International Resource Ventures, Inc. v. Diamond Mining Co.
Annotate this Case
INTERNATIONAL RESOURCE VENTURES, INC. v.
DIAMOND MINING COMPANY OF AMERICA, INC.
96-674 ___ S.W.2d ___
Supreme Court of Arkansas
Opinion delivered December 9, 1996
1. Attorney & client -- Model Rule of Professional Conduct 3.7
applies to lawyer's giving evidence by affidavit. -- Rule 3.7
of the Model Rules of Professional Conduct, which provides in
general that a lawyer shall not act as advocate at a trial in
which the lawyer is likely to be a necessary witness, is
applicable to a lawyer's giving evidence by affidavit as well
as by testimony in open court.
2. Attorney & client -- reasoning underlying advocate-witness
rule. -- Under Model Rule of Professional Conduct 3.7, a
lawyer shall not act as advocate at a trial in which the
lawyer is likely to be a necessary witness; the reasoning
underlying the general rule is to prevent prejudice and a
conflict of interest; the professional judgment of a lawyer
should be exercised, within the bounds of the law, solely for
the benefit of his client and free of compromising influences
and loyalties; conversely, a witness is to tell the truth
without loyalty to either party and without regard to which
side his testimony might favor; combining the dissimilar roles
of attorney and witness can prejudice the opposing party and
can involve a conflict of interest between the lawyer and his
client; the rule prohibits an attorney from acting as a
witness in procedural matters.
3. Attorney & client -- trial court correctly disqualified
attorney after he chose to submit evidentiary affidavit and to
testify. -- The supreme court held that the trial court
correctly disqualified one of appellant's attorneys from
acting as an attorney after he chose to submit an evidentiary
affidavit and to testify.
4. Attorney & client -- supreme court chose to follow advocate-
witness rule and its own interpretations. -- The supreme court
declined to embrace other authorities supportive of
appellant's argument that Model Rule of Professional Conduct
3.7 applies only to trial scenarios, emphasizing that it chose
to follow the Model Rule it adopted as well as its own
interpretations of the rule.
5. Attorney & client -- hardship exception to advocate-witness
rule did not apply to facts of this case. -- Model Rule of
Professional Conduct 3.7(3) provides an exception to the
general rule that a lawyer cannot act as an advocate and a
witness when disqualifying the lawyer would work a substantial
hardship on his client; the supreme court held, however, that
the hardship exception did not apply to the facts of this
case.
6. Attorney & client -- appellee would be prejudiced if
appellant's attorney were not disqualified -- appellant would
not be substantially disadvantaged by disqualification. --
Where appellant's Texas attorney's testimony was the primary
evidence of appellant's opposition to appellee's motion to
modify the order of dismissal to one with prejudice, and where
his testimony was, without question, disputed, the supreme
court, considering the nature of the case as it stood before
the trial court, concluded that appellee would be prejudiced
if appellant's Texas attorney were not disqualified and that
appellant would not be substantially disadvantaged by the
disqualification; appellant would not have the hardship of
having to hire new counsel and to familiarize them with the
case; additionally, the supreme court noted, the matter before
the trial court concerned Arkansas procedural rules on nonsuit
and modification of orders, and the Arkansas attorneys were
presumably able to interpret Arkansas rules of civil procedure
as well, or better, than Texas counsel.
7. Attorney & client -- uncontested-issue exception to advocate-
witness rule not applicable. -- There is a great difference
between agreeing or stipulating to an order of dismissal and
not objecting because there is no basis for objection; a
statement by appellee showing that it had no reason to object
to appellant's nonsuiting did not concede that the parties
agreed to an order of dismissal without prejudice;
furthermore, based on the pleadings, there appeared to be many
contested facts regarding the motion to conform, and
appellant's attorney would be a key witness on those matters;
thus, appellant's attorney's testimony would not relate only
to an uncontested issue, and the uncontested-issue exception
to the advocate-witness rule was not applicable.
8. Appeal & error -- case settled after submission -- opinion
handed down because case had already been submitted and
decided. -- Although, after the case was submitted on
interlocutory appeal, the parties informed the supreme court
that it had been settled, the court handed down its opinion
because the case had already been submitted and decided.
Appeal from Clark Circuit Court; John Ward, Judge; affirmed.
Turner & Associates; John J. Watkins; and Allen Law Firm, by:
H. William Allen, for appellant.
Wright, Lindsey & Jennings, by: N.M. Norton, Roger D. Rowe,
and Stephen R. Lancaster, for appellee.
Robert H. Dudley, Justice.
This interlocutory appeal is lodged because of the
disqualification of one of International Resource Ventures, Inc.'s
attorneys. It is before this court under Ark. Sup. Ct. R. 1-2(a)12
and Ark. R. App. P.--Civ. 2(a)8. We affirm the trial court's
ruling disqualifying the attorney.
International Resource Ventures, Inc., appellant, a Texas
corporation, owns eight percent of the common stock of Exdiam
Corporation, another Texas corporation. On August 31, 1995,
International Resource filed a shareholder's derivative suit in
Clark County, on behalf of Exdiam, against Diamond Mining Company
of America, Inc., appellee, also a Texas corporation, and several
other people and corporations, including Diamond Fields Resources,
Inc., a Canadian corporation. International Resource alleged that
Diamond Mining conspired with a co-defendant to breach fiduciary
duties. International Resource asked for compensatory and punitive
damages or, alternatively, that 1,000,000 shares paid by co-
defendant Diamond Fields for corporate opportunities of Exdiam be
deemed to be held in constructive trust for the benefit of Exdiam
and reissued to Exdiam. Diamond Mining filed a motion to dismiss
pursuant to Ark. R. Civ. P. 12(b)(2), (3), (5), and (6) on the
grounds that International Resource failed to state facts upon
which relief could be granted, failed to allege sufficient facts to
place venue in Clark County, and failed to allege sufficient
contacts among the subject transactions, Diamond Mining, and the
State of Arkansas that would render Diamond Mining subject to
personal jurisdiction. Three of Diamond Mining's co-defendants
filed similar motions to dismiss.
International Resource moved for a nonsuit, and on February 2,
1996, the trial court dismissed the action without prejudice. More
than ninety days later, on May 31, 1996, Diamond Mining filed a
motion to modify the order of dismissal to one with prejudice.
Under Ark. R. Civ. P. 60(c)(4), an order may be set aside after
ninety days for fraud practiced by the successful party in
obtaining the order. The motion to modify the order to a dismissal
with prejudice alleged that on November 18, 1995, International
Resource had nonsuited an identical suit in Texas, and, under Ark.
R. Civ. P. 41(a), the Clark County nonsuit was International
Resource's second nonsuit; therefore, it should have been with
prejudice. Diamond Mining's motion also alleged that International
Resource had committed fraud in obtaining the dismissal without
prejudice.
A summary of Diamond Mining's allegation of fraud is that on
August 29, 1995, or two days before the suit was filed in Clark
County, International Resource had filed a virtually identical
action in the district court of Dallas County, Texas, but had
instructed the clerk of that court not to have summons issued.
Diamond Mining alleged that it was unaware of the Texas suit since
service was never had. The suit in Texas was assigned to the 101st
District Court, and, a few months earlier, in another Exdiam
shareholder action, the same district court had granted summary
judgment against the plaintiff. Diamond Mining contended that, as
a result, International Resource did not wish to pursue its case in
the Texas jurisdiction, but rather chose to pursue its virtually
identical suit that was pending in Clark County. Diamond Mining
alleged that the purpose of the suits is to force Diamond Fields
Resources to pay an "in terrorem" settlement or else lose a $4.3
billion sale of its stock to Inco. Diamond Mining alleged that
Diamond Fields shareholders are being deprived of $868,492.00 in
interest each day by the "machinations" of International Resource
and that its officers want to keep the suits pending as long as
possible in an attempt to force a settlement. Diamond Mining
alleged that, after the dismissal without prejudice in Clark
County, International Resource filed a virtually identical third
suit in Texas, but that, if the Clark County order is modified to
dismissal "with prejudice," the third suit in Texas likely will be
procedurally barred. Diamond Mining alleged that, after
International Resource filed its third suit, a computer check of
the Texas court's docket revealed to it for the first time the
existence of the first Texas Suit. Diamond Mining finally alleged
that it had contacted International Resource in an attempt to
convince it to apprise the Clark County trial court of the true
facts, but that it refused to do so.
International Resource responded to the motion to modify the
order of dismissal, and, to the response, attached a twenty-nine-
page evidentiary affidavit by Eric Fryar of its Texas law firm of
Susman Godfrey, L.L.P. Diamond Mining then moved to disqualify Eric
Fryar from acting as attorney for International Resource. At a
hearing on the motion to disqualify, International Resource, by
another attorney, stated that it would submit Fryar's testimony
through the affidavit and also by live testimony. The trial judge
ruled that Fryar could serve either as a witness, or as an
attorney, but not as both. International Resource chose for Fryar
to give testimony, and the trial judge ruled that he was
disqualified from further participation as an attorney. This
interlocutory appeal is taken from the ruling disqualifying Fryar
from serving as an attorney in the case.
Rule 3.7 of the Model Rules of Professional conduct provides:
A lawyer shall not act as advocate at a trial in
which the lawyer is likely to be a necessary witness
except where:
(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature and value
of legal services rendered in the case; or
(3) disqualification of the lawyer would work
substantial hardship on the client.
The comment to Rule 3.7 states in part:
Combining the roles of advocate and witness can
prejudice the opposing party and can involve a conflict
of interest between the lawyer and client.
The opposing party has proper objection where the
combination of roles may prejudice that party's rights in
the litigation. A witness is required to testify on the
basis of personal knowledge, while an advocate is
expected to explain and comment on evidence given by
others. It may not be clear whether a statement by an
advocate-witness should be taken as proof or as an
analysis of the proof.
Model Rules of Professional Conduct Rule 3.7 cmt. (1996). We have
held that Rule 3.7 is applicable to a lawyer's giving evidence by
affidavit as well as by testimony in open court. See McIntosh v.
Southwestern Truck Sales, 304 Ark. 224, 800 S.W.2d 431 (1990).
In Arthur v. Zearley, 320 Ark. 273, 895 S.W.2d 928 (1995), we
held that the trial court abused its discretion in allowing an
attorney to testify and act as advocate at a hearing on
certification of a class action. In the opinion, we stated:
The general rule is clear and unmistakable. A lawyer
shall not act as advocate at a trial in which the lawyer
is likely to be a necessary witness. The reasoning
underlying the general rule is to prevent prejudice and
a conflict of interest. The professional judgment of a
lawyer should be exercised, within the bounds of the law,
solely for the benefit of his client and free of
compromising influences and loyalties. Conversely, a
witness is to tell the truth without loyalty to either
party and without regard to which side his testimony
might favor. Combining the dissimilar roles of attorney
and witness can prejudice the opposing party and can
involve a conflict of interest between the lawyer and his
client. The court of appeals has written that:
There are several reasons for the general rule.
First, because of interest or the appearance of
interest in the outcome of the trial, the advocate
who testifies at trial may be subject to
impeachment and the evidentiary effect of his
testimony will be weakened, thus harming his
client. Second, opposing counsel may be
handicapped in cross-examining and arguing the
credibility of trial counsel who also acts as a
witness. Third, an advocate who becomes a witness
may be in the unseemly position of arguing his own
credibility. Fourth, the roles of advocate and
witness are inconsistent and should not be assumed
by one individual. Last, the attorney should not
act as both trial counsel and a material witness
because of the appearance of impropriety,
Id. at 279-80, 895 S.W.2d at 931 (emphasis in the original)
(quoting in part Ford v. State, 4 Ark. App. 135, 139, 628 S.W.2d 340, 342 (1982)). We stated that the rule prohibits an attorney
from acting as a witness in procedural matters:
In the case before us, the trial court allowed Mr.
Hicks's testimony on the basis that he had "testified in
a hearing on dealing with a procedural consideration by
the court." Accordingly, the appellees ask us to agree
that because the class certification was "procedural,"
Mr. Hicks did not act as an "advocate at trial," and, as
such, the general rule prohibiting an attorney from
testifying is not applicable. In rejecting the
appellees' argument, we recognize that there is no
exception that allows an attorney to testify about the
propriety of a class certification in a contested case,
and note that the creation of such an exception would not
be a legitimate construction of the rule. An attorney in
our system of jurisprudence is to serve as an advocate
and is to have complete loyalty, within the bounds of the
law, to his client. The attorney so acted at the
certification hearing.
Id. at 281, 895 S.W.2d at 932. Our opinion noted that the attorney
acted as advocate at the bitterly contested hearing on class
certification, and that, in addition to his clients' interest, the
attorney "had something very close to a personal interest." 320
Ark. at 282, 895 S.W.2d at 933.
Applying the holding of Arthur to the present case, the trial
court correctly disqualified Fryar from acting as an attorney after
he chose to submit the evidentiary affidavit and to testify. See
Calton Properties v. Ken's Discount Building Materials, 282 Ark.
521, 523, 669 S.W.2d 469, 471 (1984), in which we held that the
attorney's affidavit was "nothing less than an attempt by the
attorney to disguise testimony while the attorney is still serving
as an advocate." In Calton Properties we further stated:
We have repeatedly held that an attorney must decide
whether he should serve as a witness or as an advocate.
An attorney who desires to testify must withdraw from the
litigation. An attorney who desires to serve as an
advocate may not testify. The filing of the affidavit is
a flagrant violation of our clear directive.
Id. at 523-24, 669 S.W.2d at 471 (citations omitted).
International Resource contends that Rule 3.7 states only that
a lawyer cannot act as advocate at a trial in which he is likely to
be a necessary witness and cites the case of Caplan v. Braverman,
876 F. Supp. 710 (E.D. Pa. 1995), to support its argument that the
prohibition should apply only to the trial on the merits. The
Pennsylvania District Court's opinion supports International
Resource's argument, but we choose to follow our interpretation of
the rule. International Resource also asserts that RLI Insurance
Co. v. Coe, 306 Ark. 337, 813 S.W.2d 783 (1991), supports the
proposition that attorneys can testify at hearings that are not
trials and still continue to represent the client. In that case
the attorneys testified at a Rule 60 hearing, but our opinion does
not mention Rule 3.7 or the propriety of the attorneys' giving
testimony. The case does not have a holding that affects the case
at bar.
International Resource relies on additional cases from other
jurisdictions. These cases are distinguishable from the present
case. And, as previously explained, we have interpreted Rule 3.7
and choose to follow our interpretation.
International Resource quotes from Preliminary Draft No. 12
(May 12, 1996), American Law Institute, Restatement of the Law, The
Law Governing Lawyers to support its argument that a lawyer can
testify in a procedural matter and still represent his client at
trial. We choose to follow the Model Rule that we have adopted, as
well as our interpretations of the rule.
International Resource next contends that, even if Rule 3.7
applies to this case, we should reverse the disqualification
because it would work a substantial hardship on International
Resource. It asserts that Fryar's testimony is vital to its
response to the motion and that Fryar has been the lead counsel on
this case. Its president submitted an affidavit setting out
Fryar's prior work and the fact that he did virtually all of the
factual investigation and legal analysis in the case. Model Rule
of Professional Conduct Rule 3.7(3) provides an exception to the
general rule that a lawyer cannot act as an advocate and a witness
when disqualifying the lawyer would work a substantial hardship on
his client. The hardship exception does not apply to the facts of
this case.
The comment to Rule 3.7 provides in pertinent part:
Apart from these two exceptions, paragraph (3) [the
hardship exception] recognizes that a balancing is
required between the interests of the client and those of
the opposing party. Whether the opposing party is likely
to suffer prejudice depends on the nature of the case,
the importance and probable tenor of the lawyer's
testimony, and the probability that the lawyer's
testimony will conflict with that of other witnesses.
Even if there is risk of such prejudice, in determining
whether the lawyer should be disqualified due regard must
be given to the effect of disqualification on the
lawyer's client. It is relevant that one or both parties
could reasonably foresee that the lawyer would probably
be a witness.
Model Rules of Professional Conduct Rule 3.7 cmt. (1996).
Here, Fryar's testimony is the primary evidence of
International Resource's opposition to the motion to modify the
order, and his testimony is, without question, disputed. When the
nature of the case as it now stands before the trial court is
considered, it appears that Diamond Mining would be prejudiced if
Fryar were not disqualified and that International Resource will
not be substantially disadvantaged by the disqualification.
International Resource has a "famed Texas plaintiffs' lawyer,"
according to a press release cited by Diamond Mining, and three
capable Arkansas attorneys: It will not have the hardship of having
to hire new counsel and familiarize them with the case. See West
v. State, 519 So. 2d 418 (Miss. 1988). Additionally, the matter
currently before the trial court concerns Arkansas procedural rules
on nonsuit and modification of orders, and the Arkansas attorneys
are presumably able to interpret Arkansas rules of civil procedure
as well, or better, than Texas counsel.
International Resource next argues that the uncontested-facts
exception to Rule 3.7 applies. It argues that there are no
contested facts involved in the motion to modify, only a difference
in the interpretation of those facts. It bases this argument on
the contention that Diamond Mining's counsel stated to the trial
court that there was no agreement concerning the order of dismissal
without prejudice and that Diamond Mining stated to this court that
it did not object to the order of dismissal. The argument is not
persuasive. There is a great difference between agreeing or
stipulating to an order of dismissal and not objecting because
there is no basis for objection. The statement referred to is as
follows:
To our surprise, Appellant non-suited on February 2nd.
In settlement negotiations, we had proposed a different
method of handling dismissal, one which would have
conceded our pending motions. However, we had no way,
and at that time knew no reason, to object to this move.
An order of dismissal "without prejudice" was entered.
This statement by Diamond Mining does not concede that the
parties agreed to an order of dismissal without prejudice. Rather,
it shows that Diamond Mining had no reason to object to the
nonsuiting by International Resource. Furthermore, based on the
pleadings, there appear to be many contested facts regarding the
motion to conform and Fryar will be a key witness on these matters.
Thus, Fryar's testimony does not relate only to an uncontested
issue, and this exception to the rule is not applicable.
After this case was submitted to this court for decision, the
parties informed the court that the case had been settled. Because
it had already been submitted and decided, we hand down this
opinion.
Affirmed.
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