JULY 2019 | ETHICS IN VIEW

The details are always in the fees

By Dennis Rendleman, ABA Ethics Counsel, ABA Center for Professional Responsibility

The connection between the two items discussed below is tenuous at best, but since they involve, directly or indirectly, a lawyer’s fees, they are more than “something completely different.”

Item 1:

In January 2016, a New York Times reporter published an article on “the latest conflict-ridden practice on Wall Street.” The subject of this disparagement was a practice called “designated lender counsel.” The article attacked the “insidious relationship. . .between the nation’s largest private equity firms, the banks that lend them billions to fund their buyouts and the law firms that advise on these deals.”

This practice may not directly affect the clear majority of consumers of legal services. However, it bears some commonality with the insurance company designating or assigning a lawyer to represent you in a car crash. In some states it is common for an insurance company to have a captive law firm – the firm may operate under a separate name, but all the lawyers are in fact employees of the insurance company. This is not considered the unauthorized practice of law by a non-law entity because the insurance contract calls for providing legal representation. ABA Formal Opinion 03-430 affirmed decades of such practices: 

[T]he Committee reaffirms its prior opinions and concludes that insurance staff counsel ethically may undertake such representations so long as the lawyers (1) inform all insureds whom they represent that the lawyers are employees of the insurance company, and (2) exercise independent professional judgment in advising or otherwise representing the insureds.

The Committee also concludes that insurance staff counsel may practice under a trade name or under the names of one or more of the practicing lawyers, provided the lawyers function as a law firm and disclose their affiliation with the insurance company to all insureds whom they represent.

The ethical link between the captive insurance practice and designated lender counsel is not perfect. The former has been historic; the latter is a more recent development.

However, the New York State Bar Association (NYSBA) issued Ethics Opinion 818 in 2007 addressing “designated underwriters’ counsel.” The question addressed “[a] common practice among issuers that frequently issue investment grade securities is to designate one law firm to represent the investment banks selected to underwrite the issuer’s securities offerings (a “Designated Underwriters’ Counsel”). This practice is common for both corporate and municipal issuers.”

The NYSBA Opinion concluded: 

Designated underwriters’ counsel may represent the underwriters in a securities offering even though the issuer appointed and pays counsel, provided that underwriters consent after disclosure of material facts. In certain cases, with informed consent of the affected clients, designated underwriters’ counsel may also represent the issuer.

While this well may be the origin of the designated lender counsel, there may significant differences between the two. Is there a difference between an established corporation or municipality that regularly issues securities and a private equity entity that is doing a different deal every time? Is this, as the article speculates, “the equivalent of your employer giving you an employment agreement and telling you that the only lawyer who can look it over is the one the company has retained”? Or, does disclosure and consent resolve the conflict? Or are the banks and, derivatively, the public disserved?

Model Rule 1.8(f) states that:

(f)        A lawyer shall not accept compensation for representing a client from one other than the client unless:

            (1)       the client gives informed consent;

            (2)       there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

            (3)       information relating to representation of a client is protected as required by Rule 1.6.

Rule 1.8(f) governs all third-party payment structures, whether the designated lender counsel, designated underwriter’s counsel or the captive law firm/salaried insurance counsel.

Item 2:

On June 18, 2019, the Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 487. There, the question related to the obligations of the original lawyer, the successor lawyer and the client when the original lawyer had a contingent fee agreement with the client but the client terminates the original lawyer without cause.

The opinion notes that the obligations of both lawyers to the client are often confused.  This is not a situation where Rule 1.5(e) applies.

The lawyers are not dividing a fee as in a referral or simultaneous representation. The original lawyer does not have any joint responsibility for the representation with the successor lawyer.  As the opinion notes, the two lawyers are not working on a case together. Rather, the original lawyer may have a lien on any recovery based upon the contract with the client or a claim for quantum meruit for the value added to the case before the original lawyer’s discharge.

However, in the face of a claim on the proceeds by the original lawyer, the successor lawyer must comply with Rules 1.5(b) & (c).  As Comment [2] to the rule states, “[A]n understanding as to fees…must be established.” Moreover, there is not a specific time frame in which that understanding must occur. The opinion notes that under 1.5(b) the mandated client consent must be obtained before the fee is divided – that includes up to the conclusion of the matter and prior to disbursement of any moneys.

The opinion posits a hypothetical where the client has a written contingent fee agreement with a lawyer under which the lawyer is entitled to one-third of any recovery. Without cause, the client terminates the original lawyer and retains successor counsel on the same terms – a written contingent fee agreement for one-third of any recovery. This successor agreement is silent on any obligation to the original lawyer.

It is axiomatic that a client may discharge a lawyer at any time for any reason. However, the client may be unaware of obligations to pay, not only the successor lawyer, but also the original lawyer. The opinion determines that it is not an “unreasonable burden” for successor counsel to advise the client about the original lawyer’s potential claim and entitlement to some portion of the recovery. Thereafter, the successor lawyer must discuss with the client the potential fee payments required to be made to the original lawyer. Ultimately, any such payments to the original lawyer must be recognized by a written notice to the client.

Further, if the successor lawyer negotiates with the original lawyer on the client’s behalf, the successor lawyer must advise and obtain a waiver from the client for the likely Rule 1.7 personal conflict of interest the successor lawyer has regarding the distribution of the funds.

While some may assert that the point is academic, it is a matter many ethicists say is confusing to the practicing bar. As such the opinion is a valuable clarification for lawyers and, hopefully, will alleviate confusion in the lawyer/client relationship and distribution of any recovery. 

ABA Center for Professional Responsibility is a national leader in developing and interpreting standards and scholarly resources in legal and judicial ethics, professional regulation, professionalism and client protection mechanisms.  

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