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MUSHENO v. GENSEMER

July 10, 1995

J. RANDOLPH MUSHENO, JOHN R. MUSHENO, individually and on behalf of all shareholders of KEYSTONE HERITAGE GROUP, INC., Plaintiffs
v.
HARRY Z. GENSEMER, ALBERT B. MURRY, ERNEST D. WILLIAMS, JR., RAYMOND M. DORSCH, JR., DONALD W. LESHER, JR., MARK RANDOLPH TICE, LANCE M. FREHAFER, CHARLES V. HENRY, III, HARLAN R. WENGERT, THE ESTATE OF JOHN H. GERDES, ELVIN H. SPITLER, NORMAN J. ROTHERMEL, KURT A. PHILLIPS, THE ESTATE OF HARRY T. RICHWINE, BRUCE A. JOHNSON, LEBANON VALLEY NATIONAL BANK, KEYSTONE HERITAGE GROUP, INC., Defendants



The opinion of the court was delivered by: WILLIAM W. CALDWELL

 We are considering the Plaintiffs' motion to disqualify Defendants' counsel.

 I. INTRODUCTION

 The Plaintiffs are shareholders of Keystone Heritage Group, Inc. ("Keystone"). They instituted this action by filing a writ of summons on January 6, 1994, in the Dauphin County Court of Common Pleas, against Keystone, Lebanon Valley National Bank ("LVNB"), and the board of directors of Keystone and LVNB ("Directors") *fn1" The claims arise from two loans made by LVNB to Gelder, Luttrell & Associates ("GLA"). Plaintiffs contend that the loans were made in violation of the National Bank Act, 12 U.S.C. § 21 et seq., which limits the amount of money a bank can lend to a single customer.

 On January 21, 1994, Plaintiffs' counsel sent a letter of demand to Defendant Lesher requesting that Keystone take action against the individuals responsible for losses sustained as a result of illegal loans to GLA. On February 22, 1994, the Directors appointed an independent committee to investigate Plaintiffs' demands. This group was composed of two non-defendant Directors, Thomas I. Siegal and Brett H. Tennis, and independent counsel, John P. Lampi. The committee conducted an investigation and concluded that it would not be in Keystone's best interest to pursue legal action against the Directors named in Plaintiffs' writ of summons.

 After the committee's recommendation was accepted by Keystone, the parties moved forward in the state court action, engaging in pre-complaint discovery. On April 12, 1995, before a complaint was filed, the Directors removed the case to this court, and on May 5, 1995, Plaintiffs filed their complaint against Keystone, LVNB, and the Directors. The complaint contains seven claims, all arising from losses sustained in connection with the allegedly improper loans to GLA.

 In Count I, Plaintiffs maintain that the Directors violated 12 U.S.C. § 84, which limits the amount a bank is permitted to lend to one customer. A negligence claim is made in Count II and Count III is a claim for self-dealing, willful misconduct, and/or recklessness. In Count IV, Plaintiffs contend that the Directors breached their fiduciary duty and in Count V assert that they engaged in fraud. Count VI alleges a conspiracy and Count VII is a claim for negligence against Defendant Charles V. Henry, as counsel for Keystone.

 The law firm of Drinker, Biddle & Reath ("Drinker") entered an appearance in state court on behalf of Keystone and the Directors. Plaintiffs seek to disqualify Drinker from continuing its dual representation. They claim there is a conflict of interest in the representation of both Keystone and its Directors, and that such representation violates the Model Rules of Professional Conduct. The Directors contend that, at this stage of the litigation, there is no conflict of interest, and that it is premature to disqualify counsel from representing Keystone because Keystone's interests are aligned with those of its Directors, i.e., to have this action dismissed.

 II. LAW AND DISCUSSION

 A. Disqualification

 The Plaintiffs' suit appears to be a shareholder derivative action. In a derivative action, suit is brought on behalf of a corporation, by its shareholders. The defendants are generally corporate officers and directors, as well as the corporation itself. However, the corporation is merely a "nominal" defendant, and in fact stands to receive a substantial benefit if the plaintiffs/shareholders are successful. See, e.g., Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1315 (3d Cir. 1993). Thus, the corporation is in the anomalous position of being both a plaintiff and a defendant.

 We are faced with the question of whether, within the confines of the Model Rules of Professional Conduct, an attorney or law firm can engage in the joint representation of both a corporation and its officers/directors in a derivative action. This issue has, to some extent, produced a split in authority. Early decisions adopted the position that, at least in the absence of a breach of trust, joint representation was permissible. See, e.g., Otis & Co. v. Pennsylvania R. Co., 57 F. Supp. 680, 684 (E.D.Pa. 1944), aff'd per curiam, 155 F.2d 522 (3d Cir. 1946); Hornsby v. Lohmeyer, 364 Pa. 271, 279, 72 A.2d 294, 299 (1950).

 However, more recent decisions, beginning with Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963), have identified numerous problems with dual representation. In Lewis, the shareholders of a corporation brought a derivative action against the corporation and its board of directors. After counsel entered an appearance on behalf of the corporation and its Directors, the shareholders sought to disqualify the law firm from representing the corporation. The court stated that

 
the interests of the officer, director and majority stockholder defendants in this action are clearly adverse, on the face of the complaint, to the interests of the stockholders of [the corporation other than defendants. I have no doubt that [the attorneys] believe in good faith that there is no merit to this action. Plaintiff, of course, vigorously contends to the contrary. The court cannot and should not attempt to pass upon the merits at this stage. Under all the circumstances, including the nature of the charges, and the vigor with which they are apparently being pressed and defended, I believe that it would be wise for the ...

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