Simms v. Rayes (CA1 1/2/14)

This discusses a slightly interesting point about a lawyer’s legal obligations in corporate derivative claims

Ron Simms and his brother own, through a collection of trusts and corporations, TP Racing, a partnership (actually an l.l.l.p; these folks were apparently sold every imaginable bell and whistle) that owns the Turf Paradise race track. TP sued Ron. He counterclaimed; the court dismissed his claims for lack of standing. Before re-filing them as derivative claims he asked the court to declare that his lawyers, Greenberg Traurig, did not have a conflict (because this had been the subject of earlier motions, each side having tried unsuccessfully to disqualify the other’s lawyer). TP objected, arguing that since derivative claims are brought on behalf of the business Greenberg owed TP a fiduciary duty, so it couldn’t also represent someone adverse to TP. Greenberg never actually represented TP nor did anyone think it did; the argument was entirely technical. The trial court bought it and disqualified Greenberg. Ron took a special action.

The Court of Appeals reverses. Cases from other jurisdictions allow such representation, considering the corporation to be only a nominal party in a fight between shareholders and managers. The court adopts this reasoning for partnerships. The corporation – or partnership – is not a client of the firm bringing the derivative claim and that firm, as opposed to its client, has no fiduciary duty to the corporation. TP’s position apparently rested mostly on an Arizona probate case that the opinion distinguishes fairly easily.

(link to opinion)