iii. Guarding the guards. Even if adoption of the rules and procedures your report suggests were accomplished, any attempt to "cure" through the mere requirement of Independent Directors without more should give little assurance of success. 2000 years ago Cicero inquired "But who will guard the guards?" No satisfactory answer has yet emerged. Your report's recommendation of Director training courses, with emphasis on fiduciary duties and compliance programs is an excellent suggestion, but of course, no guarantee.
3. Judicial intervention
Your report (p. 16) also addresses the role of the judiciary. It is submitted that the ability of the judiciary is a major component in dealing with the problem of Corporate Responsibility. One longs for a judiciary reminiscent of Mr. Justice Benjamin N. Cardozo. It is not difficult to imagine his angry countenance as he pronounced his opinion in Meinhard v. Salmon (1928), 249 N.Y. 458, 463-64, 164 N.E. 545, 546:
"Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."
The language quoted was adopted verbatim by the Illinois court in Labovitz v. Dolan et al., 189 Ill. App. 3d 403; 545 N.E.2d 304 September 26, 1989.
4. The conduct of lawyers
A. Rule 1.13. You have recommend expansion of the Model Rules of Professional Conduct to make it clear, under Rule 1.13, that the obligation of the lawyer who becomes aware of misconduct by a corporate officer, where the misconduct involves crime or fraud, including violation of federal securities laws and regulations, is to go to higher authority in the organization, or in an extreme case, where higher authority fails to act, resigning from the representation, or disclosing confidential client information to a third party. Clarifying and emphasizing the obligation of counsel to "do the right thing" is an important statement which might make a critical difference in a particular circumstance.
B. Rule 1.6. You have recommended expansion of the rule on permitting (even mandating) disclosure in order to prevent client conduct known to involve a crime, including securities laws violations. This is a bold proposal which departs from traditional "confidentiality at all costs" doctrine. Tradition has always been that the confidential relationship encourages disclosure by the client, affording the attorney an opportunity to counsel against proposed improper conduct.
C. Communication with independent directors/independent counsel. Your report has recommendations regarding tailoring the terms of engagement to facilitate communication by in-house counsel with the independent directors and with independent counsel. Both commendable ideas which I would endorse.
5. Points for further study
In general, I think your focus should be on recommendations which can be accomplished by the ABA itself to the greatest extent possible. If changes need to be made in existing corporation law, what the ABA can do is act on its own Model Corporation Act. If we require changes in the rules governing professional conduct, what the ABA can do is amend its model rules. I have a few other suggestions for consideration, as to things the ABA can do itself.
A. Law schools. The American Bar Association should use every persuasive power available to influence additional study of ethics at the law school level. Over 40 years ago when I was a second year student at Michigan law school, we studied Chapter 20 of the Book of Exodus as being a fundamental foundation of all our law. On the other hand, our entire study of legal ethics consisted of two two-hour lectures in the evening. In my view, legal ethics, as distinguished from merely the law of the legal profession, ought to be taught as a classroom class, but also taught as a part of every class throughout the law school experience. Our graduating lawyers ought to emerge from school with a fundamental sense that there is a special version of right and wrong which applies to the members of our profession from the day of admission until the day they die. Ethical considerations should be a knee-jerk reaction to every new engagement or employment. Of course ethical training should start long before law school (See Appendix A, attached).
B. CLE programs. ALI/ABA programs and ABA programs should make ethical considerations a mandatory part of every speaker's material. Reviewers of content of written materials should be alert for inclusion/omission of this topic. We need to constantly remind our members of their ethical obligations as we hone their practice skills. Ethical considerations should not be a stumbling block to creative practice. Instead they should always be a selling point for the employment of counsel.
C. Study groups. I belong to a men's Bible Study Group which meets weekly. It is an important part of my life, not only in a religious sense, but in an ethical one. We constantly refer to Proverbs 27:17, "As iron sharpens iron, So a man sharpens the countenance of his friend." when we try to explain the benefit of our group membership.
The American Bar Association ought to encourage the formation of small study groups of members who can meet regularly to discuss various aspects of practice and problems. Where does an attorney go to test his ideas, his objectives, his practice style? To his partners? Perhaps. To his church? Sometimes. My point here is to say that it would be a good thing to provide an outlet, a place where attorneys with issues can come to discuss these issues with others whose opinion is regarded as sound and informed. I was fortunate to be born into a family of lawyers. I am indeed very fortunate to have joined a firm of competent and caring partners to whom I can speak with candor, and listen with respect. Not everyone has this luxury, and for those who lack it, I recommend you consider the creation of discussion groups. Perhaps in person, but also perhaps on the Internet for the benefit of counsel who are geographically or temporally so separate as to make attending in-person meetings impractical or impossible.
D. Hot line. Consider the creation of an e-mail hotline. This could be like a support staff on ethical considerations, staffed 24 hours a day, seven days a week. Attorneys seeking ethical guidance could submit their issues for quick response, perhaps with follow-up later. Think about it. There is a point of no return where one must either disclose, participate or quit. At that critical point, there ought to be someone, somewhere to whom the troubled attorney can submit his concern, and get a response. If a month has gone by, or longer, the time for decision/action may well have passed. It is within the possible actions of the American Bar Association, through the use of the Internet, and yes, the telephone, to provide a voice of detached reason at a time when one is needed.
6. Conclusion
In conclusion let me once again state the obvious: You can't legislate morality. If public opinion and pressure makes you try, no one should be too critical. But I hope you will consider other alternatives to elevate the level of our profession. To provide the kind of mentoring that can be a real force for good in the legal profession and the world. It is good to recommend procedural safeguards in the area of corporate governance, and to encourage open and independent consultation between counsel and the directors and outside counsel.
What the American Bar Association should be about, however, is lawyers. Lawyers helping lawyers. Lawyers supporting each other in times of doubt, stress and crisis. Lawyers reminding each other of their obligations to the client, the public and the profession. Truly there is strength in numbers. Not the strength of a mob, but also the strength of conviction, reinforced by the conviction of others, to do the right thing.
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*The ABA's report is available at <http://www.abanet.org/buslaw/corporateresponsibility/preliminary_report.pdf>.
By Ethel Sypratos, Chicago
JMH Properties v. Industrial Commission (Released July 9, 2002)
<http://www.state.il.us/court/Opinions/AppellateCourt/2002/4thDistrict/July/Html/4010852.htm>
Issue:
Whether the Industrial Commission acts outside its statutory authority when it pierces the corporate veil and imposes liability on the stockholders when a company does not pay an award.
Facts/conclusions:
Claimant filed against the company a workers' compensation benefit application after a work-related accident. An arbitrator found the company liable for the claimant's injuries. The claimant filed a two-count complaint in circuit count attempting to enforce the arbitrator's award. His first count was against the company; in the second count claimant sought to pierce the corporate veil of the company and enter a judgment against the stockholders individually.
The stockholders moved to dismiss count 2 and the trial court granted the dismissal. The appeals court dismissed the case.
The claimant returned to the Industrial Commission and filed a new complaint under the same case number, asking the Commission to pierce the corporate veil of the company and enter judgment against the stockholders. An arbitrator granted the company's motion to dismiss and on remand a different arbitrator found the stockholders liable.
The stockholders appealed, arguing the arbitrator lacked jurisdiction to consider the issue of piercing the corporate veil. The appeals court agreed and reversed.
Laws/analysis:
The Industrial Commission, as an administrative agency, has no general or common law powers. In accordance with the Act, the Commission does not have the power to grant equitable relief, such as piercing the corporate veil when an employer does not pay an award, nor does the Act provide for individual liability against a corporation's stockholders.
Lease Partners v. R & J Pharmacies, et. al. (March 26, 2002)
<http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/march/Html/1002664.htm>
Issue:
Whether a corporation doing business in Illinois may maintain a suit if it has failed to pay its franchise taxes.
Facts/conclusions:
Lease Partners, a California company doing business in Illinois, administered from its Illinois office contracts for advisory boards which were designed to display advertising, including for the defendants. The equipment company supplying equipment to these defendants ceased to meet its obligations to defendants, who in turn ceased to make lease payments to Lease Partners. Ultimately, the equipment company filed for bankruptcy and the bankruptcy court entered an order modifying the leases between defendants and Lease Partners to reflect a total amount due. Each defendant failed to make payments under this order and Lease Partners brought suit individually.
The circuit court dismissed each of the Lease Partners' suits without prejudice, making the conclusions of law that "as a result of its failure to pay its current Illinois state corporate franchise tax, the corporation may not maintain any civil action in the State of Illinois."
Lease Partners appealed, arguing that the court misinterpreted the statute. The court agreed that the trial court erred in dismissing the suit for failure to pay its current franchise tax when the appropriate remedy was to stay the proceeding until the delinquency was remedied.
Law/analyis:
Courts have interpreted the word "maintain" to mean, "continue" and not to bar a delinquent corporation from proceeding with an action. Courts have concluded that "a suit could not be dismissed for failure to pay franchise taxes, it could only be continued until those taxes were paid."
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