Blurred lines between corporate client and its CEO gets law firm disqualified

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In The Godfather, Michael Corleone assures his brother that “It’s not personal, Sonny. It’s strictly business.” Law firms should take similar care to draw bright lines between work done for a business client and work done for the company’s officers in their personal capacities. A Greensboro law firm appears to have done a bit of both, and as a result was recently disqualified by the North Carolina Business Court from representing a longtime corporate client that’s currently suing its former CEO.

Since 1987, Tuggle Duggins has served as corporate counsel for Kingsdown Incorporated, a mattress manufacturer based in Mebane that is suing its former CEO, Eric Hinshaw. Kingsdown claims that Hinshaw abused his position as CEO in order to line his own pockets.

In the decades that Hinshaw was CEO, Tuggle Duggins also advised him on several personal matters, including some now at issue in Kingsdown’s lawsuit. When Kingsdown brought its suit, Hinshaw moved to disqualify Tuggle Duggins as its counsel, arguing that he had a prior attorney-client relationship with the firm.

Tuggle Duggins conceded that it represented Hinshaw and his wife in limited ways over the years, but argued that none of its current members represented them in any matter related to Kingsdown’s suit or had any of their confidential information. The late Richard Tuggle, who regularly provided advice to Hinshaw in both his personal and CEO capacities before Tuggle passed away in 2012, handled nearly all of that work, the firm argued. It also claimed that it never opened a client matter for the Hinshaws, sent them an engagement letter, or asked for or received payment from them.

Going to the mattress company

In one deal where it appears that Tuggle advised both Hinshaw and Kingsdown, Hinshaw leased his undeveloped Ocean Isle Beach property to Kingsdown and directed it to build a “luxurious” home there and pay for its upkeep, apparently without the company board’s knowledge. Unsurprisingly, that curious deal is now at the heart of Kingsdown’s lawsuit.

Judge Louis Bledsoe held that Hinshaw could reasonably infer, based on this advice, that he had an attorney-client relationship with Tuggle, and thus with the firm. Tuggle Duggins argued that since Tuggle is deceased and none of its current attorneys counseled Hinshaw on any of the transactions at issue in Kingsdown’s suit, it could, under the state’s Rules of Professional Conduct, represent Kingsdown in its suit against Hinshaw.

Once an attorney is no longer with a firm, the firm can, under the RPC, take a case against one of the attorney’s former clients, unless the case involves matters related to work that attorney did for the former client and any remaining lawyer at the firm knows confidential information related to the matters. The law firm, since it is in a uniquely good position to resolve such a question, has the burden of showing that it doesn’t have access to any confidential information.

Bledsoe disagreed with the firm, however, finding that the rule required him to grant the Hinshaws’ motion to disqualify Tuggle Duggins. He found that the matters on which Tuggle counseled Hinshaw were substantially related to Kingsdown’s lawsuit, and that the firm had not offered enough evidence for him to conclude that its attorneys did not possess any of the Hinshaws’ confidential information related to them.

Kingsdown had offered affidavits from all of Tuggle Duggins’ current attorneys who had any apparent involvement with Kingsdown or the Hinshaws swearing that they were unaware of any of the Hinshaws’ confidential information. One of those attorneys also testified that he had personally reviewed the firm’s billing records and found that none of its attorneys represented the Hinshaws on matters related to Kingsdown’s lawsuit.

But I must say no to you

Bledsoe found this evidence lacking, however, since the firm conceded that Tuggle provided advice to Hinshaw but the firm never asked him for payment.

“Given the Firm’s provision of legal services to both Kingsdown and the Hinshaws without maintaining separate records to distinguish between the two, it comes as no particular surprise that the Firm’s billing records do not reflect the Firm’s representation of the Hinshaws in connection with the transactions in dispute,” Bledsoe.

Bledsoe also noted that Tuggle Duggins failed to indicate whether it had conducted a review of its files for Kingsdown, specifically those related to the beach house deal. Unlike when an attorney leaves a firm to work elsewhere and takes client files with him, when an attorney passes away his clients’ files and confidential documents presumably remain at the firm and available to other attorneys there. Tuggle Duggins’ failure to account for the whereabouts for those files was a significant factor in granting the disqualification motion, Bledsoe said.

Additionally, Bledsoe held that even if the RPC didn’t require him to disqualify Tuggle Duggins, the need to prevent even the appearance of impropriety would have dictated the same result. The Hinshaws are expected to call several current and former Tuggle Duggins attorneys as witnesses in the case to support their theory that they relied on advice from the firm’s attorneys that the compensation deals were permissible.

Attorneys for Smith Moore Leatherwood in Charlotte represented the Hinshaws. An attorney with Smith Moore could not be reached in time to comment for this story. A phone message left for an attorney with Tuggle Duggins was not returned.

The 20-page decision is Kingsdown, Inc. v. Hinshaw (Lawyers Weekly No. 15-15-0295). The full text of the opinion is available online at nclawyersweekly.com.

Follow David Donovan on Twitter @NCLWDonovan