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(Inquiry No. )
Conflicts of interest arising from partners’ law partnership in one state and independent practices in New York representing adverse parties in same transactions – application of New York Lawyer’s Code to conduct partially occurring in another state – imputation of conflict among related entities – consentability of and clients’ informed consent to conflict.
DR 1-105 (A), (B) (2) (b) EC 5-1, 5-14
DR 5-105(A) to (E)
Inquiring Attorneys A and B are both admitted to practice in New York and Florida. They engage in similar practices in both states, sometimes “in the same transactions on opposite sides of the table.”
A and B wish to create a law partnership in the State of Florida without the same affecting their independent New York practices. They anticipate that if, in the future, they are both involved in New York transactions on opposite sides of the table, their clients would be informed of the existence of their Florida partnership.
May the two attorneys, A and B, who are admitted to practice in New York and Florida and engaged in the same area of practice in both states, form a law partnership in Florida and simultaneously and separately represent parties in New York who are adverse to each other in the same transaction?
Yes, provided that (1) in their separate representations in New York, a disinterested lawyer would believe that the same law firm may competently represent the interests of each client and (2) each consents to the representation after full disclosure of the implications of having law partners represent adverse parties in the same transactions and of the advantages and risks involved.
This inquiry clearly presents two issues that appear novel to this Committee: (1) Whether application of the New York Lawyer’s Code of Professional Responsibility governs the effect in New York of the Inquiring Attorneys’ law partnership in Florida? And (2) If so, whether the vicarious or “imputed” disqualification principle of DR 5-105(D) as applied to their independent representations by reason of their law partnership disqualifies the two lawyers from representing adverse parties in the same transactions? In addition, assuming the facts present disqualifying circumstances arising from the application of DRs 1-105, 5-101 and 5-105, the issueremains whether and how these conflicts of interest may be waived by the clients’ informed consents?
The Second Circuit in Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384 (1976), most closely applied the basis ethical principles to similar, but somewhat different facts. There a single New York attorney was a partner in two New York State law firms, located in widely separate cities; the court disqualified the attorney’s New York City law firm from representing a party in litigation adverse to a party that his Buffalo law firm already represented in an unrelated litigation. Essentially, the court concluded that the lawyer owed a duty of loyalty to his law firm’s first client, barring him and his other law firm from representing a party adverse to the preexisting and concurrent client, even though the two litigations were not substantially related.
In the present inquiry we have two lawyers acting individually in New York State, each representing parties adverse to each other in the same transactions but also forming a law partnership in an unrelated but similar law practice in Florida. As stated in Cinema S with respect to conflicts arising in litigation practice, 528 F.2d at 1386-87:
“One firm in which attorney [A] is a partner is suing an actively represented client of another firm in which attorney [A] is a partner. The propriety of this conduct must be measured not so much against the similarities in litigation, as against the duty of individual loyalty that an attorney owes to each of his clients. . ”
“…A lawyer’s duty to his client is that of a fiduciary or trustee … When [client X] retained [A] as its attorney in the Western District litigation it was entitled to feel that at least until that litigation was at an end, it had his undivided loyalty as its advocate and champion, . . . and could rely upon his `undivided allegiance and faithful devoted service’ [quoting U.S. Supreme Court] Because `no one can serve two masters’, Matthew 6:24, . . . it had the right to expect also that he would `accept no retainer to do anything that might be adverse to his client’s interests’ . . . Needless to say, when [A] and his New York City partners undertook to represent [Client Y], they owed it the same fiduciary duty of individual loyalty and allegiance.
“Ethical Considerations 5-1 and 5-14 of the American Bar Associations’s Code of Professional Responsibility provide that the professional judgment of a lawyer must be exercised solely for the benefit of his client, free of compromising influences and loyalties, the Code has been adopted by the New York State Bar Association and its canons are recognized by the Federal and State Courts as appropriate guidelines for the professional conduct of New York lawyers …
“Because [A] is a partner in the [Buffalo] firm, [A] owes the duty of undivided loyalty to that firm’s client, [X]. Because he is a partner of the [NYC]
firm, he owed the same duty to [Y].
“. . . Moreover, because of the peculiarly close relationship existing between legal partners, if [A] is disqualified, his partners at the [NYC] firm are disqualified as well [citations omitted]”.
A. Application of New York Rules: There are two distinctions between Inquiring Attorneys’ facts and the facts in Cinema S v. Cinerama: first, the link between Attorneys A and B is their practice of law as partners in Florida, a foreign jurisdiction. This is a distinction that this Committee determines to be without a relevant difference. First, under general principles of law, a partnership has no territorial locus or boundaries; a partnership is a mobile status that travels with each partner across jurisdictional borders, at least within the United States. “A partnership, unlike a corporation, generally, is not a legal entity separate and apart from the individuals composing it.” 15A N.Y. Juris Business Relationships §1381, at 334 (1996). This is no different than if a lawyer represented a Florida client as seller in a Florida-based real estate transaction, while also representing a New York client seller in an unrelated transaction in which that client is adverse to the Florida client now as buyer, albeit the latter is separately represented in that transaction. Absent informed consent, the attorney would be disqualified from one or both representations, notwithstanding that some of the disqualifying facts occur in Florida.
If there were any doubt of application of the New York Code to the Florida partnership, it is laid to rest by the NYSBA’s and New York Courts’ adoption in 1999 of DR 1-105, entitled “Disciplinary Authority and Choice of Law,” relating to the multi jurisdictional practice of law.
DR 1-105(A) provides: “A lawyer admitted to practice in this state is subject to the disciplinary authority of this state, regardless of where the lawyer’s conduct occurs.” And DR 1-105(B)(2)(b) provides in non-litigation contexts in relevant part,
“. . . The rules of professional conduct to be applied shall be as follows . . If the lawyer is licensed to practice in this state and another jurisdiction, the rules to be applied shall be the rules of the admitting jurisdiction in which the lawyer principally practices; provided; however, that if particular conduct clearly has its predominant effect in another jurisdiction in which the lawyer is licensed to practice, the rules of that jurisdiction shall be applied that conduct.” See NYSBA Op. 742 (2001).
Based on the facts and context set forth in the Inquiring Attorneys’ letter, it is determined by this Committee that the New York Code applies to their prospective independent representations of clients adverse to each other in the same transactions taking place in New York State, even though one disqualifying circumstance – – their law partnership – – occurs in Florida. (It does not matter here in which state the lawyers principally practice, since the conduct of A and B in simultaneously representing adverse parties in the same transactions in New York predominantly affects New York).
B. Two- Step “Imputed Attribution”: DR 5-105 governs the conduct of lawyers in law firms with regard to conflicts of interest.
“While lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under DR 5-101, DR 5-105(A) or (B), DR 5-108(A) or (B), or DR 9-101 (B) except as otherwise provided therein.”
Stated another way, if a lawyer who was a sole practitioner could not represent a client because to do so would violate the Code, then no lawyer associated with that lawyer’s law firm could represent the client.
Our two points made above are equally applicable in interpreting and applying DR 5105(D). We see no sound reason, in light of our discussion and conclusions in Part A above, to read the above section to confine its application as if it applies only to lawyers associated in “a [New York] law firm.” If this were the rule, this would enable the many non-New York law partnerships with partners practicing in New York to avoid “conflicts” by having their New York partners engage in independent representations of clients that might conflict with their law firm’s concurrent or prior representations not based in New York. Creating such a loophole for nonNew York law partnerships, not available to New York law firms, would be wholly unsound and contravene the fundamental tenet of the Code of Professional Responsibility.
Here, however, there is a novel application of the attribution principle of DR 5-105(D). We are asked whether Lawyer A’s representation of his or her client in New York would be imputed to the Florida law partnership, A&B, and through that entity, to Lawyer B, thereby normally barring B from representing a client in a transaction adverse to A’s client, and vice versa barring A from becoming adverse to B. This two-step imputation, although somewhat attenuated, is similar to the facts considered by the Second Department in Dembitzer v. Chera, 285 A.D.2d 525, 728 N.Y.S. 2d 78 (2001). There a single law firm, Z & R, represented plaintiffs in real estate litigation against several defendants, including one individual, Chera, while simultaneously in an unrelated matter Z & R represented a partnership in which Chera had a 50% interest. The Appellate Division applied the principles of DR 5-105 and ECs 5-1 and 5-14, also citing Cinema 5 v. Cinerama, to disqualify Z & R from representing plaintiffs against Chera while simultaneously Z & R represented his partnership in an unrelated matter. The court reasoned: “A partnership is generally not a separate entity existing independently of the persons who control it .
. and thus, [Z & R’s] obligation of `undivided loyalty’ to its client was owed to Chera . . .” Id. at 79, citing authorities, including Cinema 5 v. Cinerama, DR 5-105 and ECs 5-1 and 5-14.
Our conclusions are reinforced by the adoption in 1999 of DR 5-105(E) and by NYC Bar Op. 2000-4. That new rule, DR 5-105(E), makes explicit the requirement that:
“A law firm shall keep records of prior [and current] engagements, which records shall be made at or near the time of such engagements and shall have a policy implementing a system by which proposed engagements are checked against current and previous engagements, so as to render effective assistance to lawyers within the firm in complying with DR 5-105(D).”
In its Opinion 2000-4, the Ethics Committee of the Association of the Bar of the City of New York concluded, in the context of discussing “international law firms and cooperation agreements among attorneys and law firms,” that law firms listing other lawyers and firms as their “affiliates” are “required to treat the clients of all the constituent firms as their own `clients’ when determining whether a conflict exists in deciding if a new client can be accepted,” if the relationship among constituent firms and lawyers is “close and regular, continuing and semipermanent.” Even more so here, where the two attorneys A and B, acting independently in New York, are associated as law partners A & B in Florida, they must list all clients of Attorneys A and B as clients of their Florida law firm (A & B), since their relationship is “close and regular, continuing and semi-permanent.” And, by the same reasoning, all actual and imputed clients of law firm A & B also become imputed clients of both Attorneys A and B in New York.
C. Are these Conflicts Consentable by “Informed Consent” of the Clients? DRs 5-101 and 5-105 on conflicts of interest refer to waiver through the client’s consent to the conflicting representation “after full disclosure of the implications of the lawyer’s interest” (DR 5-101) and of the “simultaneous representation and the advantages and risks involved.” DR 5-105(C). Both DRs 5-101 and 5-105 are involved here in that Attorneys A and B share a common personal and business relationship in their law partnership and also represent clients imputed through the partnership to each other’s practices.
Preliminary to determining the parties’ fully informed consents is the issue whether under DR 5-101, “a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby” and whether under DR 5-105(C), “a disinterested lawyer would believe that the lawyer can competently represent the interest of each”?
As stated by Professor Mary C. Daly in her recently completed commentary in the treatise compiled and edited by her, New York Code of Professional Responsibility – – Opinions Commentary & Case Law, Vol. l, booklet XV, at 30 (Dec. 2001):
“The easiest way for a lawyer to satisfy this requirement is to pose the question: `If the client asked my counsel, would I advise him to consent to the conflict?’ If the answer is `no’, the inquiry is ended and the lawyer may not proceed to the second requirement, the solicitation of client consent. The answer must be `no’ in certain circumstances.”
Professor Daly’s commentary footnotes, “There are some conflicts that are so severe that the courts and ethics committees have labeled them `nonconsentable’, and the disinterested lawyer could never approve them.” She cites ethics opinions on lawyers representing both adoption agencies and prospective parents in parental care and adoption proceedings, and continues, “Multiple representations in real estate transactions are highly risky.” Id. at 30 n. 62, citing our NCBA Opinion 98-10 (1998) (a lawyer may not represent both a purchaser and a lender in the same residential transaction); N.Y. County Opinion 685 (1991) (a lawyer may not act as both a lawyer and a real estate broker in the same transaction); and N.Y. S. Bar Opinion 611 (1990) (under limited circumstances, a lawyer may represent both the seller and lender in real estate transactions). The Association of the Bar of the City of New York’s ethics committee issued a comprehensive opinion in 2001, providing guidelines on clients waiving such conflicts in corporate transactions, particularly where the clients are involved in unrelated matters or, if in the same matter, “where the interests of the represented clients are generally aligned or not generally adverse.” NYCBA Op. 2001-2.
Inquiring Attorneys A & B do not describe their common area of practice, only indicating it is “transactional”, in which they “represented clients involved in the same transactions on opposite sides of the table.” Thus, they may be engaged in non-litigation trusts and estates, uncontested matrimonials, real estate or other personal or business transactions for individual or corporate clients. They should therefore be made aware of this Committee’s recent opinion in NCBA Opinion 98-10 that:
“The differing interests of a purchaser and a lender in the same real estate transaction typically cannot be adequately represented by the same attorney… As a result, the lawyer’s loyalty will be divided, affecting his independent judgment on behalf of the purchaser client or lender client in violation of DR 5-101 (A) and (C) .„
See also, e.g., N.Y. County Lawyers’ Ass’n Op. 707 (1995) (representing co-defendants in some criminal case disfavored). Thus, a single lawyer or lawyers in the same law firm will generally not competently represent both purchaser and lender (or seller and purchaser) in the same real estate transaction. But see NYSBA Op. 611 (1990) (under limited circumstances, a lawyer may represent both the seller and lender. in real estate transactions). In non-litigation conflicts, there is no simple bright-line rule on consentability.
In the absence of further information from the Inquiring Attorneys as to the nature of their representations in their practices of law and the nature of their clients, it is not possible here to determine “consentability” of their resultant conflicts under DRs 5-101 and 5-105(C). Assuming, nevertheless, that the separate and adversely situated clients of Attorneys A and B may consent to the conflicting and imputed representations of their attorneys, Professor Daly provides a sensible caution in her commentary, that.
“[T]he lawyer must still proceed with caution. The lawyer must provide the client with full disclosure of the implications of the simultaneous representation and the advantages and risks involved. [Noting, “The sophistication of the client is a critical factor in evaluating the completeness of the disclosure and the effectiveness of the consent,” citing NYC Bar Op. 2001-2.] While there is no requirement that the disclosure and consent be in writing, documentation protects the interests of both the client and the lawyer. From the client’s perspective, it provides an opportunity for review and study that an oral explanation simply does not. It allows the client to seek the advice of friends and another lawyer with the certainty that they possess a correct understanding of the conflict issues and the scope of consent. From the lawyer’s perspective, the documentation offers proof of a good faith effort to comply with [DR 5-105] Subsection C. It may also force the lawyer to think more carefully about the conflict, since she will have to describe it in writing. Composing the full disclosure requires close attention.” Id. at 31.
[Approved by the Executive Committee on 03/26/02; approved by the Full Committee, subject to Executive Committee editing, on 02/27/02]