WRITTEN REMARKS OF SAMUEL B. STERRETT SUBMITTED TO THE
COMMISSION ON MULTIDISCIPLINARY PRACTICE
Statement Of Samuel B. Sterrett
Before The ABA Commission On
February 4, 1999
Mr. Chairman, Members of the Commission, I appreciate the opportunity to express my thoughts with respect to the thorny and complex problems arising out of the current trend toward one-stop shopping for professional services.
My judicial training requires me to set forth briefly my professional experience so that you can weigh my thoughts against any possible bias. Following graduation from the University of Virginia Law School, I spent four years with the Chief Counsel's Office in New York City trying cases in the Tax Court and 14 years in private practice engaged mostly in tax controversy work. In 1968, I was nominated and confirmed as a judge on the U.S. Tax Court from which I retired after 20 years in 1988 while I was serving as Chief Judge. I was a partner for 17 months in the late unlamented law firm of Myerson and Kuhn and since January 1990 have been serving in an Of Counsel capacity to the law firm of Vinson & Elkins.
It is my experience as a trial judge on the Tax Court that may be of some interest to the Commission. However, in that connection, it should be made clear that any thoughts or opinions that I may express are strictly my own and that I am not authorized to speak for the Tax Court or, in fact, Vinson & Elkins.
Of greatest concern to me now, and would be if I were holding court as a Tax Counsel judge, is the prospect of serious conflict-of-interest problems where a large multi- disciplinary practice entity is representing a taxpayer before me. I note at the outset that Section 7452 of the Internal Revenue Code provides that "No qualified person shall be denied admission to practice before the Tax Court because of his failure to be a member of any profession or calling." Pursuant to this statute, the Tax Court holds periodic examinations, open to anyone, to determine their knowledge of the procedural aspects of practicing before the Tax Court. The examination does not include any questions with respect to tax expertise and its passage is not intended to certify anyone's competence in that field.
Paragraph (g) of Rule 24 of the Rules of Practice & Procedure of the Tax Court is entitled "Conflict of Interest" and reads as follows:
"If any counsel of record (1) was involved in planning or promoting a transaction or operating an entity that is connected to any issue in a case, (2) represents more than one person with differing interest with respect to any issue in a case, or (3) is a potential witness in a case, then such counsel must either secure the informed consent of the client (but only as to items (1) and (2)); withdraw from the case; or take whatever other steps are necessary to obviate a conflict of interest or other violation of the ABA Model Rules of Professional Conduct, and particularly Rules 1.7, 1.8, and 3.7 thereof. The Court may inquire into the circumstances of counsel's employment in order to deter such violations. See Rule 201."
The notes accompanying the adoption in 1990 of now paragraph 24(g), then paragraph (f), read in part as follows:
"It has been added because the Court is concerned about the integrity of its decisions. All too frequently a disappointed party challenges a decision on the ground that the party's prior counsel had a conflict of interest. Paragraph (f) is designed to insure that the bar of this Court disclose or rectify any conflict of interest."
Upon being assigned a case when the taxpayer is represented by a multi-practice entity I would ask, as the trial judge:
1. Did the entity prepare the tax return that has been challenged by the Internal Revenue Service?
2. Did the entity plan or promote the transaction that has been challenged?
3. If the answer to question 1 or 2 above is yes, I would ask the taxpayer or an authorized spokesman, if a corporation or trust, whether he or she appreciates the fact that the entity representative in Court may feel a need to defend the entity's actions? That the entity's representative may be reluctant to confess error in any of its actions and unable to bring a dispassionate analysis of the strength and weaknesses of the taxpayer's case? That the entity is assuming the role in part of a principle rather than that of a mere advocate?
4. Does the entity intend to call any of its employees or members as a witness?
If so, does the taxpayer appreciate the fact that the trier of fact will be concerned about giving full weight to the witness's testimony when he or she realizes that the witnesses and the advocate are all part of the same entity with a common axe to grind?
All the above questions would be asked by me in the spirit of insuring a fair trial which is my responsibility. I would insist on an informed consent by the taxpayer or an authorized spokesman that the taxpayer or spokesman is aware of the appearance of a conflict of interest and understands the concerns or possibilities that I have raised, but nonetheless, elects to retain his or her counsel and waives any right to make an issue of such representation at any future time.
Beyond that there is really very little, if anything, a trial judge can do. A litigant has the right to pick its counsel and, if made aware of any problems that the litigant might not have considered, the Court, absent extraordinary circumstances, has no choice except to accept the litigant's wishes.
My conclusion reached above does not mean that I would not have as a trial judge, and do not have now as a private practitioner, deep-seated concerns about the number and amount of conflicts of interest inherent in any multi-practice entity rendering professional services. Lawyers have strict rules governing their conduct and protecting the client from an advocate who does not owe undivided loyalty to him or her. In fact there seems to be a trend in the federal courts to interpret conflict of rules very strictly. Of particular interest in this connection, and certainly to my law firm, is the decision of the Fifth Circuit in In re American Airlines, Inc. AMR Corporation, 972 F.2d 605 (5th Cir. 1992) in which Vinson & Elkins was disqualified from representing Northwest Airlines, Inc. by reason of prior representation of American Airlines. What is especially striking is the Court's holding that there is an " irrebuttable presumption that confidences obtained by an individual lawyer will be shared with the other members of his firm" 972 F.2d at 614. In fact, the whole opinion is a lesson in the land mines lying beneath the conflicts of interest issue and the difficulty a law firm has in extracting itself from a prior client relationship where an issue of such relationship has been made.
There are no such strictures on others rendering professional advice, or at least certainly not nearly as sweeping and all-encompassing. In the growing era of cross-border transactions the number of conflict situations is bound to grow exponentially. If the holding of the Fifth Circuit where held to apply to large international accounting firms, such firms would no longer be large. I know that the Commission is well aware of these inherent conflicts and there is no point in my repeating that litney or citing further illustrations.
I may wish that it were otherwise, but realism tells me that the era of multi-disciplinary entities is upon us. So what do we do about it and the inevitable problems such practice brings?
I view the facing of conflict of interest problems not a matter of turf protecting but a matter of consumer protecting. It is in that context that the debate should take place with respect to what action the ABA should take. Efforts to work with the AICPA should be continued. It is in the best interests of all professionals engaging in rendering multi-practice services to have definite ground rules under which to operate. It is a matter of self-protection. There is no need to amplify on the mind-boggling possibilities for malpractice or alleged negligence lawsuits arising out of furnishing such services.
There is a need for some universal rules of engagement that give to consumer the assurance that his, her, or its interests are receiving the undivided loyalty of a professional entity that has been hired. The provider of services needs the protection of knowing that by following certain prescribed rules it is protected from malpractice lawsuits.
It seems to me that these needs can only be satisfied by federal legislation. There are certainly ample illustrations of Congressional action in the name of consumer protection. Even now there are certain SEC requirements governing the rendering of accounting services. I suggest the consideration by this Commission that the ABA recommend that Congress authorize the formation of a multi-discipline national commission to study and recommend legislation that regulates such practice on a national basis. Such a national commission should be broad-based. This suggestion would seem to be in accord with Jim Holden's recommendation of last November.
It seems obvious that any legislation must be national in scope. To leave the issue of regulation to the states would take forever and, even if state legislation did occur, the inevitable variations between them would create a nightmare for the practitioners.
Again, I appreciate the opportunity to appear before you and will be glad to answer any questions.