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Delaware Supreme Court Addresses Conflict of Interest Issues

By Francis G. X. Pileggi, Esq.

In The Matter of a Member of the Bar of the Supreme Court of Delaware: I. Jay Katz, No. 442, 2009, (September 24, 2009), read opinion here. This decision of the Delaware Supreme Court addresses conflicts of interest in the context of  Rule 1.7(a) and 1.7(b)(4) of the Delaware Lawyers' Rules of Professional Conduct, which relate to concurrent conflicts of interest. Most of the unpleasant background facts of this 43-page opinion are beyond the scope of this blog's focus on corporate and commercial litigation in Delaware, but the ruling and discussion by Delaware's High Court on conflict of interest principles is important in the context of business litigation, even if this case deals in part with real estate transactions.  Although the penalty imposed by the Court was based on multiple violations of several rules, Rule 1.7 was one of the rules at issue, and this rule involving conflicts is equally applicable to the litigation context. 

The attorney in this case represented both a lender and a borrower in the same loan transaction, on more than one occasion, but did not obtain the required written consents required by the current version of Rule 1.7 in Delaware. As the Court explained:

Rule 1.7(a) states, in part, that '[e]xcept as provided in paragraph (b), a lawyer shall  not represent a client if the representation involves a concurrent conflict of interest.  A concurrent conflict of interest exists if: … (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client… or by a personal interest of the lawyer.'

Rule 1.7(b) states that '[n]otwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in
writing.'

By representing Cross [a client] in loan transactions in which another client (Lubach) was the lender and without having obtained Cross' informed consent, confirmed in writing, to the concurrent representation involved in the arrangement, the Respondent violated Rule 1.7 (a) and (b).

Slip op. at  16-17.

The Court referred to a leading treatise in footnote 13 that described client loyalty as a core value of the legal profession, "perhaps equal in importance with maintaining confidentiality and diligently or zealously working to advance a client's interest."  Although the Court applied Delaware's sui generis Interpretive Guidelines to Rule 1.7 that deal with real estate transactions, the Court's general discussion of Rule 1.7's conceptual underpinning was much broader. The 1908 version of the rule was referenced by the Court as requiring the express consent of both clients over 100 years ago, and the latest revision in 2002 by Delaware specifically requires written informed consent of each affected client. See Rule 1.7(b)(4).

Notwithstanding the severe penalties imposed by the Court in this case, for what it described as "knowing" violations, the result in this case is to be contrasted with the result in a very recent decision by the United States District Court for the District of Delaware, summarized here, which also involved allegations of a violation of Rule 1.7. That Court concluded that a law firm would not be disqualified from representing a client whose U.S. office and European office were on "opposite sides" of two different matters involving the same client.

Full post as published by Delaware Corporate and Commercial Litigation Blog on September 28, 2009 (boomark / email).