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Ethics Opinion #26
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The propriety of the purchase of all of the shares of a professional. corporation law firm, under circumstances in which the selling attorneys expect to be disbarred, and the firm fined.
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RICHMOND COUNTY BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
OPINION # 26
July 20, 1999
The Committee is in receipt of an inquiry from an attorney currently employed by a local law firm, which consists of two shareholders in a professional corporation. Both of these attorney/shareholders, as well as the firm, have been convicted in Federal Court of multiple counts of mail fraud, wire fraud, and conspiracy. These attorneys (hereinafter the “existing attorneys”) now await sentencing and it is anticipated that they will be suspended from practice upon notification to the Appellate Division sometime in October 1999. It is further anticipated that the attorneys will ultimately be disbarred and incarcerated, and that the firm will be fined.
Attorneys (hereinafter the “new attorneys”) employed by the firm (some of whom have been held out as partners although not shareholders) have been offered an opportunity to purchase the shares of the two existing attorneys, on a leveraged basis. Under one scenario, the new lawyers would be the shareholders of the existing professional corporation; the firm name would be changed, and they would assume the debts of the firm except for any fines levied against it as a result of the conviction.
The inquirer poses several questions relative the proposed arrangement.
1. Is it ethically proper for the new attorneys to purchase the firm shares from the existing lawyers when the existing lawyers are facing probable disbarment?
In the case of professional corporations, which includes attorneys, (Business Corporation Law §1501(b)), the problem of shareholders disqualified to practice his or her profession appears to have been anticipated by the Legislature. The disqualification is deemed to constitute an irrevocable offer by the disqualified shareholders to sell his/her shares to the corporation (BCL §1509) pursuant to BCL §1510. subdivision (a) thereof provides a procedure to be followed governing such sale, in the absence of an agreement among the professional corporation and all of the shareholders. As particularly applicable to the question at hand, the corporation is not required to purchase the disqualified shareholders shares if they are sold or transferred to another professional pursuant to §1511, within six months after disqualification. Thus, a transaction of the nature posited by the inquirer, i.e. a sale or transfer of shares in contemplation of, or even within six months after, disbarment appears permissible under the BCL. However, the provisions of Article 15 of the Business Corporation Law were never intended to
abrogate or supersede an attorney s independent obligations under the Disciplinary Rules. Thus, the Committee must now address whether the individual attorneys are under any proscription against purchasing the firm shares from the existing lawyers when the existing lawyers face probable disbarment.
While the BCL appears to make the sale of the firm shares legally enforceable, the Disciplinary Rules appear to require a contrary conclusion as to its ethical propriety.
For many years, the sale of a law practice itself under any
circumstances, was deemed professionally improper (NYSBA, Committee
on Professional Ethics, Op. # 561). This was true until the
recent promulgation of DR 2-111, which permits a “lawyer retiring
from a private practice of law, (or) a law firm.... (to) sell
a law practice, including good will, to one or more lawyers,
or law firms, who may purchase the practice.” Retirement is
defined as the cessation of the private practice of law. Although
at first blush it would appear that the existing attorneys are
“retiring” from the practice of law, case law suggests that
the two concepts, i.e. cessation of the practice of law by voluntary
retirement versus the enforced cessation by disbarment, are
not one and the same (Matter of Sturm, 225 AD2d 108 (2d
Dept.); Matter of Heckenhoff, 122 N.M. 766).
Consequently, the Committee must conclude that while the sale
of the shares of the firm to the new attorneys is legally permissible,
such sale represents only a transfer of ownership of the tangible
assets of the firm those shares represent (Op. # 561, supra).
The Committee must also conclude that, to the extent the sale
of the firm s shares held by the existing attorneys to the new
lawyers represents, or is an attempt to effectuate, the sale
of the former s law practice to the latter, it is ethically
impermissible because, inter alia, it is not specifically authorized
by DR 2-111 (see, e.g., Geffen v Moss, 53 Cal. App. 3d
215, 226; see also, Stern v Stern, 66 NJ 340, 346 (fn.
5)).
The first question is answered in the negative.
It is not clear from the inquiry whether such agreement to pay such items is included in the price of the shares, or is a separate agreement to share legal fees.
2. Is it ethically proper for the new attorneys to enter into an agreement with the existing lawyers to pay the disbursements and a percentage of the contingent fee on personal injury cases before the existing attorneys are suspended?
The statute governing the sale or transfer of shares of a professional corporation
provides for such sale or transfer at book value, unless otherwise agreed by the corporation and all shareholders (BCL § 1510, 1511).
Thus, at first blush, it would appear that the parties are free to determine the method and amount to be paid for those shares.
However, as previously indicated, the provisions of Article 15 of the Business Corporation Law were never intended to abrogate or supersede an attorney s independent obligations under the Disciplinary Rules. Thus, irrespective of their rights to sell and purchase the firm s shares, the Rules concerning the splitting of fees apply.
The inquirer states that the new attorneys will pay, and the existing attorneys will receive, a percentage of the contingent fee on personal injury cases. It is not per se unethical for the lawyer to agree in advance on a proposed fee split; however, the division of fees must always be in proportion to the work performed. At the conclusion of the matter the proportions must be adjusted if it develops that the services actually performed by the existing attorneys and the new attorneys are grossly disproportionate to the division of fees agreed upon (New York State Bar Association, Committee on Professional Ethics, Op. # 609; Bar Association of Nassau County, Committee on Professional Ethics Op. # 90-14, and 83-5; DR 2-107(a)). If the elements of DR 2- 107(a) are not met, the existing attorneys may not ethically receive, and the new attorneys may not ethically pay, the improper fee, whether it be a referral fee or a division of the fee (Id.).
The Committee assumes that the cases for which a division of fees is proposed are at various stages of completion. Therefore, a blanket percentage applicable to all cases would be
inappropriate because it would not reflect the percentage of work actually performed. Each case must be individually evaluated to reflect the proportion of work done or contemplated. If a question of the proper portion of the fee based on work done arises, the appropriate forum would be the court in which the matter is pending (Id.).
It must be noted that the foregoing is applicable only to a
division of fees prior to the existing attorneys anticipated
disbarment. After such disbarment, different rules apply. A
disbarred attorney may be compensated on a quantum meruit basis
only, for legal services rendered and disbursements incurred
prior to the effective date of disbarment. The amount of the
compensation is fixed by the court upon application. (22 NYCRR
§ 691.10(b)). However, caselaw suggests that the parties may
enter into an agreement as to the amount and manner of compensation
payable (see, Gavin v Mahoney, 55 AD2d 704). Borrowing
from the principles related to fee-splitting between attorneys
in good standing, it is reasonable to conclude that such agreement
with disbarred attorneys should reflect compensation upon a
quantum meruit basis prior to the effective date of disbarment.
The second question is answered in the affirmative, subject to the foregoing conditions and caveats.
3. Assuming the answers to questions 1 and 2 are yes (they are), is it ethically proper for the new attorneys to actually pay the existing attorneys the agreed upon percentage without court approval?
As indicated, the “percentage must actually reflect the proportion of work actually performed, or in the case of a disbarred attorney, on quantum meruit prior to the effective date thereof. Assuming the percentage does so reflect the proper allocations, no rule per se requires prior court approval. However, the courts retain jurisdiction over the matter of legal fees if one of the parties to the fee splitting arrangement claims that it is unethical or illegal (Op. #690, supra). In the case of a disbarred attorney, and without an agreement between the existing and new attorneys, application to the Court appears required by 22 NYCRR Sec. 691.10(b)).
The third question is answered in the affirmative; if agreement cannot be reached, application to the court is necessary.
4. Assuming the answers to Questions 1 and 2 are yes (they are), is it ethically proper for the new attorneys to advance the existing attorneys a draw on their fees, assuming the draw will be periodically adjusted in accordance with fee actually received by the new attorneys?
As previously indicated, Gavin v Mahoney appears to provide
authority for the proposition that the new and existing attorneys
may provide by their agreement, for the amount and manner of
compensation payable, so long as the total draw bears a reasonable
relationship to the disbarred attorney s actual work done on
the case on a quantum meruit basis. The draw represents one
manner of paying the compensation to the existing attorney,
and there is no per se prohibition against utilizing it; the
crucial factor is the amount of the total compensation and the
basis or measurement thereof. The manner of payment is more
a matter of substantive law, and it is not the function of the
ethics rules to deal with the relationships between or among
lawyers (see, “Proposed Changes to the New York Lawyers Code-Part
I by Anthony E. Davis, NYLJ May 6, 1996, p. 3).
The fourth question is answered in the affirmative, so long as the total fee paid to the existing attorneys reflect actual work performed.
5. Assuming that the new attorneys are purchasing shares of the existing attorneys before the existing attorneys are disbarred or suspended, is it ethically proper for the new attorneys to take over the handling of the existing clients of the firm without obtaining a signed consent from the client?
The purchase of the shares of the existing attorneys relates to the legal status of the new attorneys as the owners of the outstanding shares of the firm; consequently, this is a question of law beyond this Committee s jurisdiction.
Nonetheless, the removal of the existing attorneys as the individuals responsible for the handling of the client s case poses questions under the Code independent of their status as new “Owners of the firm.
Until they are disbarred or suspended, the existing attorneys
are still primarily responsible for the handling of their clients
matters, and cannot abdicate their responsibility to supervise
the work of partners and associates at the firm (see, 7 N.Y.
Jur 2d, Attorneys at Law §305, DR 1-104(a)). Since all reasonable
efforts must be made to insure that all lawyers in the firm
conform to the Disciplinary Rules (see, DR 1-104(a)), the new
attorneys should not participate in such an arrangement, and
assume responsibility for the handling of those cases unless
done so with the client s consent or by the court s permission.
In this regard, the “taking over” of the handling of the clients
cases is more analogous to the assumption of such cases of a
disbarred, suspended, or deceased lawyer, (see, NYSBA, Professional
Ethics Committee, Op. #48) requiring notice to the client that
the new lawyers have been asked to assume responsibility over
his/her case. It must be remembered that it is the right of
the client to choose his or her attorney, and the client may
discharge his or her attorneys at any time and substitute new
ones (DR 2-l10(B)(4); see, Neithercut v Ebanks, 72 AD2d
807). The standards of the profession exist for the protection
of the clients, and are demanding (see, Gabri v County of
Niagara, 127 Misc 2d 623). Consequently, the circumstances
must be such .that it is clear it is the client who is choosing
the new attorneys and not the attorneys themselves.
The fifth question is answered in the negative.
6. Assuming the answer to question 5 is no (it is), is it ethically proper for the new attorneys to have the firm clients sign consent forms over time (over several years) instead immediately (within approximately 30 days) upon the name and ownership change?
As indicated, it is improper for the new attorneys to take on the responsibility of handling client s cases without their consent (which is essentially a new retainer), for the reasons stated in response to the previous question. Such an arrangement
should not continue, even if it is anticipated that the client will sign a consent form at some unspecified time in the future. Consequently, the new lawyers should not take on the responsibility of handling client s cases until the proper consent forms are executed.
The sixth question is answered in the negative.
7. Is it ethically proper for the new attorneys to advertise the successor firm with the new name using the phrase “formerly... [old firm name]” before the existing attorneys are disbarred?
8. Is it ethically proper for the new attorneys t o advertise the successor firm with the new name using the phrase “formerly... [old firm name]” after the existing attorneys are disbarred?
DR 2-101(A) prohibits advertising which is false, deceptive or misleading. While there is no per se rule on whether any particular advertisement is false, deceptive, or misleading, the principles under DR2-102(B) may be borrowed to aid in any determination. DR 2-102(B) prohibits practice under a name that is misleading as to the identity of the lawyer or lawyers practicing under such name. Given the long standing association of the existing partners with the firm, and the nature and extent of their advertising to date, care must be taken to assure that no reasonable person would understand or believe that the soon-to-be-disbarred attorneys are still associated with the firm. If so, any advertising giving such an impression could be deemed misleading. However, the mere use of the phrase “formerly (old firm name)” does not appear in and of itself to be misleading, given the permission in companion section 2-l02(A)(2) to disseminate announcements “stating new or changed associations or addresses, change of firm name, or similar matters, and which may “state... .the names and dates of predecessor firms in a continuing line of succession.
However, notwithstanding that the use of the phrase “formerly (old firm name) is not misleading, because of its factual accuracy, the Committee is mindful (as should be the inquirer) of the admonition set forth in Opinion # 83-.5 of Bar Association of Nassau County's Committee on Professional Ethics, in which it was sated:
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“A lawyer may not be associated with a person who is suspended or disbarred from the practice of law. See Drinker, Legal Ethics, p. 53. Certainly the impression should not be left in any way that a lawyer has a distinct relationship with a disbarred attorney relative to the practice of law and the public must not to believe that the disbarred attorney is a
is a lawyer or that he is obtaining cases for the law firm. ABA Inf. 1079 (1958).”
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Care must be taken that an impression of a continued relationship between the old attorneys and the new.attorneys after the formers disbarment is not left with the public in any advertising, announcements, etc.
The seventh and eighth questions are answered in the affirmative, subject to the conditions and caveats indicated.
Pursuant to Article VI Section 19 of the R.C.B.A. ByLaws, please be advised that the statements contained herein express the opinion of the Committee alone, and have not been passed upon the Association.
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Wayne M. Ozzi
Chairman, Professional
Ethics Committee |
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