If the attorney who represented you in a lawsuit later went to work for the opposing side, you’d probably be pretty upset. That’s why legal ethics require that a client must approve any potential conflicts of interest. But sometimes it’s not clear who is the client.
That became the key issue in a dispute involving the Mark Hughes Family Trust, decided recently by the California Court of Appeal in Los Angeles. (Faulkner v. Klein, unpublished.)
Mark Hughes, the colorful founder of supplement distributor Herbalife International, died in 2000, leaving more than $300 million in the trust. He had appointed three trustees, Conrad Lee Klein, Jack Reynolds and Christopher Pair, to serve as co-trustees after his death.
All three were removed by the probate court in 2013 “for wrongdoing” involving accounting and other issues, the appellate court noted.
Before they were removed, the three had retained several law firms to represent them as trustees.
Three of the attorneys at one of those law firms later joined another law firm, Miller Barondess, LLP.
Two years after the three trustees were removed, Samantha Faulkner (a successor trustee nominated by the settlor in the Trust), filed a petition with the probate court for appointment as a successor trustee. She retained the Miller Barondess firm to help on her petition.
Two of the former trustees asked the court to disqualify Miller Barondess. They claimed it had a conflict of interest because three attorneys now at the firm had formerly done work for them when they were trustees.
Even if those attorneys were not involved in Faulkner’s petition, they argued, the conflict of interest extended vicariously to the entire law firm. That’s because confidential information they gave to their former attorneys could be shared with others at their new firm, they said.
To support their case, the former trustees showed that the attorneys had billed for thousands of hours of time – including time spent defending them in the removal order as well as a “surcharge claim” against two of the trustees involving tens of millions of dollars.
All of this was true, Faulkner replied, but it didn’t matter.
That’s because the attorneys did not represent the trustees personally, but only as trustees. Their client was the office of the trust, not the individuals.
The probate court granted the former trustees' motion to disqualify the Miller Barondess firm. It said Faulkner could not use the firm because the former trustees “formed a personal attorney-client relationship with their former counsel in addition to their attorney-client relationship as trustees,” and as a result, “the entire firm is vicariously disqualified.”
Faulkner appealed, and won a reversal by the appellate court.
“Attorneys owe undivided loyalty and confidentiality to their clients,” the higher court noted. In fact, California’s Rules of Professional Conduct say an attorney cannot accept employment adverse to a former client without first obtaining that client’s informed consent, in writing.
Normally, if an attorney is disqualified because of such a conflict of interest, the attorney’s law firm is disqualified as well, although “a proper ethical wall” may sometimes rebut the conflict, the court noted.
However, in this case the three individuals serving as trustees were not the client, the appellate judges said. “When a trustee seeks advice on trust administration, the client is the office of the trustee, not the individual trustee.”
When there is a change in trustees, the attorney-client relationship passes with the office from the predecessor to the successor trustee. If it did not, the successor trustee might not be able to look into a prior trustee’s action and remedy any breaches.
If a trustee sought legal advice in his or her personal capacity, the situation might be different. But the trustee would have had to take steps to “distinguish, scrupulously and painstakingly,” work done for the trustee from that done for the trust, with documentation and billing records. That wasn’t done, even for legal services related to the trustees’ removal.
The appellate judges ordered the probate court to deny the former trustees’ motion to disqualify Miller Barondess, and to pay Ms. Faulkner’s costs of appeal.
By Lynda I. Chung