March 2002

Ethics in Corporate Failures

by Barrie Althoff, WSBA Chief Disciplinary Counsel

When times are good, usually people are also good. But when times are bad, virtue is sometimes deemed an unaffordable luxury, particularly when crime more clearly pays. Temptations to cover up, destroy or conceal evidence, loot corporate assets, cut corners, point fingers and avoid responsibility may arise. When a corporation fails, corporate executives may seek to blame others and destroy evidence, both to save their professional reputations and to shelter their now-imperiled personal assets. Corporate creditors, including rank-and-file employees, may be looking to recover moneys or obligations owed them, including unpaid wages and possibly greatly devalued stock options or retirement-plan funds. Dissatisfied corporate shareholders and securities regulators are likely to institute litigation against management and others associated with management, including in-house and outside counsel, particularly if the corporation has recently offered or sold any securities. Anyone with perceived deep pockets is a likely defendant.

This article assumes that the corporation has failed financially and is either dead and buried, or on its death-bed with little or no hope of recovery. It assumes that investors and creditors are either circling the corporate invalid or are actually already devouring its carcass through direct or derivative litigation. It assumes securities regulators are investigating the failure. It also assumes that the corporate lawyers (either in-house or outside counsel) are either within the carcass being devoured or have been identified as the next meal. In that scenario, this article explores some of the legal ethical issues that may arise for the lawyers, asks many questions, and answers at least some of them.1 

The first question a lawyer representing a failing or failed corporation or its management or creditors should be asking is whether he is competent to handle the representation. Rule 1.1 of Washington's Rules of Professional Conduct is identical to Rule 1.1 of the American Bar Association's Model Rules of Professional Conduct and to Disciplinary Rule 6-101(A) of Oregon's Code of Professional Responsibility. Each of them requires that: "A lawyer shall provide competent representation of a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."

The lawyer should recognize that the legal issues arising in connection with a failing or failed corporation, particularly one with public investors and which is being merged or acquired or has corporate subsidiaries or affiliates, are numerous, complex, and often very time-sensitive. Questions will arise under state corporate law; federal and state securities laws; federal patent, trademark and copyright laws; federal bankruptcy and state debtor-creditor rights laws; federal and state tax laws; federal and state employment laws; federal employee-benefit plan laws; whistleblower protection statutes; and so on. Complex litigation and difficult negotiations with creditors are likely. Depending on the nature, extent and location of the corporation's business, assets and employees, the laws of numerous state, localities, and foreign jurisdictions may be involved. If the lawyer is not qualified to handle these issues either directly or through assistance from other lawyers, the lawyer's representation will likely violate the lawyer's ethical duty of competence. Similarly, if the lawyer's office does not have the personnel and resources to handle a complex corporate liquidation and related litigation, one wherein payment of legal fees and costs advanced may be very slow in coming, the lawyer should not undertake the representation.

If the lawyer's conduct violates the ethical requirement of competence, it may also constitute malpractice. Lawyers fearing they may not be competent and may be subject to malpractice claims, but wanting to undertake the representation anyway, should recall that under Washington's RPC 1.8(h) (based on ABA Model RPC 1.8(h)) they may not seek to prospectively limit their liability to a client for malpractice unless such limitations are permitted by law and the client is independently represented in making an agreement to limit the liability. A similar prohibition is set forth in Oregon's DR 6-102(A).

Generally a lawyer must be licensed to practice law in each jurisdiction in which the lawyer practices. Washington's RPC 5.5(a), the current ABA Model RPC 5.5(a), and Oregon's DR 3-101 each prohibit a lawyer from practicing law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction, or from assisting a nonadmitted person in the unauthorized practice of law. Even though the ABA provision is currently being re-evaluated and will likely be amended in light of the frequent multi-jurisdictional practice of many lawyers, as likely will the Washington and Oregon provisions, the lawyer should always assure appropriate licensing, since without it the lawyer may not only be subject to possible prosecution for ethical violations or violation of the UPL provisions of other states, but more practically may be denied legal fees. See, for example, Birbrower, Montalbano Condon & Frank P.C. v. Superior Ct, 949 P.2d 1 (CA, 1998), modified 17 CA.4th 643a (1998).

If the lawyer is representing a failing or failed corporation, the lawyer should determine whether the lawyer is licensed, or can associate with local counsel, in each jurisdiction in which the lawyer may be required to practice to represent the corporate client. Some jurisdictions have expedited admission procedures for lawyers who limit their practice entirely to representing a corporate entity. Washington, Oregon and Idaho have each recently adopted rules permitting general admission to practice, without the need to take a new bar exam, for lawyers already admitted in one of the other two states. If the failing or failed corporation is a small or local entity, the lawyer's licensing should not be an issue. If, however, the failing or failed corporation has operations or staff in various jurisdictions, the lawyer should assure he is duly admitted to practice where appropriate.

A lawyer representing a failed or failing corporation may serve the corporation both as an advocate in litigation and as an adviser. Washington RPC 2.1 and ABA Model RPC 2.1 require a lawyer as an adviser to exercise independent professional judgment and render candid legal advice.2 

If the advising lawyer is involved in any conduct arguably related to the failure of the corporation, or if the advising lawyer is an investor in the corporation, the lawyer may have a conflict of interest which would prevent the lawyer from providing the required independent judgment and candid advice. Thus, RPC 2.1 forms an independent ground for requiring a lawyer to avoid conflicts of interest that may impede the lawyer's ability to provide independent judgment and render candid advice. Further, if a lawyer representing a corporation knows it intends to undertake a course of conduct with likely significant adverse legal consequences to it, the lawyer has a duty under Washington's RPC 1.4 and ABA Model RPC 1.4 (duty to communicate) to provide the corporation with candid advice about the legal consequences of such conduct.3 If the corporate management is inexperienced in legal affairs, the lawyer may be required to advise the client that more than merely technical legal advice may be involved. (See comment 3 to ABA Model RPC 2.1.) For example, in a failed or failing corporation, the corporate client will likely need professional advice from accountants, investment bankers or other financial specialists.

RPC 2.1 also makes it clear that a lawyer representing a failing or failed corporation may provide advice to corporate management on other than merely technical legal issues.4 The lawyer may also refer, for example, to other nonlegal considerations such as moral, economic, social and political factors, which may be relevant to the corporate client's situation.

For example, the lawyer may want to advise corporate management that while the corporation may undertake a particular course of conduct, it will have significant adverse consequences for the community or employees, or likely receive publicity reflecting adversely on both the corporation and the executive officers. Or, the lawyer may simply tell corporate management that their proposed course of conduct is legal but foolish, or legal but socially irresponsible. In providing such nonlegal advice, however, the lawyer should not expect to be paid as a lawyer, if at all, for such advice, unless the client specifically agrees to pay for nonlegal advice.

Conflicts of interest for a lawyer arise not merely between existing or former clients, but also as to the lawyer's own interests. For example, if the advising lawyer has invested a significant amount of personal money in the capital of the corporation, either independently or through its stock option or other employee investment plans, the lawyer may well have interests which are in conflict with those of the corporate entity or its officers or directors that would disqualify him or her from continuing a representation. (For further discussion of investment conflicts, see Althoff, "Investing in Your Client's Business," Washington State Bar News, p. 45, March 2000.)

Most conflicts of interest arise, however, between current or past clients of the lawyer. Unless the lawyer knows whom he is now representing and whom he has represented in the past, the lawyer cannot comply with many of the ethics rules which are client-based, such as those requiring the lawyer to maintain client confidences and secrets, and those prohibiting the lawyer from representations which conflict with other representations of the lawyer.

When a client is other than an individual, questions often arise as to exactly who is the client. The general rule is that a lawyer who represents a corporation does not thereby create a lawyer-client relationship with any of the corporation's constituents, such as promoters, founders, directors, shareholders or employees.5 The lawyer should thus determine whether his client is the corporation, a subsidiary, an affiliate, or one or more members of senior management, and so on. In a closely held corporation, these distinctions can often be difficult to make, but if the lawyer does not make them, he will likely be violating his ethical duties to one or more clients. In any case, since the corporate lawyer represents the corporation and not its constituents, the lawyer's duty must be to the corporate entity; accordingly, if the lawyer becomes aware that the constituents are not acting in the best interests of the corporate entity, he may be required to take action to protect corporate interests, such as going to higher corporate officials, or ultimately in some cases resigning from the representation. See generally ABA Model RPC 1.13 (organization as a client), which has not been adopted by Washington, and ABA/BNA Lawyers' Manual on Professional Conduct, p. 91-2401 and following.6 

The general rule that a lawyer's representation of a corporation does not of itself create a lawyer-client relationship with the corporation's constituents does not prohibit the lawyer, however, from also representing those constituents if the lawyer can do so without engaging in conflicts of interest, or in certain cases where there is a conflict, if the clients consent to the waiver.

Rules 1.7 through 1.13 of the ABA Model RPCs, Rules 1.7 through 1.12 of Washington's RPCs, and Oregon's DR 5 set out the detailed conflicts rules. Under those rules, a lawyer generally may not represent two persons with conflicting interests, or represent a client if the lawyer's own interests conflict with those of the client. In some cases the otherwise conflicted clients may waive the conflict, while in other cases the representation is prohibited and cannot be waived.

Conflicts of interest must be determined not only at the initiation of a representation, but also throughout the course of the representation. At various times during the corporate existence, a lawyer (either in-house or outside) may have represented the corporation on corporate matters and various members of senior management or other employees on personal matters unrelated to the corporation, without there having been any conflict of interest. However, since the time of those representations, conflicts may have arisen which would require the lawyer to decline further representation of one or all clients related to the failing or failed corporation. Similarly, if the lawyer represented both the corporation and another person (for example, a manager or employee) in the same transaction, the usual rule is that if a conflict develops as to that representation the lawyer must withdraw not merely from representing the corporation or the other person, but from representing both the corporation and the other person.7 If investors or creditors have made claims against both a failing corporation and its senior management, for example, and if a lawyer has in the past represented both the corporation and management prior to the failure, it is possible, depending on the nature of the claims being made against the failing corporation and its management, that the lawyer may have to withdraw from representing both the corporation and its management.

Even where a corporation is not failing it is not unusual for employees to seek legal advice from the corporation's lawyer, particularly when the lawyer is in-house. If the representation involves a personal matter unrelated to the corporation, the lawyer usually can undertake the representation (assuming the lawyer is duly licensed to practice law in the jurisdiction). For example, an employee wanting the lawyer to draft a simple will, or to assist in a marital dissolution or property acquisition, could normally do so without conflict to the lawyer's corporate representation.

Where the corporation is failing or has failed, however, employees (or former employees) may have questions in regard to their personal financial situation which are related to their employment, such as issues about wages, retirement or stock-option plans, and so on; the interests of the corporation and the employee may be adverse. In these cases, the lawyer should beware of conflicts and advise the employee that the lawyer represents the corporation and not the employee, and that anything the employee tells the lawyer is neither privileged nor confidential. Better yet, the lawyer should politely decline to communicate with the employee about the matter.

The lawyer representing the corporation should be particularly alert and careful should an employee (or a member of management) seek the lawyer's legal advice about the employee's own possible misconduct, since it is likely the corporation and the employee may have conflicting interests and the lawyer would be unable to represent both. If the lawyer fails to do so, the lawyer may find that he is representing both the corporation and the employee and is in an irreconcilable conflict requiring withdrawal from both representations. If the employee seeking legal advice from the corporation's outside counsel or from another in-house lawyer is an in-house lawyer, both the consulted lawyers would be conflicted out if they undertook the employee representation. They would also likely be prohibited from reporting the erring lawyer's known misconduct as they would otherwise be required to do under RPC 8.3, discussed below, except to the extent they reasonably sought to prevent a future crime or sought to defend themselves.8 

Lawyers serving as in-house counsel of a failing or failed corporation will likely need new employment. In seeking and securing it, they need to take care to preserve their former client's confidences and secrets and to avoid new employment in conflict with the corporation's interests. They should recall that if they were to be employed by a law firm, for example, with adverse interests to their former corporate client, that law firm may be disqualified from its representations because of hiring the lawyer by reason of the RPC imputation provisions in Washington and ABA Model RPC 1.10. While Washington's RPCs generally allow screening to avoid imputed conflicts, the ABA Model RPCs do not.9 

Unless the client gives informed consent to disclosure, a lawyer is ethically required to maintain a client's confidences and secrets, subject to a few narrow exceptions. See Rule 1.6 of the ABA Model RPCs, Rule 1.6 of Washington's RPCs, and DR 4 of Oregon's Code of Professional Responsibility. The evidentiary attorney-client privilege rule similarly protects certain lawyer-client communications, but is generally more narrow than the ethics provisions.

Where a corporation is failing or has failed, difficult issues of confidentiality may arise for the lawyer. These issues may arise either directly under the confidentiality ethics provisions cited above, or indirectly under the conflicts-of-interest or other RPC sections. In addition, if the corporate client is asked to voluntarily make, or is required to make, disclosures of otherwise ethically confidential information or information protected by attorney-client privilege to governmental regulatory authorities, the lawyer should advise the corporate client of the consequences of making such disclosures. Those consequences may include waiving the privilege of confidentiality such that the information might be usable against the corporation and its management not only in governmental enforcement or criminal proceedings, but also in private damage lawsuits. Similar concerns may arise when the corporate lawyer is asked to provide otherwise confidential information to the corporation's auditors.10 

(A) Disclosure to Prevent Future Crime. The ABA Model RPCs, Washington's RPCs, and Oregon's CPR each permit a lawyer in some cases to disclose client information without client consent to prevent the client from committing a crime. In each case, the rule permits, but does not require, the lawyer to make the specified disclosure, although some jurisdictions mandate disclosure in certain cases. Since only a future act and not a past act can be prevented, the rules' permission to disclose confidential client information "to prevent" the client from committing a crime necessarily means that the crime must be a future crime and cannot be a past crime. Reality, however, sometimes declines to fit precise classifications of a past crime or a future crime, particularly when the client's course of conduct may be viewed as an ongoing or continuing crime, which in effect rolls together past, present and future crimes into one crime. In these cases, the lawyer may not make a general disclosure of past and present crimes but may disclose only that information reasonably necessary to prevent future crime. Since there are few guidelines to help the lawyer making such a distinction, the lawyer will have to measure his conduct against the purpose of the rule, the imminence and seriousness of the future crime, and against the standard of what a "reasonable lawyer" would do under the circumstances. To assure compliance with the rule and lessen the likelihood of being subjected to either malpractice suits or disciplinary sanctions, a lawyer confronted with these thorny issues should, when in doubt, seek counsel from an experienced legal ethicist and heed that counsel.

ABA Model RPC 1.6(b)(2) provides that a lawyer may disclose, without client consent, information relating to the representation of a client to the extent the lawyer reasonably believes necessary "to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm." Washington's RPC 1.6(b)(1), which corresponds to ABA Model Rule 1.6(b)(2), provides that a lawyer may reveal a client's confidences or secrets to the extent that the lawyer reasonably believes necessary "to prevent the client from committing a crime." Oregon's DR 4-101(C)(3) provides that a lawyer may reveal "the intention of the lawyer's client to commit a crime and the information necessary to prevent the crime."

Washington's RPC 1.6(b)(1) differs from the ABA Model RPC 1.6(b)(2) in several ways. Washington's RPC 1.6(b)(1) permission to disclose a client's planned crime does not have the limitations set out in the Model ABA rule, which requires the lawyer to have a reasonable belief that the planned crime will result in imminent death or substantial bodily harm. Thus, under Washington's more permissive RPC, a lawyer may disclose a client's planned future fraudulent conduct if it constitutes a crime, but not if the conduct is merely civilly fraudulent. Under the current ABA Model rule, however, future criminally fraudulent conduct could not be disclosed unless the conduct was likely to result in imminent death or substantial bodily harm. For example, disclosure regarding planned fraudulent conduct relating to safety hazards of a consumer product (for example, defective tires) might be permitted, whereas disclosure regarding planned financial fraud would likely not be permitted.11 Oregon's DR 4-202 (C)(3), like Washington's rule, has no limitations on the nature or required results of the planned crime.

If the lawyer is permitted under RPC 1.6 to make a disclosure, the disclosure may not be a general disclosure, but must be narrowly directed to the appropriate enforcement agency (for example, the police or prosecuting attorney), and must only relate to the planned criminal conduct. The lawyer may not, for example, disclose any other confidences or secrets of the client which are unrelated to the planned crime.

In the case of a failing or failed corporation, the lawyer may learn of past crimes of the corporation or of management. If the lawyer represents either, however, the lawyer may not disclose information related to that client's past crimes. If the lawyer learns that either the corporation or management whom the lawyer represents are planning on committing a future crime in connection with the failed corporation, the lawyer is in a different situation. Under Washington's rule, the lawyer may, but is not required to, disclose that planned crime. Under the ABA Model rule, the lawyer may, but is not required to, disclose the planned crime only if the lawyer has a reasonable belief that the planned crime will likely result in imminent death or substantial bodily harm.

Before the lawyer makes any disclosure permitted by either Washington's or the model rule, the lawyer should consider whether it is appropriate to make the disclosure even if permitted. The lawyer has a duty of loyalty to the client and should, after having determined that the client's planned conduct would in fact be a crime, try to dissuade the client from engaging in the planned conduct. If the objective of the planned client conduct can be achieved in a legal, noncriminal manner, the lawyer should so advise the client, and the client will likely follow the legal path. If the client's objective cannot be accomplished legally, the lawyer should advise the client, that the planned conduct is a crime which the lawyer is ethically permitted to disclose.

If the client assures the lawyer that the client will not engage in the planned criminal conduct, the lawyer should evaluate the client's credibility and the risk to others if the planned crime were in fact executed. If the lawyer believes the client's assurances, he may determine not to report the conduct, but the lawyer may want to consider whether he wishes to continue the representation or withdraw from future representation.12  If the lawyer decides to withdraw, he should be careful in doing so not to disclose client confidences or secrets beyond what is permitted under RPC 1.6. So-called "noisy withdrawals" are dangerous to the lawyer,13 and likely will lead to claims of ethical violation and malpractice by the client.14 

If the lawyer does not believe the client's assurances, however, the lawyer may report the planned crime. Whenever a lawyer makes a permitted disclosure under RPC 1.6, the lawyer should also expect that the client will likely claim that he never intended to commit the crime, and possibly file a disciplinary grievance (claiming breach of RPC 1.6) and malpractice action against the lawyer.

(B) Disclosure to Defend/Protect Lawyer. Washington's RPC 1.6(c), ABA Model RPC 1.6(b)(2), and Oregon DR 4-101(C)(4) each permit a lawyer to make certain disclosures of otherwise confidential information in order to protect the lawyer's own interests. Washington's RPC 1.6(c) provides that the lawyer may reveal the information, to the extent the lawyer deems reasonably necessary,

to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, to respond to allegations in any proceeding concerning the lawyer's representation of the client, or pursuant to court order.15 

This provision gives the lawyer considerable leeway in disclosing otherwise confidential client information when the lawyer reasonably believes it necessary to defend himself. Again, the disclosure should be only to the extent necessary, and the lawyer should take reasonable precautions to limit access to the information such as seeking protective orders. For example, if a third person claims to have been defrauded by the lawyer's corporate client, or by managers thereof, and claims the lawyer participated in the fraud, the lawyer may disclose otherwise confidential information in his own defense.

Sometimes lawyers are not mere observers in misconduct which leads to a corporation's failure, but are active participants. The involved lawyer may be either an in-house lawyer or outside counsel. What should a lawyer do who has knowledge of another lawyer's participation in such misconduct?

Under Washington's RPC 8.3(a), a lawyer who knows another lawyer has violated the Rules of Professional Conduct should report that misconduct to the WSBA Office of Disciplinary Counsel; however, that duty is aspirational in nature. A Washington lawyer who fails to report another Washington lawyer for such known violations will not be disciplined by the Washington disciplinary system for failing to do so under Washington's RPCs.16 Under Rule 8.3(a) of the ABA's Model RPCs, and similar rules in some other jurisdictions, however, that same duty to report is mandatory, and failure of a lawyer to report another lawyer's known ethical misconduct is conduct subject to discipline.

Oregon requires a lawyer having non-confidential information about another lawyer's misconduct to report that misconduct to the Oregon Bar, and if requested, to other regulatory authorities. See Oregon's DR 1-103 (A & B). Thus, a Washington lawyer who is also admitted to practice law in other jurisdictions and who knows of another lawyer's ethical misconduct should be alert to the possibility that the ethics rules of other states may require the lawyer to report that misconduct. With the recent adoption of reciprocal admission for Washington, Oregon and Idaho lawyers, lawyers admitted in those states should take care to comply with each of those states' reporting provisions.

For misconduct to be reportable, the lawyer must "know" that another lawyer has committed the misconduct with knowledge being actual knowledge and not merely a suspicion. Further, the known misconduct must raise a substantial question as to that lawyer's honesty, trustworthiness or fitness as a lawyer.

Known violation by a lawyer of certain ethical provisions would clearly seem to raise substantial questions about a lawyer's honesty, trustworthiness or fitness as a lawyer. For example, Washington's RPC 4.1 and ABA Model RPC 4.1 prohibit a lawyer in the course of representing a client from knowingly making a false statement of material fact or law to a third person, or from failing to disclose (subject to the lawyer's RPC 1.6 duty not to disclose client confidences and secrets) a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client. Oregon's DR 102(A)(5) provides that a lawyer shall not "knowingly make a false statement of law or fact," while its DR 102(A)(3) provides a lawyer shall not "conceal or knowingly fail to disclose that which the lawyer is required by law to reveal." Further, Washington's RPC 8.4, ABA Model RPC 8.4 and Oregon's DR 1-102(A)(2 & 3) each include as acts of lawyer misconduct the commission of any criminal act which reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer, and a lawyer's engaging in any conduct (whether a crime or not) which involves dishonesty, fraud, deceit or misrepresentation.

In the case of a failing or failed corporation, the most likely lawyer misconduct that may come to light is participation in fraud, dishonesty or deceit (including, for example, knowingly making false representations or statements to others in legal documents or opinions), and knowing destruction of documents or evidence.

If the lawyer engaged in misconduct is outside counsel and other outside or in-house counsel know of such lawyer's misconduct, they should consult with their client (unless the client is the errant lawyer) and urge the client, or seek authorization from the client, to report it to the appropriate disciplinary authority. If the lawyer engaged in misconduct is in-house counsel, and other in-house or outside counsel know of the lawyer's misconduct, they should likewise consult and, where appropriate, report it. In both cases, however, the potential reporting lawyer's knowledge of the errant lawyer's misconduct may involve confidences or secrets of the corporate client (presumably the erring lawyer is not a client of the potential reporting lawyer) which may not be disclosed except with the corporate client's consent or, as discussed above, to prevent the client from committing a future crime or to defend the reporting lawyer.

Failing corporate clients may have few resources left to maintain valuable corporate records and documents. In-house counsel may be especially hard hit since that lawyer, like any lawyer, has an obligation under Washington's RPC 1.14, ABA Model RPC 1.15, and Oregon's DR 9-101 to safeguard client property in the possession of the lawyer, but likely has insufficient clerical and other support to do so. Similarly, outside counsel must preserve any corporate records in their possession, but may have little likelihood of being paid for their expenses in doing so from a failing or failed corporation.

If the lawyer is withdrawing from representation of a failing corporation, the lawyer is required, as any withdrawing lawyer is, to take steps to protect the clients' interests which may include, for example, surrendering papers and property to which the client is entitled, and refunding any unearned advance fee payments. The lawyer is generally entitled to retain papers under a lawyer's lien for unpaid fees provided that the client does not need those papers and cannot afford to pay the fees. See Washington's RPC 1.15(d), WSBA Formal Opinion 181, and ABA Model RPC 1.16(d). Lawyers should be wary, however, of claiming retaining liens on the files when the client needs the files and cannot afford to pay the amounts due the lawyer.

Whether inside or outside counsel, a lawyer in possession of files or other property (for example, advance fee deposits) of a failing or failed corporation may find warring corporate factions claiming the right to possession of, or to destroy, the files or property. The lawyer is required in such a case to maintain security of the files and property, and seek to resolve the dispute including, if appropriate, instituting litigation such as a declaratory judgment action.

A lawyer should be alert to the possibility that the failing corporate client, its management or employees may intend to destroy files and other materials which would be evidence in likely litigation and regulatory investigations. RPC 3.4(a) provides that a lawyer shall not "unlawfully obstruct another party's access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value. A lawyer shall not counsel or assist another person to do any such act." Similarly, RPC 1.2(d) provides that a lawyer shall not "counsel a client to engage or assist a client in conduct that the lawyer knows is criminal or fraudulent." In addition, such conduct may be subject to criminal prosecution for obstruction of justice. The lawyer confronted with plans to destroy files should first consult with senior corporate officials and, if the proposed conduct appears to be a crime and the lawyer is not reasonably assured that the proposed misconduct will cease, determine whether the lawyer should disclose it to prevent the commission of a future crime.

When a corporation fails or is failing, in-house and outside counsel will both likely be faced with difficult ethical issues, including issues of competence, appropriate professional licensing, independence, confidentiality, conflicts of interest, and so on. The range of issues the lawyer will face can be vast. For the lawyer to act ethically, the lawyer must know both who the client is, what ethics rules apply, and what those rules require or prohibit. The more complex the corporation, and the more complex the failing or failure thereof, the more complex the ethical problems related to the corporation's failure are likely to be.

When first beginning a representation of a failing or failed corporation, the lawyer should take the time to carefully reread the applicable ethical rules and, when in doubt, seek ethical assistance from lawyers knowledgeable in these areas. Throughout the representation the lawyer should apply them, abide by them, and document his continued attempts to do the right thing. Compliance with the ethical requirements of the legal profession not only serves the client and the public well, but enhances the reputation of both the individual lawyer and of the entire legal profession, and verifies that the law is indeed a noble profession.

1. This article was initially prepared for the 22nd Annual Northwest Securities Institute. For a related discussion of the ethical responsibilities and challenges facing an in-house lawyer, see Althoff, "The Sad Story of an In-House Lawyer," 54 Washington State Bar News 46 (May 2000).

2. Oregon does not have a directly parallel provision. Its DR 5-108, prohibiting a lawyer from permitting third-party hiring, recommending, or paying the lawyer's fee to direct the lawyer's judgment in providing legal services, which is similar to Washington's RPC 5.4(c), implies independence but does not directly require it.

 3. Oregon does not have a directly parallel provision to this, although the ABA Model Code of Professional Responsibility, the predecessor of the ABA Model RPCs and on which Oregon's Code of Professional Responsibility is based, discusses in its Ethical Considerations 7-8 and 9-2 a lawyer's duty to communicate and keep a client informed. Oregon did not adopt the ABA Model CPR ethical considerations.

4. Oregon does not have a directly parallel Disciplinary Rule. See ABA Model CPR Ethical Consideration 7-8, which likewise permits the lawyer to discuss nonlegal factors.

5. See, for example, McCarthy v. John T. Henderson Inc., 587 A.2d 280 (NJ Superior Court Appellate Division 1991), wherein the court permitted a lawyer who formerly represented Corporation A to represent a person opposing Corporation B which had the same shareholders and officers as Corporation A. For further discussion, see ABA/BNA Lawyers' Manual on Professional Conduct, 51:210; ABA Formal Opinion 95-390 (1995), and Rotunda, Legal Ethics–The Lawyer's Deskbook on Professional Responsibility (2000), Section 14-7.

6. Oregon does not have a disciplinary rule parallel to ABA Model RPC 1.13. See ABA Model Code of Professional Responsibility Ethical Considerations 5-18 and 5-24, although not adopted by Oregon, which explain Disciplinary Rule 5, relating to conflicts of interest, and raise issues similar to those addressed in ABA Model RPC 1.13.

7. If the representation is one that a future conflict should reasonably have been anticipated at the outset of the representation, the lawyer may also not be entitled to legal fees for the representation. See, for example, Eriks v. Denver, 118 Wn.2d 451, 463 (1992), wherein the court affirmed a trial-court order of disgorgement of legal fees where a lawyer undertook multiple conflicting representations, namely representing both tax-shelter investors and promoters in an IRS audit. The court observed that: "disgorgement of fees is a reasonable way to 'discipline specific breaches of professional responsibility, and to deter future misconduct of a similar type.'" In re Eastern Sugar Antitrust Litig., 697 F.2d 524, 533 (3rd Cir. 1982)."

8. The lawyer should also comply with Washington's RPC 4.3 (and the ABA Model RPCs' counterpart Model RPC 4.3). Those rules prohibit a lawyer who is dealing with a person not represented by counsel from stating or implying the lawyer is disinterested, and, if the lawyer knows or reasonably should know the person misunderstands the lawyer's role, to make reasonable efforts to correct the misunderstanding.

9. In 2001, the ABA Ethics 2000 Commission recommended amending the ABA Model RPCs to permit such screening, but the ABA House of Delegates tentatively rejected that recommendation. It is expected that on conclusion of the House's review and debate of the Ethics 2000 recommendations, likely either later in 2002 or the following year, the House will take a final vote on all of its tentative decisions.

10. See ABA, Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information, 31 Business Lawyer 1709 (1976), and other ABA publications thereon cited at ABA/BNA Lawyers' Manual on Professional Conduct, p. 91:2409 et seq.

11. The ABA Ethics 2000 Commission has proposed modifying ABA Model RPC 1.6 by adding a new section (b)(3) which would permit a lawyer to disclosure a client's confidential information "to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services." The ABA House of Delegates has tentatively rejected the proposal.

12. The lawyer may be required to withdraw under Washington's RPC 1.15(a)(1) and ABA Model RPC 1.16(a)(1) if the representation will result in a violation of the RPCs or other law.

13. Official comment 16 to ABA Model RPC 1.16 states that a withdrawing lawyer may give notice of the fact of withdrawal and may also withdraw or disaffirm any opinion, document, affirmation or the like. Washington has not adopted any of the ABA Model RPC comments. For a further discussion of noisy withdrawals, see ABA Formal Opinion 92-366 (1992) and ABA Annotated Model Rules of Professional Conduct, Fourth Edition (1999), pps. 79 and 249.

14. The clever client, suspecting that the lawyer might disclose his planned crime, might fire the lawyer and then contend that RPC 1.6's permission to disclose a client's confidences and secrets applies only to a current client and that the now ex-client's plan to commit a crime may not be ethically disclosed. While the client would be correct in believing that a lawyer's duty of confidentiality continues after the lawyer-client relationship terminates, the clever client's argument will not prevail. Rule 1.9(b) of the RPCs, while prohibiting a lawyer from using confidential information of a former client without the client's consent, also contains an exception to the general prohibition: "except as rule 1.6 would permit." Thus, a lawyer may disclose the planned crime of a past client on the same basis as the lawyer may disclose the planned crime of a current client.

15. The ABA version of this rule, ABA Model RPC 1.6(b)(2), is identical, except it does not have the final phrase "or pursuant to court order." Oregon's provision is substantially the same as the ABA Model RPC provision.

16. For a more detailed discussion of a Washington lawyer's duty to report known misconduct, see Althoff, "Reporting Professional Misconduct," 53 Washington State Bar News 49 (Sept. 1999). The duty to report another lawyer's known misconduct does not require the lawyer to report his or her own known misconduct.