BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 1997-2
(Inquiry No. )
Propriety of attorneys establishing a budget planning service in accordance with General Business Law § § 455, 456, and 457.
Because only lawyers may operate a statutorily defined “budget planning service” without obtaining a special license, lawyers may operate such a service only in conformity with the standards of the Code of Professional Responsibility, and must supervise any non-lawyer employees of the budget planning service to ensure that they also comply with the Code of Professional Responsibility. Lawyers thus may not operate such a service under a trade name, must not engage in prohibited conflicts of interest, and must abide by all other provisions of the Code of Professional Responsibility in the operation of the service.
The inquiring attorneys are law partners. They wish to establish a “budget planning service” as defined in General Business Law § 455. Debtors will contract to pay a fixed periodic sum of money to the service, which in turn will pay the debtor’s creditors in accordance with an agreed upon plan. As compensation, the budget planning service will receive both an initial retainer fee from the debtor and a service fee based on the number of creditors it must pay.
The inquiring attorneys plan to operate the budget planning service as a copartnership under an assumed name (i.e., a trade name), which will not include the individual names of the inquiring attorneys. The proposed service will operate out of the suite of offices where the inquiring attorneys practice law, but the law firm will avoid any implication that the law firm and the budget planning service are affiliated. For example, there will be no reference to the budget planning service on the law firm’s letterhead, business cards, professional announcements, telephone listings, or building directory listing.
With respect to confidentiality, the inquiry states that the law firm will train and supervise law firm employees to avoid disclosing any protected client information to customers of the budget planning service. In addition, the law firm will take steps to prevent budget planning service employees from overhearing or viewing the law firm’s confidential communications or client information. The inquiring attorneys also plan to maintain separate computer systems and printers for the budget planning service and the law firm, and plan to keep all law firm data separate from budget planning service data. Moreover, employees from the law firm will not work for the budget planning service, and vice versa. In short, the inquiry states that the law firm and the budget planning service will have no common employees. However, the law firm and the budget planning service plan to use the same conference room, photocopy machine, fax machine, and various common areas.
With respect to advertising and solicitation, the inquiry states that the budget planning service plans to advertise in the mass media, including radio, television, and print, and will solicit business via targeted mailings. The advertising will not mention the law fin-n and will not mention that the principals of the budget planning service are attorneys. The inquiring attorneys themselves will not have any contact with customers of the budget planning service unless the regular employees are unavailable or there are other extraordinary circumstances. No law firm clients will be referred to the budget planning service, and no customers of the budget planning service will be referred to the law firm. If customers of the budget planning service need a lawyer, the service will refer them to some other law firm, not the firm operated by the inquiring attorneys.
With respect to banking, the inquiry states that the inquiring attorneys plan to use the same bank for both the law firm and the budget planning service, but accounts will be strictly separated. Monies from budget planning customers will be deposited into one account, and monies incidental to the law practice will be deposited into other accounts.
May the Inquiring attorneys enter into the budget planning service business in the form described in the inquiry without violating the New York Code of Professional Responsibility?
This inquiry presents difficult questions that generated considerable debate within the Committee. The difficulty arises partly from the unusual statutory scheme governing budget planning services, and partly from the blurry boundary between the practice of law and the Pursuit of non-law activities. That blurry boundary is especially difficult to locate when non-law services are performed out of a law office.
Without doubt, attorneys have the right to enter into non-law businesses. However, a budget planning service is a unique type of business because the business is, by statute, open only to two classes of people — (1) lawyers, and (2) type B not-for-profit corporations(i.e., religious organizations and social clubs).
A. The Statutory Framework.
The entire business of budget planning is governed by Sections 455, 456, and 457 of the General Business Law, which provide, in pertinent part, as follows (with emphasis added.):
§ 455 Definitions
Budget planning, as used in this article, means the making of a contract with a particular debtor whereby the debtor agrees to pay a sum or sums of money periodically to the person engaged in the budget planning who shall distribute the same among certain specified creditors in accordance with a plan agreed upon ….
Person, as used in this article, shall not include a person admitted to practice law in this state.
Finn, as used in this article, shall not include a copartnership, all of the members of which are admitted to practice law in this state.
Corporation as used in this article shall not include a type B not-for- profit corporation … licensed by the superintendent, to engage in the activity of budget planning as defined in this section.
§ 456 Budget planning prohibited
No person, firm, association or corporation, shall, after the effective date of this act, engage in the business of budget planning as defined in the preceding section ….
§ 457 Penalty
Whoever either individually or as officer, director or employee of any person, firm association or corporation, violates any of the provisions of the preceding section shall be guilty of a misdemeanor and shall be subject to a fine of not more than five hundred dollars and to imprisonment for not more than six. months of to both for such violation.
The effective date of the act was September 1, 1967 — nearly thirty years ago. Thus, the combined effect of § § 455, 456 and 457 is to prohibit anyone from engaging in the business of budget planning without a special license except a “person admitted to practice law. ” (A not-for- profit religious corporation may engage in budget planning only after obtaining a special license issued by the New York State Superintendent of Banking . Applications by type B not-for-profit corporations to obtain a license to engage in budget planning are governed by § § 579 to 583 of the New York State Banking Law.)
The language of § 456 of the General Business Law does not expressly state whether a lawyer may to engage in budget planning as a passive organizer and investor while non- lawyers actually operate the business. That is a question of law beyond the jurisdiction of this Committee, and we need not answer it to address concerns raised earlier in this opinion. However, if such an arrangement would violate § 456 of the General Business Law, then the inquiring attorneys might be violating DR 1-102(A)(8), which prohibits a lawyer from engaging in “conduct that adversely reflects on the lawyer’s fitness to practice law. ” As EC 1-5 states, in pertinent part:
Nor can we determine whether the service proposed by inquiring attorneys would constitute the “practice of law. ” That determination, too, rests on a question of law beyond our jurisdiction.
However, we can determine that when the Legislature provides that only lawyers may engage in a business without obtaining a special license, then the lawyers who engage in the business must adhere to the standards of the Code of Professional Responsibility. The lawyers cannot allow their employees to escape the high standards of the Code merely because the lawyers — the professionals essential to making the business legitimate — are not directly rendering the services.
B. Lawyer Involvement in Non-Law Businesses.
We understand that many lawyers own businesses that are operated by non-lawyers, and this Committee has often approved such businesses, as have other ethics committees. When a lawyer employs non-lawyers to operate a non-law business such as a restaurants or a gas station, the non-lawyers are not held to the standards of lawyers. For example, the non-lawyers may use a trade name and may freely solicit business. (A lawyer, however, is held to the high standards of the Code at all times, both in the practice of law and outside the practice of law.)
A budget planning service, however, is not a typical non-law business. Unlike a restaurant or a gas station or even a tax certiorari service that can be operated by either lawyers or non-lawyers alike, a budget planning service may be operated only by Type B not-for-profit corporations that have obtained a special licensed upon application to the Superintendent of Banking and by lawyers.
Thus, a person engaged in budget planning who is not a licensed Type B not-for- profit corporation must be engaging in budget planning as a lawyer. A person operating a budget planning service must wear the hat either of a lawyer or of a Type B not-for-profit corporation. The inquiring attorneys do not plan to wear the hat of a not-for-profit corporation. Therefore, they must wear the hat of a lawyer. Like a soldier in uniform who must adhere to the standards of military law, a lawyer wearing a lawyer’s hat must adhere to the standards of the Code of Professional Responsibility.
Similarly, a non-lawyer who is engaging in budget planning must do so either as an agent of a lawyer or as an agent of a licensed Type B not-for-profit corporation. Those are the only two categories of people that can employ non-lawyers to work at a budget planning service. Here, the non-lawyers will not be agents of a Type B not-for-profit corporation, and the only other possibility is that they are agents of the lawyer acting as a lawyer. A lawyer acting as a lawyer is responsible to ensure that the activities of non-lawyers associated with a law practice conform to the Code of Professional Responsibility. See DR 1-104(A).
The reasons for restricting budget planning to lawyers are found in the history of the applicable legislation. The predecessor of the current law, § 410 of the old Penal Law, made budget planning a misdemeanor for all but lawyers. (Licensed not-for-profit religious corporations did not gain the right to engage in budget planning until the law was amended in 1965.) When Governor Averell Harriman signed § 410 of the Penal Law into law in 1956, Governor Harriman stated:
I have been informed by the Better Business Bureau of New York City “that there has been substantial justified complaint about the practices of some of the companies engaged in budget planning. ” The Attorney General reports that debt consultants lure the financially distressed by false and deceptive advertising; that they charge excessive fees; and that they derive the bulk of their revenue from the poorly educated and the people in the lower income groups.
It appears that these practices are so common and widespread in the area affected, that the only feasible way to control them is by prohibiting this type of business with the exception [for lawyers] already noted.
There is no absolute right to engage in a business that conflicts with the public interest. In my opinion “budget planning,” as defined in this bill, is such a business.
(Message of the Governor on approving L. 1956, c. 3 1.)
Based on this legislative history, this Committee concludes that a lawyer who engages in budget planning is acting as a lawyer. Otherwise, the conduct would be illegal. Thus, the lawyer’s conduct in operating the budget planning service must measure up to the standards of the Code of Professional Responsibility.
Thus, the lawyer engaged in budget planning must comply with Code provisions governing confidentiality, advertising, solicitation, legal fees, conflicts of interest, trust accounts, and all other conduct. This is what we believe the Legislature intended when it permitted lawyers and only lawyers to engage in budget planning without obtaining an additional special license. The law license itself stands for honesty, integrity, and strict adherence to the Code of Professional Responsibility.
C. The Obligation to Supervise Non-Lawyers
Under DR 1-104, lawyers who hire non-lawyers in connection with a law practice must actively supervise those non-lawyers. A lawyer engaged in budget planning is acting as a lawyer, so employees of the budget planning service fall within the ambit of DR 1-104(A). As amended effective May 22, 1996, DR 1-104 provides in relevant part as follows (with emphasis added):
C. A law firm shall adequately supervise, as appropriate, the work of partners, associates and non-lawyers who work at the firm. The degree of supervision required is that which is reasonable under the circumstances, taking into account factors such as the experience of the person whose work is being supervised, the amount of work involved in a particular matter, and the likelihood that ethical problems might arise in the course of working on the matter.
D. A lawyer shall be responsible for a violation of the disciplinary rules by another lawyer or for the conduct of a non-lawyer employed or retained by or associated with the lawyer that would be a violation of the disciplinary rules if engaged in by a lawyer if:
1. The lawyer orders, or directs the specific conduct, or, with knowledge of the specific conduct, ratifies it; or
2. The lawyer in the law firm in which the other lawyer is a partner practices or the non-lawyer is employed, or has supervisory authority over the other lawyer or the nonlawyer, and knows of such conduct, or in the exercise or reasonable management or supervisory authority should have known of the conduct so that reasonable remedial action could be or could have been taken at a time when its consequences could be or could have been avoided or mitigated.
To the same effect is DR 4-101(D), which provides (with emphasis added), as follows:
A lawyer shall exercise reasonable care to prevent his or her employees, associates, and others whose services are utilized by the lawyer- from disclosing or using confidences or secrets of a client, except that a lawyer may reveal the information allowed by DR 4-101(C) through an employee.
We see no escape from these provisions. Lawyers who engage in a business that is restricted (absent a special license) to lawyers and their agents must ensure that their non-lawyer employees also comply with the Code of Professional Responsibility.
D. Reconciling Our Prior Opinions.
We understand that some of this Committee’s recent opinions suggest a different conclusion. For example, in BANC Op. 96-2 (1996), we condemned an inquiring attorney’s plan to participate actively in a partnership with non-lawyers that proposed to negotiate out-of-court settlements for business debtor clients. We made clear that the attorney could not free himself of his ethical obligations under the Code of Professional Responsibility even if the attorney expressly advised clients that he would be acting in a non-legal capacity. We stated (with emphasis added.):
[T]he proposed business activity (“negotiation” of out-of-court settlements on behalf of debtors with business creditors) cannot be confined to “negotiation” in a vacuum. A lawyer participant in such an activity must, and as a matter of human nature, bring to bear in such a process his Knowledge of the law, an evaluation of the legal rights and duties of the participants and the remedies of each participant. It is folly to suggest otherwise…
But our opinion in BANC 96-2 left open the possibility that a lawyer could form a partnership with non-lawyers who would be performing non-law activities as long as the lawyer did not, actively participate in the non-law business. We stated:
Inquiring attorney has indicated that the negotiation would occur in the context of an anticipated out-of-court settlement. … [N]egotiation is often a prelude to litigation. If efforts at negotiation fail, litigation, at the creditor’s option, often follows. With this in mind, the Committee cannot condone a lawyer’s participation in the negotiation service which we find to be characterized as a quasi-litigation proceeding and prelude to litigation.
The present inquiry differs because the inquiring attorneys here do not plan to participate actively in the budget planning service. Under the proposal, only the non-lawyer employees of the budget planning service will actively participate in the business. Thus, dicta in BANC Op. 95-3 (1995) (quoted heavily in BANC Op. 96-2) might appear to support the inquiring attorneys plan. In BANC OP. 95-3, the inquiring attorney proposed to form a corporation with a real estate broker for the purpose of filing residential tax certiorari cases. The inquiring attorney planned to be “an active participant in the corporation, and actually engage in the performance of services. ” The Committee stated that the Code of Professional Responsibility prohibited the lawyer from doing so because “when a lawyer represents a client in a litigation or quasi-litigation proceeding, the lawyer is practicing law whether or not a non-lawyer is legally permitted to perform the same function. BANC Op. 95-3, quoting N. Y. State Op. 662 (1994). However, we also noted in BANC Op. 95-3 (with emphasis added):
[I]f the attorney were not proposing to render the services at issue, but rather was merely a passive investor in the corporation (and did not hold himself or herself out as providing services), this Committee’s view of the applicability of these Disciplinary Rules would be different. In that event, the lawyer, as an investor, would not be rendering a service, so there could be no conduct considered to be the practice of law. This would thereby enable the lawyer to remain a passive investor, with the corporation through its non-lawyer agents or employees, allowed to provide services as authorized by statute, without the lawyer- practicing law in affiliation with non-lawyers ….
The language just quoted describes the present inquiry. The inquiring attorneys plan to be only passive investors in the budget planning service. But this lack of involvement by the inquiring attorneys creates a new problem. The lawyers who own the budget planning service may have a personal financial interest in referring people to a budget planning service rather than recommending the alternative of bankruptcy. (I.e., signing up a client for the budget planning service may more lucrative than filing a personal bankruptcy.) For that reason, DR 5-101(A) requires the lawyers (either personally or through the employees of the budget planning service, who are the lawyers’ agents) to tell customers in appropriate cases that personal bankruptcy is an alternative method for dealing with past due debts. This advice about bankruptcy will ordinarily call for legal judgment, including weighing the relative advantages and disadvantages of a budget planning contract versus bankruptcy. With respect to legal advice, the lawyers rather than the non-lawyers must counsel the customers on this point. To allow non-lawyers to exercise legal judgment might well be assisting non-lawyer in the unauthorized practice of law. See DR 3-103. As we stated in BANC 96-2:
All the fundamental laws aspects of the debtor-creditor relationship are governed by the laws of our state and nation. … To suggest that one could provide “negotiation” service [to debtors) disconnected from the application of legal principles (and the “practice” of law) is unrealistic.
Thus, apart from the problem of whether the governing statute for budget planning services would allow the inquiring attorneys to function solely as passive investors, the Code of Professional Responsibility itself will not allow the inquiring attorneys to remain entirely passive. As EC 7-8 states, in pertinent part:
A lawyer should exert best efforts to insure that decisions of the client are made only after the client has been informed of relevant considerations. A lawyer ought to initiate this decision-making process if the client does not do so. … A lawyer should advise the client of the possible effect of each legal alternative. A lawyer should bring to bear upon this decision-making process the fullness of his or her experience ….
Thus, we conclude that lawyers operating a budget planning service cannot act as if they were non-lawyers. In other words, they may not remain entirely passive when clients of the budget planning service need to weigh alternatives to the service. Rather, the lawyers must operate the budget planning service as part of their law practice, and must uphold the standards of the Code of Professional Responsibility when doing so.
E. Applying the Principles to the Present Inquiry.
Applying the principles we have stated to the inquiry at hind, we make the following comments on the proposal:
The budget planning service may not use false or misleading advertising. See DR 2-101(A). Nor may it operate under a trade name. See DR 2-102(B). Nor may the budget planning service improperly solicit business. See DR 2-103. Thus, the budget planning service may not engage in in-person solicitation or other forms of solicitation prohibited to lawyers.
The budget planning service owes the same fiduciary duties to customers as it does to clients, and must thus maintain customer confidences and secrets. See DR 4-101. (This is not to say that a person automatically establishes an attorney-client relationship by becoming a customer of the budget planning service. It is not this Committee’s place to determine, for example, whether a disappointed customer of the budget planning service could sue for legal malpractice.)
The budget planning service must not enter into an agreement for, charge, or collect an illegal or excessive fee. See DR 2-106(A). If the budget planning service desires to receive fees or any other thing of value from any source other than the customer/client (e.g., “commissions” or a percentage of credit card bills paid through the budget service) — as we have been told is often the case — the service may do so only “with the consent of the client after full disclosure.” See DR 5-107(A).
If the lawyers currently represent or formerly represented any creditors of the customers of the budget planning service, the service must determine whether a conflict of interest exists and, if so, must comply with the relevant Code provisions. See DR 5-105 and DR 5- 108(A).
Customer funds deposited with the budget planning service must be kept in special accounts governed by DR 9-102, and must be treated in the same manner as funds in lawyer trust accounts. (Indeed, the high standards to which lawyers are held when entrusted with the funds of others appears to be one of the main reasons that the New York Legislature initially restricted budget planning services exclusively to lawyers, and amended the law to extend budget planning service only to those who have a special license and are prohibited by statute from making a profit.)
The above concerns are by no means exhaustive. The lawyers who own the budget planning service will be responsible under DR 1-104 to supervise all non-lawyer employees to ensure that their conduct complies with every provision of the Code of Professional Responsibility. We have listed only those that readily come to mind.
The Committee does not believe it would be improper under the Code for the inquiring attorneys to engage in budget planning provided they adhere to the high standards of that Code. However, we are unwilling to allow lawyers engaging in a business open only to lawyers to fall below those standards, or to evade those standards by closing their eyes to the activities of their non-lawyer employees, or to allow non-lawyers to exercise legal judgment or give customers legal advice. Because the plan as proposed does not adhere to the standards of the Code of Professional Responsibility, we decline to approve it.
Conclusion: Because the plan described by the inquiring attorneys would violate several provisions of the Code of Professional Responsibility, this Committee does not believe that the Code permits the inquiring attorneys to carry out their plan. However, if the attorneys wish to operate a budget planning service within the confines of their law practice, the Code poses no obstacles provided lawyers who own the service and the non-lawyer employees who work for the service adhere to the Code of Professional Responsibility.
[Approved by the Full Committee on April 30, 1997 subject to specified revisions; Revised draft approved by the Executive Committee on June 17, 1997.]