General Practice, Solo & Small Firm DivisionBest of ABA Sections

FALL 1997

Business Law

Malpractice Alert: No "Conflict," but a Conflict of Interest

By Steven Lubet

Consider this parable. A good lawyer was sued for malpractice. He had put together a joint venture that eventually went bust. The principal investor lost his life savings, and was now crying conflict of interest. Here is what the good lawyer had to say about the claim: There was no conflict of interest between joint venturers because they had the same objectives and goals, that is, to acquire and develop the real estate.

Because he saw no conflict of interest, the good lawyer made no disclosures and gave no warnings. Because he believed that he represented "the venture," he obtained no explicit consents from the individual participants.

The lawyer had introduced two clients to each other. One was a real estate developer in search of financing to redevelop a strip mall; the other was an investor in search of new enterprises. It was a "slam-dunk" project, and they were perfect for each other. After a short round of friendly negotiations, the lawyer helped them forge a joint venture, drafting the agreement and otherwise papering the deal. The developer would take care of appraisals, permanent financing, renovation and management. The investor would provide a bridge loan and a substantial infusion of working capital. Once the mall was up and running, they would share the plentiful profits.

All went well until an essential "anchor tenant" failed to materialize and the whole deal collapsed. At once, the previously cooperative team members were at each other's throats. The friendly negotiations began to seem suspect. The perfect arrangement appeared questionable. The developer declared bankruptcy. The investor discovered that he had all sorts of unanswered questions for his lawyer. Why hadn’t there been an independent appraisal? Where was the accounting for the so-called development costs? Why was no security pledged for the bridge loan? How committed had the anchor tenant been in the first place? The good lawyer suddenly looked liable.

And, indeed, it turned out that he was liable—ordered by a jury to pay more than $1 million in damages. His error was a common one, though not a mistake that a layperson would expect a lawyer to make. He had forgotten to pay attention to each word in a sentence. Remember his explanation, "There was no conflict between the joint venturers, because they had the same objectives and goals." The good lawyer had overlooked a crucial, and most fateful phrase: "Of interest."

The key to avoiding malpractice liability is to worry not exclusively about conflicts, but principally about "conflicts of interest." Our good lawyer recognized immediately that his co-clients were not in direct conflict. They were, after all, trying to do a deal that promised to enrich everyone. They had a strong mutual desire to see the mall open and prosper. But so what? Clients who were in direct conflict, who were actually hostile or opposed to each other, probably wouldn't be doing a deal together. And if they were doing a deal, they certainly would not go to the same lawyer. It is hard even to imagine the scenario: "You want the mall to succeed, but I want it to fail; let's see if we can get the same lawyer to help us."

No, the true danger lurking in most cases of joint representation is the unrecognized conflict of interest. Though the parties' ultimate goals may be in complete and utter harmony, their predicate interests may still be inconsistent and diverse. So long as their goals are achieved, of course, everyone will enjoy the happy ending and no one will sue for malpractice. But once aspirations are thwarted and hopes are dashed, clients may come to realize that their constituent interests were not fully safeguarded.

In the case of our good lawyer, for example, the developer was putting up "sweat equity." He had a half-rehabbed mall on his hands and he desperately needed an interim loan. His costs were sunk; he would lose everything unless he could attract new money. The developer's interest, then, was in pushing the joint venture through. The investor, on the other hand, had liquid capital. If he didn't invest in the mall, well, there were plenty of other places where he could park his million and a half bucks. The investor had a strong interest in caution and security.

Realizing the competing nature of the two interests, it should be obvious that one lawyer could not fully protect them both. It would be impossible to propel the deal urgently (which is what the developer needed) while at the same time judiciously slowing it down (to make sure that the investor's concerns were served). Despite the parties' general concurrence, their interests dictated very different approaches to the process.

This is certainly not to say that the good lawyer was absolutely barred from representing both the investor and the developer. Indeed, it is common, and often preferable, for a single lawyer to represent several partners, incorporators or joint venturers. It is necessary, though, that each of the clients be fully advised of the risks and implications of the multiple representation. And that requires a clear-eyed understanding of all of their underlying interests. Once there has been full disclosure, the clients may or may not elect to proceed with the same counsel, but their consent must be knowing and intelligent. Most important, it must be based on something more than an absence of direct antagonism.

I have quite purposely referred to our malpractice defendant as a good lawyer. In fact, he was a very good lawyer—careful, thorough, competent, and thoughtful about his legal work. He did pro bono cases and was active in the bar. Good lawyers are not immune from malpractice or malpractice lawsuits. Our good lawyer made one devastating, irrevocable mistake. He looked only at whether his clients were in conflict and he forgot about conflicts of interest.

 

Conflicts and Rules

The following are some of the ethics rules that govern conflicts of interest:

Model Rules of Professional Conduct, Rule 1.7

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client . . . unless

(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

Model Code of Professional Responsibility, DR 5-105

(A) A lawyer shall decline proffered employment if the exercise of his professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests . . . .

(C) [A] lawyer may represent multiple clients . . . if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.

Steven Lubet is a professor of law at Northwestern University in Chicago.

This article is an abridged and edited version of one that originally appeared in Business Law Today, Jan./Feb. 1997 (6:3).

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