Ethical Pitfalls of Representing Multiple Clients in a Transaction Presented by Suzanne Raggio Westerheim, Attorney, Mediator, and Counselor to the Legal Profession

Risk to the Clients Clients want to save money by hiring one lawyer, but they do not understand the risks and potential disadvantages of joint representation. Nor do they realize that any savings may disappear if their interests unexpectedly diverge, forcing new counsel to be hired. The lawyer has a duty to inform the clients about these risks before undertaking the representation.

Risk to the Lawyer Conflicts issues. Confidentiality issues. Professional liability exposure to clients and inadvertent clients. Dealing with unrepresented parties. Disciplinary exposure for failure to fulfill ethical duties to clients and third persons.

Who’s Your Client? One or more individuals? An existing or to be-formed entity? An entity and its constituents? Only the entity?

Who’s Your Client? Everyone needs to agree and understand whom the lawyer is representing and whom the lawyer is not representing, especially when some parties are unrepresented. ALWAYS use an engagement agreement specifying who the client or clients are.

Unrepresented Parties Tell non-client parties early and often that you do not represent them. Send non-representation letters confirming that you do not represent them and recommending that they seek independent counsel. Reconfirm the non-representation in writing if you even suspect that the non-client is beginning to look on you as their lawyer.

Duties to Unrepresented Parties A lawyer must not mislead the unrepresented person about the lawyer’s role. A lawyer must not state or hint that the lawyer is disinterested. A lawyer should make it clear whom the lawyer represents and whom the lawyer does not represent.

Duties to Unrepresented Parties A lawyer must make reasonable efforts to correct any misunderstanding about the lawyer’s role. A lawyer should not give the unrepresented party legal advice. A lawyer should avoid suggesting that an unrepresented party would benefit from any particular course of action other than a recommendation to obtain counsel.

Unrepresented Parties A lawyer should advise the unrepresented party to secure the advice of counsel if interests of unrepresented party conflict with interests of the client. A lawyer should never tell an unrepresented party that they do not need a lawyer.

Representing Only the Entity Entity Theory: A lawyer can represent an entity without representing the officers, directors, or shareholders. This theory is the basis of Rule Organization as a Client. Aggregate Theory: In the context of a closely-held entity, a lawyer represents the constituents/incorporators as well as the entity.

Representing Only the Entity Can a lawyer really represent only the entity in the context of a closely-held business or is there a de facto representation of the owners as well? Freivogel on Conflicts, at the “Corporations” page. Specific disclosures and consents are required when limiting your representation to the to- be-formed entity.

Representing Only the Entity As with other non-clients, a lawyer who only represents the entity needs to take care not to inadvertently form an attorney-client relationship with a constituent of the entity. Lawyers should take the same precautions in dealing with constituents as with other unrepresented parties.

Representing Only the Entity A lawyer seeking to limit representation to the entity only should avoid taking on representation of a constituent, even in unrelated matters. The lawyer should also be clear that any legal advice the lawyer gives to a constituent is being given to them only in their capacity as a representative of the entity.

Rule Conflict of Interest: General Rule A lawyer may not represent a person in a matter if: Representation is substantially related matter in which the person’s interests are directly and materially adverse to the interest of another client. Representation is or could become adversely limited by the lawyer’s responsibilities to other clients, third persons, or the lawyer’s own interests.

Rule 1.09: Conflicts of Interest: Former Clients. Cannot represent another person in a matter adverse to former client if: Questions validity of lawyer’s services or work product for the former client; or Reasonable probability of violation of confidentiality rule; or The same or substantially related matter.

Former Clients and Confidentiality Common conflict in the transactional context occurs where the lawyer has learned confidential information in the course of the representation of the former client that would benefit the current client. Rule 1.05 provides that all information learned in the course of the representation of a client is confidential.

Former Clients and Confidentiality On the other hand, Rule 1.03 requires the lawyer to disclose to the client information that is material to the representation. The lawyer cannot undertake the representation of the new client if Rule 1.03 would require him to reveal confidential information of the former client that he is required by Rule 1.05 not to disclose.

Potential Sources of Conflict Differences among the principals as to understanding of the business; Different experiences; Different investments in the business; Different expectations.

Potential Sources of Conflict Drafting agreements that affect the shareholders’ rights with respect to each other – percentage of ownership, buy-out rights, rights of first refusal, and valuation of shares issues, voting rights; etc. All involve decisions that may put the parties at odds with each other.

One Principle is Current or Former Client In cases where lawyer represents only the entity, the client may expect that the lawyer is representing that client’s individual interests, even if the lawyer believes he is only representing the entity.

One Principle is Current or Former Client If the lawyer intends to represent all the parties, the new-client party must be made aware of the prior relationship. The lawyer must be reasonably sure that he will not favor the prior client over the new client in the transaction.

One Principle is Current or Former Client The client-party must be told that the lawyer’s relationship with the client will be different when there is joint representation and how.

Is Multiple Representation Proper? Rule Conflicts of Interest: Lawyer as an Intermediary. Although the language of the rule refers tp the lawyer as an “intermediary,” the rule is actually a multiple representation rule. Proposed Rule 1.07 provides an excellent roadmap for handling multiple representations.

Is Multiple Representation Proper? Can the clients agree among themselves to a resolution of any issue concerning the matter? Is each client capable of understanding what is in that client’s best interest and making informed decisions?

Is Multiple Representation Proper? Is the lawyer able to deal impartially with each of the clients? Is the multiple representation unlikely to result in material prejudice to the interests of any of the clients? Has the lawyer made the appropriate disclosures and obtained the appropriate consents?

Confidentiality Lawyer has a duty to disclose to client all information material to the representation. A conflict can arise if one client asks the lawyer to keep confidential information that another client would benefit from knowing.

Confidentiality Each client should be informed and agree that the lawyer will share confidences of one client that are material to the representation with the other jointly-represented clients. Clients should also be informed about the exception to the attorney-client privilege in a subsequent disputes.

Texas Rule of Evidence 504(d)(5) There is no privilege under this rule: As to a communication relevant to a matter of common interest between or among two ro more clients if the communication was made by any of them to a lawyer retained ro consulted in common, when offered in an action between or among them any of the clients.

Disclosures and Consent Disclosures should always be made, or at least confirmed, in writing. The lawyer should obtain a written consent, signed by each affected client, to the joint representation.

Disclosures and Consent Disclosures required for an effective conflicts waiver are matter-specific. Forms are a good starting point, but they may not contain all of the disclosures required in your matter.

Disclosures and Consent A conflicts waiver is not a cure all. A lawyer should always be cognizant of the potential for conflict as the representation progresses. A conflict may arise that was not foreseeable at the inception of the representation. In that case, a new disclosure and consent may be required, or the lawyer may be required to withdraw.

Minimum Disclosures All known or reasonably foreseeable sources of potential conflict among the clients. That the client might gain some advantages if represented by separate counsel. That the lawyer must deal impartially with each of the clients.

Minimum Disclosures That the lawyer cannot serve as an advocate for one client in the matter against any of the other clients, but instead must assist all of them in pursuing their common purposes. As a consequence, each client must be willing to make independent decisions without the lawyer’s advice concerning whether to agree to any proposed resolution of any issues concerning the matter.

Minimum Disclosures That information received by the lawyer from any jointly represented client concerning the matter may not be confidential as between the clients, and, Specifically, that the attorney-client privilege will not apply to a communications made by any of the joint clients to the lawyer regarding the subject matter of the representation in any subsequent action between or among them regarding the subject matter of the representation.

Minimum Disclosures That the lawyer will be required to disclose information concerning the matter to any jointly represented client if the lawyer knows that information would likely materially affect the position of that client, even if requested by another jointly represented client not to do so.

Minimum Disclosures That the lawyer will be required to correct any false or misleading statement or omission concerning the matter made by or on behalf of any jointly represented client, if the lawyer knows failure to do so would likely materially affect the position of any client, even if requested by another jointly represented client not to do so.

Minimum Disclosures That the lawyer may not be able to continue representing any of the clients if discharged by any one of them or if the lawyer is required to withdraw from representation under the Rules.

Minimum Disclosures That while the representation of all clients by a single lawyer or firm could expedite handling of the matter and reduce associated attorneys’ fees and expenses, it also could result in delays and increased attorneys’ fees and expenses in the event a conflict arises requiring the lawyer to withdraw.

Withdrawal from Joint Representation Withdrawal is required: If an unwaivable conflict arises. If it becomes apparent during the representation that the lawyer cannot adequately represent the interests of each party. If any party revokes consent to the joint representation.

Withdrawal from Joint Representation In such a case, the lawyer typically will be required to withdraw from representation of every one of the jointly represented clients and may not thereafter represent one party against another on the same matter.

Questions?