Formal Opinion 1994-10: Confidences and secrets; disclosure of organizational wrongdoing; limited partnership

October 21, 1994

ACTION: FORMAL OPINION

OPINION:

TOPIC: Confidences and secrets; disclosure of organizational wrongdoing; limited partnership.

DIGEST: A lawyer for a limited partnership must tell the limited partners any information concerning improprieties by the general partner, but may not reveal the information to non-clients unless necessary to prevent the commission of a crime.

CODE: DRs 4-101(A), 4-101(B)(1), 4-101(C)(3), 5-105(B), 5-108(A)(2), 5-109, 7-102(B)(1), 7-102(B)(2); ECs 4-4, 4-6, 5-1, 5-14, 5-18, 7-6; Definitions 6, 9.

QUESTIONS

1. Must an attorney who represents a limited partnership and discovers that the general partner, whom the attorney also represents in an individual capacity, has engaged in improper conduct with respect to the partnership business in ways that adversely affect the interests of the limited partners, reveal that information to the limited partners?

2. May the attorney also reveal the information to non-clients affected by the wrongdoing?

OPINION

An attorney has served for several years as legal counsel to a limited partnership (the “Partnership”) from which she receives a weekly legal fee. She has also represented the sole general partner (“GP”) of the Partnership in connection with the Partnership business and on other unrelated matters. The accountant for the Partnership recently informed the attorney of the existence of a bank account which GP, without the Partnership’s knowledge or approval, has been using to run a related business. GP has deposited all profits from his business into this bank account. The accountant also informed the attorney that GP has refused to allow the accountant or the general manager of the Partnership business to see any books or records concerning the side business, has failed to pay certain taxes on the proceeds, and has not reported income from the side business to the limited partners or on the Partnership’s tax returns, limited partner K-1 forms, or otherwise. Based upon the attorney’s own inquiry, she believes this information to be true.

The attorney has also been informed by the general manager of erratic behavior by GP in his dealings with the staff and others, and that GP has asked for advances of net profits because he “needs the money.” The attorney suspects that the money that has been earned from the side business has been advanced to GP personally and therefore is not in the Partnership account for distribution to limited partners and others. The attorney has twice written to the GP and asked GP to make appropriate distributions and to report the concession income on amended tax returns. GP has not responded to the attorney’s letters, has not taken the steps the attorney advised him to take, and has not communicated with the attorney directly for several months.

The ethical principles involved in this inquiry are: (1) the duties of an attorney retained by a partnership, see EC 5-18; DR 5-109; (2) an attorney’s duty of primary loyalty to the client, including the obligation to provide a client with material information helpful to the client’s interests, see EC 5-1; Spector v. Mermelstein, 361 F. Supp. 30 (S.D.N.Y. 1972), aff’d in relevant part, 485 F.2d 474 (2d Cir. 1973); (3) an attorney’s duty to preserve the confidences and secrets of a client, see DR 4-101; (4) an attorney’s duty to reveal fraud perpetrated by a client or another person, see DR 7-102(B); and (5) an attorney’s duty to discontinue representation where differing interests may affect the attorney’s independent professional judgment, see EC 5-14, DR 5-105(B).

The committee concludes that while the attorney must make disclosure of GP’s actions to the Partnership’s limited partners, she is not under a duty to disclose such information to others. Furthermore, the differing interests of GP and the limited partners likely will require that she discontinue her representation of the Partnership, the GP or any limited partner relating to Partnership matters, if she determines that her individual professional judgment will be or is likely to be affected thereby.

The Partnership entity is the attorney’s client. DR 5-109 provides:

When a lawyer employed or retained by an organization is dealing with the organization’s directors, officers, employees, members, shareholders or other constituents, and it appears that the organization’s interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer for the organization and not for any of the constituents.

EC 5-18, in turn, provides in pertinent part that:

A lawyer employed or retained by a corporation or similar entity owes allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity. In advising the entity, a lawyer should keep paramount its interests and the lawyer’s professional judgment should not be influenced by the personal desires of any person or organization. Occasionally, the lawyer may learn that an officer, employee or other person associated with the entity is engaged in action, refuses to act, or intends to act or to refrain from acting in a matter related to the representation that is a violation of a legal obligation to the entity, or a violation of law which reasonably might be imputed to the entity, and is likely to result in substantial injury to the entity. In such event, the lawyer should proceed as is reasonably necessary in the best interest of the entity.

The attorney, therefore, owes her primary allegiance to the Partnership, and not to GP or any other individuals connected with it. N.Y. City 1986-2; ABA Inf. 1233 (1972).

When the attorney for an entity such as the Partnership discovers acts of impropriety by a partner or employee 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. EC 5-18; N.Y. City 1986-2; ABA 202 (1940); ABA Inf. 1318 (1975). Where, however, the “governing body” of the entity is implicated in the improper act, disclosure to limited partners outside of the “governing body” is warranted in order to allow them to protect their interests if the governing body could not reasonably be expected to do so. N.Y. City 1986-2 (1986); Texas 387 (1977); Florida 65-59 (1965). In the situation presented, GP is the sole general partner of the Partnership and reasonably cannot be expected to protect the limited partners’ interests. Accordingly, the attorney should disclose her knowledge of the GP’s improprieties to the Partnership’s limited partners.

Such disclosure of GP’s improprieties 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 GP’s improprieties in the course of her representation of the Partnership, her duty of loyalty to the Partnership would be paramount to any duty to respect the secrets of any individual partner, such as GP, disclosed during the course of Partnership representation, even if GP is also a client. N.Y. City 1986-2.

The attorney does not, however, have a corresponding duty to reveal information of GP’s improprieties to interested third parties, who are not her clients. DR 7-102(B)(1) provides that:

A lawyer who receives information clearly establishing that . . . [t]he client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon the client to rectify the same, and if the client refuses or is unable to do so, the lawyer shall reveal the fraud to the affected person or tribunal, except when the information is protected as a confidence or secret.

Even if the attorney determines that she has information which “clearly establishes” a fraud perpetrated by GP, * she may not reveal such information if it is a protected “confidence” or “secret.” Except in specifically circumscribed instances, a lawyer may not reveal a confidence or secret of a client. DR 4-101(B)(1). According to EC 4-4, a lawyer’s obligation to preserve a client’s secrets is much broader than the attorney-client privilege and “exists without regard to the nature or source of information or the fact that others share the knowledge.” This obligation applies to substantially all information gained in the professional relationship. N.Y. State 528 (1981), citing Hazard, Ethics in the Practice of Law 21 (1978) (“The basic rule of confidentiality is that the lawyer should keep everything secret that he learns from or about a ‘client,’ except when its disclosure helps his client.”) This obligation to preserve client confidences and secrets continues beyond the termination of a lawyer’s employment. DR 5-108(A)(2); EC 4-6; N.Y. City 1986-8.

* This is a factual determination that cannot be made by this Committee. In determining whether GP has committed a fraud, the attorney should be mindful that the term “fraud,” as used in the Code, “does not include conduct, although characterized as fraudulent by statute or administrative rule, which lacks an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations which can be reasonably expected to induce detrimental reliance by another.” Definition 9. In making such a determination, the attorney should also be mindful of EC 7-6, which states, in pertinent part:

In many cases a lawyer may not be certain as to the state of mind of the client, and in those situations the lawyer should resolve reasonable doubts in favor of the client.

It would be for the attorney to make the ultimate determination whether all the information available to her “clearly establishes” a fraud by GP.

“Confidence” refers to information protected by the attorney-client privilege as a matter of law. “Secret” is defined much more broadly, however, and refers to any information, whether or not privileged, that was gained in the professional relationship and that the client has requested be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client. DR 4-101(A); N.Y. City 1986-8. The information she received concerning GP is a “secret” under DR 4-101(A) because it was “gained in the professional relationship” and its disclosure obviously would be “detrimental” to GP.

One exception to the rule mandating preservation of client confidences and secrets is DR 4-101(C)(3), which permits, but does not require, an attorney to disclose a client’s intention to commit a crime. The exception is strictly construed, however, and is applied only when a client is planning to commit a crime in the future or is continuing an ongoing criminal scheme. See EC 4-7. That question is one of law which must be answered by the attorney; it is not for this Committee’s determination. If the attorney concludes that GP is intending to commit a future crime, then, and only then, may the attorney reveal such intent. She is not, however, in any event ethically required to reveal that information.

We have assumed that the attorney’s retention by the Partnership, her continuing retention by GP on other matters and her work for GP in connection with Partnership affairs render GP a “client” for purposes of DR 7-102(B). Even if GP were not considered a “client,” the result under DR 7-102 would be unchanged. DR 7-102(B)(2) provides that “[a] lawyer who receives information clearly establishing that . . . [a] person other than the client has perpetrated a fraud upon a tribunal shall promptly reveal the fraud to the tribunal.” As none of the interested third parties fits within the Code’s definition of “tribunal,” Definition 6, no duty to disclose arises under DR 7-102(B)(2).

The differing interests of the GP and the Partnership’s limited partners created by GP’s improper actions, however, may also require that the attorney discontinue her representation of the Partnership, as well as either GP or any limited partner, relating to Partnership matters (and particularly relating to any actions taken by the Partnership against GP relating to the conduct that is the subject of this inquiry), if she determines that her independent professional judgment will be or is likely to be affected by such differing interests. DR 5-105(B); N.Y. City 1986-2; N.Y. State 555 (1984); ABA Inf. 1441 (1979).

CONCLUSION

For the foregoing reasons, the first question is answered in the affirmative; the second question is answered in the negative.