Motion to disqualify attorney and firm denied

A motion to disqualify an attorney based on a conflict of interest in this minority shareholder corporate dispute is denied. There is no evidence as of yet to show that his clients’ interests are materially adverse to those of the corporation he formerly represented.

Background

The parties are siblings. Each owns a one-third interest in Mid-Atlantic Leasing Corp., which they purchased from their father and his business partner. The parties are all MALC directors. Robert Foley is the plaintiff and MALC’s former vice president. Michael Foley, Charlene Warren and MALC are the defendants in this case. Michael serves as MALC’s president, Charlene is secretary, treasurer and bookkeeper.

In 2015, Michael and Charlene wanted to buy out Robert’s interest. Robert claims that during this time, his siblings were allegedly “misappropriating MALC assets,” for their own benefit and not repaying the loan taken out against their father’s trust to buy MALC. Robert claims he was denied distributions and was removed as an officer and director.

During the buyout negotiations, Robert demanded, through counsel, documentation to valuate the business. Bergethon responded, indicating that he represented Michael, Charlene and MALC. His firm, Sands Anderson, later billed MALC for a legal analysis concerning how to remove Robert as vice president. Bergethon later contacted Robert to deny his allegations of misconduct by Michael and Charlene.

Later, Robert  sued. Bergethon and Biondi, another Sands Anderson lawyer, responded on behalf of Michael and Charlene. Martingayle, an attorney with Bischoff Martingayle, represents MALC.

Robert has moved to disqualify Bergethon and his firm for an alleged conflict of interest.

Discussion

Regarding Rule 1.9 Va. R. Prof. Conduct, plaintiff argues Bergethon and his firm have a conflict of interest between Michael and Charlene, their current clients, and MALC, their former client. The matters on which  Bergethon previously represented MALC are “substantially related to the current dispute.” The issue is whether Michael and Charlene’s interests are materially adverse to MALC’s interests.

Both plaintiff and defendants say they are aligned with the corporation’s interests. “Robert argues because he has alleged misappropriation of corporate assets and fraud, counsel is acting contrary to the interests of the corporation by defending those allegations. Michael and Charlene argue that because they have denied the allegations, their interests are aligned with those of the corporation. Either conclusion begs the question.”

Until evidence is presented, the court cannot say whose interests are aligned with the corporation. Because Robert bears the burden of proof to prove a conflict, the motion as to Rule 1.9 is denied. “[A]t this stage of the case, the court will accept counsel’s assurances that they have investigated the allegations and found them to be false, and that, as attorneys, they are capable of self-regulation.”

For similar reasons, the motion as to Rule 1:13, which requires counsel to act in the corporation’s best interest, is denied as well.

Robert seeks disqualification under Rule 3.7. He says that he intends to call Bergethon as a witness, and that his testimony may be prejudicial to his clients’ interests. But the Rule does not prohibit an attorney from testifying “until it is apparent” the testimony is, or could be, prejudicial to the clients. That cannot be determined at this time.

Defendants argue that even if there is a conflict, Charlene and Michael can waive it. They concede that Rule 1:13(e) prohibits them from waiving the conflict as directors but claim they can do so as shareholders. However, the court concludes that under Code § 13.1-691, “[b]ecause neither Charlene nor Michael would be considered shareholders entitled to vote on the corporation’s consent to dual representation, they may not waive a conflict, should one later arise in this case.”

The motion to disqualify is denied without prejudice. The court relies on counsel’s assurances to withdraw if the facts reveal a conflict.

Foley v. Mid-Atlantic Leasing Corp. Case No. CL18-6498, March 20, 2019; Chesapeake Cir. Ct. (Banks). Carolyn L. Camardo, Andrew Biondi, Gregory P. Bergethon, Kevin E. Martingayle for the parties. VLW 019-8-029, 5 pp.