State Bar of Arizona Ethics Opinions
91-05: Conflict of Interest; Imputed Disqualification
Lawyer may not defend a client in criminal fraud proceedings when client's bookkeeper was defended by lawyer's partner in substantially related IRS tax assessment proceedings, and, the bookkeeper will appear as critical prosecution witness against the client.
February 20, 1991
This opinion concerns a lawyer's obligation to a former client of his law firm. The lawyer, A, represents defendant D in a criminal proceeding presently pending in federal court. A partner in Ats law firm, lawyer P, formerly represented a witness, W, who will be appearing on behalf of the prosecution at the criminal trial.
The criminal charges against D arose out of several businesses operated by D during the late 1970’s and early 1980’s. During this time, D received numerous loans from a bank to finance his operations. By late 1982, D and his associates realized that the businesses were becoming increasingly unwieldy, and they approached the bank about a major restructuring. The bank agreed to participate in the restructuring, but withdrew after the president of the bank was killed in an automobile accident in March, 1983. With financing for the restructuring no longer available, D and his entities sought Chapter XI bankruptcy protection from creditors.
After a lengthy investigation, D and three of his associates were indicted by federal authorities on felony charges involving the operation of the businesses. The indictments charge that D and his co-defendants knew or had reason to know that various investors in their businesses would not receive the returns promised when they made their investment. D will contend at trial that the businesses had a legitimate source of financing from the bank which would have resulted in full payment to the investors had the restructuring gone forward as planned.
W was a bookkeeper for D and his business entities during the years involved in the indictment. W is knowledgeable about the internal workings of the entities, their financial health, and the financing relationship between D and the bank. W was an authorized signatory on most, if not all, of the bank accounts.
In 1985 and 1986, the Internal Revenue Service (IRS) began assessment proceedings against W for the unpaid payroll taxes owed by Dss business entities. The IRS alleged that W, as a check signer, was a controlling person within the relevant sections of the Internal Revenue Code. W retained A’s partner, P, to represent her in the proceedings before the IRS. After P had presented W’s defense -- apparently arguing that she was nothing more than an employee acting under the direction of D -- the IRS dropped the assessment. This dismissal apparently was unconditional. W did not enter into any agreements with the IRS to cooperate in any future investigations or criminal proceedings against D.
In 1989, three or four years after his partner had represented W in the IRS assessment proceeding, A was retained to represent D in defending against the criminal indictment. A’s law firm ran a computerized conflicts check which did not identify the firm’s previous representation of W. A proceeded to invest hundreds of hours in preparing D’s defense to the indictment.
The government has announced its intention to use W as a critical prosecution witness against D in the upcoming criminal trial. The government has not revealed the specific testimony which it intends to elicit from W, and W has not submitted to an interview or deposition regarding her knowledge. A believes that W might be used as a foundation witness for numerous documents. She might also be asked to testify about the relationship between D and the bank.
On the basis of his partner’s prior representation of W, the government has moved to disqualify A from representing D in the upcoming criminal trial. A has avowed at hearings on the motion, and has stated in communications with this committee, that he has not reviewed his firm’s file regarding P’s representation of W, nor has he discussed the representation with P or obtained any other information regarding communications between W and his firm. A has stated that he will not, in the future, obtain such information. A’s client, D, has requested that A be permitted to continue representing him in the criminal proceeding. D has been informed of A’s conflict of interest, and has agreed in open court that A may proceed with the defense without reviewing any information relating to W’s prior representation by A’s firm.
W objects to the representation. W has stated that she will not consent to her former law firm’s representation of D at the criminal trial.
As one possible solution to the problem, the trial judge has appointed lawyer X, who is not associated with A•s law firm, to "shadow" the defense of D and be prepared to take up that defense if A is disqualified. A has proposed that X be permitted to conduct the investigation and cross examination of W at trial, and has avowed that nobody from his law firm will discuss with x the firm’s prior representation of W.
1. May A ethically continue to represent D over the objection of W, a prosecution witness in the criminal proceedings and a former client of A’s law firm?
2. May A ethically conduct the cross examination of W concerning all aspects of her relationship with D and his business entities, questioning her motives and competency to testify? May A ethically comment on her testimony and demeanor in final summation to the jury?
3. Other than A's obvious obligation not to disclose privileged information, are there any ethical restrictions on A’s examination of W which would not be present if W had not been a former client of A’s law firm?
4. Does X’s involvement in the preparation, investigation, and cross examination of W eliminate the potential ethical conflict of interest for A and his law firm?
ETHICAL RULES INVOLVED
ER 1.9. Conflict of Interest: Former Client
A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation; or
ER 1.10. Imputed Disqualification: General Rule
(a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by ER 1.7, 1.8(c), 1.9 or 2.2.
ER 1.10(a), as applied to the facts here, provides that A may not represent D in the pending federal criminal proceeding if A’s partner, P, would be prohibited by ER 1.9 from representing D in the same matter. We must therefore determine, initially, whether P would be prevented from representing D by the terms of ER 1.9(a).
ER 1.9(a) states that a lawyer who has formerly represented a client in a matter shall not thereafter "represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation. n Applied to the facts here, this means that lawyer P, who formerly represented W in the IRS assessment proceeding, shall not thereafter represent D in the same or a substantially related matter in which D’s interests are materially adverse to those of W, unless W consents after consultation. W refuses to consent. We must therefore determine (a) whether the subsequent criminal proceeding against D is "the same or a substantially related matter," and (b) whether D's interests in the criminal proceeding are "materially adverse" to the interests of W.
Before answering these questions, a word should be said about the scope and intent of ER 1.9(a). The rule has been adopted "for the protection of clients." Comment to ER 1.9. It seeks to assure clients that their lawyers will not use confidential information against them in a subsequent proceeding. To accomplish this important objective, the rule takes a broad, prophylactic approach. Rather than merely prohibiting the lawyer from using confidential information against the former client, the rule prohibits the lawyer from even entering into a relationship where such misuse is possible. The former client is thus protected not only from the misuse of his confidences, but also from the possibility of such misuse.
One commentator has identified the public purpose in this rule as follows:
"There is a public interest in assuring every client that communications to a lawyer will not be used adversely in the lawyer’s later work. Situations that create a realistic risk that that will occur are those in which the former-client conflict rules should require disqualification.
"Courts sometimes speak in terms of the former client’s being ‘entitled to freedom from apprehension’ that confidences will be revealed in a succeeding representation ... The other important interest to be protected is the public interest of assuring all clients that lawyers can be trusted not to elicit their confidential information and then turn it against their interests. Only in that way can the assurance of confidentiality serve the objective of encouraging full client disclosure to a trusted lawyer."
See C. Wolfram, Modern Legal Ethics, 360-361 (1986) (citation and footnote omitted).
The broad, preventive approach of ER 1.9(a) has been recognized by Arizona courts. In Foulke v. Knuck, 162 Ariz. 517, 784 P.2d 723 (App. 1989), the Court of Appeals noted that the rule establishes an "absolute prohibition" against employment that falls within its terms. 162 Ariz. at 521, 784 P.2d at 727. In response to a lawyer’s argument that no confidences had been disclosed in the first representation so that no harm would result from the subsequent employment, the Court of Appeals emphasized that the rule does not require the client to prove that the lawyer will use client confidences adversely:
“[The subsequent client's] first contention fails to recognize the mandatory nature of ER 1.9(a). The rule does not require that confidences and secrets be divulged in order for a conflict to exist or for disqualification to be proper. (citations omitted) Regardless of what was communicated during the representation of the former client, the rule prohibits subsequent representation of an individual whose interests are substantially adverse to those of a former client."
162 Ariz. at 522, 784 P.2d at 728.
This cautious approach is not new. When examining possible conflicts with former clients, the law has long presumed that client confidences were shared in the first representation. As this committee stated in 1981: ". . . if the attorney switches sides in the same case or a substantially related case, it is presumed that the former client communicated confidential information to the attorney." Opinion No. 81-29 at 4 (September 17, 1981).
The Arizona Supreme Court recently recognized this presumption:
"[T]he [substantial relationship] test itself is premised, at least in part, on the presumption that a lawyer who now wants to represent an interest adverse to a former client has received confidences of that former client, which he should not be allowed to use now against the former client. The majority of courts that have considered the issue have held that the presumption that a lawyer received such confidences may not be rebutted."
Matter of Ockrassa, _____ Ariz. _____, 799 P.2d 1350, 1352 (1990), quoting ABA/BNA Lawyers’ Manual on Professional Conduct, p.51:201 (1987).
The inquiring lawyer in this case has not attempted to rebut the presumption that W conveyed confidential information to P during the tax assessment proceeding. For purposes of this opinion, accordingly, we presume that W communicated such information to P.
With this background in mind, we will now determine whether the present criminal proceeding is “the same or a substantially related matter,” and whether D’s interests in that proceeding are "materially adverse" to W’s interests. We address these issues separately.
1. Substantial Relationship
The current criminal proceeding and the former IRS assessment proceeding cannot be characterized as "the same" action. Both arose out of the same businesses and financial difficulties, but the objectives and parties are different: the IRS assessment proceeding sought to recover unpaid payroll taxes; the criminal prosecution, by contrast, seeks to establish D’s criminal liability. If ER 1.9(a) applies to these facts, therefore, it must do so because the two matters are "substantially related" within the meaning of ER 1.9(a).
The comment to ER 1.9 provides little guidance for identifying substantially related matters. The Comment states only that the "scope of a 'matter’ for purposes of ER 1.9 (a) may depend on the facts of a particular situation or transaction." Examining the facts before us, we conclude that the matters are substantially related.
The IRS assessment proceeding against W, and her testimony in the criminal prosecution, both arise out of her previous employment by D, her thorough involvement in D’s finances, and the information she acquired as a result of that position. Both involve W’s knowledge of D’s banking relationship. In addition to this common business background, both proceedings arise out of the series of events that led ultimately to D’s business failure. Moreover, it is quite possible that the defense asserted in the IRS assessment proceeding -- that W was acting under the direction of D at all times -- will be relevant during W’s cross examination in the pending criminal proceeding. To the extent that D's lawyers seek to attack W's actions as an employee, or to establish her culpability for the charges against D in the indictment, W undoubtedly will respond by asserting D's close supervision of her actions. We thus find a close factual bond between the prior assessment proceeding and the pending criminal case. Matters so factually related are, in our view, "substantially related," within the meaning of ER 1.9 (a).
The Arizona Supreme Court discussed the scope of the "substantially related" requirement in Alexander v. Superior Court, 141 Ariz. 157, 685 P.2d 1309 (1984). Alexander concerned a motion to disqualify a lawyer for representing interests adverse to those of his former clients. The lawyer targeted in the disqualification motion previously had represented several tax shelter investors in proceedings against the Internal Revenue Service. The IRS had disallowed most of the deductions claimed by the investors, and the lawyer sought to obtain a reversal by proceedings in the Tax Court. 141 Ariz. at 159, 685 P.2d at 1311.
Sometime later, the lawyer was asked to represent the principals involved in the tax shelter investments in defending against civil securities fraud charges brought by the State of Arizona. When the lawyer appeared as counsel for the principals, the State moved for disqualification, claiming that his prior representation of the investors placed him directly in conflict with his current representation of the principals in the securities fraud action. 141 Ariz. at 160, 685 P.2d at 1312. The court held that "[t]he present litigation is, indeed, ‘substantially related’ to the Tax Court litigation," 141 Ariz. at 164, 685 P. 2d at 1316, but declined to disqualify the lawyer after finding that the only investor who had made a confidential communication to the lawyer had made it public. Id.1
We find Alexander to be closely analogous to our facts. The lawyer previously represented investors in proceedings against the IRS, just as P represented W in proceedings before the IRS in this case. The lawyer then represented the principals involved in the tax shelters in defending against various securities fraud allegations, just as P’s firm now represents W’s employer in defending against criminal fraud charges. If the securities fraud action in Alexander was “substantially related” to the preceding Tax Court litigation, we believe the criminal fraud action in this case is "substantially related" to the preceding tax assessment matter. In both cases, the tax proceedings and subsequent fraud actions arose out of a common nucleus of facts. That factual connection is sufficient, under Alexander, to satisfy the “substantially related” test.
This conclusion is strengthened by the Supreme Court’s decision in Ockrassa. The lawyer complained against in Ockrassa was found in State Bar disciplinary proceedings to have violated ER 1.9(a). The lawyer previously had defended a Mr. Otto in three criminal DUI cases. Otto was convicted in each case. Three years later, while employed as a deputy county attorney, Ockrassa prosecuted Mr. Otto for two additional crimes (at least one of which was also a DUI case). The criminal allegations in these later proceedings identified the previous DUI convictions as offenses within the preceding 60 months, making Otto eligible for more severe criminal penalties. _____ Ariz. At _____, 799 P. 2d at 1350.
Although the previous DUI convictions were factually and legally unrelated to the subsequent criminal proceedings, the Supreme Court found that all were “substantially related” within the meaning of ER 1.9(a). The Court identified "a substantial danger that confidential information revealed in the course of the attorney/client relationship would be used against Mr. Otto by respondent, his former attorney." _____ Ariz. At _____, 799 P.2d at 1352. Because confidences might have been revealed to the lawyer in the earlier proceedings that could be relevant to the later cases, the Court found the two sets of proceedings to be “substantially related.” Id.
In this case, it is entirely possible that W conveyed confidences to P that could be relevant to the defense of D in the criminal proceeding. The facts underlying the IRS assessment proceeding underlie the criminal prosecution as well. We thus find in this case the same danger identified in Ockrassa -- confidential information revealed by the former client during the previous representation which could be used to the client’s disadvantage in the current proceeding. Under Ockrassa, the two representations are "substantially related" within the meaning of ER 1.9(a).2
2. Materially Adverse
Having concluded that the matters involved in this inquiry are substantially related, we must now determine whether D’s interests in the criminal proceeding are "materially adverse" to the interests of W. We find that they are. W will appear as a key prosecution witness in the criminal trial of D. D's objective at trial will be to discredit W’s testimony in any way feasible, including the possible suggestion of W’s own criminal culpability. It seems apparent that the interests of W and D in the criminal proceeding are thus materially adverse.
This conclusion is supported by the Arizona Supreme Court’s decision in Rodriguez v. State, 129 Ariz. 67, 628 P.2d 950 (1981). The lawyer in Rodriguez, a member of the Maricopa County Public Defender’s Office, was defending Rodriguez against an indictment charging 15 counts of sexual assault and related crimes. In order to strengthen his defense of mistaken identity, the lawyer decided to call Frank Silva as a witness at trial. Silva, who was similar in appearance to Rodriguez, was also being represented by the Public Defender’s Office, but in entirely unrelated sexual assault matters. The office withdrew from representation of Silva, and requested permission to withdraw from representation of Rodriguez so that Rodriquez’s defense lawyers could vigorously examine Silva, a former client of the Public Defender’s Office, at trial. 129 Ariz. at 69, 628 P.2d at 952.
Applying the former ethical rules of the Code of Professional Responsibility, the Supreme Court held that the Public Defender’s Office should have been permitted to withdraw because it would be ethically impermissible for that office to defend one client by calling a former client to testify at the present client’s criminal trial. In the course of this decision, the Court noted the adversity that could arise at Rodriguez’s trial. "If the Public Defender’s Office continues to represent Rodriguez and a confrontation with Silva developed at Rodriguez’s trial, it is possible, even probable, that it would be to Silva’s disadvantage." 129 Ariz. at 74, 628 P.2d at 957. We likewise conclude that a confrontation between D and W at D’s criminal trial might well be to W’s disadvantage. As noted above, D’s lawyer, has every incentive, indeed every obligation, to attack and discredit w’s testimony.
The relationship between a prosecution witness and the criminal defendant was found to be "materially adverse" within the meaning of ER 1.9(a) in United States v. Cheshire, 707 F. Supp. 235 (M.D. La. 1989 ). The court in Cheshire considered facts almost identical to those before us. The defense lawyer, Anthony Marabella, represented one Dyer in a federal criminal prosecution. Mr. Marabella previously had represented Reginald Jones in a related criminal matter. Mr. Jones was designated to testify as a key prosecution witness at Dyer’s trial. Id. At 236-237. The court wasted little time in concluding that the interests of Jones, the witness, were materially adverse to the interests of Dyer, the defendant:
“There is no question but that the interests of Mr. Marabella’s present client, Mr. Dyer, arc materially adverse to the interests of his former client, Mr. Jones, because it is largely upon the basis of Mr. Jones' testimony that the government hopes to convict Mr. Dyer.”
Id. at 239. We likewise find that the interests of W, the former client of the inquiring lawyer’s law firm, are materially adverse to the interests of D, the law firm’s present client.
Having concluded that the current criminal trial is substantially related to the IRS tax assessment proceeding against W, and that D’s interests in the present criminal proceeding are materially adverse to the interests of W, we conclude that ER 1.9(a) would prohibit lawyer P from representing D in the current criminal proceeding. As the Arizona Court of Appeals recognized in Foulke, the rule establishes an "absolute prohibition against such representation." 162 Ariz. at 521, 784 P.2d at 727.
If P would be prohibited from representing D in the criminal proceeding, can his partner, A, undertake and continue the representation? We think not. Like ER 1.9(a), ER 1.10(a) is absolute. Its language admits of no exceptions. The rule states plainly: "While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by ER 1.7, 1.8(c), 1.9 or 2.2." Because lawyer P would be disqualified from representing D by ER 1.9, lawyer A, his partner, is likewise disqualified. It is irrelevant that A has never discussed the prior representation with P, and has never reviewed his law firm’s files regarding W. Possession of such knowledge is not a prerequisite to the imputed disqualification found in ER 1.10(a). Like ER 1.9(a), the rule is prophylactic. It is designed to prevent even the possibility of misusing confidential information.
The disqualification of lawyer A is supported by the Cheshire case discussed above. As noted, Cheshire presents a remarkably similar factual situation. Lawyer Marabella was disqualified from representing defendant Dyer because he previously had represented Jones, a key prosecution witness against Dyer. In addition, an associate of Mr. Marabella was representing defendant Cheshire in the same criminal proceeding. The court held that Marabella's previous representation of Jones disqualified not only Marabella, but also his associate. This was true even though the associate had "no actual knowledge concerning the case of Mr. Jones" and "performed' no legal services on his behalf.” 707 F. Supp. at 240. The court found the prohibition of 1.10(a) to be absolute:
"If one concludes, as I have here, that these lawyers constitute a ‘law firm’ within the meaning of ABA Rule 1.10, then ‘none of them’ may represent a new client when any of them would be prohibited from representing that client under ABA Rule 1.9. The disqualification applies without regard to actual information or knowledge or participation of the associate."
Id. at 241. Lawyer A readily admits that he and P are members of the same law firm, and have been partners since before P represented W. The disqualification mandated by ER 1.10(a) applies to lawyer A.
We thus provide the following answers to the first three questions posed by the inquiring lawyer: (1) lawyer A may not ethically continue to represent D over the objection of W, a witness in the prosecution against D and a former client of A's law firm; (2) lawyer A may not, with ethical propriety, conduct the cross examination of W, question her motives and competency to testify, and comment on her testimony and demeanor in final summation to the jury; and (3) in response to the question whether there are any restrictions on examination of W other than A’s obvious obligation not to disclose privileged information, we respond that there are indeed additional restrictions. There is a complete prohibition. A may not represent D in the current criminal proceeding.
This leaves the fourth and final question: Does the involvement of lawyer X eliminate the conflict of interest for A and his law firm? If lawyer X is not part of A’s firm, and will conduct an independent investigation and cross examination of W, may A ethically continue the representation? We think not.
One must remember that ER 1.9(a) is designed to protect W. It is intended to give W the assurance that her lawyer-client confidences will not be used against her. No matter how carefully X and A avoid discussing W or her prior representation by A’s firm, they necessarily will engage in many communications about the criminal defense of D. They will have to coordinate their facts, coordinate their theories, coordinate their arguments. W will thus be confronted with the uncomfortable fact that her former lawyers are cooperating closely with the lawyer who will cross examine her at trial. ER 1.9(a) is designed to prevent precisely such discomfort from arising. W is “’entitled to freedom from apprehension’ that confidences will be revealed in a succeeding representation.” Wolfram, op. cit., at 360.
Again, our conclusion is supported by Cheshire. When lawyer Marabella was confronted with the prospect of cross examining his former client who would be appearing as a prosecution witness, he too struck upon the possible solution of appointing independent counsel. Mr. Marabella, like lawyer A in this case, recommended that such counsel be appointed to investigate and cross examine his former client. The court in Cheshire rejected the suggestion:
"Mr. Marabella acknowledges that he could not, under the canons of ethics, conduct the cross examination of his former client. His proposed solution -- having a separate lawyer cross examine Mr. Jones -- does not eliminate the conflict. At the very least, in order to represent his present client, Mr. Marabella must be completely free and unfettered to analyze, characterize and repudiate the testimony of his former client in closing argument. Moreover, this judge views it as an almost impossible task for a lawyer to participate throughout the course of a trial but not suggest a single question or style for cross examination of the most important witness against his present client."
707 F. Supp. at 240. Like the court in Cheshire, we do not believe that the appointment of independent counsel (X) to cross examine W eliminates the interest of W which ER 1.9(a) is designed to protect. We therefore conclude that such a solution will not obviate A’s disqualification under the rule.
A has emphasized in his inquiry that his client, D, has consented to his continued representation. Although such consent might remove the ethical impediment A might otherwise face under ER 1.7(b), it does not eliminate the impediment of ER 1.9(a). It is the consent of W, not the consent of D, that A must obtain to avoid the strictures of ER 1.9(a). W has refused to give that consent.
We reach no conclusion on the legal question of whether the court should disqualify A in response to the government’s motion. Our responsibility is that of giving ethical advice, not legal advice. On the basis of the discussion set forth above, we conclude that ER 1.9(a) and ER 1.10(a) require that A and all other members of his law firm refrain from representing D in the current criminal proceeding.
Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.
©State Bar of Arizona 1991
1. The use of the “substantial relationship” test to resolve claimed conflicts of interest between a lawyer and a former client has been common since T.C. Theatre Corp. v. Warner Brothers Pictures. Inc., 113 F. Supp. 265 (S.D.N.Y. 1953). Indeed, ER 1.9 (a) adopted the "substantial relationship" and "materially adverse" tests first set forth in T.C. Theatre. See ABA/BNA Lawyers' Manual on Professional Conduct, p. 51:204 (1987). Although the Arizona Supreme Court’s Alexander decision was rendered before ER 1.9(a) had been adopted in Arizona, the opinion follows the substantial relationship test established in T.C. Theatre. See Alexander, 141 Ariz. at 163-164, 685 P.2d at 1315-1316. The substantial relationship analysis found in Alexander is, thus, the same as that required by ER 1.9(a), and provides guidance for our conclusions in this opinion.
2. Although courts apply different tests to determine whether matters are "substantially related," all seem to give this term a fairly broad reading. In this case, we are presented with identical facts underlying the past IRS assessment and the current criminal proceeding. Many courts require only that the factual contexts of the two representations be similar or related. See, e. g., Trone v. Smith, 621 F.2d 994, 998 (9th Cir. 1980); Smith v. Whatcott, 757 F.2d 1098, 1100 (10th Cir. 1985). Some of these courts, like the Arizona Supreme Court in Ockrassa, also emphasize the likelihood that confidences were exchanged between the former client and the lawyer. "If there is a reasonable probability that confidences were disclosed which could be used against the client in the later, adverse representation, a substantial relation between the two cases is presumed." Trone, 621 F.2d at 998. See also Kevlic v. Goldstein 724 F.2d 844, 851 (1st Cir. 1984). We find that the facts here present a substantial relationship no matter which of these tests is used.