Formal Opinion 1986-2

April 30, 1986

ACTION: Formal Opinion

OPINION:

An attorney was engaged by the general partner of a limited partnership to render professional services for the partnership, and his fees were paid from a partnership account. During the course of his representation, the attorney discovered from his own investigation and from outside sources that the general partner committed certain acts which (although in his view do not amount to criminal or fraudulent conduct), will adversely affect the partnership interests of limited partners. The attorney confronted the general partner with this information, informed the general partner that his acts were improper and requested that he disclose the acts to the limited partners so that they might take steps to protect their interests. The general partner, while admitting that he committed the acts in question, has refused to make such disclosure.

The attorney and the general partner never discussed the extent to which their communications would be privileged and the general partner did not request that his statements be kept confidential. The attorney would like to disclose the information in his possession concerning the general partner’s action to the limited partners (who he believes are without knowledge of these events and would suffer adverse consequences if they remain uninformed) and asks whether he can do so without violating an ethical duty to respect the confidences of the general partner. For the following reasons, we answer the inquiry in the affirmative.

The ethical principles involved in this inquiry are an attorney’s duty of primary loyalty to his client, including the obligation to provide a client with material information helpful to his interests, EC 5-1; Spector v. Mermelstein, 361 F. Supp. 30 (S.D.N.Y. 1972); an attorney’s duty to preserve the confidences and secrets of a client, Canon 4; and an attorney’s duty to discontinue representation where differing interests may affect his independent professional judgment, EC 5-14; DR 5-105 (B).

We conclude that the attorney may make the requested disclosure to the limited partners. Furthermore, the differing interests of the general partners and limited partners may require that the attorney discontinue his representation of the partnership or the general partners or any limited partner relating to partnership matters, if the attorney determines that his individual professional judgment will be or is likely to be affected thereby.

For purposes of this inquiry, we have assumed that the limited partnership entity is the inquiring attorney’s client. The attorney therefore owes his primary allegiance to the partnership and not to any individuals connected with it. EC 5-18; A.B.A. Inf. Op. 1233 (1972); Michigan Op. CI-747 (1982) (limited partnership). However, it has also been said that “an attorney represents the partnership interest of each individual partner of a partnership when he represents the entity of a partnership.” Alaska Op. 84-2 (1984).

When the attorney for an entity such as a partnership discovers acts of impropriety by an officer, partner, employee or other member of that entity that may adversely affect the interests of others therein, that attorney may disclose such information to the “governing body” of the entity to enable it to take action necessary to protect its interests. A.B.A. Form. Op. 202 (1940); A.B.A. Inf. Op. 1318 (1975). In a situation where the “governing body” of the entity is implicated in the improper act, however, disclosure to persons such as shareholders or partners outside of the “governing body” may be warranted in order to allow them to protect their interests if the governing body could not reasonably be expected to do so. Tex. Op. 387 (1977); Fla. Op. 65-59 (1965). In the situation presented, since the general partner is the sole governing body of the limited partnership and reasonably could not be expected to protect the limited partners’ interests, the attorney may disclose his knowledge of the general partner’s improprieties to the limited partners.

Such disclosure is not prohibited by the principle that an attorney has a duty to preserve the confidences and secrets of a client. While the attorney discovered the general partner’s improprieties in the course of his representation of the partnership, his duty of loyalty to the partnership would be paramount to any duty to respect the secrets of any individual partner disclosed during the course of partnership representation.

In N.Y. State 555 (1984), representation of a two-person partnership was analogized to representation of joint clients, and it was held that a confidential communication from one partner could not be disclosed to the other if such disclosure would be disadvantageous to the first partner. The result in that opinion, however, was based in part upon the fact that the attorney learned of the disadvantageous fact solely from the client, who “specifically in advance designated his communication as confidential, and the lawyer did not demur”. Here, there was no such stipulation by the general partner when confronted by the attorney, and, more importantly, the inquiring attorney initially discovered the general partner’s improper acts through the attorney’s own investigation and from outside sources, facts that the State Committee stated might require “different relative weighting . . . given to the duty of loyalty.”

The differing interests of the general partner and limited partners may, however, also require that the inquiring attorney discontinue his representation of the partnership, as well as either the general partner or any limited partner relating to partnership matters, if the attorney determines that his independent professional judgment will be or is likely to be affected by such differing interests. DR 5-105(B); N.Y. State Op. 555 (1984); A.B.A. Inf. Op. 1441 (1979).

Accordingly, the inquiring attorney may disclose his knowledge of the general partner’s actions to the limited partners so that they will be able to take steps to protect their interests. The inquiry is answered in the affirmative.