When is an Attorney in Conflict of Interest

Many times client ask an attorney or his firm to represent them in a legal dispute bewteen fellow shareholders or partners where the attorney or firm had rendered legal representation in the past.

While the general ethical rule states that an attorney may not represent a party if there the possibility of a conflict of interest, the issue is a bit more complicated. The complication arises in defining the term “conflict of interest.”

Ohio has adopted the three-part test for disqualification of counsel due to a conflict of interest set forth in Dana Corp. v. Blue Cross & Blue Shield Mut. Of N. Ohio., (C.A.6, 1990), 900 F.2d 882. Also see Morgan v. N. Coast Cable Co. (1992), 63 Ohio St.3d 156, 586 N.E.2d 88; Hollis v. Hollis (1997), 124 Ohio App.3d 481, 485, 706 N.E.2d 798; Kitts v. U.S. Health Corp. of S. Ohio (1994), 97 Ohio App.3d 271, 275, 646 N.E.2d 555. The test is as follows:

(1) a past attorney-client relationship must have existed between the party seeking disqualification and the attorney he or she wishes to disqualify;

(2) the subject matter of the past relationship must have been substantially related to the present case; and

(3) the attorney must have acquired confidential information from the party seeking disqualification.

In determining whether corporate counsel should be disqualified from representing any of the corporation's officers in a later suit, the trial court is required to find all three factors enumerated in the Dana test before ordering disqualification, Legal Aid Soc. of Cleveland v. W & D Partners I, L.L.C., 162 Ohio App.3d 682, 2005 Ohio 4130, 834 N.E.2d 850.

Even though an attorney has served as counsel for a corporation, Ohio does not require the immediate disqualification of the attorney from serving as personal counsel for a shareholder or officer in a suit involving the corporation, Phillips v. Haidet (1997), 119 Ohio App.3d 322, 325, 695 N.E.2d 292; A.G. Financial, Inc. v. LaSalla, Cuyahoga App. No. 84880, 2005 Ohio 1504; Maloof v. Benesch, Friedlander, Coplan & Aronoff, Cuyahoga App. No. 84006, 2004 Ohio 6285.

In Ohio, pursuant to Rule 1.13(a) of the Ohio Rules of Professional Conduct, corporate counsel represents the interests of the corporation and not those of individual officers:

"(a) A lawyer employed or retained by an organization represents the organization acting through its constituents. A lawyer employed or retained by an organization owes allegiance to the organization and not to any constituent or other person connected with the organization. The constituents of an organization include its owners and its duly authorized officers, directors, trustees, and employees."

Therefore, in order for there to be a conflict of interest the following must be proven:

1. There was a past attorney-client relationship between the lawyer and the individual. Just because an attorney represented the corporation, that does not assume he presented the individual shareholders or partners too. Even if the attorney met with the members of a closely held corporation to discuss corporate business does not, in and of itself, arise to an attorney-client relationship with the individual shareholder or partner, and

2. Even if there was an attorney-client relationship, the subject matter of that relationship must be related to the present case for which the attorney is being retained, and

3. The attorney must have acquired confidential information from the party.

Note, all three of these requirements must be met before the conflict will arise. They are not mutually exclusive but a three-part requisite.

The “Statutes of Limitation”

From time to time, I receive telephone calls from clients who want to know how long they have to take action against someone. Ohio, as do all states, set time limitations by which you must file legal action. This is known in legal jargon as the “Statute of Limitations.” While this term is somewhat descriptive, it fails to completely describe some of the dates of which you should be aware. The Ohio Revised Code provide a series of statutes for this purpose. There are some dates set forth by which you must file an action. There are other dates that are dates of expiration. Allow me to explain.

Statute of Limitations

The State of Ohio sets, by statute, time limits by which you must file an action. Failure to file by that time nullifies any action. Some of the important dates are:

• Injury to person - If you or your employee is hurt in some type of accident (other than those injuries covered by statute such as injuries on the job) you have two years from the time you incurred the injury or discovered the injury. For example, if you are injured in an automobile accident, you have two years to file an action.

• Professional Malpractice - If you were injured as a result of negligence by a professional, you have one year from the time or the injury or when you discovered the injury to file an action. Giving a medical professional the appropriate notice can extend the time limit by 180 days in certain circumstances. If, for example, you incur bodily injury due to a doctor’s negligence and do not discover that injury for some time, you, generally, have one year from the date you discovered that injury to file an action.

• Contracts - If the contract is in writing, you have 15 years to file an action for breach of contract. If the contract was not in writing (known as an “oral contract”), you have only 6 years. Remember my adage - Always get it in writing!

• Collection on Account - If you keep running accounts, you have 6 years to file an action. You will note this is the same as your time limit for an oral contract. Therefore, it is important to obtain a written contract setting balance limits, guarantees or other issues relating to the sales of goods and/or services.

• Dishonored checks and drafts - There is a three year limitation. Note, this does not apply to the bank where you presented the check or the bank upon which the check was drawn. The bank’s liability is set forth by separate statute that outlines limitations on their liability.

• Judgments - Judgments are valid for 21 years.

• Embezzled funds - Although any resolution of criminal action may require reimbursement, the civil limitation is one year.

Federal statutes also contain limitations relating to issues involving federal projects, jobs and other issues.

Time Limits

While not exactly statutes of limitation, Ohio and the US Government do put limitations on the enforcement of certain liens and judgment.

• Mortgages - A mortgage that has not been released but has been of record for 21 years past it due date is deemed to be of no effect.

• Mechanic’s Lien - This type of lien is valid for 6 years. The lien is not renewable. Therefore, you must take action to foreclose within 6 years or lose your rights related to that realty.

• Judgment Liens - A judgement lien must be renewed every 5 years. This lien will only be enforceable as long as the judgment is in force. Note, although a judgment is valid for 21 years, a lien recorded pursuant to that judgment must be renewed every 5 years.

• Federal Tax Liens - This type of lien must be renewed every 10 years. Note, this type of lien attaches to after acquired property. A federal tax lien runs with the person, not the land. Therefore, if a federal tax lien is placed upon you and you subsequently purchase realty, that lien attaches to the newly acquired property.

• Federal Judgment Lien - This lien is effective for 20 years and is renewable.

• Ohio State Liens - This type of lien is valid for 15 years and is renewable if the renewal is filed within 6 months of the expiration of the lien.

• Condominium Lien - Liens by condominium association for CAM or other charges are valid for 5 years unless renewed prior to expiration.

• Child Support Lien - Liens upon property resulting from support issues have no expiration date and attach to after acquired property.

• UCC Financing Statements - Also known as “chattel mortgages,” these are valid for 5 years unless renewed prior to expiration or the term of the mortgage if filed as security along with the mortgage.

Also note that dower rights (rights of a spouse relating to property owned by the other spouse) attach to all property owned by a husband or wife. Also be aware that various state and federal laws may alter these date limitations in specific instances such as workers compensation, subcontractor rights on federal projects, etc.

Restrictive Covenants in Employment Contracts

A recent Ohio case brought to mind the ever changing status of covenants not to compete. The case, Murray v. Accounting Center & Tax Services, Inc., while not the most controversial or ground breaking case, does evoke thought regarding the tentative nature of covenants not to compete in employment contracts.

Murray v. Accounting Center & Tax Services, Inc.

The case involves an accountant who was employed by the bookkeeping service. She had signed a covenant not to compete for a period of two years after her termination. Other facts pertinent to the case were that: 1) She was a bookkeeper and had a private practice providing tax return services prior to her employment, and 2) the agreement was signed AFTER she was employed.

Consideration

Historically, Ohio courts were resolute that any covenant not to compete had to include additional consideration (usually an increase in pay or bonus) if the covenant was entered into after employment began. If an employer demanded an employee sign such an agreement after their employment began and additional monies or other consideration was not paid, the covenant was unenforceable.

In the last few years this principle has eroded and several courts in Ohio have abandoned this theory of law. The Eighth Appellate District (Cuyahoga County) has completely reversed this historical precedent by stating that continued employment is sufficient consideration for such a covenant. Many other courts have follows this ruling and, today, the courts of Ohio are split regarding this issue. The Ohio Supreme Court has yet to rule on this legal conflict.

Modification by Court Order

The other issue this case presents is the power of the court to limit the restrictions of such covenants. Typically, restrictive covenants set forth limitations as to time and distance. Such restrictions are characterized by such terms as ..”for a period of two years and 500 miles.” This meant the employee could not work in the same field for two years within 500 miles of the employer’s address.

Once again, historically, the courts are allowed to reduce these limitations if they are too restrictive. In the Murphy case, the court stated,

“ A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.”

If the covenant not to compete is unreasonable, courts are empowered to modify the terms of the covenant to create reasonable constraints. Some the factors taken into consideration are:

1. Absence or presence of limitations as to time and space.

2. Whether the employee represents the sole contact with the customer.

3. Whether the employee is possessed of confidential information or trade secrets.

4. Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition.

5. Whether the covenant seeks to stifle the inherent skill and experience of the employee.

6. Whether the benefit to the employer is disproportionate to the detriment of the employee.

7. Whether the covenant operates as a bar to the employee’s sole means of support.

8. Whether the employee’s talent was developed during the employee’s term of employment.

9. Whether the forbidden employment is merely incidental to the main employment.

For example, lets assume the covenant read,...”shall not be employed as an accountant for a period of two years within 500 miles...” This covenant would obviously be subject to modification. It bars the employee from obtaining any employment in their chosen profession. The benefit to the employer far outweighs the detriment to the employee and, finally, it operates to bar the employee’s sole means of support.

Now, let’s modify the covenant to read, “...shall not be employed as an accountant for a bookkeeping service to widget manufacturers for a period of two years within 50 miles...” The difference is obvious. The covenant does not totally restrict the employee from obtaining employment in their profession and the restriction appears only to protect the vertical market serviced by the employer. In this instance the court might maintain the covenant as is.

Conclusion

Nonetheless, the employer should be mindful of the fluidity of these type of restrictions. They should be aware of where they are located and determine whether the court in their jurisdiction will enforce the covenant and/or modify it. It requires the employer to be somewhat creative in the way the covenant is written. Most importantly it requires the employer to be aware that courts, generally, will side with the employee when the court feels the employer is treating its employee unfairly.

The Case for Putting it in Writing

In prior blogs, I’ve emphasized the need to get any agreement in writing. A recent court of appeals case, shows what happens when you reply on oral agreements.

The case, Catz Enters. v. Valdes, 2009 Ohio 4962, involved two checks given by one party to the other totaling $20,000. The checks were written on July 8, 1991. As alleged by the creditor, the payments were a loan to the debtors. He continued to demand payment, writing several letters to the debtors demanding payment through April 7, 2006 when the he finally filed suit. The creditor claimed there was an oral agreement calling for the debtors to repay the loan by September 6, 1991. He further alleged that the statute of limitations for filing suit was extended by his oral and written demands for payment. The debtors denied there was a loan.

Written in Ohio statutes are various “statutes of limitation” setting forth the time by which a party must take action against another for any alleged wrongdoing. For example, an action based on negligence (a car accident, for example) must be filed within two years. In the case of contracts, the statute of limitations on a written contract is 15 years. The statute of limitations on an oral contract is 6 years.

As stated by the court, “the statute of limitations on oral contracts is six years and ...The six year statute of limitations may be extended [only] if there is a writing, signed by the charged party, acknowledging the debt or promising to pay it, O.R.C. 2305.08.”

Since the creditor could produce no written document signed by the debtors acknowledging the debt or extending the terms of the agreement, the statute of limitations ran on September 6, 1997 (6 years from the date the loan was allegedly due). Therefore, the creditor could not enforce the debt because the statute of limitation had run.

So, we have a prime example of the consequences in relying upon an oral agreement. What is also apparent is the fact that the debtors denied there was even a loan. Therefore, the terms of the alleged agreement were even in controversy. Had the creditor obtained a document, signed by the debtors acknowledging the loan, the outcome may have been different.

The obvious – get any agreement in writing, signed by both parties.

Let the Sub-Contractor Beware

A recent decision of Franklin County Court of Appeals (10th District) should give sub-contractors fair warning that giving estimates without proper restrictions could result in general contractor’s making use of the sub’s time and energy without compensation.

In the case of Complete General Construction Co. v. Kard Welding, Inc., 182 Ohio App.3d 119, Complete submitted an estimate to Kard for supplying steel highway ramp components. Kard used these estimates when it submitted its bid to the Ohio Department of Transportation. Kard won the bid, but used another supplier to supply the components.

In trial Complete argued that by using the estimate, Kard is estopped from using another supplier and the court should impose a contract upon Kard and award damages to Complete for breach of contract. The trial court ruled in favor of Kard saying there was no contract and, therefore, no breach. The evidence presented at the time of trial included testimony that certain terms of Complete’s bid were not acceptable and the covenants required by Complete were subject to renegotiation. Consequently, the court found that there was no acceptance of the offer by Kard.

Complete appealed the court’s decision and the appellate court sustained the lower court’s findings. In summary, the court stated:

“A subcontractor who makes a "bid" or "quote" which constitutes an offer to a general contractor, who submits a bid in reliance upon such offer, is bound to perform in accordance with the terms of that offer when the general contractor (1) is awarded the contract and (2) within a reasonable time thereafter notifies the subcontractor that the offer is accepted. Under such circumstances the subcontractor is liable in damages to the general contractor for failure to perform.”

“A general contractor's mere use of a subcontractor's quote in formulating a bid for a general contract does not constitute acceptance of the subcontractor's offer.”

Apparently, the court was looking for some memorandum or other documentation between the parties implying an acceptance of the offer by Kard given the disputed terms. The court obviously concluded that an element of contract was not met - a meeting of the minds - and, therefore, there could be no breach from which damages would arise.

The jurisdiction of this court of appeals is only Franklin County (Columbus area) but I would warn those reading this blog that the 10th Appellate Court is very influential and other courts tend to follow their opinions.

So what does one do to protect its work product? First, know whom you are dealing with. If this is the first time you are submitting a bid seek out the contractor’s reputation for “bid-shopping.” Second, work with your attorney to determine language in the bid that protects you from this type of contractor. Finally, be sure you have, in writing from the contractor, some memorandum of understanding that in the event its bid is accepted using your estimate, that your estimate is deemed a consummated contract for the purpose of performing the work or supplying the material set forth in your estimate.

Contracts and Equitable Relief

How to you solve the issue of payment when you can’t prove you have an express contract? If you’ve read this blog, you know I stress to my clients the necessity to enter into WRITTEN contracts. But for those who still rely on the “handshake” take heart. The courts do permit relief.

A typical example of this issue was discussed in the recent case of Bldg. Industry Consultants v. 3M Parkway, 182 Ohio App.3d 39, arising from the Ninth Appellate District of Ohio (Lorain). In that case the parties never entered into a formal contract. There were communications, letters and memorandums exchanged, the plaintiff did perform some services, but the parties never formally agreed on a price or for that matter an agreement outlining the contractual obligations of each party. As the court stated, the elements of a formal express contract were not present - “...offer, acceptance, contractual capacity, consideration, a manifestation of mutual assent and legality of object and consideration.”

The court went on to say, “To constitute a valid contract, both parties to a contract must assent to its terms; there must be a meeting of the minds of the parties with respect to the essential terms of the contract, which terms are also definite and certain.”

Even though there is no express contract, a court does have the power to compensate an aggrieved party under the theories of “unjust enrichment” or “quantum meruit.” In other words, the court can impose an implied or constructive contract using these theories of equitable relief. As is obvious from the term, “equitable relief” is available if it is proven that a party obtains a unjust benefit through another’s actions.

To be success ful, the aggrieved party must prove that: “... (1) a benefit has been conferred by a plaintiff upon a defendant, (2) the defendant had knowledge of the benefit, and (3) the defendant retained the benefit under circumstances where it would be unjust to do so without payment,” Bldg. Industry Consultants, v. 3M Parkway, Supra.

So even though parties do not enter into a formal written contract, given the proper evidence, a court will award payment. In this case the court did award the plaintiff payment for work the plaintiff did perform in furtherance of the project notwithstanding the fact that the plaintiff was unable to prove a formal express contract.

The Use of Cognovit Notes in Ohio

Historically, the use of cognovit notes was prevalent in Ohio. The use of this type of promissory note allowed the creditor to obtain a judgment against the debtor without the need to file legal proceedings. Based upon the terms of such a note, the creditor merely obtained the signature of any attorney who confessed judgment against the debtor for the amount owed - no lawsuit, no court proceedings and no need for presentation of evidence.

Identifying the perceived dangers in such a note, the legislature passed O.R.C. 2323.13. Entitled “Warrant of attorney to confess,” the statute sets forth certain restrictions in the use of a cognovit note.

First and foremost, a cognovit note can not be used for any transaction arising out of a “consumer loan” or “consumer transaction.” These terms are defined in the code as follows:

“(1) Consumer loan means a loan to a natural person and the debt incurred is primarily for a personal, family, educational, or household purpose. The term "consumer loan" includes the creation of debt by the lender's payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; the creation of a debt by a credit to an account with the lender upon which the debtor is entitled to draw; and the forbearance of debt arising from a consumer loan.”

“(2) Consumer transaction means a sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, franchise, or an intangible, to an individual for purposes that are primarily personal, family, educational, or household.”

Additionally, any note containing a confession of judgment feature (a cognovit note) must contain the following verbiage:

"Warning -- By signing this paper you give up your right to notice and court trial. If you do not pay on time a court judgment may be taken against you without your prior knowledge and the powers of a court can be used to collect from you regardless of any claims you may have against the creditor whether for returned goods, faulty goods, failure on his part to comply with the agreement, or any other cause."

This language must be in “...such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document...”

Case law has also restricted the use of cognovit notes. In a recent Pickway County case, Onda v. Johnson, 2009 Ohio 4727, the court found that the use of a cognovit note will be strictly construed not only as to the requirements of ORC 2323.13 but as to the provisions on Ohio’s Uniform Commercial Code, ORC 1301.01 et seq. The court wrote, “...[if] the cognovit note is facially insufficient, the trial court lacked subject matter jurisdiction and its judgment on the note is void ab inito.” In other words, if the terms of the note fail to meet the requirements of a promissory note as required by 1301.01, et seq., the note will be void.

While, cognovit notes are still valid for commercial transactions, it is incumbent upon the maker of the note to ensure that the note strictly complies with the edicts of ORC 2323.13 and 1301.01, et seq.