Bottoms v. Stapleton
| Decision Date | 02 December 2005 |
| Docket Number | No. 04-0132.,04-0132. |
| Citation | 706 N.W.2d 411 |
| Parties | Russell P. BOTTOMS, Jr., Appellee, v. Jack W. STAPLETON, Individually, S & S Equipment & Supply, Ltd., Paducah Gear & Machine Co., L.C., and Jack W. Stapleton, as Officer and Majority Owner of Paducah Gear & Machine Co., L.C., Appellants. Paducah Gear & Machine Co., L.C., and Jack W. Stapleton, Individually and as Officer and Majority Owner of Paducah Gear & Machine Co., L.C., Appellants, v. Russell P. Bottoms, Jr., Appellee. |
| Court | Iowa Supreme Court |
Mark E. Weinhardt and Margaret C. Callahan of Belin Lamson McCormick Zumbach Flynn, A Professional Corporation, Des Moines, for appellants.
J. Campbell Helton and Jonathan Kramer of Whitfield & Eddy, P.L.C., Des Moines, for appellee.
A minority shareholder brought this action against a limited liability company and its majority shareholder seeking damages for breach of fiduciary duty and conversion, judicial dissolution of the company, an accounting, and appointment of a receiver. Upon the minority shareholder's motion to disqualify the defendants' counsel, the district court held that counsel could not represent the company, but could continue to represent the majority shareholder. We granted the defendants' application for interlocutory appeal. Although the potential for a conflict of interest exists, the record does not establish there is currently a significant risk that the defense attorneys' representation of one defendant will materially interfere with their zealous representation of the other defendant. Therefore, we reverse the district court's order and remand this case for further proceedings.
The appellant, Paducah Gear & Machine Co., L.C., is an Iowa limited liability company that provides industrial machine shop repairs and service from a facility located in Paducah, Kentucky. Paducah Gear was formed in 1998 and has two shareholders. The appellant, Jack Stapleton, owns fifty-one percent of the company, and the appellee, Russell Bottoms, owns the remaining forty-nine percent.
Pursuant to the parties' agreement, Stapleton handled the financial, recordkeeping, and corporate aspects of the company from Iowa, where Stapleton lived, while Bottoms worked on site at the Paducah, Kentucky shop, supplying the machinist services and managing the machinist crew. After several years, the relationship between the co-owners began to deteriorate. In March 2002, Bottoms and Stapleton ceased doing business together. That same month Bottoms incorporated Global Gear & Machine Co. in competition with Paducah Gear.
On July 17, 2003, Bottoms filed this lawsuit against Stapleton and Paducah Gear.1 The plaintiff alleged "Stapleton converted certain assets of Paducah Gear to his own use, made certain distributions to himself at the expense of Plaintiff and Paducah Gear, and has refused to fulfill his contractual and fiduciary duties." Based on this conduct, the plaintiff pursued various remedies in six counts. In Count I Bottoms sought compensatory and punitive damages due to Stapleton's alleged breach of fiduciary duty to the plaintiff. In Count II Bottoms requested a judicial dissolution of Paducah Gear or, alternatively, an order requiring Paducah Gear to pay to Bottoms his "fair share of the assets" of the company. In Count III the plaintiff asserted Stapleton "intentionally misappropriated and took dominion and control over [the plaintiff's] ownership interests." As in Count I, the plaintiff sought a money judgment against Stapleton. In Count IV Bottoms demanded an accounting, and in Count V he asked for the immediate appointment of a receiver to control the assets of Paducah Gear. In Count VI Bottoms requested a temporary injunction as an alternative to the appointment of a receiver and sought an order preserving the assets of Paducah Gear.
The defendants, represented by Richard R. Chabot of Sullivan & Ward P.C., filed an answer denying the plaintiff's accusations of wrongdoing and entitlement to equitable relief. The defendants also filed counterclaims alleging Bottoms had misappropriated proprietary information and other assets of Paducah Gear and had improperly interfered with Paducah Gear's business relationships.
Subsequently, the plaintiff filed a motion to disqualify the law firm of Sullivan & Ward, P.C. from representing both defendants. This motion precipitated the appearance of Mark Weinhardt of the law firm of Belin Lamson McCormick Zumbach Flynn, A Professional Corporation, on behalf of the defendants and Sullivan & Ward. Bottoms then filed a motion to disqualify the Belin law firm as well from simultaneously representing Stapleton and Paducah Gear.
The district court granted the plaintiff's motions to disqualify and held that neither Sullivan & Ward nor the Belin law firm could represent Paducah Gear. It observed, "Assuming that the allegations of wrongdoing against Stapleton can be proven, there is a significant potential for divergence of the interests of Paducah and Stapleton." The court noted that under the Iowa Code of Professional Responsibility, which was in effect at the time, as well as under the Iowa Rules of Professional Conduct, which were then under consideration, clients were allowed to consent to conflicting multiple representation. But the court concluded such consent on behalf of an entity must come from a disinterested person, a person other than the client who would be jointly represented with the entity. Here, the only persons who could consent were Bottoms, who would not consent, and Stapleton, who would not be disinterested. The court concluded, therefore, that it was necessary for Paducah Gear to retain separate counsel. If the parties could not agree on such counsel, the court required the parties to submit the dispute to the court for resolution.
This court granted the defendants' application for interlocutory appeal. The sole issue on appeal is whether the district court abused its discretion in ruling the potential for a conflict of interest between Paducah Gear and its majority shareholder was sufficient to preclude joint representation of the company and Stapleton.2 See Doe v. Perry Cmty. Sch. Dist., 650 N.W.2d 594, 597 (Iowa 2002) (). A court abuses its discretion when its ruling is based on clearly untenable grounds, such as reliance upon an improper legal standard or error in the application of the law. Id. The district court's "factual findings in disqualification cases will not be disturbed on appeal if they are supported by substantial evidence." Killian v. Iowa Dist. Ct., 452 N.W.2d 426, 428-29 (Iowa 1990).
A. General principles regarding attorney disqualification. The right of a party to choose his or her own attorney is important, but it must be balanced against the need to maintain "the highest ethical standards" that will preserve the public's trust in the bar and in the integrity of the court system. Id. at 430. In balancing these interests, a court must also be vigilant to thwart any misuse of a motion to disqualify for strategic reasons. See id.; accord 1 Geoffrey C. Hazard, Jr. and W. William Hodes, The Law of Lawyering § 10.2, at 10-10 (3d ed. 2004 Supp.) () [hereinafter "The Law of Lawyering"].
Thus, our starting point in evaluating a claim that an attorney should be disqualified from representing a party is the ethical principles outlined in the Iowa Rules of Professional Conduct. See Killian, 452 N.W.2d at 429. (We focus on the Iowa Rules of Professional Conduct, which became effective on July 1, 2005, since the future conduct of the attorneys in this litigation will be governed by these rules rather than the old Iowa Code of Professional Responsibility.) The rule governing the conflict at issue here is rule 32:1.7,3 which addresses the problem of concurrent conflicts of interest:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawr may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
(c) In no event shall a lawyer represent both parties in dissolution of marriage proceedings.
Iowa R. of Prof'l Conduct 32:1.7; see also id. r. 32:1.13(g) (). Bottoms does not argue that the defendants' interests are "directly adverse," but rather that these parties have potentially differing interests. See generally 1 The Law of Lawyering § 11.8, at 11-22 (...
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