BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS

Opinion No. 1997-4

(Inquiry No. )

Topics:
Obligations to constituents of corporate client; disclosure of confidences and secrets.
Digest:
Attorney for corporation owes allegiance to the corporation, not its officers, directors, shareholders or employees. Attorney may reveal confidences and secrets to extent necessary to establish or collect the attorneys fee.
Code Provisions:
DR 4-101(A)
DR 4-101(B)
DR 4-101(C)
DR 4-101(C)(4)
EC 5-18
DR 5-109
Facts Presented:
Inquiring attorney states that he was retained by a restaurant corporation to handle a sales tax audit. Inquiring attorney submitted a written contingent fee retainer agreement to the client for signature but the agreement was never signed. During the course of his investigation of the matter, inquiring attorney determined that the client had an exposure for taxes, interest and penalties of approximately $500,000 which the client confirmed as correct. Inquiring attorney also learned in the course of his representation that several of the client’s principals (whom inquiring attorney had never met) may have engaged in illegal activities unrelated to the sales tax issues. Inquiring attorney negotiated a settlement with the tax authorities for approximately $69,000 but the client has not signed the consent form required by the tax authority. The client has not paid the inquiring attorney’s bill.
Inquiry:
(1) Does inquiring attorney have any commitment towards the client’s principals?

(2) Does inquiring attorney have an obligation to advise the tax authorities of the attorney’s determination of the client’s sales tax exposure?

(3) If inquiring attorney sues for his fee, can he disclose that the retainer was a contingent fee arrangement and the amount of liability exposure he determined existed?
Determination:
(1) An attorney retained by a corporation owes allegiance to the entity and not to a stockholder, director, officer, employee, representative or other person connection with the entity.
(2) No.

(3) Yes, subject to limitations.
Analysis:
(1) Whether or not the inquiring attorney has an attomey-client relationship with the corporate client’s principals is a question of law, which ” Committee does not address. However, inquiring attorney indicates that he never met the principals and never considered himself retained by them. Counsel should be mindful that EC 5-18 provides that “[a] lawyer employed or retained by a corporation or similar entity owes allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity.” The obligation of a corporate client’s attorney to the corporation’s principals is further defined in DR 5-109 which provides:

“When a lawyer employed or retained by an organization is dealing with the organization’s directors, officers, employees, members, shareholders or other constituents, and it appears that the organization’s interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer for the organization and not for any of the constituents.”

(2) The information which the inquiring attorney acquired in the course of his investigation with respect to the client’s tax liability exposure is as set forth in DR 4-101(A) clearly a secret of the client (i.e., “information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client”) which may not be revealed, as provided by DR 4-101(B), except as provided in DR 4-101(C), which exceptions, other than DR 4-101(C)(4) discussed below, are not applicable here. Not only does inquiring attorney have no obligation to disclose, but disclosure is prohibited as set forth above.

(3) Because client never signed a retainer agreement, if counsel has a retainer arrangement, it is unwritten. Whether or not the inquiring attorney can enforce the unsigned retainer arrangement between inquiring attorney and the client as one calling for a contingent fee is another question of law which this Committee does not address, even though the sending of the unsigned retainer agreement appears to satisfy DR 2-106(D) which requires a written statement of the contingency fee terms. However, to the extent that the information to bi-, disclosed in any litigation over the fee is necessary to enable the attorney to collect his fee, then DR 4-101 (C)(4) provides that the disclosure may be made. But, the extent of disclosure is clearing limited to that which is “necessary to establish or collect the lawyer’s fee.” DR 4-101(C)(4).

[Approved by the Executive Committee on July 1, 1997; Approved by the Full Committee on July 30, 1997]