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ANDON L. AMARAICH, Chief Justice:
This case comes before the Court on a motion by plaintiffs to disqualify attorney Daniel Berman and the law firm of Saimon & Associates from representing co-defendants Agnes Etscheit, Ace Construction Company, formerly known as Caroline Islands Development Corporation ("CIDCO"), and E&N Construction Company Inc. ("E&N") (hereinafter collectively referred to as "defendants"), filed on April 5, 2001. Oral argument was heard on the motion on June 11, 2001. For the reasons stated herein, the Court will deny plaintiffs' motion.
On March 12, 2001, plaintiffs Steve and Casmira Nix filed a complaint against defendants Agnes Etscheit, individually, and dba Ace Construction Co., formerly known as Caroline Islands Development Corp. & E&N Construction Inc. The complaint alleges causes of action for breach of contract and what appears to be a claim for unjust enrichment.
Plaintiffs claim they and Agnes Etscheit entered into a written contract for the dissolution of their joint business ventures. Plaintiffs claim they entered into a written contract with Ms. Etscheit which requires the plaintiffs to give certain business assets, such as heavy construction equipment, to Ms. Etscheit. The contract also requires Ms. Etscheit to make an initial payment of $200,000 to plaintiffs on or before February 15, 2001, and an additional six payments of $50,000 per annum, for a total of $500,000. Additionally, Ms. Etscheit is to give plaintiffs $50,000 worth of building materials and equipment rentals.
On April 2, 2001, defendants Agnes Etscheit, individually and dba Ace Construction Company, formerly known as Caroline Islands Development Corporation and E&N Construction Inc. filed their answer to plaintiffs' complaint. Also, a counterclaim was filed on behalf of Agnes Etscheit, individually and as administratrix of the estate of Robert Etscheit, Jr., and Agnes Etscheit dba E&N Construction Company ("E&N"), and Agnes Etscheit dba Ace M/N Construction Company ("Ace"), and Caroline Islands Development Corporation ("CIDCO") and against plaintiffs.
Defendants claim that Robert Etscheit, Jr. died on June 22, 1996, and up to that point was the owner of Ace and E&N. After his death, Ace & E&N were and have been owned by the estate of Robert Etscheit, Jr. Steve Nix was employed as the general manager of Ace until the death of Robert Etscheit, Jr.
Defendants seek an accounting and dissolution of CIDCO. Defendants claim Agnes Etscheit and previously Robert Etscheit, Jr. were and are the majority shareholders of the common stock issued by
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CIDCO. Defendants state that Steve Nix was the general manager and chief executive officer of CIDCO, and is currently the treasurer, a shareholder and a director, and that Casmira Nix was the bookkeeper and/or assistant manager of CIDCO for a period of eight years or more. Defendants claim that Steve Nix's stock shareholder interest in CIDCO is 24.5%, and that Casmira Nix owns no stock in CIDCO. CIDCO demanded that Steve and Casmira Nix produce an accounting for CIDCO including a list of all assets and liabilities, and in response plaintiffs produced an unsatisfactory handwritten accounting. Defendants request that the Court order a full accounting and disclosure of the financial statements from the Nix, appoint a trustee and an appraiser, marshal assets, conduct a sale supervised by the Court, and order a dissolution of CIDCO to determine the respective fair and equitable shares of the parties.
Defendants also maintain that E&N was void from the beginning and not incorporated pursuant to applicable FSM law because of certain acts and omissions of the plaintiffs. Defendants claim these acts and omissions resulted in a lack of start up capital, lack of transfer of paid-in capital, lack of stock subscriptions, lack of any directors or shareholders meetings, deadlock 50/50 shareholder design, and use of voidable stock subscription contracts by children who as dual citizenship minors cannot contract. Defendants maintain that Agnes Etscheit is the majority individual shareholder owner of the common stock designed for E&N and its president; Steve Nix was the general manager and treasurer of E&N from June 14, 1997 to May 1, 2000; and Casmira Nix was the bookkeeper/assistant manager, secretary, vice-president, a director and minority shareholder designated for E&N from June 14, 1997 to May 1, 2000. Casmira Nix's stock shareholder interest in E&N, together with her four minor children, was designed for a collective limit of 50%. Defendants demanded that plaintiffs render an accounting for E&N that would separate any assets and liabilities of E&N from other entities. Plaintiffs failed to provide an accounting for E&N's assets other than the unsatisfactory accounts described above.
Defendants' attorney Daniel Berman submitted an affidavit with defendants' opposition to plaintiffs' motion to disqualify defendants' counsel in which he states that he has continually represented defendant Agnes Etscheit and the late Robert Etscheit, Jr. over the past fifteen years. Further, Mr. Berman represented E&N Construction Company in a lawsuit known as P. Cantero v. E&N Construction Company and Steve Nix, FSM Civil Action No. 2000-036,and did not appear for Steve Nix. Also, Mr. Berman has continually represented defendant CIDCO in other matters over the past fourteen years. The representation of CIDCO has involved the filing of actions for court relief in trespass and assertion of possessory land rights as against third parties, not related to plaintiffs.
Motion to Disqualify
Plaintiffs bring their motion to disqualify defendants' counsel under Rules 1.7, 1.13 and 3.7 of the Model Rules of Professional Conduct (the Model Rules). The Court looks first to the section of the Model Rules entitled "Scope" in reaching its decision. That section states that:
[v]iolation of a Rule [of the Model Rules] should not give rise to a cause of action nor should it create any presumption that a legal duty has been breached. The Rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies. They are not designed to be a basis for civil liability. Furthermore, the purpose of the Rules can be subverted when they are invoked by opposing parties as procedural weapons. The fact that a Rule is a just basis for a lawyer's self-assessment, or for sanctioning a lawyer under the administration of a disciplinary authority, does not imply that an antagonist in a collateral proceeding or transaction has standing to seek enforcement of the Rule. Accordingly, nothing in the Rules should be deemed to augment any substantive legal duty of lawyers or the extra-
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disciplinary consequences of violating such duty.
FSM MRPC preamble (emphasis added).
A. Conflict of Interest
Plaintiffs' main argument appears to be that a conflict exists in the representation of defendants Agnes Etscheit, CIDCO, and E&N by attorney Daniel Berman and the Law Office of Salmon & Associates. Plaintiffs contend Daniel Berman and Salmon & Associates should be disqualified from representing the defendants.
The Comment to Model Rule 1.7 discusses the situation where an opposing party charges that a conflict of interest exists for an attorney to represent more than one client:
Resolving questions of conflict of interest is primarily the responsibility of the lawyer undertaking the representation. In litigation, a court may raise the question when there is reason to infer that the lawyer has neglected the responsibility. In a criminal case, inquiry by the court is generally required when a lawyer represents multiple defendants. Where the conflict is such as clearly to call in question the fair or efficient administration of justice, opposing counsel may properly raise the question. Such an objection should be viewed with caution, however, for it can be misused as a technique of harassment. See Scope.
FSM MRPC R. 1.7 cmt. (emphasis added). The comment makes it evident that the Model Rules are not designed to be used by one party in a litigation to make prosecuting or defending the action more difficult for his adversary. Therefore, the Court considers plaintiffs' motion with caution, considering the possibility that the motion has the potential of being used as a technique of harassment.
Under the Model Rules, the test for a lawyer to determine whether a conflict of interest in representing more than one client exists is found in Rule 1.7:
(a) A lawyer shall not represent a client if the representation of the client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each 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 interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
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To begin with, the Court is not convinced that any conflict of interest exists with defendants' counsels' representation of all defendants. Plaintiffs argue that representation of Agnes Etscheit is clearly adverse to representation of CIDCO and E&N because Agnes Etscheit wants to dissolve both corporations. However, as defendants point out in their opposition, it is not always against a corporation's interests to dissolve. While it is possible that Agnes Etscheit's interests are adverse to the corporations', it is not necessarily true that because she wants to dissolve the corporations her interests are adverse to them. It appears the only "evidence" of a conflict before the Court is plaintiffs' assertion that there is a conflict. The Court does not find that Agnes Etscheit's interests are directly adverse to the corporations' interests.
Next, even if a direct conflict exists between defendants' counsel's representation of Agnes Etscheit and the corporations, Rule 1.7 allows a lawyer to represent all of the defendants if (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client and (2) each client consents after consultation.
(1) Reasonable Belief
In opposition to plaintiffs' motion, defendants' counsel Dan Berman submits an affidavit in which he states that he believes that his representation of all defendants will not adversely affect his representation of any one of the defendants. In addition, the reasons for Mr. Berman's belief were provided to all defendants in writing, and all defendants consented to his representation after consultation. Plaintiffs have not introduced any evidence that leads the Court to doubt Mr. Berman's statement that he believes representation of Agnes Etscheit will not adversely affect his representation of CIDCO and E&N, or vice-versa. The Court also finds that Mr. Berman's belief that his representation of all defendants will not adversely affect the representation of any one of the defendants is legitimately reasonable.
(2) Consent of corporations
Plaintiffs argue that Rule 1.7 requires that they, as directors and officers in both CIDCO and E&N, be consulted and consent to the countersuit brought against them by the corporations. However, Rule 1.13(e) states that "[i]f the corporation's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders." FSM MRPC R. 1.13(e) (emphasis added). There is no requirement that all directors of the corporation must consent. The consent and waiver attached to defendants' opposition as exhibit "H" (the "consent form") establishes that Ron Etscheit, as acting general manager of both corporations, gave consent to Mr. Berman's representation on behalf of the corporations. The Court believes Ron Etscheit's consent on behalf of the corporation is sufficient to satisfy Rule 1.13(e) (see discussion below). Therefore, the Court finds that informed consent was given by all defendants to representation of all defendants by Dan Berman and Saimon & Associates.
B. Corporations as Clients
When a legal organization (such as a corporation) is the client, Rule 1.13 applies. The general rule, as established by Rule 1.13(a), provides that "[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." Rule 1.13(e) permits an attorney under certain circumstances to represent a corporation at the same time as a director or officer of that corporation. Rule 1.13(e) provides that:
A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the
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provisions of Rule 1.7. If the organization's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.
Agnes Etscheit signed the consent form on her own behalf, and Mr. Ron Etscheit signed the consent form as acting general manager for both CIDCO and E&N. Therefore, even if the corporations' consent is required by Rule 1.7 (which is not established since it has not been shown that the interests of Agnes Etscheit and the corporations are directly adverse), the Court finds that such consent was given by Ron Etscheit, an appropriate official of the organization other than the individual who is to be represented (Agnes Etscheit). Therefore, the Court finds that even if consent to Mr. Berman's representation were required pursuant to Rule 1.7, the consent form establishes that consent has in fact been given satisfying Rule 1.13.
C. Derivative Actions
The Comment to Rule 1.13 discusses derivative actions. It provides that:
Under generally prevailing law, the shareholders or members of a corporation may bring suit to compel the directors to perform their legal obligations in the supervision of the organization. Such an action may be brought nominally by the organization, but usually is, in fact, a legal controversy over management of the corporation.
The question can arise whether counsel for the organization may defend such an 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 [of directors]. In those circumstances, Rule 1.7 governs who should represent the directors and the organization.
The Comment to Rule 1.13 concerning derivative actions would have bearing on the present case only if this case were in fact a derivative action. However, the present case is not a suit by the shareholders or members of either of the corporations (CIDCO or E&N) to compel the directors of the corporation to perform their legal obligations in the supervision of the organization. The Court believes that the comment to Rule 1.13 makes it clear that the present case is not a derivative action.
Even still, plaintiffs argue that since there are claims of serious misconduct by the directors, as alleged in defendants' counterclaims, the interests of one of the directors of the Corporations (Agnes Etscheit) are adverse to the corporations' interests. Therefore, plaintiffs claim a conflict exists between defendants' counsel representing Agnes Etscheit and the corporations. However, the claims of misconduct are leveled at plaintiffs, not Agnes Etscheit. Since there are no claims of misconduct against Agnes Etscheit, the Court finds that Rule 1.13 does not prohibit Dan Berman and Saimon & Associates from representing all defendants.
D. Lawyer as Witness
Rule 3.7 provides that a lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a witness except where: (1) the testimony relates to an uncontested issue; (2) the testimony relates to the nature and value of legal services rendered in the case; or (3) disqualification of the lawyer would work substantial hardship on the client.
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Plaintiffs seek to disqualify defendants' counsel Dan Berman as he was an officer of one of the corporations (CIDCO) for a number of years. Therefore, plaintiffs claim Mr. Berman's testimony will be required in this matter. The affidavit of Steve Nix attached to plaintiffs' motion states that he worked with Mr. Berman's law firm on business involving CIDCO matters, and that Mr. Berman received much `confidential information' that will certainly bear on the issues in this case.
Although Mr. Berman may have knowledge of evidence of material matters in this case, plaintiffs have not established that Dan Berman is the only witness who would be able to testify about such evidence. Steve Nix himself could testify as to such evidence, since he evidently has knowledge of it. Plaintiffs can introduce this evidence by methods other than calling defendants' counsel to testify. See Pohnpei v. KSVI No. 3, 9 FSM Intrm. 273, 278 (Pon. 1999) (issuing protective order preventing deposition of counsel where opposing party could not demonstrate it was the only means of obtaining the information sought).
And, as Mr. Berman states in his affidavit attached to defendants' opposition, he has worked as Agnes Etscheit's attorney for over fifteen years. The Court believes it would constitute a substantial hardship to Agnes Etscheit to disqualify Mr. Berman and require Ms. Etscheit to find another attorney to represent her in this matter. See id. Therefore, the Court finds plaintiffs' claim that they desire to call Dan Berman as a witness does not represent a basis for disqualification of Mr. Berman.
E. Suit Against Former Client
Plaintiffs argue Dan Berman should be disqualified since Steve Nix is a former client of Dan Berman's. In Weital v. Robert Etscheit, Jr. and Steve Nix, Civil Action No 1994-152, Dan Berman represented Robert Etscheit, Jr. and Steve Nix against claims of worker's injury and compensation arising out of an alleged injury to the plaintiff. Plaintiffs argue that since Steve Nix is a former client of Dan Berman, a conflict of interest exists with Dan Berman representing the co-defendants, who have filed counterclaims against Steve Nix in the present case.
Model Rule 1.9 addresses this situation. It provides as follows:
A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) represent another person in the same or a substantially related matter in which that person's interest are materially adverse to the interests of the former client unless the former client consents after consultation; or
(b) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 would permit with respect to a client or when the information has become generally known.
The Weital matter involved an alleged injury to a person working for or with Steve Nix. The present matter involves a dispute arising over ownership and management of CIDCO and E&N. The Court believes the present matter is not substantially related to the Weital case. Therefore, the Court finds that Rule 1.9(a) does not disqualify Dan Berman from representing clients who have filed claims against Steve Nix in the present matter.
Further, the affidavit of Dan Berman states that he received no confidential information from Steve Nix relating to the instant action. Plaintiffs have not disclosed any such information to the Court. Therefore, the Court does not find that Dan Berman received information from Steve Nix relating to his representation of Mr. Nix in the Weital matter which Dan Berman is using to the disadvantage of Mr.
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Nix in violation of Rule 1.9(b).
The Court finds no reason to disqualify Daniel Berman and the Law Office of Saimon & Associates from representing all of the defendants in this matter. Therefore, it is hereby ordered that plaintiffs' motion to disqualify Daniel Berman and the Law Office of Saimon & Associates as counsel for defendants is denied.
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