GPSolo Magazine - April/May 2004
Family Business Lawyer:
Hero or Villain?
The family business has proven to be fertile ground for novelists and playwrights throughout history, and for good reason. All the classic elements of drama—conflict, romance, wealth, power, grief, history, ambition, envy, and pride—are ripe for the writer’s picking. There are the self-made father, the ne’er-do-well son, the hard-working but overlooked senior employee, the shrewd sister-in-law, and the sweet yet sad mother.
Standing in the wings, ready to advance the plot at key turning points, is the family lawyer. A Marcus Welby sans stethoscope, the family lawyer listens thoughtfully to each party’s confidences and dispenses wise counsel to any and all. (Important note: Fictional lawyers rarely concern themselves with the rules of professional conduct. And they never get sued for malpractice.)
The challenge for the real-life family business lawyer, on the other hand, is how to comply with the rules of professional conduct without shattering the very thing the rules are intended to protect—the client’s trust in the lawyer. Contrary to all those dramatic television series, family-owned closely held corporations and partnerships are the backbone of this country’s economy and provide the steady work that pays the rent at many small and midsize law firms.
This article discusses the professional responsibility and liability involved in representing closely held family businesses—in which multiparty representation and conflicts of interest are inherent—and offers recommendations for how to act within the rules without jeopardizing the whole production.
Who’s Your Client?
On paper the rules seem fairly unambiguous: You cannot concurrently represent two clients if the representation of one will be “directly adverse” to the other. Neither can you represent more than one client if there is a significant risk that the representation may be “materially limited” by your responsibilities to another client, a former client, or a third person or by your personal interest. You may represent more than one client if you disclose the potential conflict, explain the consequences, and obtain the necessary waivers. (See sidebar “ABA Model Rules of Professional Conduct, Rule 1.7, Conflict of Interest,” below.)
ABA Model Rule 1.3, Organization as Client, does not distinguish among organizational clients that are publicly held or closely held, unincorporated organizations, or government agencies. The commentary to Rule 1.3 recognizes that the organization is a legal entity but that it can act only through its people (i.e., officers, directors, employees, shareholders, and other constituents). The commentary further advises lawyers to make certain that individual constituents understand that when interests are (or become) adverse, the lawyer for the organization cannot provide legal representation for the individual.
Rules vs. Reality
The ethics rules work well when lawyers represent plaintiffs and defendants in litigation—the client boundaries are clear. Even broadening the definition of “client,” the rules still easily apply to publicly held corporations. But who is the client in a closely held business where the principals are related or well known to one another? Do you represent the individuals or the entity they comprise? Both? How can you represent an entity when your job is to create it? How do you explain “adverse interests” to clients who are not adversarial? From whom do you take direction? How do you isolate the interests of one generation from those of the next in the transfer of a family business? Can you fairly parcel out your loyalty and attention? Or does one person inevitably become the “lawyer’s pet”? (See sidebar “Conflict of Interest—Ethics Issue or Malpractice?” page 16.)
The family business lawyer who wants to make a living, be of service to long-term clients, and avoid appearing overly concerned with self-protection frequently is faced with a Hobson’s choice: Break the rules or lose the business.
Citing a “paternalistic” presumption that the lawyer knows best and can represent the interests of all parties involved, some writers have called for changes in the Model Rules of Professional Conduct to reflect the realities of law practice. In a March 1995 Texas Law Review article, New York lawyer Bryan J. Pechersky wrote that the current standards, in which the client is defined as a group or organization, create a type of “entity fiction.” According to Pechersky, case law indicates the attorney owes an obligation to the individuals in the general partnership or close corporation—where the “distinction between the entity and its constituents begins to blur....”
The distinction apparently has been blurred for some time. During nomination hearings before Congress in 1916, Supreme Court Justice Louis D. Brandeis defended allegations that he had improperly represented conflicting interests in a 1907 case, stating that he had acted as “counsel to the situation.” In materials for the American Law Institute-ABA study course of September 1998, Boston attorney Thomas F. Sitzmann used this historical reference to illustrate the long-standing lack of congruence between the ideals of the legal profession and actual law practice: “Particularly in the context of family business clients, it is a reality that lawyers often represent persons with common goals but differing interests.”
Improvise a Plan
Without a formal script to go by, lawyers who represent multiple related parties in business transactions may need to improvise. The following suggestions may help hone a workable plan.
Understand the rules. Several ethics rules come into play, most notably the rules pertaining to conflicts of interest (current and former clients), the organization as client, and confidentiality of client information. Read the rules and the accompanying comments with a current or potential family business client in mind. Ask yourself how a jury would interpret these rules if a claimant’s lawyer presented this situation at your trial for malpractice.
Obtain signed waivers of conflicts of interest. The discomfort you may feel asking for a waiver is negligible compared with the prolonged angst of an ethics grievance or malpractice claim. Remember, each and every represented individual must sign and return a waiver.
Establish reasonable expectations. No one wants to cast a pall on a future partnership or transaction, but don’t be tempted to downplay the possible consequences of your dual or multiparty representation. Make sure your disclosure and the waiver of conflicts of interest are not misinterpreted as guarantees of a good outcome.
Refer part of the business out. Many lawyers hesitate to refer clients to another practitioner because they don’t want to appear to be creating work for cohorts or don’t want to risk losing the entire matter to a lawyer willing to bend the ethics rules. Explain to clients why it is good business practice to have separate counsel look at the situation from each party’s perspective, just as if the individuals were unrelated.
Write a letter of engagement. Scores of legal malpractice claims and grievances could be averted by routine use of engagement letters. Your engagement letter is your single best opportunity to establish reasonable expectations, clarify the roles of the various participants, explain the potential effects of dual or multiparty representation, ask for signed waivers of conflicts, and address payment and terms—and at the same time create a record of having done so. (See sidebar “ Excerpts from a Sample Engagement Letter.”)
Make no warranties. Hand-me-down legal representation might be serviceable, but it’s rarely ideal. Point out to the clients you represent that your counsel and the decisions they make now may not fit future circumstances. Sending a letter once a year to suggest a review of their file is good risk management for both you and your clients.
Some situations cannot be remedied with disclosures and waivers, and the only option is to decline or withdraw from representation. Here are some recommendations for making a graceful exit.
Don’t miss your cue. Saying no to those who come to you for help goes against the nature of most lawyers, but the sooner you exit, the better. You may miss your opportunity to withdraw if you wait until it may cause undue hardship to the client. Tell the client directly—in a face-to-face or telephone conversation (no e-mail or voice mail)—that you will not be his or her lawyer. Avoid giving legal advice; you may be held responsible for the accuracy of your statements.
Be diplomatic. Assure the client that your decision to decline or withdraw from representation is not a comment on the viability of the concept and should not become ammunition in a conflict among the various parties. If family members reach an impasse, suggest they retain another lawyer to give them a fresh perspective on their situation.
Write a letter of nonengagement or disengagement. Confirm and document your declination. Make sure all parties involved receive a letter, including those with whom you have never met. Use the mnemonic “PART” to help you remember the elements to include in such a letter:
P osition: Clearly and succinctly state your position. Do not bury your refusal in legal platitudes or polite ambiguities that leave clients uncertain whether you are or are not representing them.
A ction: Summarize the action you have taken to date and suggest the client retain another attorney as soon as possible. Include the phone number or website for your state bar’s lawyer referral information service if applicable.
R eason: If your reasons are objective, as in a conflict situation, say so. Otherwise, respectfully offer your regrets without further commentary.
T erms: You can justifiably bill for specific legal services you provided; if your withdrawal will cause the client to incur additional expense, however, consider reducing or waiving your fees. Goodwill pays off. Do not sue former clients for legal fees or hold their file as ransom for payment.
Create a trail. Ideally, you will create a file and enter into your conflicts system the individuals and entities you decline to represent. At the very minimum, write non-engagement or disengagement letters and file them in a common file. Some contemporaneous documentation of your position could be invaluable in the long run.
ABA Model Rules of Professional Conduct, Rule 1.7, Conflict of Interest:Current Clients
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.
Conflict of Interest—Ethics Issue or Malpractice?
Conflicts of interest, from a purely academic view, are ethics violations rather than negligence. Conflicts of interest increasingly are being denoted as breaches of duty to clients. Claimants often cite conflicts of interest in conjunction with other errors or omissions to add drama to what is an otherwise lackluster malpractice claim.