Problem Areas in Legal Ethics:

Cases & Commentaries

Topic 7. Conflict of Interest and the Corporate lawyer
Atty. Rodel V. Capule, MD, author

Problem Areas in Legal Ethics

Arellano University School of Law – Arellano Law Foundation
2020-2021

WARNING
Unauthorized reproduction or claim of ownership of this original [derivative] work by any person amounts to
copyright infringement.
CPR provisions
Rule 15.03. - A lawyer shall not represent conflicting interests except by written consent of all concerned
given after a full disclosure of the facts.

Canon 21. A lawyer shall preserve the confidence and secrets of his client even after the attorney-client
relationship is terminated.

Corporate counsel and possibility of COI

Members of the Board of Directors
Employees of the corporation
General public
Counsel’s private interest

Duty of attorney to a corporate client

“[a]n attorney for a corporate client owes his duty [of loyalty] to the corporate entity rather than a
particular officer, director, or shareholder.”

“[a] corporate attorney represents the corporation, not the individual directors or officers.”

“[t]he attorney for a corporation, even a closely held one, does not have a specific fiduciary duty toward
the individual shareholders.” - Kopka v. Kamensky and Rubenstein, 821 NE.2d 719, 727 (2004)
He should resolve all doubts against the propriety of the representation.

COI and Juridical entity

However, identifying the prospective client can sometimes be difficult especially when the prospective
client is an association, a corporation, partnership, limited liability company or a juridical entity such as a
trust, estate or conservatorship, or when the potential client is a governmental entity or body politic.
If the prospective client is anything but an individual, the lawyer must also identify the constituent
members of the entity in order to properly analyze the potential for conflict of interests regarding h
the constituents. –

Corporate counsel not protected by A-C privilege

In that case, the attorney was serving on a personnel action review committee. The lawyer, together with the
rest of the committee, reviewed terminations to determine if they complied with company policy and
practices.

When the plaintiff, a former employee, brought a discrimination claim, the court held that, although the
attorney may have provided some legal advice during committee discussions, his role was primarily non-legal
in that he simply served as another member of the committee determining whether the termination was

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consistent with company policy. The court held that an attorney’s communications were not protected
by the attorney-client privilege.

Legal advice versus non-legal business communications

From a practical standpoint, in-house counsel should be extremely careful when serving on corporate
committees such as affirmative action, personnel review, ERISA claim review, diversity, or product liability
committees.
If possible, it is essential for corporate counsel to segregate legal advice from non-legal business
communications. This is really the only way to guarantee the protection of the privilege. – Preserving the
Attorney-client privilege in corporate communications: Common errors by Frank Harty (2008)

Attorney representing a partnership

“[A]n attorney representing a partnership does not necessarily have an attorney-client relationship
with an individual partner for purposes of applying the conflict of interest rules. Whether such a
relationship exists turns on finding an agreement, express or implied, that the attorney also represents the
partners.” – Lynn et. al. v. George et. al., (Super. Ct. No. 30-2016-00831759)

Corporate Miranda warning

“I REPRESENT THE CORPORATION, NOT YOU. THIS INTERVIEW IS COVERED BY THE ATTORNEY-
CLIENT PRIVILEGE. THAT PRIVILEGE BELONGS TO THE CORPORATION – NOT YOU. THE
CORPORATION MAY DECIDE, IN ITS SOLE DISCRETION, WHETHER OR NOT TO DISCLOSE THIS
INFORMATION TO THIRD PARTIES, INCLUDING THE GOVERNMENT.”

Hot potato rule

“[A] law firm that knowingly undertakes adverse concurrent representation may not avoid
disqualification by withdrawing from the representation of the less favored client before [the] hearing [on a
motion for disqualification].

Hot potato rule

“[A] firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more
lucrative client.” -

When a conflict situation arises, the general rule is that attorneys cannot pick and chose to retain the
more remunerative client.

Corporate counsel and controversies among the corporation's directors and shareholders
A corporation's legal advisor must abstain from taking part in controversies among the corporation's
directors and shareholders "to avoid placing the ... practitioner in a position where he may be required to
choose between conflicting duties or attempt to reconcile conflicting interests.

Common practice for corporate counsel to represent an individual corporate officer

The Court takes judicial notice that it is not uncommon for corporate counsel to represent an individual
corporate officer when he is sued as a result of actions he has taken within the ambit of his official duties.
When this occurs, corporate counsel becomes counsel for the individual officer as well, even if the
corporation pays all of his fee. If the officer is a party to a proceeding, and corporate counsel appear on his
behalf, an implied relationship between them arises.

When representing a director in his personal capacity

Occasionally a lawyer for an entity is requested by a stockholder, director, officer, employee, representative,
or other person connected with the entity to represent him in an individual capacity; in such case the
lawyer may serve the individual only if the lawyer is convinced that differing interests are not present.

Who can(not) be a director

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A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
No person who is an attorney against the corporation in a law suit is eligible for service on the board.
- Gokongwei Jr. v. SEC, et. al., G.R. No. L-45911 April 11, 1979

Palm v. Atty. Iledan, Jr.

A.C. No. 8242 [2009]
Complainant is the President of Comtech, a corporation engaged in the business of computer software
development.

From February 2003 to November 2003, respondent served as Comtech’s retained corporate counsel for
the amount of P6,000 per month as retainer fee.
From September to October 2003, complainant personally met with respondent to review corporate
matters, including potential amendments to the corporate by-laws.

In a meeting held on 1 October 2003, respondent suggested that Comtech amend its corporate by-laws
to allow participation during board meetings, through teleconference, of members of the Board of
Directors who were outside the Philippines.

Comtech decided to terminate its retainer agreement with respondent effective November 2003.
On 24 March 2004, Comtech’s new counsel sent a demand letter to Soledad [a former officer and director of
Comtech, who resigned and who was suspected of releasing unauthorized disbursements of corporate funds]
to return or account for the amount of P90,466.10 representing her unauthorized disbursements when
she was the Corporate Treasurer of Comtech.

On 22 April 2004, Comtech received Soledad’s reply, signed by respondent.

In July 2004, due to Soledad’s failure to comply with Comtech's written demands, Comtech filed a complaint
for Estafa against Soledad before the Makati Prosecutor’s Office. In the proceedings before the City
Prosecution Office of Makati, respondent appeared as Soledad’s counsel.

In his Answer, respondent alleged that in January 2002, Soledad consulted him on process and procedure in
acquiring property.

In April 2002, Soledad again consulted him about the legal requirements of putting up a domestic
corporation. In February 2003, Soledad engaged his services as consultant for Comtech.
Respondent alleged that from February to October 2003, neither Soledad nor Palm consulted him on
confidential or privileged matter concerning the operations of the corporation. Respondent further
alleged that he had no access to any record of Comtech.

Respondent admitted that during the months of September and October 2003, complainant met with him
regarding the procedure in amending the corporate by-laws to allow board members outside the
Philippines to participate in board meetings.

Respondent alleged that there was no conflict of interest when he represented Soledad in the case for Estafa
filed by Comtech. He alleged that Soledad was already a client before he became a consultant for Comtech.
He alleged that the criminal case was not related to or connected with the limited procedural
queries he handled with Comtech.

In addition, although the information about the necessity to amend the corporate by-laws may have been
given to respondent, it could not be considered a confidential information.

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Further, whenever any amendment or adoption of new by-laws is made, copies of the amendments or the
new by-laws are filed with the Securities and Exchange Commission (SEC) and attached to the original
articles of incorporation and by-laws. The documents are public records and could not be considered
confidential.

We agree with the IBP that in the course of complainant’s consultations, respondent obtained the
information about the need to amend the corporate by-laws to allow board members outside the
Philippines to participate in board meetings through teleconferencing. Respondent himself admitted
this in his Answer.

It is settled that the mere relation of attorney and client does not raise a presumption of confidentiality. The
client must intend the communication to be confidential. Since the proposed amendments must be
approved by at least a majority of the stockholders, and copies of the amended by-laws must be filed
with the SEC, the information could not have been intended to be confidential. Thus, the disclosure
made by respondent during the stockholders’ meeting could not be considered a violation of his
client’s secrets and confidence within the contemplation of Canon 21 of the Code of Professional
Responsibility.

Representing client’s opponent on a different matter

We find no conflict of interest when respondent represented Soledad in a case filed by Comtech. The case
where respondent represents Soledad is an Estafa case filed by Comtech against its former officer. There was
nothing in the records that would show that respondent used against Comtech any confidential
information acquired while he was still Comtech’s retained counsel.

Further, respondent made the representation after the termination of his retainer agreement with
Comtech. A lawyer’s immutable duty to a former client does not cover transactions that occurred beyond
the lawyer’s employment with the client.

The intent of the law is to impose upon the lawyer the duty to protect the client’s interests only on matters
that he previously handled for the former client and not for matters that arose after the lawyer-client
relationship has terminated.

Representing client’s opponent on the same matter

The principle which forbids an attorney who has been engaged to represent a client from thereafter
appearing on behalf of the client’s opponent applies equally even though during the continuance of the
employment nothing of a confidential nature was revealed to the attorney by the client .

Where it appeared that an attorney representing one party in litigation had formerly represented the adverse
party with respect to the same matter involved in the litigation, the court need not inquire as to how
much knowledge the attorney acquired from his former client during that relationship, before
refusing to permit the attorney to represent the adverse party.

In order that a court may prevent an attorney from appearing against a former client, it is unnecessary that
the court ascertain in detail the extent to which the former client’s affairs might have a bearing on
the matters involved in the subsequent litigation on the attorney’s knowledge thereof. – Mabini Colleges,
Inc. v. Atty. Pajarillo, A.C. No. 10687, July 22, 2015

Santos Ventura Hocorma Foundation, Inc. v. Atty. Funk, A.C. No. 9094 August 15, 2012
It alleged that Atty. Funk used to work as corporate secretary, counsel, chief executive officer, and trustee of
the Santos Ventura Hocorma foundation from 1983 to 1985. He also served as its counsel in several criminal
and civil cases.

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Hocorma Foundation further alleged that on November 25, 2006 Atty. Funk filed an action for quieting of
title and damages against Hocorma Foundation on behalf of Mabalacat Institute, Inc. (Mabalacat
Institute). Atty. Funk did so, according to the foundation, using information that he acquired while
serving as its counsel xxx.

Here, it is undeniable that Atty. Funk was formerly the legal counsel of Hocorma Foundation. Years
after terminating his relationship with the foundation, he filed a complaint against it on behalf of
another client, the Mabalacat Institute, without the foundation's written consent.

Here, the evidence shows that Hocorma Foundation availed itself of the legal services of Atty. Funk in
connection with, among others, the transfer of one of the properties subject of the several suits that the
lawyer subsequently filed against the foundation. Indeed, Atty. Funk collected attorney's fees from the
foundation for such services.

An attorney may not, without being guilty of professional misconduct, act as counsel for a person whose
interest conflicts with that of his present or former client. This rule is so absolute that good faith and
honest intention on the erring lawyer's part does not make it inoperative.

The reason for this is that a lawyer acquires knowledge of his former client's doings, whether
documented or not, that he would ordinarily not have acquired were it not for the trust and
confidence that his client placed on him in the light of their relationship.

It would simply be impossible for the lawyer to identify and erase such entrusted ledge with faultless
precision or lock the same into an iron box when suing the former client on behalf of a new one.

Hornilla v. Atty. Salunat

A.C. No. 5804, July 1, 2003
They alleged that respondent is a member of the ASSA Law and Associates, which was the retained counsel
of the Philippine Public School Teachers Association (PPSTA). Respondent’s brother, Aurelio S. Salunat, was
a member of the PPSTA Board which approved respondent’s engagement as retained counsel of PPSTA.

Complainants, who are members of the PPSTA, filed an intra-corporate case against its members of the
Board of Directors for the terms 1992-1995 and 1995-1997 before the Securities and Exchange Commission.
which was docketed as SEC Case No. 05-97-5657, and a complaint before the Office of the Ombudsman,
docketed as OMB Case No. 0-97-0695, for unlawful spending and the undervalued sale of real property of the
PPSTA.

Respondent entered his appearance as counsel for the PPSTA Board members in the said cases.

Complainants contend that respondent was guilty of conflict of interest because he was engaged by the
PPSTA, of which complainants were members, and was being paid out of its corporate funds where
complainants have contributed. Despite being told by PPSTA members of the said conflict of interest,
respondent refused to withdraw his appearance in the said cases.

Respondent admits that the ASSA Law Firm, of which he is the Managing Partner, was the retained
counsel of PPSTA. Yet, he appeared as counsel of record for the respondent Board of Directors in the
said case. Clearly, respondent was guilty of conflict of interest when he represented the parties
against whom his other client, the PPSTA, filed suit.

What is a “derivative suit”?

Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder

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may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong done directly to the corporation and indirectly to the stockholders.

This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the
corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only
nominal party. The corporation should be included as a party in the suit.

A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s
board of directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional Responsibility.

The interest of the corporate client is paramount and should not be influenced by any interest of the
individual corporate officials.

Counsel of corporation cannot represent members of board of directors

After due deliberation on the wisdom of this doctrine, we are sufficiently convinced that a lawyer engaged as
counsel for a corporation cannot represent members of the same corporation’s board of directors in a
derivative suit brought against them. To do so would be tantamount to representing conflicting interests,
which is prohibited by the Code of Professional Responsibility. -Hornilla v. Atty. Salunat, A.C. No. 5804, July
1, 2003

Can a corporation give consent for dual representation vis-a-vis defend members of the board in a
derivative suit?
Furthermore, this restriction on dual representation should not be waivable by consent in the usual way;
the corporation should be presumptively incapable of giving valid consent. – Hornilla v. Atty. Salunat,
A.C. No. 5804. July 1, 2003

Quiambao v. Atty. Nestor Bamba

A. C. No. 6708 August 25, 2005
Complainant Felicitas S. Quiambao charges respondent Atty. Nestor A. Bamba with violation of the Code of
Professional Responsibility for representing conflicting interests when the latter filed a case against
her while he was at that time representing her in another case, and for committing other acts of
disloyalty and double-dealing.

The complainant was the president and managing director of Allied Investigation Bureau, Inc. (AIB), a
family-owned corporation engaged in providing security and investigation services. She avers that she
procured the legal services of the respondent not only for the corporate affairs of AIB but also for her
personal case.

Particularly, the Spouses Santiago and Florita Torroba filed by her on 29 December 2000 before the
Metropolitan Trial Court (MeTC) of Parañaque City.

About six months after she resigned as AIB president, or on 14 June 2001, the respondent filed on behalf of
AIB a complaint for replevin and damages against her before the MeTC of Quezon City for the purpose of
recovering from her the car of AIB assigned to her as a service vehicle. This he did without withdrawing as
counsel of record in the ejectment case, which was then still pending.

We do not sustain respondent’s theory that since the ejectment case and the replevin case are unrelated
cases fraught with different issues, parties, and subject matters, the prohibition is inapplicable. His
representation of opposing clients in both cases, though unrelated, obviously constitutes conflict of
interest or, at the least, invites suspicion of double-dealing.

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While the respondent may assert that the complainant expressly consented to his continued representation
in the ejectment case, the respondent failed to show that he fully disclosed the facts to both his clients
and he failed to present any written consent of the complainant and AIB as required under Rule 15.03,
Canon 15 of the Code of Professional Responsibility.

Neither can we accept respondent’s plea that he was duty-bound to handle all the cases referred to him by
AIB, including the personal cases of its officers which had no connection to its corporate affairs.
That the representation of conflicting interest is in good faith and with honest intention on the part of
the lawyer does not make the prohibition inoperative.

Extent or degree of prohibition on representing COI

It must be noted that the proscription against representation of conflicting interests finds application where
the conflicting interests arise with respect to the same general matter however slight the adverse interest
may be.

It applies even if the conflict pertains to the lawyer’s private activity or in the performance of a
function in a non-professional capacity.
Business transactions between an attorney and his client are disfavored and discouraged by the policy of
the law.

De Guzman v. Atty. L. De Dios,

A.C. No. 4943 January 26, 2001
In 1995, complainant engaged the services of respondent as counsel in order to form a corporation.
On January 10, 1996, with the assistance of Atty. De Dios, complainant registered Suzuki Beach Hotel, Inc.
(SBHI) with the Securities and Exchange Commission.

On December 15, 1997, the corporation required complainant to pay her unpaid subscribed shares of stock
amounting to two million two hundred and thirty five thousand pesos (P2,235,000.00) or 22,350 shares, on or
before December 30, 1997.

Complainant soon learned that her shares had been acquired by Ramon del Rosario, one of the incorporators
of SBHI. The sale ousted complainant from the corporation completely. While respondent rose to be
president of the corporation, complainant lost all her life's savings invested therein.

Complainant alleged that she relied on the advice of Atty. de Dios and believed that as the majority
stockholder, Atty. de Dios would help her with the management of the corporation.

Complainant pointed out that respondent appeared as her counsel and signed pleadings in a case
where complainant was one of the parties. Respondent, however, explained that she only appeared
because the property involved belonged to SBHI.

Respondent alleged that complainant misunderstood the role of respondent as legal counsel of Suzuki
Beach Hotel, Inc. Respondent manifested that her appearance as counsel for complainant Diana de Guzman
was to protect the rights and interest of SBHI since the latter was the real owner of the land in
controversy.
Respondent claims that there was no attorney-client relationship between her and complainant. The claim
has no merit. It was complainant who retained respondent to form a corporation. She appeared as
counsel in behalf of complainant.

The present situation shows a clear case of conflict of interest of the respondent.

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 A stockholder of a corporation and later became its Director, Treasurer, Administrative Officer,
Vice-President for Finance, then its counsel
As lawyer for Paces, he appeared for it in several cases such as in Sisenando Malveda, et al. v. Paces
Corporation (NLRC R-04 Case No. 11-3114-73) and Land & Housing Development Corporation v. Paces
Corporation (Civil Case No. 18791).

In the latter case, Salandanan failed to file the Answer, after filing a Motion for a Bill of Particulars, which the
court had denied. As a result, an order of default was issued against Paces. Salandanan never withdrew his
appearance in the case nor notified Paces to get the services of another lawyer. Subsequently, a decision was
rendered against Paces which later became final and executory.
…….
On December 4, 1973, E.E. Black Ltd., through its counsel, sent a letter to Paces regarding the latter's
outstanding obligation to it in the amount of ₱96,5 l 3.91. In the negotiations that transpired thereafter,
Salandanan was the one who represented Paces. He was likewise entrusted with the documents relative to the
agreement between Paces and E.E. Black Ltd.

Meanwhile, disagreements on various management policies ensued among the stockholders and officers in
the corporation. Eventually, Salandanan and his group were forced to sell out their shareholdings in the
company to the group of Mr. Nicolas C. Balderama on May 27, 1974.

After said sell-out, Salandanan started handling the case between E.E. Black Ltd. and Paces, but now,
representing E.E. Black Ltd.

……..
On the other hand, Salandanan claimed that he was never employed nor paid as a counsel by Paces.
There was no client-lawyer contract between them. He maintained that his being a lawyer was merely
coincidental to his being a stockholder-officer and did not automatically make him a lawyer of the
corporation, particularly with respect to its account with E.E. Black Ltd. He added that whatever
knowledge or information he had obtained on the operation of Paces only took place in the regular,
routinary course of business as him being an investor, stockholder, and officer, but never as a lawyer
of the company.
……..
In the absence of the express consent from Paces after full disclosure to it of the conflict of interest,
Salandanan should have either outrightly declined representing and entering his appearance as
counsel for E.E. Black Ltd., or advised E.E. Black Ltd. to simply engage the services of another lawyer.
Unfortunately, he did neither, and must necessarily suffer the dire consequences. - Paces Industrial
Corporation v. Atty. Edgardo M. Salandanan, A.C. No. 1346, July 25, 2017

The prohibition against conflict of interest rests on the following five (5) rationales
First, the law seeks to assure clients that their lawyers will represent them with undivided loyalty. A client is
entitled to be represented by a lawyer whom the client can trust. Instilling such confidence is an objective
important in itself.

Second, the prohibition against conflicts of interest seeks to enhance the effectiveness of legal
representation. To the extent that a conflict of interest undermines the independence of the lawyer's
professional judgment or inhibits a lawyer from working with appropriate vigor in the client's behalf, the
client's expectation of effective representation could be compromised.

……………
Third, a client has a legal right to have the lawyer safeguard confidential information pertaining to it.
Preventing the use of confidential information against the interests of the client to benefit the lawyer's
personal interest, in aid of some other client, or to foster an assumed public purpose, is facilitated through
conflicts rules that reduce the opportunity for such abuse.

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Fourth, conflicts rules help ensure that lawyers will not exploit clients, such as by inducing a client to make a
gift or grant in the lawyer's favor.

Finally, some conflict-of-interest rules protect interests of the legal system in obtaining adequate
presentations to tribunals. In the absence of such rules, for example, a lawyer might appear on both sides of
the litigation, complicating the process of taking proof and compromise adversary argumentation. - Paces
Industrial Corporation v. Atty. Edgardo M. Salandanan, A.C. No. 1346, July 25, 2017

Thank you for your attention!!