Formal Opinion 1988-5
June 14, 1988
ACTION: Formal Opinion
OPINION:
Many New York attorneys participate in the affairs of their cooperative or condominium apartment buildings, and also may be called upon for legal assistance relating to the affairs of the corporations or their tenants or both. Ethical questions arise in a variety of circumstances, some of which may not be immediately apparent. The purpose of this opinion is to alert the Bar to some of these questions.
RELEVANT GENERAL PRINCIPLES
Canon 5 of the Code of Professional Responsibility requires a lawyer to exercise independent professional judgment on behalf of a client. The lawyer’s professional judgment must be exercised solely for the benefit of the client and free of compromising influences and loyalties. EC 5-1. The diverse interests that may arise include the personal interests of the lawyer, EC 5-2 et seq., interests of multiple clients, EC 5-14 et seq., and desires of third persons, EC 5-21 et seq.
In the first instance, a lawyer-tenant must take into account his or her property interest in the cooperative or condominium apartment. DR 5-101(A) provides that:
Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests.
See EC 5-3; N.Y. State 162 (1970); N.Y. City 247 (1932); cf. N.Y. City 525 (1940). In many instances, the lawyer’s investment in an apartment is substantial. In addition, the lawyer-tenant’s relationships with other tenants and with respect to the amenities of the building may, more subtly, be influences that could possibly compromise the lawyer’s duty of undivided loyalty to a client. In determining whether the lawyer’s professional judgment “reasonably may be affected” by the lawyer’s own interests, an objective standard is applied. Accordingly, consent must be obtained after full disclosure if the lawyer determines that there is a “reasonable probability” that “personal interests or desires” will impair the lawyer’s professional judgment or adversely affect the advice or services to be rendered. EC 5-2.
Secondly, problems of representation of multiple or diverse interests may arise. DR 5-105(A) and (B) require a lawyer to decline or not to continue multiple employment if the lawyer’s “independent professional judgment . . . is likely to be adversely affected, . . . except to the extent permitted under DR 5-105(C).” Under the latter rule, a lawyer may represent multiple clients only if (1) it is obvious that the lawyer can adequately represent the interests of each and (2) each client consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each. The lawyer should resolve all doubts against the propriety of the representation. EC 5-15. n1
n1 It should be noted that, under the Code as currently in effect, if a lawyer is required to decline or withdraw from employment under DR 5-105, all lawyers in his or her firm are similarly disqualified. DR 5-105(D).
A third area of concern is the protection of client confidences and secrets learned by the lawyer in the course of representing either the cooperative or a fellow tenant. Such confidences and secrets may not be revealed or used to the disadvantage of the client or to the advantage of a third person except with the consent of the client after full disclosure. DR 4-101(B), (C). The lawyer should be particularly sensitive to the possibility that by rendering informal legal advice to fellow board members or fellow tenants, the lawyer may create an attorney-client relationship for purposes of DR 4-101. n2
n2 If a lawyer is asked to provide legal services for the corporation, either by specific request or through an informal and perhaps unspoken arrangement, an attorney-client relationship arises. However, where a lawyer-director receives no legal fees from the cooperative, has never represented the cooperative and the cooperative has outside legal counsel, we do not believe that the lawyer-director becomes a legal advisor to the board merely by expressing views, in the lawyer’s capacity as a director, on legal matters affecting the corporation.
I.
THE LAWYER-TENANT AS ATTORNEY FOR THE CORPORATION OR BOARD
The first question is whether a lawyer-tenant who serves as an officer or director of the cooperative may also render legal services to the cooperative. There is no general prohibition against simultaneous service on a board of directors and as counsel for the corporation, although such dual roles raise a number of ethical issues. See generally N.Y. State 589 (1988). In addition to the particular problems that may arise in the cooperative apartment context, which are discussed below, certain ethical restraints apply in all cases in which a lawyer serves simultaneously as a director and counsel to a corporation. For example, the lawyer may not “tak[e] advantage of his or her position [as director] to procure professional employment for the lawyer or the lawyer’s law firm,” N.Y. State 589 (1988), or participate in the board’s decision to retain the lawyer, N.Y. City 611 (1942). Indeed, the lawyer-director may not participate “in any decision of the [board] that will or reasonably may affect the lawyer’s own personal or financial interests as counsel.” N.Y. State 589 (1988). Finally, the lawyer-director must exercise his or her independent professional judgment “solely for the benefit of [the corporation] and free of compromising influences and loyalties,” EC 5-1, that may arise out of his or her role as director (such as a desire to be re-elected to the board or concern for the lawyer’s personal liability as a director).
Whenever a corporation’s counsel is considering joining the corporation’s board of directors, or if already a director, a lawyer is considering representing the corporation, the lawyer must determine whether “the exercise of his professional judgment on behalf of [the corporation] will be or reasonably may be affected by his own financial, business, property, or personal interests,” DR 5-101(A), and if so, the lawyer must obtain the corporation’s consent after full disclosure. However, where there is a “reasonable probability” that the lawyer’s “personal interests or desires will . . . affect adversely the advice to be given or services to be rendered,” the lawyer should not serve in both roles regardless of whether the corporation has consented. EC 5-2. n3
n3 While DR 5-101(A), read literally, may permit a lawyer to serve as both director of and counsel to a corporation if the client consents after full disclosure even in cases where there is a material risk that the lawyer’s own interests will adversely affect the representation, we believe that lawyers should decline the representation in such cases. Rule 1.7(b)(1) of the Model Rules of Professional Conduct provides that client consent will not cure the conflict unless “the lawyer reasonably believes the representation will not be adversely affected. . . .” The comment to this Rule makes clear that even with consent, a lawyer cannot serve as both a director of and counsel to a corporation “[i]f there is material risk that the dual role will compromise the lawyer’s independence of professional judgment.” In N.Y. State 589 (1988), the Committee on Professional Ethics of the New York State Bar Association stated its belief, with which we concur, that this comment “accurately reflects the relevant concerns under the principles articulated in the Code of Professional Responsibility.”
In the cooperative context, the lawyer must carefully consider whether his interest as an owner and as a tenant could affect the exercise of his or her independent professional judgment on behalf of the corporation, either generally or as to specific matters. In the normal course of events, the lawyer’s proprietary interest is coextensive with that of other tenants. Such interest should not prohibit the lawyer from acting as an officer or director of a cooperative or otherwise participating in the affairs of the corporation. But such interest may well be relevant in evaluating the propriety of providing legal services to the corporation or others.
While, in general, the interest of the lawyer may be coextensive with the interests of other members, and not immediately perceived as interfering with the exercise of independent judgment, circumstances may arise where the property or other interests of the lawyer-tenant may conflict with the interests of the board or other tenants. Conflicts are particularly likely in the event of litigation between the cooperative corporation or the board of directors and another tenant in the building. For example, a tenant may sue the board to compel it to permit him to construct an alteration to his apartment, e.g., Demas v. 325 West End Avenue Corp., 127 A.D.2d 475, 511 N.Y.S.2d 621 (1st Dep’t 1987), or to sell his apartment to a buyer rejected by the board, e.g., Bernheim v. 136 East 64th Street Corp., 128 A.D.2d 434, 512 N.Y.S.2d 825 (1st Dep’t 1987), or the board may sue a tenant to compel him to remove an illegal pet or alteration. The lawyer’s property or personal interests could well be adverse to the board’s if the lawyer-tenant had a similar problem, or was a friend of the other tenant.
A lawyer’s personal interests reasonably may be expected to affect professional judgment, and accordingly, under DR 5-101(A), the lawyer may not accept an engagement to represent the cooperative in such litigation unless the board consents after full disclosure of the possible effect on the lawyer’s professional judgment. n4 Even with the board’s consent, however, we believe that the representation should not be undertaken if there is a material risk that the lawyer’s advice or services would be adversely affected by the conflict, EC 5-2, for example, in a lawsuit between the cooperative and member of the lawyer’s family.
n4 In extreme cases, such as where the lawyer seeks to represent the cooperative in a business transaction with an entity owned or controlled by the lawyer, DR 5-104(A), informed consent may require that an independent attorney advise the board regarding the conflict. See Goldman v. Kane, 3 Mass. App. Ct. 336, 341, 329 N.E.2d 770, 773 (1975).
More subtle questions arise where a lawyer-director is asked to represent the cooperative in a commercial or corporate transaction. In most cases, the lawyer’s property and personal interests should coincide with those of the other tenants and the board. However, that will not always be the case. The greatest potential for conflicting interests arises in transactions involving other tenants in the building. For example, the board may ask the lawyer to represent it in connection with the sale of an apartment by another tenant. The lawyer should be sensitive to the possibility that his personal feelings about the selling tenant and the prospective buyer may influence his professional judgment. To the extent there are no matters to be negotiated by the lawyer in connection with the transaction, the problem is somewhat alleviated. Cf. N.Y. City 81-4 (a lawyer can represent both a mortgagor and a mortgagee “[i]f the parties themselves have agreed to the terms without an attorney, and if the attorney’s work is mostly ministerial,” and the parties have consented after full disclosure). If, however, the prospective buyer seeks concessions or promises from the board (for example, to make certain repairs), the lawyer’s property interests will be implicated and the need for his impartial judgment will increase. In all such cases, the board must be fully informed of, and consent to, the possible effect on the lawyer’s judgment before the lawyer may accept the engagement.
Finally, we note that in all cases where a cooperative seeks to retain a lawyer-tenant as counsel, the board should be fully informed of the risk of a later withdrawal by the lawyer if differing interests should arise, see EC 5-3, n5 and that in no circumstances may a lawyer represent the board in any litigation if it appears that he “ought to be called as a witness” in the matter. DR 5-101(B).
n5 We do not decide here whether DR 5-101(A) requires withdrawal if, after accepting employment, a conflict arises between the cooperative’s interests and the attorney’s interests. Some authorities have argued that withdrawal is not required in such circumstances. See American Bar Foundation, Annotated Code of Professional Responsibility 193-94 (1979).
II.
THE LAWYER-TENANT AS ATTORNEY FOR A CO-TENANT
Careful consideration should be given whenever a co-tenant requests representation in connection with a matter relating to the cooperative or condominium. If the lawyer is neither a member of the cooperative’s board of directors, nor the attorney for the cooperative, the question is whether the lawyer’s professional judgment may reasonably be affected by the lawyer’s property or personal interests. DR 5-101(A). The potential for such impairment is most evident where a co-tenant seeks to retain the lawyer-tenant as counsel in an action against the cooperative. n6 Again, informed consent would permit such represenation unless there is a material risk that the conflict would impair the representation.
n6 The lawyer must decline the representation if he “ought to be called as a witness” in the litigation. DR 5-101(B).
Not so readily apparent are the potential difficulties in the lawyer-tenant’s representation of a co-tenant in the sale of an apartment. While the immediate “adversarial” interests are between the purchaser and seller, and no direct conflict exists in representation of the seller only, the corporation’s interest and the lawyer’s interest as a tenant-shareholder may be affected by the transaction. For example, the lawyer-tenant may personally dislike the proposed buyer, who is to be the lawyer’s new neighbor, or, conversely, if the proposed buyer is not approved by the corporation’s board of directors, the lawyer-tenant may not be able to advise the seller objectively as to whether he has a legal claim against the corporation. In another situation, the cooperative, and therefore the lawyer as a tenant, may have an interest in requiring the seller to repair or restore the apartment prior to its sale in accordance with the terms of the proprietary lease even if the buyer has raised no objection.
A different set of issues arises if the lawyer is either a board member or counsel for the cooperative. In either case, the lawyer-tenant would owe fiduciary duties to the cooperative that could conflict with the representation of another tenant in a matter relating to the cooperative. See N.Y. State 589 (1988). Where the lawyer is also counsel for the cooperative, he or she may represent an individual tenant-stockholder “only if the lawyer is convinced that differing interests are not present.” EC 5-18. For example, where a lawyer who represents the cooperative is requested to represent both the cooperative and a tenant in a sale of the tenant’s apartment, the lawyer must determine whether in fact there are adverse interests between the parties, such as a dispute over unpaid maintenance. In cases where the lawyer’s role on behalf of the cooperative is largely ministerial and there are no adverse interests between the cooperative and the selling tenant, the dual representation would be permissible with the informed consent of both parties.
On the other hand, the lawyer must be sensitive to situations where the selling tenant is in fact aligned with the buyer in seeking concessions from the cooperative to the buyer in order to facilitate the sale. In such cases, as in cases where the cooperative’s lawyer is asked to enforce a claim on behalf of a co-tenant against the cooperative or the board of directors, we do not believe it will ever be “obvious” that the lawyer can “adequately represent the interest of each,” DR 5-105(C), and accordingly, the conflict could never be cured by consent. EC 5-15. n7 Even if the dual representation is initially proper, if a nonwaivable conflict later develops between the cooperative and the tenant, the lawyer may be forced to withdraw from both representations and may in some cases be prohibited by the rules prohibiting disclosure of client confidences even from informing one or the other of the clients of the reasons for the withdrawal.
n7 In addition, such a dual representation could lead to a breach of the duty to keep client confidences and secrets, DR 4-101, or a breach of the duty to represent a client zealously, DR 7-101(A).
III.
THE LAWYER-TENANT AS ATTORNEY FOR A PURCHASER
The interests of a purchaser of shares in the cooperative apartment can be quite different from the interests of the cooperative as a whole, creating areas of actual or potential conflict of interests. Potential conflicts include negotiation of a recognition agreement whereby the cooperative corporation may recognize a lending bank’s lien on the new owner’s shares, and negotiation with the corporation as to alterations or other questions under the proprietary lease or house rules. Additionally, the prospective purchaser needs to be approved by the board of the building, representing another potential for conflict of interest, whether the lawyer-tenant is acting as board member or as a lawyer for the corporation. If the lawyer-tenant is the lawyer for the corporation, acting also for the potential purchaser clearly constitutes representation of differing interests. Accordingly, the lawyer-tenant may act only if it is “obvious” that he can adequately represent both the cooperative and the purchaser and each party consents after full disclosure of the conflict between the cooperative and the purchaser and the lawyer-tenant’s personal and property interests in the transaction. DR 5-105(A).
Whether the “obviousness” test can be met depends on the particular facts and circumstances, but in general, the more issues there are to be negotiated between the board and the applicant, the less likely it will be satisfied. See N.Y. State 162 (1970). Conversely, if there is nothing to be negotiated, and the lawyer is acting primarily in a ministerial capacity, the conflict may be waivable. N.Y. City 81-4; N.Y. County 615 (1973). In any event, we agree with the opinion of the New York State Bar Association Committee on Professional Ethics that “[d]ual representation should be practiced sparingly and only when it is clear that neither party will suffer any disadvantage from it.” N.Y. State 38 (1966), quoted in N.Y. State 162 (1970).
Recognition should also be given to the possibility of future disputes between the purchaser and the corporation. Problems of rental payments or other relationships between tenant and corporation may arise. They should be recognized, fully disclosed and consented to by both the cooperative and the purchasing tenant, and it should be clearly agreed that the representation is limited to completion of the purchase transaction and does not extend into the future.
IV.
THE LAWYER-TENANT AS ATTORNEY FOR A TENANTS’ GROUP WITH RESPECT TO A CONVERSION PLAN
Finally, we turn to the question of whether a lawyer residing in a rental building may represent a tenants’ committee formed in response to an announced conversion plan. Although the property interests of a lawyer may initially be co-extensive with those of the members of a tenants’ group or committee, and not currently interfere with the exercise of the lawyer’s independent judgment, if the likelihood of such interference can reasonably be foreseen, the lawyer should explain the situation to the tenants’ group, including the risk of later withdrawal and the serious disruptions that may ensue. The lawyer should decline or withdraw from employment unless the tenants’ group consents to the continuance of the relationship after full disclosure. DR 5-101(A); EC 5-3. Issues upon which the lawyer’s personal or financial interests may diverge from other tenants could include, for example, whether to try to defeat the conversion plan, what parts of the building to seek to have the landlord repair and how to allocate the maintenance among the apartments in the building.
If the lawyer believes that there is no reasonable possibility that the lawyer’s interest in his or her own apartment will at some point adversely affect the services the lawyer will render to the tenants’ committee, it would be proper for the lawyer to undertake the representation, provided (1) full disclosure is made to the prospective clients of the lawyer’s interest and of the potential risks and conflicts that could arise from that interest and (2) each of those clients thereafter consents to the lawyer’s retention. See N.Y. City 80-87. (Given the changing composition of tenants’ groups, such consents may be difficult to obtain throughout the representation.) In the case of a lawyer-tenant involved with a cooperative conversion, however, we caution that in many circumstances it is reasonably foreseeable that the lawyer’s financial and property interests could diverge from the interests of other tenants and thus interfere with the lawyer’s representation of other tenants. A lawyer should accept or continue such representation only after the most careful consideration and should resolve all doubts against the propriety of the representation. EC 5-15.
An additional ethical consideration arises from the possibility that at some point in the conversion process the interest of the constituent members of the tenants’ committee may diverge. If the lawyer’s exercise of independent professional judgment on behalf of some tenants will be or is likely to be adversely affected by his or her representation of others, the lawyer must discontinue the multiple employment, DR 5-105(B), unless it is obvious that the lawyer can adequately represent the interests of each group and each group consents after full disclosure of the possible risks and effects of such representation. DR 5-105(C); see also EC 5-16, EC 5-19, N.Y. City 81-4. While each case depends on its own facts, we caution that in many instances it will not be obvious that a single attorney — particularly one who is also a tenant — will be able to represent adequately the interests of numerous tenants in the entire conversion process.
Assuming compliance with DR 5-101 and DR 5-105, representation of a tenants’ committee by a tenant is not inherently unethical. However, the prospect of diverging interests between the lawyer and some of his or her clients, or among the individual members of a tenants’ committee, is sufficiently possible that the better practice may be to decline such representation at the outset and spare the clients the expense and inconvenience caused by later withdrawal. See N.Y. City 81-27.
CONCLUSION
Lawyers who participate in the affairs of the cooperative or condominium apartment buildings in which they live should be sensitive to the ethical issues that may arise. At the heart of these issues is Canon 5 of the Code of Professional Responsibility, which requires a lawyer to exercise independent professional judgment on behalf of a client. The Ethical Considerations and Disciplinary Rules under Canon 5, as well as others that may be applicable, should be carefully considered in the context of the various roles that lawyers may play. As tenants, lawyers have a property or personal interest that may affect the exercise of their professional judgment. When acting as a lawyer for the corporation, for sellers or buyers of apartments or for tenants’ committees, a lawyer may be dealing with multiple and diverse interests that may adversely affect the independence of his or her professional judgment or the lawyer’s duty of loyalty to a client. Service on the board of directors of the building corporation raises further ethical problems if the lawyer also proposes to function in a professional capacity.
This opinion is intended to serve as a guide to assist the Bar in dealing with these questions. We emphasize that, as with conflicts of interest in general, lawyers who participate in the affairs of the cooperative or condominium apartment buildings in which they live should resolve all doubts against the propriety of the proposed representation.
