HALECK, RAYMOND M. McMOORE,
SESE McMOORE on behalf of themselves and
shareholders of TRT, Inc., Plaintiffs,
Inc., AMERICAN SAMOA 2002, Inc.,
C. TAUTOLO, AGAESE ACE TAGO,
R. DRAKE, RAYMIE P. SNOW,
DOES I-XX, Defendants.
Court of American Samoa
 Conduct of
attorneys is governed by the American Bar Association Model Rules of
1.13(e) of the Model Rules of Professional Conduct addresses representation of
corporations in lawsuits by third parties, not shareholder derivative
actions are actions brought by shareholders on behalf of the corporation where
the corporation, although named a defendant, is essentially the real party in
interest and the stockholder is best described as the nominal plaintiff.
determining whether a conflict of interest exists between a corporate
attorney’s duty to the corporate and duty to the board, Rule 1.7 of the Model
possible exception to the disqualification of an attorney for conflict of
interest arises when a case is patently frivolous.
 While some
jurisdictions have held that non-client litigants only have standing to
disqualify opposing counsel in narrow circumstances, shareholders in a
derivative suit are technically clients of corporate counsel and cannot be
classified as non-clients.
 A suit
brought which objects to the use of corporate funds to pay for the defense of
individual defendants whose conduct is allegedly contrary to the best interests
of the corporation is credible and will not be classified as a tactical motion
brought solely to harass.
 When the
court ordered counsel of record to withdraw based on a conflict of interest,
the court would not take it upon itself to appoint new counsel and instead left
that task to the corporations.
RICHMOND, Associate Justice, LOGOAI, Chief Associate Judge, and SAGAPOLUTELE,
Counsel: For Plaintiffs, Charles V.
William H. Reardon, Dean Hansell and Devin A. McRae, Pro Hac Vice
GRANTING MOTION TO DISQUALIFY
FROM REPRESENTING BOTH
AND INDIVIDUAL DEFENDANTS
shareholders of Defendant TRT, Inc. (“TRT”), brought a shareholder’s derivative
suit alleging, inter alia, that Defendant Agaoleatu Tautolo
(“Agaoleatu”), a director of both TRT and Defendant American Samoa 2000, Inc.
(“AS2000”), breached his fiduciary duty to the corporations. They now move to disqualify the attorneys
from representing both the corporations and the individual defendants, as
directors of the corporations.
For purposes of
this motion a little background is needed.
Count four in Plaintiffs’ complaint is directed to Agaoleatu, for
alleged breach of his fiduciary duty as a director of TRT and AS2000 and as the
controlling officer of TRT. Defendants
themselves concede, perhaps unintentionally, that count four alleges that
Agaoleatu “engaged in self-dealing, which implicates [his] duty of loyalty.” (See Defs.’ Mot. for J. on the
Pleadings at 4) (emphasis added).
Furthermore, the same attorneys represent all Defendants: the two
corporations, TRT and AS2000, and the four individual directors, Agaoleatu,
Agaese Ace Tago, Murray R. Drake, and Raymie P. Snow.
that the attorneys of record should be disqualified from representing the
corporations because the interests of the corporations and the individual
Defendants are inherently adverse. They
do not object, however, to the attorneys continuing representation of the
individual directors. Defendants counter
that there is no conflict of interest and that their attorneys should be
allowed to stay on the case. They make
other arguments, which we will address below.
American Samoa, the conduct of attorneys is governed by the American Bar
Association Model Rules of Professional Conduct. See H.C.R. 104. We must look to
those rules to determine whether a conflict exists. Representation of corporations is dealt with
in Rule 1.13, which states, inter alia, “[a] lawyer representing an
organization may also represent any of its directors, officers; employees,
members, shareholders or other constituents, subject to the provisions of rule
Rules of Prof’l Conduct R. 1.13(e).
This section, however, addresses lawsuits by third parties against the
listed individuals. Derivative actions
present a more complicated matter.
actions are actions brought by shareholders on behalf of the corporation, not
individually. See In re Oracle Secs.
Litigations, 829 F. Supp. 1176, 1188 (N.D. Cal. 1993). The corporation, “[a]lthough named a
defendant, . . . is the real party in interest, the stockholder being at best
the nominal plaintiff.” Ross v.
Bernhard, 396 U.S. 531, 538 (1970).
In some cases, shareholders will seek relief for minor corporate
violations, such as mismanagement. See,
e.g., Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1316 (3d Cir.
1993). On the other hand, at times,
shareholders may level serious charges against directors of the corporation
such as fraud or self-dealing. See
id. An attorney’s role in such
situations is contemplated by the Model Rules:
question can arise whether counsel for the organization may defend [an action
to compel the directors to perform their legal obligations-otherwise known as a
derivative action]. The proposition that
the organization is the lawyer’s client does not alone resolve the issue. Most derivative actions are a normal incident
of an organization’s affairs, to be defended by the organization’s lawyer like
any other suit. However, if the claim
involves serious charges of wrongdoing by those in control of the organization,
a conflict may arise between the lawyer’s duty to the organization and the
lawyer’s relationship with the board. In
those circumstances, Rule 1.7 governs who should represent the directors and
Model Rules of Prof’l Conduct R. 1.13(e), cmt.
12 (emphasis added).
Rule 1.7, in
(a) A lawyer shall not represent a client if the
representation of that client will be directly adverse to another client,
lawyer reasonably believes the representation will not adversely affect the
relationship with the other client; and
client consents after consultation,
(b) A lawyer shall not represent a client if the
representation of that client may be materially limited by the lawyer’s
responsibilities to another client or to a third person, or by the lawyer’s own
lawyer reasonably believes the representation will not be adversely affected;
client consents after consultation
Model Rules of Prof’l Conduct R. 1.7.
overwhelming majority of courts which have analyzed this issue have taken the commentary
of Rule 1.13 to heart, and have required disqualification under Rule 1.7, where
at the very least, the shareholders put forth a claim of serious
wrongdoing. See generally Bell Atl.
Corp., 2 F.3d 1304; Musheno v. Gensemer, 897 F. Supp. 833 (M.D. Pa.
1995); In re 0racle, 829 F. Supp. 1176; Messing v. FDI, Inc., 439
F. Supp. 776, 782 (D.N.J. 1977); Cannon v. U.S. Acoustics Co., 398 F.
Supp. 209 (N. D. Ill. 1975); Lewis v. Shaffer Stores Co., 218 F. Supp.
238 (S.D.N.Y. 1963); Rogers v. Virgin Land, Inc., 1996 W.L. 493174
(D.V.I.); Forrest v. Baeza, 67 Cal. Rptr. 2d 857 (1997); Rowen v. Le
Mars Mutual Insurance Co. of Iowa, 230 N.W.2d 905 (Iowa 1975); Tydings
v. Berk Enterprises, 565 A.2d 390 (Md. App. 1989); Garlen v. Green
Mansions, Inc., 193 N.Y.S.2d 116 (1959).
the defendants concede, count four of the complaint puts forth a serious charge
of self-dealing and breach of duty of loyalty, raising the concerns of conflict
and warranting disqualification. One
possible exception to this disqualification arises when a case is “patently
frivolous.” See, e.g., Bell Atl. Corp., 2 F.3d at 1317. At this stage, however, having already denied
Defendants’ motion to dismiss, it is clear that the lawsuit is not frivolous.
cited only two cases in support of their position. The first is an unpublished appellate
decision from Hawaii, Retotal v. Hawaii Ballroom Dance Ass’n, 2002 Haw.
App. LEXIS 34, which relies wholly on Defendants’ second case, Robinson v.
Snell’s Limbs and Braces of New Orleans, Inc., 538 So. 2d 1045 (La. App.
1989). Such dearth of authority is not
convincing. Moreover, in Retotal,
the derivative action sought only an accounting, which standing alone does not
constitute a “serious” allegation warranting dismissal under even the majority
argue three other points of contention.
First, they claim that Plaintiffs’ motion is untimely, and they have
thus waived their right to object. At most, Plaintiffs have been aware of
counsels’ dual representation of the two corporations and Agaleatu for over a
year, when counsel Reardon filed a motion to dismiss on behalf of all these
Defendants on April 9, 2002. Plaintiffs’
motion to disqualify was not submitted until April 10, 2003. But, because conflict is not an issue in
cases where the lawsuits are “patently frivolous,” it was in everyone’s
interest to await a decision on the motion to dismiss. See Clark v. Lomas & Nettleton Fin.
Corp., 79 F.R.D. 658, 661 (N.D. Tex. 1978) (no conflict before motion to
dismiss is decided), contrast Musheno, 897 F. Supp. at 838. Now that we have ruled, counsel and the
corporation can take the appropriate steps to comply with the Model Rules. In any event, we do not deem the delay to be inexcusable,
i.e., “extreme in terms of time and consequence.” Forrest, 67 Cal. Rptr. 2d at 865.
Defendants’ argue that Plaintiffs’ lack standing to move to disqualify. Specifically, once again relying on Retotal,
they argue that Plaintiffs are non-client litigants and “only under certain,
narrowly defined, circumstances would a non-client litigant have standing to
move to disqualify opposing counsel.” Retotal,
at 58 (quoting Decaview Distribution Co., Inc.v. Decaview Asia Corp.,
2000 W.L. 1175583, at *8 (N. D. Cal. 2000)).
But Plaintiffs, as shareholders, are technically clients of corporate
counsel. Indeed, all the parties to this
litigation are–that is part of the problem.
Defendants’ classification of Plaintiffs as non-clients is inaccurate.
Defendants argue that the motion is tactical, and brought solely to
harass. But we find Plaintiffs’ reasons
to be credible: they object to the use of corporate funds to pay for the
defense of individual Defendants when the conduct alleged is contrary to the
corporation’s best interest. We impute
no improper purpose to their motion.
CONCLUSION AND ORDER
counsel of record for Defendants will withdraw as counsel for TRT and
AS2000. However, we will not take it
upon ourselves to appoint new counsel.
This task we leave to the corporations.
See Musheao, 897 F. Supp at 838-39; Tydings, 565 A.2d
390. But see Rowen, 230 N.W.2d at
916 (appointing counsel).
It is so
 Plaintiffs also seek recovery under the shareholder
derivative theory on two other counts and certain relief in their personal
capacity, all of which are not relevant to this motion. For a fuller discussion of all the claims, see
Order Denying Motion to Dismiss, CA No. 20-02 (Trial Div. September 16, 2002).
 In re Oracle also provides multiple citations
to treatises and articles supporting the same proposition. In re Oracle, 829 F. Supp. at 1188-89
(citing 13 William M. Fletcher, Fletcher
Cyclopedia of the Law of Private Corporations § 6025, at 442 (perm. Ed.
Rev. vol. 1991); Note, Developments in the Law–Conflicts of Interest
in the Legal Profession, 94 Harv. L.
Rev. 1244 (1981), G. Dent, The Power of Directors to Terminate
Shareholder Litigation; The Death of the Derivative Suit?, 75 Nw. U. L. Rev. 96 (1980); Note,
Disqualification of Corporate Counsel in Derivative Actions: Jacuzzi and the
Inadequacy of Dual Representation, 31 Hastings
L. J. 347 (1979), Note, Derivative Actions—Bowen v. Lemars
Mutual Insurance Co.—Disqualification of Corporate Counsel and Appointment of
Independent Counsel, 2 J. Corp. L.
174 (1976); Note, Independent Representation for Corporate Defendants
in Derivative Suits, 74 Yale L. J.
524 (1965); New York City Bar Association Committee on Professional and
Judicial Ethics, Opinion 842, 15 Record of nycba 80 (1960)).