Ethics Opinon 1984-1
Attorney X writes the tax opinion letter for a tax shelter investment. Y, a non-attorney and an apparent promoter of the tax shelter investment scheme, mails a form letter on Attorney X's stationery to prospective investors which urges them to purchase an interest in the investment scheme. Y states that the investment will be done through "our legal and investment firm, Attorney X, a Professional Law Corporation." Y signs the letter, requesting that all letters to "our notification" be sent to the address of Attorney X's law office.
Attorney X has also been engaged to be the defense counsel for the promoters of the investment transaction in the event the IRS challenges the transaction.
In addition, Attorney X drafted portions of the offering memorandum for a fee.
1. May Attorney X be engaged in a business partnership with Y which involves both the practice of law and an investment business and, in the course of conducting such a business, allow Y to use X's legal stationery?
2. Is it proper for Attorney X to be the promoter of the investment scheme and, in addition, write the tax opinion letter and the offering memorandum for the investment scheme?
There are several problems that arise as a result of this transaction. Rule 3-103 of the Rules of Professional Conduct provides that a lawyer may not enter into a partnership with a non-lawyer where any part of the partnership business will constitute the practice of law. In this case, it appears that Attorney X is engaged in a partnership with a non-lawyer which involves both the practice of law and an investment business. Therefore, Attorney X has violated Rule 3-103.
Furthermore, it appears from these facts that Attorney X is a promoter, legal advisor and an investor of the investment scheme. Rule 5-101 of the Rules of Professional Conduct provides that a member of the State Bar shall not enter into a business transaction with one of his clients unless (i) the terms of the transaction are fair and reasonable and fully disclosed to the client, (ii) the client is given a reasonable opportunity to seek the advice of independent counsel regarding the transaction and (iii) the client consents in writing thereto. Therefore, if Attorney X does not want to be subject to discipline, he must (i) fully disclose that he is serving as a promoter, investor, and legal advisor to the investment scheme, (ii) encourage the prospective investors to obtain advice from independent counsel and (iii) obtain written consent from all of the investors.
Rule 3-103 of the Rules of Professional Conduct provides:
"A member of the State Bar shall not form a partnership with a person not licensed to practice law if any of the activities of the partnership consist of the practice of law."
Moreover, Rule 3-102 of the Rules of Professional Conduct provides:
"(A) A member of the State Bar or the member's firm shall not directly or indirectly share legal fees except with a person licensed to practice law except that:
"(1) An agreement by a member of the State Bar or the member's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the member's death, to his or her estate or to one or more specified persons."
Disciplinary Rule 3-103(A) of the ABA Code also prohibits a lawyer from forming a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law. Disciplinary Rule 3-102 further provides:
"(A) A lawyer or law firm shall not share legal fees with a non-lawyer, except that:
"(1) An agreement by a lawyer with his firm, partner, or associate may provide for the payment of money, over a reasonable period of time after his death, to his estate or to one or more specified persons.
"(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer.
"(3) A lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit sharing arrangement providing such plan does not circumvent another Disciplinary Rule."
Attorney X's partner, Y, a non-attorney, has mailed form letters on Attorney X's stationery which urges prospective investors to purchase an interest in an investment scheme.
The use of Attorney X's stationery by Y gives the appearance of some sort of partnership between X and Y. Y's reference to "our legal and investment firm" also makes it appear as if X and Y are partners. Moreover, the statement that this is a "legal and investment firm" makes it appear as if they have combined in this partnership the practice of law and an investment business. Finally, Y asks that all mail be sent to Attorney X's law office, which further makes it appear that X and Y are in a partnership together.
Under such circumstances, it appears that Attorney X and Y have formed a partnership involving both a law practice and an investment business. Since Y is not an attorney, such a practice violates rule 3-103 of the Rules of Professional Conduct and ABA rule 3-103(A), which prohibit a lawyer from forming a partnership with a non-lawyer. Such a practice also violates Rule 3-102 of the Rules of Professional Conduct and ABA Rule 3-102, which prohibit a lawyer from sharing legal fees with a non-lawyer.
On the other hand, nothing prohibits a lawyer from joining with a non-lawyer in a business relationship that does not involve the practice of law. If Attorney X does not want to violate these rules and be subject to discipline, he should form a business separate and apart from his law practice. This would involve getting new stationery that does not state that the business is a law practice or that X is an attorney. If possible, X should set up an office for his investment business which is located apart from the law office so as not to give the appearance of any relation between the investment business and the law practice. Finally, X should do whatever is necessary so as not to give the appearance that the two practices are related. As long as the investment business does not in any way involve the practice of law, X and Y may also split their fees between each other.
Rule 5-101 of the Rules of Professional Conduct provides:
"A member of the State Bar shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless (1) the transaction and terms in which the member of the State Bar acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in manner and terms which should have reasonably been understood by the client, (2) the client is given a reasonable opportunity to seek the advice of independent counsel of the client's choice on the transaction and (3) the client consents in writing thereto."
Moreover, ABA Disciplinary Rule 5-101(A) provides:
"Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests."
Finally, Ethical Consideration 5-3 provides:
"The self interest of a lawyer resulting from his ownership of property in which his client also has an interest or which may affect property of his client may interfere with the exercise of free judgement on behalf of his client. If such interference would occur with respect to a prospective client, a lawyer should decline employment proferred by him. After accepting employment, a lawyer should not acquire property rights that would adversely affect his professional judgment in the representation of his client. Even if the property interests of a lawyer do not presently interfere with the exercise of his independent judgment, but the likelihood of interference can reasonably be foreseen by him, a lawyer should explain the situation to his client and should decline employment or withdraw unless the client consents to the continuance of the relationship after full disclosure. A lawyer should not seek to persuade his client to permit him to invest in an undertaking of his client nor make improper use of his professional relationship to influence his client to invest in an enterprise in which the lawyer is interested."
Attorney X has urged his clients, and prospective investors who will become his clients, to invest in a venture in which Attorney X has a personal interest. In addition, Attorney X has written the tax opinion letter and portions of the offering memorandum for the investment scheme. It appears that these prospective investors have not been advised that Attorney X is a promoter of the investment scheme and is also serving as the legal advisor for the investment scheme.
There are two problems that arise as a result of this situation. First, Attorney X's personal interest might influence his exercise of judgement on behalf of his clients. Second, his interest in the investment scheme may conflict with the clients' interests, since the investors want Attorney X, as the promoter, to receive as small a fee as possible, whereas Attorney X wants to receive as large a fee as possible. Moreover, the tax opinion letter drafted by Attorney X may not be as realistic and accurate as it might be if he had no interest in the scheme, since he is interested in seeing the project go well.
If Attorney X does not want to be subject to discipline, he must (i) fully disclose that he is serving as a promoter, investor and legal advisor to the investment scheme, (ii) encourage the prospective investors to obtain advice from independent counsel and (iii) obtain written consent from all of the investors. It would be advisable for Attorney X to obtain a written consent statement signed by each investor and an attorney.
Further, even if Attorney X complies with the instructions set forth in this opinion, he may incur a variety of other legal problems not addressed by this opinion if he continues to serve as both promoter and legal advisor.
Any securities law violations that are involved in this transaction are not addressed by this opinion. Further, recent opinions and decisions, such as ABA Opinion 346, may impose increased obligations on the author of an opinion letter to verify the accuracy of the contents of that letter.
This opinion is advisory only. It is not binding upon the State Bar, the Board of Governors, its agents or employees.
Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.