ASSOCIATION OF THE BAR OF THE CITY
OF NEW YORK COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
TOPIC: In-house attorney; fees to third parties;
Year 1994 Ethics Opinions
THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 1994-6
COMMITTEE ON PROFESSIONAL AND
Friendly Version >>
May 5, 1994
ACTION: FORMAL OPINION
DIGEST: Attorney may be employed
in-house by bank that charges borrowers a fixed fee for the
attorney's services so long as the fee represents the actual cost
of these services; attorney may properly serve as shareholder,
officer, and/or director of employer or client.
CODE: DRs 1-102(A)(4); 3-101(A);
3-102(A); 5-101(A); 5-109; 7-102(A)(7); ECs 4-2; 4-4; 5-1; 5-18.
1. May an attorney be employed as
in-house counsel by a bank that intends to charge borrowers a
fixed fee for the attorney's services?
2. May an attorney become a
shareholder, officer, and/or director of an employer or of a
An attorney renders legal services
as an independent contractor to a mortgage banking institution,
but is considering an offer to become in-house counsel to the
bank. The attorney is also considering the possibility of
becoming a shareholder, officer and/or director of the
As in-house counsel, the attorney
would supervise a loan closing department which would be staffed
by the attorney, one or more paralegals, and a secretary. Under
the direction of the attorney, the department would prepare and
review all documents required for each loan transaction, and
would provide legal representation to the bank at all closings.
The bank would charge each borrower a flat fee for these
services, which would be paid by the borrower directly to the
bank. The fee will be disclosed to each borrower prior to closing
and would be used to defray the bank's cost of maintaining the
The attorney would be paid a fixed
annual salary based on the full range of legal services to be
rendered to the bank, regardless of the number of closings
performed or the aggregate value of the closing fees generated
each year. Thus, the salary received by the attorney would have
no direct relation to the fees received by the bank.
A lending institution may properly
require a borrower to pay the reasonable legal fees incurred by
the bank in connection with a loan transaction. N.Y. City 695
(1946); N.Y. State 438 (1976); ABA Informal Op. 837 (1965). Such
fees may include a charge for the lawyer's office overhead. N.Y.
County 670 (1989).
Consistent with this principle, it
is not improper for a bank to charge borrowers for legal services
rendered by in-house counsel, provided that the amount charged
does not exceed the actual cost to the bank of employing in-house
counsel to provide those services, including the allocable
portion of the attorney's annual salary and the bank's reasonable
overhead expenses. E.g., N.Y. State 618 (1991); N.Y. County 670
(1989); ABA Informal Op. 1451 (1980). A separate fee may be
charged by the mortgage bank to its customers for the legal
services rendered by the attorney on behalf of the bank in
connection with the closing of a loan transaction provided it is
not excessive in light of market conditions.
It would be improper, however, for
a bank to profit from any fee charged for the services of
in-house counsel, i.e., to charge, collect and retain a fee that
exceeds the actual cost of those services. Moreover, an in-house
lawyer cannot ethically participate in any such arrangement
because: (i) it constitutes sharing a legal fee with a lay person
in violation of DR 3-102(A); (ii) it constitutes aiding a lay
person in the unauthorized practice of law in violation of DR
3-101(A); and (iii) it constitutes a misrepresentation in
violation of DR 1-102(A)(4) to label as "attorneys'
fees" an amount which has no necessary relationship to the
compensation of the attorneys involved. See N.Y. State 618
(1991). Accord N.Y. County 670 (1989); Iowa Op. 92-1 (1992); Fla.
Op. 87-8 (1987); Mass. Op. 84-1 (1984).
Thus, participation in the
proposed arrangement would not be improper provided that the fee
collected by the bank does not exceed the portion of the
attorney's salary allocable to each loan transaction, plus the
allocable overhead of the loan closing department, including the
cost of paralegals, secretaries, utilities and similar expenses.
Moreover, it is important that the bank make appropriate
disclosure to each borrower concerning the nature and calculation
of the fee. See DR 1-102(A)(4) (prohibiting lawyer from engaging
in conduct "involving dishonesty, fraud, deceit or
misrepresentation"); DR 7-102(A)(7) (prohibiting lawyer from
assisting the client in conduct that the lawyer knows to be
Whether the bank's receipt and
retention of a fee for legal services constitutes the
unauthorized practice of law in violation of N.Y. Judiciary Law
§ 495 is a question of law. See Thompson v. Chemical Bank, 84
Misc. 2d 721 (Civ. Ct. N.Y. Co. 1975). Accordingly, this
Committee expresses no view concerning the applicability of this
statute. We do note, however, that if the proposed arrangement
were deemed to constitute the unauthorized practice of law, the
attorney would be prohibited by DR 3-101(A) from rendering any
assistance to the bank in connection with such conduct.
There is no per se rule of
professional ethics that prohibits a lawyer for a corporation
from owning stock in, or serving as an officer or a director of,
the client company. Such multiple roles are permissible
regardless of whether the lawyer is employed as an in-house
attorney or retained as outside counsel. N.Y. State 589 (1987);
Oregon Op. 91-91 (1991); Phila. Op. 87-14 (1987).
Nevertheless, counsel to a
corporation "owes his [or her] allegiance to the
entity" and must exercise independent professional judgment
solely for its benefit. N.Y. State 589 (1987); EC 5-1; EC 5-18.
Moreover, the attorney must discharge this ethical responsibility
to the corporation without regard to the interests of any other
person, including the lawyer's own interests as shareholder,
director or officer of the company. Id. See also DR 5-109. If
those interests diverge from the lawyer's duties as counsel, the
lawyer may be precluded from providing legal representation to
the corporation with respect to the matter that gives rise to the
actual or potential conflict of interest.
A related concern is that, absent
client consent following full disclosure, a lawyer is prohibited
from accepting or continuing employment if the lawyer's exercise
of professional judgment on behalf of the client will, or
reasonably may, be affected by the lawyer's own financial or
business interests. DR 5-101(A). This general
"conflict-of-interest" rule could operate, for example,
to prohibit a lawyer/director or lawyer/officer from rendering
legal advice to the corporation when both the company and its
officers or directors are named as defendants in a lawsuit. N.Y.
State 589 (1987). But whatever the particular circumstances
presented, a lawyer must carefully consider the potential for
conflict and refrain from acting as counsel (absent client
consent) whenever there exists a risk that his or her
professional judgment may be compromised.
Even in the absence of an actual
or potential conflict of interest, a lawyer must disclose to a
client corporation the potentially adverse consequences of his or
her multiple roles within the organization. For example, a lawyer
who also serves as an officer or director of a corporate client
must disclose the risk that certain communications with the
corporation may not be protected by the attorney-client
privilege. N.Y. State 589 (1987). The client should be aware that
the lawyer's conversations with corporate personnel subsequently
may be held to have been in the role of director or officer
rather than counsel, thereby invalidating any assertion of the
attorney-client privilege that the corporation may attempt to
make. See SEC v. Gulf & Western Industries, 518 F. Supp. 675,
683 (D.D.C. 1981). See also EC 4-2 (obligation to protect client
confidences and secrets); EC 4-4 (lawyer should act in a manner
which preserves privilege).
Subject to the caveats discussed
above: (1) an attorney may be employed in-house by a bank that
proposes to charge borrowers a fixed fee to cover the cost of the
services rendered by the attorney; and (2) an attorney may become
an officer, director or shareholder of the bank regardless of
whether the attorney accepts employment as in-house counsel or
continues to render legal services as an independent contractor.