Year 1988 Ethics Opinions
THE ASSOCIATION OF
THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 1988-5
COMMITTEE ON
PROFESSIONAL AND JUDICIAL ETHICS
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June 14, 1988
ACTION: Formal
Opinion
OPINION:
Many New York attorneys
participate in the affairs of their cooperative or condominium
apartment buildings, and also may be called upon for legal
assistance relating to the affairs of the corporations or their
tenants or both. Ethical questions arise in a variety of
circumstances, some of which may not be immediately apparent. The
purpose of this opinion is to alert the Bar to some of these
questions.
RELEVANT GENERAL PRINCIPLES
Canon 5 of the Code of
Professional Responsibility requires a lawyer to exercise
independent professional judgment on behalf of a client. The
lawyer's professional judgment must be exercised solely for the
benefit of the client and free of compromising influences and
loyalties. EC 5-1. The diverse interests that may arise include
the personal interests of the lawyer, EC 5-2 et seq., interests
of multiple clients, EC 5-14 et seq., and desires of third
persons, EC 5-21 et seq.
In the first instance, a
lawyer-tenant must take into account his or her property interest
in the cooperative or condominium apartment. DR 5-101(A) provides
that:
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.
See EC 5-3; N.Y. State 162 (1970);
N.Y. City 247 (1932); cf. N.Y. City 525 (1940). In many
instances, the lawyer's investment in an apartment is
substantial. In addition, the lawyer-tenant's relationships with
other tenants and with respect to the amenities of the building
may, more subtly, be influences that could possibly compromise
the lawyer's duty of undivided loyalty to a client. In
determining whether the lawyer's professional judgment "reasonably may be affected" by the lawyer's own
interests, an objective standard is applied. Accordingly, consent
must be obtained after full disclosure if the lawyer determines
that there is a "reasonable probability" that
"personal interests or desires" will impair the
lawyer's professional judgment or adversely affect the advice or
services to be rendered. EC 5-2.
Secondly, problems of
representation of multiple or diverse interests may arise. DR
5-105(A) and (B) require a lawyer to decline or not to continue
multiple employment if the lawyer's "independent
professional judgment . . . is likely to be adversely affected, .
. . except to the extent permitted under DR 5-105(C)." Under
the latter rule, a lawyer may represent multiple clients only if
(1) it is obvious that the lawyer can adequately represent the
interests of each and (2) each client consents to the
representation after full disclosure of the possible effect of
such representation on the exercise of the lawyer's independent
professional judgment on behalf of each. The lawyer should
resolve all doubts against the propriety of the representation.
EC 5-15. n1
n1 It should be noted that, under
the Code as currently in effect, if a lawyer is required to
decline or withdraw from employment under DR 5-105, all lawyers
in his or her firm are similarly disqualified. DR 5-105(D).
A third area of concern is the
protection of client confidences and secrets learned by the
lawyer in the course of representing either the cooperative or a
fellow tenant. Such confidences and secrets may not be revealed
or used to the disadvantage of the client or to the advantage of
a third person except with the consent of the client after full
disclosure. DR 4-101(B), (C). The lawyer should be particularly
sensitive to the possibility that by rendering informal legal
advice to fellow board members or fellow tenants, the lawyer may
create an attorney-client relationship for purposes of DR 4-101.
n2
n2 If a lawyer is asked to provide
legal services for the corporation, either by specific request or
through an informal and perhaps unspoken arrangement, an
attorney-client relationship arises. However, where a
lawyer-director receives no legal fees from the cooperative, has
never represented the cooperative and the cooperative has outside
legal counsel, we do not believe that the lawyer-director becomes
a legal advisor to the board merely by expressing views, in the
lawyer's capacity as a director, on legal matters affecting the
corporation.
I.
THE LAWYER-TENANT AS ATTORNEY FOR
THE CORPORATION OR BOARD
The first question is whether a
lawyer-tenant who serves as an officer or director of the
cooperative may also render legal services to the cooperative.
There is no general prohibition against simultaneous service on a
board of directors and as counsel for the corporation, although
such dual roles raise a number of ethical issues. See generally
N.Y. State 589 (1988). In addition to the particular problems
that may arise in the cooperative apartment context, which are
discussed below, certain ethical restraints apply in all cases in
which a lawyer serves simultaneously as a director and counsel to
a corporation. For example, the lawyer may not "tak[e]
advantage of his or her position [as director] to procure
professional employment for the lawyer or the lawyer's law
firm," N.Y. State 589 (1988), or participate in the board's
decision to retain the lawyer, N.Y. City 611 (1942). Indeed, the
lawyer-director may not participate "in any decision of the
[board] that will or reasonably may affect the lawyer's own
personal or financial interests as counsel." N.Y. State 589
(1988). Finally, the lawyer-director must exercise his or her
independent professional judgment "solely for the benefit of
[the corporation] and free of compromising influences and
loyalties," EC 5-1, that may arise out of his or her role as
director (such as a desire to be re-elected to the board or
concern for the lawyer's personal liability as a director).
Whenever a corporation's counsel
is considering joining the corporation's board of directors, or
if already a director, a lawyer is considering representing the
corporation, the lawyer must determine whether "the exercise
of his professional judgment on behalf of [the corporation] will
be or reasonably may be affected by his own financial, business,
property, or personal interests," DR 5-101(A), and if so,
the lawyer must obtain the corporation's consent after full
disclosure. However, where there is a "reasonable
probability" that the lawyer's "personal interests or
desires will . . . affect adversely the advice to be given or
services to be rendered," the lawyer should not serve in
both roles regardless of whether the corporation has consented.
EC 5-2. n3
n3 While DR 5-101(A), read
literally, may permit a lawyer to serve as both director of and
counsel to a corporation if the client consents after full
disclosure even in cases where there is a material risk that the
lawyer's own interests will adversely affect the representation,
we believe that lawyers should decline the representation in such
cases. Rule 1.7(b)(1) of the Model Rules of Professional Conduct
provides that client consent will not cure the conflict unless "the lawyer reasonably believes the representation will not
be adversely affected. . . ." The comment to this Rule makes
clear that even with consent, a lawyer cannot serve as both a
director of and counsel to a corporation "[i]f there is
material risk that the dual role will compromise the lawyer's
independence of professional judgment." In N.Y. State 589
(1988), the Committee on Professional Ethics of the New York
State Bar Association stated its belief, with which we concur,
that this comment "accurately reflects the relevant concerns
under the principles articulated in the Code of Professional
Responsibility."
In the cooperative context, the
lawyer must carefully consider whether his interest as an owner
and as a tenant could affect the exercise of his or her
independent professional judgment on behalf of the corporation,
either generally or as to specific matters. In the normal course
of events, the lawyer's proprietary interest is coextensive with
that of other tenants. Such interest should not prohibit the
lawyer from acting as an officer or director of a cooperative or
otherwise participating in the affairs of the corporation. But
such interest may well be relevant in evaluating the propriety of
providing legal services to the corporation or others.
While, in general, the interest of
the lawyer may be coextensive with the interests of other
members, and not immediately perceived as interfering with the
exercise of independent judgment, circumstances may arise where
the property or other interests of the lawyer-tenant may conflict
with the interests of the board or other tenants. Conflicts are
particularly likely in the event of litigation between the
cooperative corporation or the board of directors and another
tenant in the building. For example, a tenant may sue the board
to compel it to permit him to construct an alteration to his
apartment, e.g., Demas v. 325 West End Avenue Corp., 127 A.D.2d
475, 511 N.Y.S.2d 621 (1st Dep't 1987), or to sell his apartment
to a buyer rejected by the board, e.g., Bernheim v. 136 East 64th
Street Corp., 128 A.D.2d 434, 512 N.Y.S.2d 825 (1st Dep't 1987),
or the board may sue a tenant to compel him to remove an illegal
pet or alteration. The lawyer's property or personal interests
could well be adverse to the board's if the lawyer-tenant had a
similar problem, or was a friend of the other tenant.
A lawyer's personal interests
reasonably may be expected to affect professional judgment, and
accordingly, under DR 5-101(A), the lawyer may not accept an
engagement to represent the cooperative in such litigation unless
the board consents after full disclosure of the possible effect
on the lawyer's professional judgment. n4 Even with the board's
consent, however, we believe that the representation should not
be undertaken if there is a material risk that the lawyer's
advice or services would be adversely affected by the conflict,
EC 5-2, for example, in a lawsuit between the cooperative and
member of the lawyer's family.
n4 In extreme cases, such as where
the lawyer seeks to represent the cooperative in a business
transaction with an entity owned or controlled by the lawyer, DR
5-104(A), informed consent may require that an independent
attorney advise the board regarding the conflict. See Goldman v.
Kane, 3 Mass. App. Ct. 336, 341, 329 N.E.2d 770, 773 (1975).
More subtle questions arise where
a lawyer-director is asked to represent the cooperative in a
commercial or corporate transaction. In most cases, the lawyer's
property and personal interests should coincide with those of the
other tenants and the board. However, that will not always be the
case. The greatest potential for conflicting interests arises in
transactions involving other tenants in the building. For
example, the board may ask the lawyer to represent it in
connection with the sale of an apartment by another tenant. The
lawyer should be sensitive to the possibility that his personal
feelings about the selling tenant and the prospective buyer may
influence his professional judgment. To the extent there are no
matters to be negotiated by the lawyer in connection with the
transaction, the problem is somewhat alleviated. Cf. N.Y. City
81-4 (a lawyer can represent both a mortgagor and a mortgagee "[i]f the parties themselves have agreed to the terms
without an attorney, and if the attorney's work is mostly
ministerial," and the parties have consented after full
disclosure). If, however, the prospective buyer seeks concessions
or promises from the board (for example, to make certain
repairs), the lawyer's property interests will be implicated and
the need for his impartial judgment will increase. In all such
cases, the board must be fully informed of, and consent to, the
possible effect on the lawyer's judgment before the lawyer may
accept the engagement.
Finally, we note that in all cases
where a cooperative seeks to retain a lawyer-tenant as counsel,
the board should be fully informed of the risk of a later
withdrawal by the lawyer if differing interests should arise, see
EC 5-3, n5 and that in no circumstances may a lawyer represent
the board in any litigation if it appears that he "ought to
be called as a witness" in the matter. DR 5-101(B).
n5 We do not decide here whether
DR 5-101(A) requires withdrawal if, after accepting employment, a
conflict arises between the cooperative's interests and the
attorney's interests. Some authorities have argued that
withdrawal is not required in such circumstances. See American
Bar Foundation, Annotated Code of Professional Responsibility
193-94 (1979).
II.
THE LAWYER-TENANT AS ATTORNEY FOR
A CO-TENANT
Careful consideration should be
given whenever a co-tenant requests representation in connection
with a matter relating to the cooperative or condominium. If the
lawyer is neither a member of the cooperative's board of
directors, nor the attorney for the cooperative, the question is
whether the lawyer's professional judgment may reasonably be
affected by the lawyer's property or personal interests. DR
5-101(A). The potential for such impairment is most evident where
a co-tenant seeks to retain the lawyer-tenant as counsel in an
action against the cooperative. n6 Again, informed consent would
permit such represenation unless there is a material risk that
the conflict would impair the representation.
n6 The lawyer must decline the
representation if he "ought to be called as a witness" in the litigation.
DR 5-101(B).
Not so readily apparent are the
potential difficulties in the lawyer-tenant's representation of a
co-tenant in the sale of an apartment. While the immediate "adversarial" interests
are between the purchaser and seller, and no direct conflict exists in representation
of the
seller only, the corporation's interest and the lawyer's interest
as a tenant-shareholder may be affected by the transaction. For
example, the lawyer-tenant may personally dislike the proposed
buyer, who is to be the lawyer's new neighbor, or, conversely, if
the proposed buyer is not approved by the corporation's board of
directors, the lawyer-tenant may not be able to advise the seller
objectively as to whether he has a legal claim against the
corporation. In another situation, the cooperative, and therefore
the lawyer as a tenant, may have an interest in requiring the
seller to repair or restore the apartment prior to its sale in
accordance with the terms of the proprietary lease even if the
buyer has raised no objection.
A different set of issues arises
if the lawyer is either a board member or counsel for the
cooperative. In either case, the lawyer-tenant would owe
fiduciary duties to the cooperative that could conflict with the
representation of another tenant in a matter relating to the
cooperative. See N.Y. State 589 (1988). Where the lawyer is also
counsel for the cooperative, he or she may represent an
individual tenant-stockholder "only if the lawyer is
convinced that differing interests are not present." EC
5-18. For example, where a lawyer who represents the cooperative
is requested to represent both the cooperative and a tenant in a
sale of the tenant's apartment, the lawyer must determine whether
in fact there are adverse interests between the parties, such as
a dispute over unpaid maintenance. In cases where the lawyer's
role on behalf of the cooperative is largely ministerial and
there are no adverse interests between the cooperative and the
selling tenant, the dual representation would be permissible with
the informed consent of both parties.
On the other hand, the lawyer must
be sensitive to situations where the selling tenant is in fact
aligned with the buyer in seeking concessions from the
cooperative to the buyer in order to facilitate the sale. In such
cases, as in cases where the cooperative's lawyer is asked to
enforce a claim on behalf of a co-tenant against the cooperative
or the board of directors, we do not believe it will ever be "obvious" that the lawyer can "adequately
represent the interest of each," DR 5-105(C), and
accordingly, the conflict could never be cured by consent. EC
5-15. n7 Even if the dual representation is initially proper, if
a nonwaivable conflict later develops between the cooperative and
the tenant, the lawyer may be forced to withdraw from both
representations and may in some cases be prohibited by the rules
prohibiting disclosure of client confidences even from informing
one or the other of the clients of the reasons for the
withdrawal.
n7 In addition, such a dual
representation could lead to a breach of the duty to keep client
confidences and secrets, DR 4-101, or a breach of the duty to
represent a client zealously, DR 7-101(A).
III.
THE LAWYER-TENANT AS ATTORNEY FOR
A PURCHASER
The interests of a purchaser of
shares in the cooperative apartment can be quite different from
the interests of the cooperative as a whole, creating areas of
actual or potential conflict of interests. Potential conflicts
include negotiation of a recognition agreement whereby the
cooperative corporation may recognize a lending bank's lien on
the new owner's shares, and negotiation with the corporation as
to alterations or other questions under the proprietary lease or
house rules. Additionally, the prospective purchaser needs to be
approved by the board of the building, representing another
potential for conflict of interest, whether the lawyer-tenant is
acting as board member or as a lawyer for the corporation. If the
lawyer-tenant is the lawyer for the corporation, acting also for
the potential purchaser clearly constitutes representation of
differing interests. Accordingly, the lawyer-tenant may act only
if it is "obvious" that he can adequately represent
both the cooperative and the purchaser and each party consents
after full disclosure of the conflict between the cooperative and
the purchaser and the lawyer-tenant's personal and property
interests in the transaction. DR 5-105(A).
Whether the "obviousness" test can be met depends on the particular
facts and circumstances, but in general, the more issues there
are to be negotiated between the board and the applicant, the
less likely it will be satisfied. See N.Y. State 162 (1970).
Conversely, if there is nothing to be negotiated, and the lawyer
is acting primarily in a ministerial capacity, the conflict may
be waivable. N.Y. City 81-4; N.Y. County 615 (1973). In any
event, we agree with the opinion of the New York State Bar
Association Committee on Professional Ethics that "[d]ual
representation should be practiced sparingly and only when it is
clear that neither party will suffer any disadvantage from
it." N.Y. State 38 (1966), quoted in N.Y. State 162 (1970).
Recognition should also be given
to the possibility of future disputes between the purchaser and
the corporation. Problems of rental payments or other
relationships between tenant and corporation may arise. They
should be recognized, fully disclosed and consented to by both
the cooperative and the purchasing tenant, and it should be
clearly agreed that the representation is limited to completion
of the purchase transaction and does not extend into the future.
IV.
THE LAWYER-TENANT AS ATTORNEY FOR
A TENANTS' GROUP WITH RESPECT TO A CONVERSION PLAN
Finally, we turn to the question
of whether a lawyer residing in a rental building may represent a
tenants' committee formed in response to an announced conversion
plan. Although the property interests of a lawyer may initially
be co-extensive with those of the members of a tenants' group or
committee, and not currently interfere with the exercise of the
lawyer's independent judgment, if the likelihood of such
interference can reasonably be foreseen, the lawyer should
explain the situation to the tenants' group, including the risk
of later withdrawal and the serious disruptions that may ensue.
The lawyer should decline or withdraw from employment unless the
tenants' group consents to the continuance of the relationship
after full disclosure. DR 5-101(A); EC 5-3. Issues upon which the
lawyer's personal or financial interests may diverge from other
tenants could include, for example, whether to try to defeat the
conversion plan, what parts of the building to seek to have the
landlord repair and how to allocate the maintenance among the
apartments in the building.
If the lawyer believes that there
is no reasonable possibility that the lawyer's interest in his or
her own apartment will at some point adversely affect the
services the lawyer will render to the tenants' committee, it
would be proper for the lawyer to undertake the representation,
provided (1) full disclosure is made to the prospective clients
of the lawyer's interest and of the potential risks and conflicts
that could arise from that interest and (2) each of those clients
thereafter consents to the lawyer's retention. See N.Y. City
80-87. (Given the changing composition of tenants' groups, such
consents may be difficult to obtain throughout the
representation.) In the case of a lawyer-tenant involved with a
cooperative conversion, however, we caution that in many
circumstances it is reasonably foreseeable that the lawyer's
financial and property interests could diverge from the interests
of other tenants and thus interfere with the lawyer's
representation of other tenants. A lawyer should accept or
continue such representation only after the most careful
consideration and should resolve all doubts against the propriety
of the representation. EC 5-15.
An additional ethical
consideration arises from the possibility that at some point in
the conversion process the interest of the constituent members of
the tenants' committee may diverge. If the lawyer's exercise of
independent professional judgment on behalf of some tenants will
be or is likely to be adversely affected by his or her
representation of others, the lawyer must discontinue the
multiple employment, DR 5-105(B), unless it is obvious that the
lawyer can adequately represent the interests of each group and
each group consents after full disclosure of the possible risks
and effects of such representation. DR 5-105(C); see also EC
5-16, EC 5-19, N.Y. City 81-4. While each case depends on its own
facts, we caution that in many instances it will not be obvious
that a single attorney -- particularly one who is also a tenant
-- will be able to represent adequately the interests of numerous
tenants in the entire conversion process.
Assuming compliance with DR 5-101
and DR 5-105, representation of a tenants' committee by a tenant
is not inherently unethical. However, the prospect of diverging
interests between the lawyer and some of his or her clients, or
among the individual members of a tenants' committee, is
sufficiently possible that the better practice may be to decline
such representation at the outset and spare the clients the
expense and inconvenience caused by later withdrawal. See N.Y.
City 81-27.
CONCLUSION
Lawyers who participate in the
affairs of the cooperative or condominium apartment buildings in
which they live should be sensitive to the ethical issues that
may arise. At the heart of these issues is Canon 5 of the Code of
Professional Responsibility, which requires a lawyer to exercise
independent professional judgment on behalf of a client. The
Ethical Considerations and Disciplinary Rules under Canon 5, as
well as others that may be applicable, should be carefully
considered in the context of the various roles that lawyers may
play. As tenants, lawyers have a property or personal interest
that may affect the exercise of their professional judgment. When
acting as a lawyer for the corporation, for sellers or buyers of
apartments or for tenants' committees, a lawyer may be dealing
with multiple and diverse interests that may adversely affect the
independence of his or her professional judgment or the lawyer's
duty of loyalty to a client. Service on the board of directors of
the building corporation raises further ethical problems if the
lawyer also proposes to function in a professional capacity.
This opinion is intended to serve
as a guide to assist the Bar in dealing with these questions. We
emphasize that, as with conflicts of interest in general, lawyers
who participate in the affairs of the cooperative or condominium
apartment buildings in which they live should resolve all doubts
against the propriety of the proposed representation.
