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ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
TOPIC: In-house attorney; fees to third parties; multiple roles.

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.

QUESTION

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 client?

OPINION

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 institution.

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 closing department.

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.

I.

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 fraudulent).

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.

II.

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).

CONCLUSION

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.


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