How to Avoid Common Conflict of Interest Traps
Particularly in the solo and small firm setting, conflict missteps are often not a “whoops, we missed that name” kind of thing. More often the misstep is an attorney or firm simply fails to recognize that a conflict is in play, or if it is recognized, a decision is made to move forward regardless. Given this, here are a few general tips that can help you avoid many of the more common conflict missteps.
- Be wary of representing two or more parties at once such as a divorcing couple, a husband and wife wanting wills, multiple plaintiffs in a personal injury matter, multiple partners forming a new business, or the buyer and seller in a real estate transaction. This doesn’t mean you can never take on multiple parties. There are situations where it is ethically permissible and entirely appropriate. However, if you do, fully disclose to each of the multiple clients the ramifications of agreeing to joint representation and only after you determine that competent representation can be provided to each of the clients. For example, are there any alternative courses of action that might be less available or no longer available as a result of the joint representation? If so, this needs to be shared. Discuss how both potential and any actual conflicts will affect your representation of everyone and come at it from the perspective of a disinterested attorney who only represents one of the parties. Advise the clients that on matters concerning the joint representation there is no individual client confidentiality among the group. In addition, consider advising each of them to seek independent outside advice as to whether they should agree to joint representation. Regardless, do not proceed with the representation until all clients have given you their informed consent, which should be in writing.
Now two quick side notes. First, recognize that non-waivable conflicts do exist, despite what some of your peers choose to believe, and they often appear in these types of settings. When in doubt, seek advice from someone well versed in the ethical rules. Second, in an attempt to avoid dual representation problems some attorneys will agree to represent one of the parties and document that the other has been advised to seek independent counsel. Should the remaining non-client decide to proceed without representation, understand that you don’t get it both ways. In spite of any documentation to the contrary, if you continue to interact with this individual by answering questions to help move the matter along you can unintentionally establish an attorney-client relationship and undo the precautions taken. Your actions will always speak louder than your written words. Never answer any legal questions from the non-client. Simply advise them to seek independent counsel. If that slows things down, so be it.
- Avoid joint representation in those potential conflict situations where there is a high probability that potential conflicts will evolve into actual conflicts such as with criminal co-defendants or with certain situations involving multiple plaintiffs. Remember Murphy’s Law. More often than not the actual conflict will arise. If it does and is one that cannot be waived, your only option will be to completely withdrawal from the entire matter. Stated another way, in most multiple client representation matters if you’re conflicted out for one client, you’re conflicted out for all. This is just one of the risks that come with joint representation. In the world of ethics and malpractice, an attempt to stay in with one client while dropping another is called the “Hot Potato Drop.” Should a claim ever arise as a result of your dropping all but one as a client, the lawyers on the other side will put this spin on your actions. They’ll argue that you put your financial interests above the interests of the client or clients you dropped and that rarely turns out well for the lawyer being sued.
- Always document the conclusion of representation with a letter of closure. In terms of conflicts, an interesting question that arises from time to time is when does a current client become a past client for conflict resolution purposes? The temptation is to rationalize that the passage of time coupled with a bright line gets you there. After all, doesn’t the fact that the deed was delivered four months ago, the settlement funds were disbursed two years ago, the judge signed the final order last year, or that the contract was signed three years ago mean these various matters are concluded and all of these clients are now past clients?
Our conflict rules don’t speak of bright lines or the passage of time as being determinative. Keep it simple. For conflict resolution purposes, once someone becomes a current client, they are always a current client unless and until you clearly document otherwise. For example, one would be well advised to never alter a will for one party after having written the wills for both parties a few years earlier absent clear documentation that the prior representation of both had ceased.
Finally, keep the following in mind if you ever get to the point where you are considering suing a client for fees. It’s unethical to sue a current client for fees. Make certain you have documentation that this client is a past client prior to filing suit. Again, this is usually done in a closure letter that plainly states something along the lines of “this concludes our representation of you in this matter.” In fact, this is one of a number of reasons why conflict savvy firms keep all letters of closure even after destroying the related files years after closing them. The closure letter is part of the conflict database because it’s what documents who are past clients.
- Avoid becoming a director, officer or shareholder of a corporation while also acting as the corporation’s attorney. This dual role can create all kinds of problems to include loss of attorney client privilege, an increased risk of a malpractice claim, and an inability to participate in certain decisions. If you do find yourself on a client corporate board, don’t further compound the conflict issues by taking an ownership interest in the company that exceeds 5%. At that point the potential conflict problems reach a point where some malpractice carriers will decide to exclude the risk. The safest play is to never take a financial interest in a client entity due to the difficulty in proving down the road that you never put your financial interests above the interests of your client.
- Periodically stop and remind yourself just who the client is and act accordingly because sometimes it can get messy. For example, an attorney was approached by the son of two long-term clients. Son introduced several non-clients to the attorney and asked the attorney to incorporate a startup business and handle related matters for a small stake in this new company. The son’s contribution was to be his intellectual capital and the non-clients were the money guys. The attorney accepted the work and had frequent contact with the son and the investors throughout the process. Sometime later, one of the investors contacted the attorney and asked him to remove a preemptive rights clause from the organizing documents in order to facilitate a needed cash infusion from two additional investors who would only make a contribution if they were granted a substantial stake in the company. There were no funds available to pay the attorney for this additional work, but he was offered the opportunity to increase his own stake in the company. This request forced the attorney to determine who his client was. At that point he realized that his failure to clarify and document who was a client and who wasn’t, coupled with past actions that seemed to allow corporate constituents and investors to believe that he represented everyone, resulted in his correctly deciding that he had no other option but to withdraw.
- Never solicit investors on behalf of a client’s business. Should their investment in the business ever go south, one of the allegations in any subsequent claim is going to be you put your financial interests above those of the investors. And note that malpractice policies don’t cover investment advice. This loss could all too easily end up being on you.
- Last but certainly not least, be extremely cautious about entering into business relationships with clients. At the outset, Model Rule 1.8 is clear. The transaction must be fair and reasonable to the client. The client must be made fully aware of and clearly understand the terms of the transaction, the material risks and disadvantages to the client, any reasonable alternatives, the attorney’s part in the transaction, and any potential conflicts of interest. The client must not only be advised to seek independent legal advice but actually given a reasonable amount of time to do so. Finally, the client must provide written consent.
The problem here is that the attorney needs to be particularly mindful that he cannot continue employment if his independent professional judgment will be affected by the business interest taken. Additionally, the full disclosure requirements of the rule include the fact that at some point the attorney and the client may potentially have differing interests in this business transaction that would preclude the attorney from continued service. Further, while the client should be encouraged to seek independent legal counsel, many times the reason that the issue comes up is that the client has no money to pay for legal services and the business deal being considered is an offer of stock in exchange for legal services. At a minimum, the client should be counseled to seek independent advice from another source, perhaps their CPA or financial advisor.
If the business relationship happens to be a stock in lieu of fees deal, don’t minimize the risk that the business will be wildly successful or falter terribly. In either case the lawyer can find himself in a difficult position because the lawyer may now find that he has been substantially overpaid (from the client’s perspective) or is facing the reality that no payday is coming. While there are no specific boundaries as to how much of an ownership interest is too much, certainly the degree to which a lawyer can maintain independent legal judgment would seem to be directly correlated to the percentage of ownership interest taken. As a general guideline, consider never allowing your ownership interest to exceed 5% as the conflict concerns can become quite significant beyond that point.
Authored by: Mark Bassingthwaighte, Risk Manager
Since 1998, Mark Bassingthwaighte, Esq. has been a Risk Manager with ALPS, an attorney’s professional liability insurance carrier. In his tenure with the company, Mr. Bassingthwaighte has conducted over 1200 law firm risk management assessment visits, presented over 600 continuing legal education seminars throughout the United States, and written extensively on risk management, ethics, and technology. Mr. Bassingthwaighte is a member of the State Bar of Montana as well as the American Bar Association where he currently sits on the ABA Center for Professional Responsibility’s Conference Planning Committee. He received his J.D. from Drake University Law School.