Hornilla vs. Salunat

A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s board of directors in a derivative suit brought against them, as such dual representation gives rise to a conflict of interest that is not waivable by the corporation's consent.

Complainants, members of the Philippine Public School Teachers Association (PPSTA), filed an intra-corporate case before the Securities and Exchange Commission and a complaint before the Office of the Ombudsman against the PPSTA Board of Directors for unlawful spending and the undervalued sale of corporate property. Respondent, the managing partner of the law firm retained by PPSTA, entered his appearance as counsel for the individual board members in these actions. Complainants demanded that respondent withdraw due to the conflict of interest, but he refused.

• Retainer Agreement: Respondent is the managing partner of ASSA Law and Associates, the retained counsel of PPSTA. His brother, Aurelio Salunat, sat on the PPSTA Board that approved the retainer.
• Derivative Suits: Complainants, as PPSTA members, filed SEC Case No. 05-97-5657 and OMB Case No. 0-97-0695 against the PPSTA Board of Directors.
• Appearance for the Board: Respondent entered his appearance for the respondent Board members in the SEC case (through his firm) and the OMB case (by filing a "Manifestation of Extreme Urgency" seeking dismissal of the complaint against the individual board members).
• Refusal to Withdraw: Despite being informed by PPSTA members of the conflict of interest, respondent refused to withdraw his appearance.
• Alleged Assurance of Victory: Complainants alleged respondent assured the Board of victory, which respondent denied, claiming he merely stated the truth would come out and the OMB case would be dismissed for lack of jurisdiction over private employees.

• Conflict of Interest: Petitioner argued that respondent represented the PPSTA Board against PPSTA members while being retained by and paid from PPSTA corporate funds.
• Rule 15.06 Violation: Petitioner averred that respondent violated Rule 15.06 of the Code of Professional Responsibility by assuring the PPSTA Board of victory in the cases.

• Capacity of Representation: Respondent maintained that he engaged with the PPSTA Board in representation of the ASSA Law Firm, not in his individual capacity.
• Scope of Appearance: Respondent argued that he only filed a manifestation in the OMB case, while another partner handled the SEC case (later claiming a different firm entirely handled the SEC case).
• Immaterial Relationship: Respondent pointed out that his relationship to Board member Aurelio Salunat was immaterial.
• Denial of Assuring Victory: Respondent denied assuring victory, claiming he merely asserted the truth would prevail and the OMB case would be dismissed for lack of jurisdiction.
• Counter-Charge: Respondent averred that complainant Atty. Ricafort was guilty of gross misconduct for filing trumped-up charges.

• Conflict of Interest: Whether a lawyer engaged as retained counsel for a corporation can represent the members of its board of directors in a derivative suit filed against them.

• Conflict of Interest: Representing the directors of a corporation in a derivative suit constitutes prohibited conflicting interests. In a derivative suit, the corporation is the real party in interest, and the stockholder is merely a nominal party. Because the corporation is the true client, defending the directors against the corporation creates an inconsistency of interests. The corporation is presumptively incapable of giving valid consent to waive this conflict. Respondent's appearance for the board members, despite his firm's retainer with the corporation, violated Rule 15.03 of the Code of Professional Responsibility.

• Conflict of Interest in Derivative Suits — A lawyer retained by a corporation cannot represent its directors in a derivative suit against them. Dual representation in derivative actions is prohibited because the corporation is the real party in interest. The corporation is presumptively incapable of giving valid consent to waive this conflict.
• Test for Conflict of Interest — Conflict exists when a lawyer represents inconsistent interests of opposing parties, such that arguing for one client requires opposing that argument for another client, or when acceptance of a new retainer prevents the full discharge of undivided fidelity and loyalty to the first client.

• "The possibility for conflict of interest here is universally recognized. Although early cases found joint representation permissible where no conflict of interest was obvious, the emerging rule is against dual representation in all derivative actions. Outside counsel must thus be retained to represent one of the defendants. Furthermore, this restriction on dual representation should not be waivable by consent in the usual way; the corporation should be presumptively incapable of giving valid consent."

• Cannon v. United States Acoustics Corporation, 398 F. Supp. 209 — Cited as persuasive authority for the rule that a lawyer representing both a corporation and its assailed directors unavoidably gives rise to a conflict of interest, as the corporate client's interest is paramount.

• Rule 15.03, Code of Professional Responsibility — Prohibits a lawyer from representing conflicting interests except by written consent of all concerned given after a full disclosure of the facts. Applied to hold respondent guilty of conflict of interest for representing the PPSTA Board in a suit brought by PPSTA members for the corporation's benefit.
• Section 23, Corporation Code — Defines the board of directors as the body exercising all corporate powers, conducting all business, and controlling all property, establishing its fiduciary character separate from the corporate entity.

Davide, Jr., C.J., Vitug, Carpio, and Azcuna, JJ.