July 2017

Put It In Writing: Letters Memorialize Crucial Information

By Jennifer Gilman

Frantz Law Group

Attorneys dedicate many years of their lives and make tremendous personal sacrifices when they decide to practice law. These sacrifices sometimes result in uneasy family relationships, delays in starting a family, or financial hardships that are ostensibly temporary. And yet, these sacrifices are made willingly, as many attorneys become solo practitioners with the admirable overlapping goals of making a name for themselves, helping those in need, ensuring that the legal system is accessible to all and upholding justice.

Solo practitioners are soon to discover, however, that practicing law is expensive, and lawyers must answer to their creditors as well as their clients. It is tempting, then, to take on as many cases as possible, in any area of law, in order to ensure an attorney’s practice remains solvent. Some attorneys are willing to simultaneously practice in various areas of law in order to keep the business afloat – litigation and transactional work; criminal defense and divorces; hourly rates and contingency fees. But lean economic times may give rise to the potential for serious legal ethics blunders.

Imagine, for a moment, that a potential client indicates he is not able to pay for legal services, but that he’s willing to compensate an attorney by providing a stake in the LLC he wants the attorney to form for him and his business partners. If the LLC boasts particularly robust financials, ethical considerations may take a backseat. What’s more, if the attorney does not have experience representing or forming LLCs, the legal landscape may form a quagmire that is exceedingly difficult to traverse without running afoul of ethical obligations.

As an initial matter, an attorney should immediately determine who the client is. In this case, it may be the LLC, it may be the individual who walked in to contract for services to form the LLC, or it may be the individual’s business partners. Best practices suggest the attorney should make this determination, and then promptly and clearly communicate it in writing before agreeing to undertake the representation. A conflict letter that satisfies California Rule of Professional Conduct Rule 3-310 will go so far as to set out the limits of representation, as well as the scope of services the attorney is agreeing to provide to the LLC and its individual officers.

California Rule of Professional Conduct Rule 3-500 requires members to keep clients reasonably informed about significant developments relating to the employment or representation – which would undoubtedly include a determination by the attorney that the person who walked into the office to enter into a contract is not, in fact, the client. This dovetails with California Rule of Professional Conduct Rule 3-600, which provides that when an attorney represents an organization as a client, a member shall conform his or her representation to the concept the client is the organization itself, acting through its highest officer.

The individual who engaged the attorney for legal services may reasonably believe that he, personally, is being represented by the attorney, and that all information communicated to the attorney is confidential, in line with Business and Professions Code section 6068(e)(1). The attorney’s initial letter should communicate that the LLC is the client, and where there are multiple parties represented by the attorney in the same transaction, there is no privilege of confidentiality as between the jointly-represented parties.

That means the individual should not tell the attorney anything he or she does not want other LLC officers to know. The letter will also remind those who are not represented by the attorney that they have the right to consult independent counsel on these matters, and set forth the foreseeable potential conflicts between the LLC and the individual officers, as well as contingencies for what happens if and when an unresolvable conflict of interest arises – namely, the attorney will have to withdraw.

With all of these considerations, it is also easy to overlook the potential trouble this situation may create with self-dealing under California Rule of Professional Conduct Rule 3-300. The attorney is agreeing to accept, in lieu of attorney’s fees, a stake in the LLC. It is incumbent upon the attorney to set out, with specificity, what “a stake” means.

Under Business and Professions Code section 6148, if it is reasonably foreseeable that the total expense to a client, including attorney fees, will exceed $1,000, the contract for services shall be in writing. The written contract shall include the basis for the computation of the fee, including, but not limited to, hourly rates, statutory fees or flat fees, and other standard rates, fees, and charges applicable to the case. The attorney may believe the agreement between the parties is that the attorney will provide legal services on behalf of the LLC in exchange for a certain number of shares in the LLC; it must be made clear that the attorney is not accepting a percentage of any one individual’s personal stake in the LLC. Moreover, he must be certain that his retainer agreement includes the appropriate language for an equity billing arrangement.

This article focuses on threshold considerations in a transactional matter in the context of forming a corporation, but it could just as easily have been written about litigation or other areas of law. Perhaps a car accident resulted in injuries to multiple plaintiffs who wish to be jointly represented by one attorney. Perhaps a husband and wife agree upon an amicable dissolution of marriage and want one attorney to represent both of them jointly in negotiating a marital settlement agreement in order to effectuate and finalize their divorce. Perhaps two parents need to retain the services of a criminal defense attorney to represent their son in a criminal proceeding. Each of these scenarios – and many others – requires the attorney to determine who the client is, what the scope of representation is, and how to handle the communication of any confidential information throughout the course of representation.

Detailed letters that set out all of this information are sometimes difficult to write – there exists the possibility the recipients of these letters may become angry, upset, or frustrated by the information contained therein. However, failing to memorialize these crucial details, in writing, can result in a much worse situation for an attorney.

Drafting a conflicts letter or a letter that sets out the scope of representation forces an attorney to engage in the analysis set out here and creates a document the clients can review if a question arises. If a conflict later emerges that raises a question as to the attorney’s duties on behalf of his client, these letters can be key documents in establishing the attorney acted in conformity with his ethical and legal duties.

**No portion of this article is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**