Arizona Court of Appeals Division One Holds That ER 1.7(a) Does Not Prevent A Lawyer in a Derivative Action From Also Representing the Minority Shareholder on any Direct Claims Against the Corporation or its Management that Arise From the Same Set of Facts.

Ron and Jerry Simms are the principal owners of TP Racing.  In July 2010, TP Racing separately sued Ron and one of Ron’s corporations.  Ron answered the complaints and counterclaimed against TP Racing, alleging, among other things, breaches of contract and breaches of fiduciary duty.  In March 2012, TP Racing moved to dismiss several of the counterclaims, arguing that Ron lacked standing to bring the claims because they were derivative.  The trial court agreed and dismissed those counterclaims without prejudice.  Before refiling the counterclaims as derivative claims, Ron filed a “Motion for a Determination of No Conflict,” asking the trial court to determine that Greenberg Traurig, LLP (“GT”) could represent Ron on the derivative claims brought in TP Racing’s name without creating a conflict of interest between GT and TP Racing.  The trial court denied Ron’s motion and granted TP Racing’s motion to disqualify GT.  Ron filed a special action seeking relief from the trial court’s order.

The Arizona Court of Appeals accepted jurisdiction, and reversed the trial court’s order, holding that nothing prevents a lawyer in a derivative action from also representing the minority shareholder on a direct claim against the corporation or its management that arise from the same set of facts.  In Arizona, conflict of interest disputes are resolved under Arizona Rules of Professional Conduct Ethical Rule (“ER”) 1.7(a).  That rule prohibits a lawyer from representing a client if (1) that representation will be directly adverse to another client or (2) a significant risk exists that the lawyer’s responsibilities to another client, a former client, a third person, or to the lawyer’s personal interest will materially limit the client’s representation.  Although no Arizona appellate court has considered the issue, courts that have considered the issue have held that lawyers are not disqualified from representing clients who are simultaneously pursuing direct claims against a corporation and derivative claims on behalf of that corporation.  If the filing of a derivate claim created an attorney-client relationship between the corporation and the lawyer for the minority shareholder, there would be no way for the derivative plaintiff to ever have conflict-free counsel. 

Because Ron’s interests in his direct claims and the interests of TP Racing in the derivative claims at issue in this case are aligned, the Court concluded that GT was not representing adverse interests and had no conflict of interest cognizable under ER 1.7(a).

Judge Howe authored the opinion; Judges Swann and Gemmill concurred.