assume an adverse position to a client or former client. Here , the facts indicate that Larry went to work for NewCom. While working for NewCom, his ongoing duty of loyalty prevents him from working on a project that is adverse to WestTel. A new negotiation with CodeCo would qualify if it involved any confidential information that Larry acquired while working at WestTel. IMPUTED DISQUALIFICATION: Additionally, an attorney's disqualification will be imputed to all other attorney's working at that attorney's firm. Where as here, the firm is not a law firm, a disqualification will be imputed where the lawyers share office space and resources. Therefore, here Larry’s disqualification would be imputed to any other lawyer working for NewCom under these conditions.
Fraud: The facts do not clearly indicate that Larry was involved in a fraudulent attempt to misadvise Susan with respect to the contract. However, if he was involved in a fraud, it would be an ethical violation in addition to a tort.