Goldstein v. Lees

• Decision Date: 28 March 1975
• Court: California Court of Appeals Court of Appeals
• Parties: Charles H. GOLDSTEIN et al., Plaintiffs and Respondents, v. Alan B. LEES and Florenza Lees, Defendants and Appellants. Civ. 43869.

Page 253

120 Cal.Rptr. 253

46 Cal.App.3d 614

Charles H. GOLDSTEIN et al., Plaintiffs and Respondents, v. Alan B. LEES and Florenza Lees, Defendants and Appellants.

Civ. 43869.

Court of Appeal, Second District, Division 5, California.

March 28, 1975.

Hearing Denied June 4, 1975.

Schurmer, Drane, Bullis & Reese, by Earl D. Reese, Los Angeles, for defendants and appellants.

Nelson, Kirshman, Goldstein, Gentile & Rexon, by Jeffrey C. Freedman, Los Angeles, for plaintiffs and respondents.

STEPHENS, Acting Presiding Justice.

On January 31, 1972, the law firm of Charles H. Goldstein, Joseph F. Gentile, and Norman H. Kirshman filed its amended complaint claiming money due for the reasonable value of legal services rendered by Norman H. Kirshman. Defendants Alan B. Lees and Florenza Lees contended at trial that the monies prayed for in the complaint exceeded the amount specified in an oral agreement between Alan Lees and Norman Kirshman. Plaintiffs contended that there was no such agreement, and the trial judge agreed. The defendants have appealed.

The basic question presented in this case is whether or not a former counsel to a corporation can properly render legal services on behalf of a minority shareholder and director in a proxy fight designed to gain control of the same corporation under circumstances where the former counsel holds corporate confidences and secrets which are relevant to the proxy fight. We hold that such representation is improper and that a contract to provide such services is void for reasons of public policy.

Facts

Norman Kirshman served as Executive Vice President, Secretary, and general counsel to Diodes, Inc. from April 1967 to October 1969. Before assuming the position of general counsel, he had been retained by Diodes as outside counsel, beginning February 1965. In his position as an officer and as general counsel to Diodes, Kirshman became privy to its innermost secrets. In fact, Kirshman testified that he 'knew the operations of the corporation intimately . . . all of the subsidiaries had been acquired either as a result of my negotiations ¹ or as a result of my participation that I had as a member of the board of directors. . . . I think I knew the company more intimately than anybody other than Mr. Lloyd . . . the chief executive officer.'

Early in 1971, Kirshman and Alan Lees (a director of Diodes, who owned more than 107,000 shares of its stock) discussed the possibility of a proxy solicitation to gain control of the corporation. After a series of preliminary discussions, the decision to initiate the proxy battle was made, and Lees agreed to assume the cost of soliciting proxies. Initially, Lees, at Kirshman's suggestion, retained the legal services of Goldstein and Moffitt. After two months, Lees discharged Goldstein and Moffitt and hired Kirshman as counsel for the proxy effort. Kirshman testified that he felt he could perform the work 'very effectively because of my insight to the facts, whereas some other attrney who was a total stranger to the Diodes scene would not have, and I agreed to accept full responsibilty for the Diodes contest.'

Thus there is no question that Kirshman's 'insight to the facts' of Diodes was a critical component in the retention of his services as counsel. Indeed, as Kirshman explained, the decision to initiate the proxy struggle was preceded by 'many questions by Dr. Lees to me about the intricacies and inside information that I had because I had been very close to Mr. Lloyd as his No. 2 man. . . .'

Discussion

It is settled in California that an attorney may not recover for services rendered if those services are rendered in contradiction to the requirements of professional responsibility. As the California Supreme Court explained in Clark v. Millsap, 197 Cal. 765, 785, 242 P. 918, 926 (quoting 6 C.J. 722, 723), 'Fraud or unfairness on the part of the attorney will prevent him from recovering for services rendered; As will . . . acts of impropriety inconsistent with the character of the profession, and incompatible with the faithful discharge of its duties.' (Emphasis added.) (See also Priester v. Citizens Nat'l Trust & Sav. Bank of Los Angeles, 131 Cal.App.2d 314, 322, 280 P.2d 835; Denton v. Smith, 101 Cal.App.2d 841, 845, 226 P.2d 723.) Contracts to render such services even if not tainted with actual fraud have been held to be 'clearly against public policy and void.' ² (Anderson v. Eaton, 211 Cal. 113, 116, 293 P. 788, 789.) Thus the facts and law applicable to this case require us to decide a question of first impression in California--whether a former counsel to a corporation can properly represent a minority shareholder and director of the same corporation in a proxy contest in circumstances where counsel holds corporate secrets that are material to the proxy fight.

At the time of the performance of the services for which compensation is demanded here, Rule 5 of the Rules of Professional Conduct provided that: 'A member of the State Bar shall not accept employment adverse to a client or former client, relating to a matter in reference to which he has obtained confidential information by reason of or in the course of his employment by such client or former client.' ³ (See Bus. & Prof.Code, § 6076.) The primary purpose of this rule is to protect the confidential relationship which exists between attorney and client. (Jacuzzi v. Jacuzzi Bros., Inc., 218 Cal.App.2d 24, 28, 32 Cal.Rptr. 188.) Thus, nothing in the rule prohibits an attorney from accepting employment adverse to a former client if the matter has no relationship to confidential information acquired by reason of or in the course of his employment by the former client. Similarly, nothing in the rule prohibits an attorney from accepting employment relating to a matter in which he has obtained confidential information provided that the new employment is not adverse to the interests of the former client. Plaintiffs contend that Kirshner's representation was not adverse to the interests of the corporation.

In one sense, plaintiffs are correct. There is no basis in the record which would permit an appellate court to conclude that the proxy fight itself was adverse to the interests of the corporation. This conclusion follows even though Kirshman and Lees failed in their attempt to gain control of the corporation. We cannot say that this exercise in corporate democracy was inimical to the interests of the corporation. Certainly if the proxy fight itself were in fact adverse to the interests of the corporation, a violation of Rule 5 would be apparent. Although the conclusion that the proxy fight may have been consistent with the interests of the corporation is necessary to preserve the plaintiffs' judgment, it is not sufficient. The question is whether or not the Employment of Kirshman was adverse to the interests of the former client. Clearly, it was.

Business and Professions Code section 6068 subdivision (e) states: 'It is the duty of an attorney: . . . (t)o maintain inviolate the confidence, and at every peril to himself to preserve the secrets, of his client.' In this instance, Kirshman accepted employment which surely at best must have tempted him to reveal or to improperly monopolize the confidences and secrets of his former client. As the Supreme Court recognized in Anderson v. Eaton, Supra (211 Cal. at p. 117, 293 P. at p. 790), 'Conscience and good morals dictate that an attorney should not so conduct himself as to be open to the temptation of violating his obligation of fidelity and confidence.' Clearly, the acceptance of employment which threatens the revelation or improper monopolization of a former client's confidences is adverse to the interests of the former client. To be sure, Rule 5 implies that an attorney may accept employment on a matter is reference to which he has before obtained confidential information, but nothing in Rule 5 sanctions the accepance of such employment when the representation of the interests of the new client inherently tempts the attorney to reveal or improperly monopolize the confidences of the old. Such a reading of Rule 5 would conflict with the policies underlying section 6068, subdvision (e) of the Business and Professions Code; it would needlessly permit attorneys to create the appearance of impropriety. Nor would such an interpretation offer assistance to the new client. Clients are entitled to vigorous and determined representation by counsel. It is difficult to believe that a counsel who scrupulously attempts to avoid the revelation of former client confidences--i.e., who makes every effort to steer clear of the danger zone--can offer the kind of undivided loyalty that a client has every right to expect and that our legal system demands. Rule 5 operates to preclude any impediment to the fulfillment of an attorney's professional obligation to hsi client by proscribing any conflict of interest in his representation of past and present clients. ⁴ 'It is better to remain on safe and secure professional ground, to the end that the ancient and honored profession of the law and its representatives may not be brought into disrepute. Courts have consistently held the members of the profession to the strictest account in matters affecting the relation of attorney and client.' (Tomblin v. Hill, 206 Cal. 689, 694, 275 P. 941, 943, quoting Addison v. Cope, 210 Mo.App. 569, 243 S.W. 212, 215.)

It could be argued that as a shareholder and as a director, Lees was entitled to be apprised of corporate confidences and secrets. Since Lees' status as a shareholder and his status as a director give rise to different issues, we treat the questions separately.

Clearly, the duty stated in section 6068, subdivision (e) applies in the corporate context. As the California Supreme Court stated in discussing the narrower ⁵ but related question of the attorney-client privilege, 'Certainly the public policy behind the attorney-client privilege...