Gardner v. North Carolina State Bar

• Decision Date: 02 April 1986
• Docket Number: No. 706PA84,706PA84
• Parties: , 54 USLW 2521 Robert R. GARDNER, and Nationwide Mutual Insurance Co. v. The NORTH CAROLINA STATE BAR.
• Court: North Carolina Supreme Court

Page 517

341 S.E.2d 517

316 N.C. 285, 54 USLW 2521

Robert R. GARDNER, and Nationwide Mutual Insurance Co. v. The NORTH CAROLINA STATE BAR.

No. 706PA84.

Supreme Court of North Carolina.

April 2, 1986.

Bryant, Drew, Crill & Patterson, P.A. by Victor S. Bryant, Jr., Durham, for petitioners-appellees.

L. Thomas Lunsford, II, and James E. Tucker, Raleigh, for respondent-appellant.

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan by James D. Blount, Raleigh, for amicus curiae, The Nat. Ass'n of Independent Insurers, The Alliance of American Insurers and the American Ins. Ass'n.

Smith, Moore, Smith, Schell & Hunter by J. Donald Cowan, Jr., Greensboro, for amicus curiae, The North Carolina Bar Ass'n.

FRYE, Justice.

The parties to this action have brought a single question before this Court: May a licensed attorney who is a full-time employee of an insurance company ethically represent one of the company's insureds as counsel of record in an action brought by a third party for a claim covered by the terms of the insurance policy or appear as counsel of record for the insured in the prosecution of a subrogation claim for property damage? We hold that under North Carolina law, the answer is no.

Petitioners ¹ presented this question to respondent Bar on 13 January 1982 with a request that the Bar reconsider two of its ethics opinions, Opinion 682 and CPR 19. Opinion 682, issued in 1969, held that it would be unethical for "house counsel" of an insurance company to defend that company's insureds against claims arising out of automobile accidents. CPR 19, issued in 1974, held that prosecution of subrogation claims in the name of the insured by "house counsel" would also be unethical. The Bar responded to petitioners' request by reconsidering these earlier opinions and then affirming them in CPR 326, adopted 14 January 1983.

Considering CPR 326 to be a declaratory ruling as defined by N.C.G.S. § 150A-17, petitioners filed a petition for judicial review with the Superior Court, Wake County, on 11 February 1983. Both parties submitted memoranda and presented oral arguments to the trial judge. On 21 August 1984, the trial judge entered judgment, out of session by consent of the parties, in favor of petitioners. The trial judge held that the distinction made by the Bar between "house" and "outside independent" counsel was an arbitrary distinction and therefore unlawful.

Respondent Bar accordingly filed a timely notice of appeal, and petitioned this Court for leave to by-pass the Court of Appeals. This Court granted the Bar's petition on 30 January 1985.

We note initially that petitioners' reliance on the Administrative Procedure Act (N.C.G.S. § 150A-1 et seq.) ² for authority to bring their petition before the superior court raises a jurisdictional problem. The Administrative Procedure Act allows a party aggrieved by an agency's declaratory ruling (N.C.G.S. § 150A-17), or final decision in a contested case (N.C.G.S. § 150A-43), to bring the matter before the Superior Court, Wake County, for judicial review. N.C.G.S. § 150A-45 (1983). Without deciding the general applicability of the Act to the State Bar and the decisions of its Council, this Court, in N.C. State Bar v. DuMont, 304 N.C. 627, 286 S.E.2d 89 (1982), held that Article 4 of the Act would provide the standard of review applicable to decisions of the Disciplinary Hearing Commission.

Nevertheless, in this particular case we need not rely upon the Administrative Procedure Act to find jurisdiction. Instead, we conclude that jurisdiction to decide the question now before us arises out of the court's inherent power to deal with its attorneys. As this Court explained in In re Burton, 257 N.C. 534, 542-43, 126 S.E.2d 581, 587-88 (1962), " '[This] power is based upon the relationship of the attorney to the court and the authority which the court has over its own officers to prevent them from, or punish them for, committing acts of dishonesty or impropriety calculated to bring contempt upon the administration of justice.' " (citation omitted.) While we agree with the statement in McMichael v. Proctor, 243 N.C. 479, 485, 91 S.E.2d 231, 235 (1956), that "questions of propriety and ethics are ordinarily for the consideration of the ... Bar" because that organization was expressly created by the legislature to deal with such questions, nevertheless the power to regulate the conduct of attorneys is held concurrently by the Bar and the court. The legislation creating and empowering the State Bar expressly states that it does not abridge or disable the court's inherent powers to deal with its attorneys. N.C.G.S. § 84-36 (1985). Therefore, in a proper case, the court may rule on questions concerning the conduct of attorneys. The question presented by the petitioners in this case is of sufficient importance to warrant the superior court's consideration.

CPR 326 as recommended by the Ethics Committee and adopted by the Council of the North Carolina State Bar provides in part as follows:

It would be unethical for a full time salaried employee of an insurance company, who is an attorney licensed to practice in the State of North Carolina, to appear as counsel of record in an action brought against an insured by a third party for a claim covered by the terms of the insurance policy or to appear in the prosecution of subrogation claims for the property damage unless such actions are defended or prosecuted only in the name of the insurance company and the insurance company assumes or is subrogated to the complete legal liability and pecuniary interest of the claim. Independent counsel must be retained for the insured when he is the named defendant or plaintiff and thereby the real party in interest. See G.S. 1-57.

This reconsideration affirms Opinion 682 and CPR 19 and those decisions' premise that it is unethical to engage in the unauthorized practice of law as proscribed by G.S. 84-5 ....

Protecting and preserving the relationship of the attorney to his client and the court and avoiding professionally reprehensible conflicts of interest also prohibit this manner of legal representation.

The attorney's paramount responsibility is to the court and client which he serves before the court. This responsibility should not be influenced by any other entity. When an attorney, who is employed by a corporation, is directed by his employer in the representation of other individual litigants, he is subject to the direct control of his employer, which is not itself the litigant and which is not itself subject to strict professional discipline as an officer of the court. This diluted responsibility to the court and the client must be avoided.

The Bar gave two reasons for its decision. First, it concluded that allowing attorney-employees to represent insureds would violate the ban on the practice of law by corporations. Second, it reasoned that the proposed practice would result in an increased risk of conflicts of interest that the Bar considered unacceptable.

In considering the Bar's first reason, the trial judge found as follows Ethics Opinion 682 and CPR 19 each prohibited appearance by ... full time salaried employee[s] of an insurance company ... on the basis that such appearance ... would constitute an unauthorized practice of law by an insurance company.

....

There is no case decided by the Appellate Courts of North Carolina directly on point with the issues raised in this case. Because of the substantial financial interest of the insurer in such actions the insurer is in effect representing itself when its House Counsel represents its insured. This does not appear to be in conflict with established law in this State....

We agree with respondent Bar that the trial judge erred in his conclusion.

The practice of law is defined in North Carolina as "performing any legal service for any other person, firm or corporation, with or without compensation...." N.C.G.S. § 84-2.1 (1985). A corporation may not perform legal services for others; N.C.G.S. § 84-5 forbids it to do so. "It shall be unlawful for any corporation to practice law or appear as an attorney for any person in any court in this State...." N.C.G.S. § 84-5 (1985). See also State ex rel. Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 184 S.E. 540 (1936). The question at hand is whether an appearance by one of petitioner corporation's employees on behalf of an insured would constitute a prohibited appearance by the corporation.

The first point of inquiry is whether the corporation would be making an appearance at all. We believe that it would. When a corporation's employees perform legal services for the corporation in the course of their employment, their acts have been held to be the acts of the corporation so that in law, the corporation itself is performing the acts. State v. Pledger, 257 N.C. 634, 127 S.E.2d 337. Pledger, a layman, was convicted of violating the statute against the unauthorized practice of law when he prepared legal documents for his corporate employer. This Court decided that Pledger was not guilty, concluding that, "[A] person who, in the course of his employment by a corporation, prepares a legal document in connection with a business transaction in which the corporation has a primary interest, the corporation being authorized by law and its charter to transact such business, does not violate the statute, for his act in so doing is the act of the corporation in the furtherance of its business." Id. at 637, 127 S.E.2d at 339-40. Here, petitioner Nationwide is proposing to send its employees into court in connection with a matter in which it alleges it has a primary interest. Such employees, acting in the course of their employment by the corporation, would be charged with representing its insureds as part of their job for Nationwide. Their acts would thereby be the acts of Nationwide itself. Cf. Rucker v. Hospital, 285 N.C. 519, 206 S.E.2d 196 (1974) (hospital liable for staff...