It is an all too familiar scenario. Two good friends join in forming a small or medium size business venture. Typically, the entrepreneurs form a corporation, limited liability company or a partnership. And once again, in a frequently repeated scenario, at the time of formation, the founders fail to put in place a buy-sell agreement, partnership agreement and other documentation to avoid disputes years down the road as the business develops. In a variation on the theme, the business is formed by Mom and Dad and thrives and prospers. Years later, after Mom and Dad are gone, the business passes to the children. And in this latter scenario, one or more of the children may be active in running the business, while others may just sit on the sidelines hoping to receive the profits for little or no exertion of effort.

In both of the scenarios I have described, friction may develop and rise to a level that makes co-existence among the owners intolerable. That friction may develop when one of the owners discovers or suspects that his or her "partner" has been diverting money or business from the enterprise or when the owners cannot agree on the direction of the enterprise or the roles of each of the participants in the business. In these circumstances, when a dissatisfied owner seeks assistance to untangle the mess, it is important that the correct team be assembled. In addition to experienced legal counsel, depending on the business and its assets, the team the owner needs to consult, typically should include a competent CPA who can help ascertain what the true financial picture of the business, including whether there have been diversions or other questionable transactions. Depending on the circumstances, the team may need to include real estate professionals and business appraisers, a banker or lender, and a person that can act as a provisional director or court appointed receiver. And there is often a role for a business or turnaround consultant. And these days prudence often requires that an experienced bankruptcy attorney be ready to act on short notice. Beyond this, at an appropriate point in the process (depending on the case, either before or after a lawsuit is filed) there is likely to be a need for a competent mediator who can help the parties reach a result that has much greater economic benefits than protracted litigation.

In these various situations, the entrepreneur's attorney is often in the best position to quarterback the team. In selecting counsel, the dissatisfied entrepreneur needs to recognize a minefield of conflicts of interest that need to be spotted and avoided. Thus, an attorney cannot represent both the business entity and the individuals who are alleged to have acted to harm the business. To illustrate the point, the following is an excerpt from a letter that I wrote to opposing counsel, an attorney at a large national law firm:

We are writing concerning your purported joint representation of the parties listed above on whose behalf you have filed Answers to Plaintiffs' Complaint. We respectfully submit that your joint representation of these parties is prohibited by, among other things, Rule 3-310 of the California Rules of Professional Conduct. As you know, the Complaint in this action alleges that the defendants named therein engaged in conduct to defraud [XYZ CORPORATION] , by stripping [XYZ CORPORATION] of virtually all of its assets, to wit the . . . . . . property identified in the Complaint. [T]he causes of action in the Complaint are derivative causes of action brought for the benefit of [XYZ CORPORATION. As a result, you have placed yourself in an irreconcilable conflict by purporting to represent in the same lawsuit both [XYZ CORPORATION], the victim of the alleged fraudulent conversion and breaches of fiduciary duty, and the very parties who are alleged to have orchestrated, participated and benefited from that same tortious conduct.

As the California Court of Appeal recognized in Forrest v. Baeza (1997) 58 Cal. App. 4th 65 at 74, 67 Cal. Rptr. 2d 857 at 862-863, a corporation such as [XYZ CORPORATION] named as a nominal defendant in a derivative suit is in actuality a plaintiff in that kind of litigation. As the Baeza court explained, the attempted representation of both the corporation and those charged with misappropriating that corporation's assets results in a breach of the attorney's duty of undivided loyalty to each of his clients. Moreover, under these circumstances the defendants you have purported to represent are legally incapable of giving any effective "consent" to the joint representation. See Baeza (58 Cal. App. 4th 75-77, 67 Cal. Rptr. 2d 857 at 863-864).

In the case I just referred to the recipient of my letter failed to voluntarily withdraw from the representation. This resulted in my successful filing of a motion to disqualify the lawyer and his law firm. The point I would encourage the business owner to take away from this example is simply that when a part owner of a business realizes that he or she is faced with "irreconcilable" differences with the one or more of his or her co-owners, care should be taken to consult with an experienced attorney who can assemble the needed team and guide the entrepreneur to take the steps needed to deal with the situation.