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Attorneys — Disqualification – Corporate & Personal Representation – Potential Conflict of Interest – Appearance of Impropriety

Attorneys — Disqualification – Corporate & Personal Representation – Potential Conflict of Interest – Appearance of Impropriety

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Kingsdown, Inc. v. Hinshaw (Lawyers Weekly No. 15-15-0295, 20 pp.) (Louis Bledsoe III, J.) 2015 NCBC 27

Holding: A law firm is disqualified from representing its long-time corporate client in the corporation’s lawsuit against its CEO because lawyers from the firm not only represented the CEO in private matters, but also allegedly advised him to take some of the very actions which are the subject of this breach-of-duty action.

The court grants the motion to disqualify filed by defendants Eric and Rebecca Hinshaw.

The plaintiff-corporation alleges that defendant Eric Hinshaw, while serving as the corporation’s chief executive officer and chairman of the board of directors, breached his duty to act in good faith by engaging in self-dealing. Among other things, the corporation alleges that Mr. Hinshaw leased his undeveloped Ocean Isle Beach property to the corporation for approximately 15 years and then directed the corporation to build a luxurious home on the property, to furnish and clean the property, and to pay monthly rent, insurance, taxes and upkeep on the property, all without the board’s knowledge or approval. The lease allowed Mr. Hinshaw to keep all improvements when the lease terminated.

The corporation also alleges that Mr. Hinshaw received excessive compensation without the knowledge or approval of the board.

Mr. Hinshaw contends that these arrangements were made on the advice of attorneys at Tuggle Duggins, P.A. (the firm), especially Richard Tuggle, who passed away on Jan. 23, 2012. However, some current firm attorneys also allegedly provided representation for Mr. and Ms. Hinshaw as to these and other, personal matters.

The corporation has failed to show that the firm does not have any material confidential information of the Hinshaws. From the corporation’s admissions, it appears that Mr. Tuggle regularly provided advice to Mr. Hinshaw, both as a corporate executive and in his personal capacity. There is ample evidence that Mr. Hinshaw could reasonably infer that he had an attorney-client relationship with the firm, including with Mr. Tuggle prior to Mr. Tuggle’s death in 2012.

The corporation opposes the motion to disqualify based, in part, on the firm’s review of its billing records, which show that the Hinshaws were never billed for work done for them personally. However, the corporation has not shown that the firm reviewed its files to determine whether they contain material confidential information about the Hinshaws.

Given the limited representations of seven firm attorneys that they are not “aware” of any material confidential information of the Hinshaws, and N.C. R. Prof. Cond. 1.10(b)’s emphasis on a law firm’s demonstration of the lack of actual knowledge of the current members of the firm, the court cannot conclude that the corporation has met its burden of showing that current attorneys at the firm do not possess material confidential information of the Hinshaws that is substantially related to the matters at issue in this lawsuit.

Separately, there is an appearance of impropriety. The firm provided legal advice, through Mr. Tuggle as well as through current firm attorneys, to both the corporation and Mr. Hinshaw on various matters, including the beach property and arguably Mr. Hinshaw’s compensation – both of which are core issues in this litigation. In this situation, the Hinshaws’ perception that their material confidential information is potentially available to their adversary is reasonable.

Motion granted.

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