Formal Opinion 1990-1

January 29, 1990

ACTION: Formal Opinion

OPINION:

In Formal Opinion 1988-5, the Committee addressed ethical questions arising in a variety of circumstances in which lawyers who are shareholders in a cooperative apartment corporation are active in the affairs of their building or are called upon to provide legal services for different constituencies in the building, e.g., the board of directors, a fellow shareholder or a potential purchaser. The situations discussed in that opinion did not include that of a lawyer representing both a cooperative corporation and the sponsor after a conversion of the building from rental apartments, and this opinion is intended to address that subject.

The inquirer is contemplating acting as the lawyer for a sponsor during the process of converting rental apartments into cooperative ownership and then continuing as the lawyer for both the sponsor and the cooperative corporation after the conversion. The inquirer asks whether the lawyer for the sponsor during the conversion process may continue such dual representation after conversion if the lawyer agrees to withdraw from the dual representation when a specific conflict between the two clients arises. The inquirer asks further whether the fact that the tenants themselves control the board of directors of the cooperative corporation and thus have the power to discontinue the services of that corporation’s lawyer is sufficient to justify such dual representation if it would otherwise be ethically impermissible.

By way of background, the inquirer notes that the sponsor typically functions throughout the conversion process in many different capacities. The sponsor usually is the owner of the building undergoing conversion at the outset. As owner of the building, the sponsor is also the landlord of the building and continues to operate as landlord after the conversion with respect to all tenants who choose to remain as rental tenants rather than purchase shares in the cooperative corporation and obtain from it a proprietary lease. The sponsor creates the cooperative corporation and initially owns all shares of such corporation. Through the conversion, the sponsor sells these shares to certain of the rental tenants, who may be represented by their own tenants’ association and who generally will retain their own counsel. The sponsor usually also sells shares to certain purchasers who are not rental tenants and these purchasers typically retain their own counsel.

Initially, according to the inquirer, the sponsor is the controlling shareholder in the corporation. As the creator of the corporation and its controlling shareholder, the sponsor appoints its own agents to the board of directors of the cooperative corporation. Although some of the sponsor’s directors often resign within 30 days following conversion in favor of directors appointed by the tenant shareholders, the sponsor frequently continues to be the controlling shareholder of the cooperative corporation for some period of time.

The inquirer has further advised that the sponsor may act in other capacities throughout the conversion process and may continue to act in various capacities after all the shares of the cooperative corporation have been sold. The sponsor often will act as the managing agent of the cooperative corporation. The sponsor may also be a lessee from the cooperative corporation with respect to any commercial space in the building. The sponsor also frequently is the holder of the mortgage on the building.

The inquirer already has concluded that the interests of the tenant shareholders are adverse to the interests of the sponsor in virtually all capacities in which the sponsor might act. Indeed, during the conversion process itself and prior to actual conversion, the tenants’ association customarily employs independent counsel to represent its interests vis-a-vis the sponsor as the original landlord, the seller of the cooperative corporation’s shares, the entity that appoints the initial board of directors of the corporation, the controlling shareholder and the holder of unsold shares. The issue, however, is the likelihood that the interests of the cooperative corporation will conflict with the interests of the sponsor after the conversion and the ethical implications of that likelihood for the lawyer proposing to represent both.

Canon 5 of The Lawyer’s Code of Professional Responsibility (the “Code”) requires a lawyer to exercise independent professional judgment on behalf of a client. DR 5-105(A) and (B) provide that a lawyer shall decline multiple representation, or having undertaken multiple representation shall discontinue it, if the exercise of his independent professional judgment on behalf of a client will be or is likely to be adversely affected or if it would likely involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Whether a lawyer’s representation of both the sponsor and the cooperative corporation would be likely to affect adversely the lawyer’s independent professional judgment on behalf of either client or involve the lawyer in representing differing interests will depend on the facts and circumstances of each case. Nevertheless, the Committee finds it difficult to conceive of a situation in which a lawyer should not conclude that his or her representation of both the sponsor and the cooperative corporation is “likely to involve” the representation of “differing interests” (defined in the Code to encompass interests that are “inconsistent” or “diverse”, as well as those which are “conflicting”). In this regard, a lawyer should be mindful of EC 5-18, which admonishes that a lawyer employed or retained by a corporation owes allegiance to the corporation and not to a stockholder, director, officer, employee, representative, or other person connected with the corporation, such as in this case the sponsor.

Nevertheless, DR 5-105(C) permits a lawyer to represent multiple clients in a situation covered by DR 5-105(A) “if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.” (Emphasis added.) As the Committee indicated in Formal Opinions 80-7 and 81-4, “the touchstone of this provision of the Code is the adverse effect that competing interests of more than one client have on the attorney’s capacity to exercise full professional judgment on behalf of each client.” EC 5-15 notes that a lawyer should resolve all doubts against the propriety of the representation of clients having potentially differing interests.

Whether the “obviousness” test can be met depends on the particular facts and circumstances, but, in general, the more issues that are likely to arise between the sponsor and the cooperative corporation, the less likely is the test to be satisfied. See N.Y. State 162 (1970). 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 sponsor and the cooperative corporation. Potential conflicts between the sponsor as controlling shareholder and the tenant shareholders and other potential problems arising from the relationship between the sponsor and the cooperative corporation may arise. Before undertaking any such multiple representation, these potential problems should be recognized, fully disclosed and consented to by both the sponsor and the cooperative corporation.

As we noted in Formal Opinion 1988-5, even if a lawyer concludes that multiple representation is initially proper in a given situation, if a non-waivable conflict later develops between the sponsor and the cooperative corporation, the lawyer may be forced to withdraw from both representations and may in some cases be forbidden by rules prohibiting disclosure of client confidences even from informing one or the other of the clients of the reasons for the withdrawal. Indeed, the Committee has been informed that in common practice if the lawyer for the sponsor does continue to represent the cooperative corporation after the conversion process, the lawyer will typically resign from representing the cooperative corporation when tenant shareholders develop interests conflicting with those of the sponsor as controlling and non-tenant shareholder. Declining representation of the cooperative corporation at the outset would spare all parties such disruption.

In conclusion, the Committee believes that the preferable course in general would be for a lawyer to decline to represent the cooperative corporation if the lawyer has represented the sponsor throughout the conversion process and proposes to continue that representation. Declining representation of the cooperative corporation at the outset would spare the lawyer’s clients the expense and inconvenience caused by later withdrawal. See N.Y. City 81-27. Such a decision is consistent with the Code’s admonishment to resolve all doubts against the propriety of any proposed multiple representation.