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THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 1995-7
May 31, 1995
ACTION: FORMAL OPINION
TOPIC: Prospective Limitations on Liability; Limited Liability Companies ("LLCs") and Limited Liability Partnerships ("LLPs").
DIGEST: A lawyer may ethically take advantage of the recently enacted provisions of New York's Limited Liability Company Law and Partnership Law to limit liability for malpractice to the lawyer's own acts or those of other persons in the LLC or LLP who were subject to the lawyer's "direct supervision or control."
CODE: DR 6-102(A); EC 6-6.
May a New York attorney prospectively limit liability for malpractice as provided in the New York LLC and LLP statutes?
New York's recently enacted Limited Liability Company Law (§ 1205) and Partnership Law (§ 26(b), (c)) protect a lawyer from professional liability for the acts of other associates or partners in the LLC or LLP and limit the lawyer's liability for malpractice to the lawyer's own acts or those of other persons in the LLC or LLP who were subject to the lawyer's "direct supervision or control".
The ethical issue presented is whether a lawyer, in adopting the above protection by practicing under the LLC or LLP form, would violate the ethical proscription against absolving oneself for future malpractice contained in DR 6-102(A). That rule provides, in relevant part, as follows:
A lawyer shall not seek, by contract or other means, to limit prospectively the lawyer's individual liability to a client for malpractice . . . .
(Emphasis added.) The limitation on liability provided by the recently enacted LLC and LLP laws is a limitation on the lawyer's vicarious liability imposed by virtue of the lawyer's practice through the medium of a general partnership. The new statutes clearly do not absolve the lawyer from liability for his or her own "individual" malpractice nor for that of anyone supervised by the lawyer. Thus the new statutes are completely consistent with DR 6-102(A).
Since the LLC and LLP are new to New York, there are not yet any provisions in the Code which directly refer to such entities. The Code's treatment of professional corporations, however, is instructive and supports the above conclusion that the limitation on malpractice liability contained in the LLC and LLP statutes is consistent with the Code.
The New York Professional Corporation Law has been in effect for approximately 24 years. The limitation on malpractice liability in the Professional Corporation Law is virtually identical to that in the recently passed LLC and LLP statutes. The Code specifically recognizes Professional Corporations. See Definitions 2 and 4; DR 2-102(B) and EC 2-11 (names); DR 5-107(C) (control of professional corporation).
Most importantly for the present issue, the Code, in EC 6-6, specifically recognizes the ethical validity of the provision in Professional Corporation Law which limits a shareholder lawyer's vicarious liability for the malpractice of other shareholder lawyers in the same Professional Corporation.
Thus EC 6-6, in explaining the policy underlying DR 6-102(A), and the proscription against limiting liability for future malpractice, states:
A lawyer who is a stockholder in or is associated with a professional legal corporation may, however, limit the lawyer's liability for malpractice of associates in the corporation, but only to the extent permitted by law.
Since the limitations on malpractice liability in the LLC and LLP statutes are virtually identical to that in the Professional Corporation Law, the above quoted statement from EC 6-6 should be deemed to apply to LLCs and LLPs.
Finally, both the LLC and LLP statutes include provisions that preserve existing laws, except to the extent they are in conflict with said statutes. This constitutes a clear expression of legislative intent to permit professionals, including lawyers, to avail themselves of protections provided in the LLC and LLP forms notwithstanding any court- imposed restrictions, which might conflict with those statutes. Thus, even if there were a conflict between the statutes and the Code on the limitation of liability -- which there is not -- it would appear to be the legislative will that the statute prevail.
With respect to notification of clients and others that an attorney is practicing under a legal form which limits the lawyer's liability, the LLC and LLP statutes require the lawyer by specific words or abbreviations to designate the limited liability form in his or her firm name. Limited Liability Company Law § 1212(b) ; Partnership Law § 121-1501.
There have been discussions in other jurisdictions adopting LLC and LLP statutes as to whether the lawyer has ethical obligations outside the statutes to notify and explain to clients and potential clients the limitations on the lawyer's professional liability under such entities.
Some jurisdictions have required detailed disclosures, in addition to the designations required by statute, when changing to LLC or LLP form. See, e.g., District of Columbia 235 (1993) (amended in District of Columbia 254 (1995) (use of abbreviations "LLP" and "LLC" permitted)); Kansas 94-03. Other committees have stated that adherence to the statutory designations were in themselves sufficient. See, e.g., Michigan R-17 (1994); N.Y. County 703 (1994) ("use of the term... 'LLC' or 'LLP,' without more, in a law firm's name provides adequate notice to clients of the limitation of the members' liability"). While we agree that use of the abbreviations or phrases permitted by the LLC or LLP statutes will in most cases provide clients with sufficient notice, lawyers may wish to consider whether that is adequate in all circumstances. In addition, lawyers changing to LLC or LLP form should be prepared to answer any client questions regarding the nature of the change and its ramifications.
As discussed above, the question is answered in the affirmative.