January 28, 2013
When a lawyer is required to limit the scope of her representation of an existing or prospective client in order to obtain a conflict waiver from another client, the lawyer may do so only if she is able to (1) obtain the necessary clarity regarding the limitations to be imposed, (2) reasonably determine that she will be able to provide competent representation with the limitations in place, (3) reasonably determine that neither her relationship with the client from whom the waiver is sought nor the representation of an existing or prospective client will be adversely affected, and (4) obtain consent from each client after consultation.
In the course of meeting her duties to the existing or prospective client, the lawyer may not agree to a limitation that would preclude her from disclosing to the existing or prospective client information necessary to pursue the objectives of the representation.
References: MRPC 1.0, 1.1, 1.2(b), 1.4(b), 1.6(b) and (c)(1), 1.7(a) and (b), 1.8(b), 1.9(a) and (c); RI-347, RI-348, RI-350; ABA/BNA Lawyers' Manual §51:116
A lawyer has requested an opinion on the following issue:
May house counsel for a bank request1 and may an outside counsel accept a limited waiver of conflict of interest which prohibits the outside counsel from offering certain types of advice to or engaging in certain activities on behalf of another client?
The issue is presented in the following factual context:
A lawyer (the "outside counsel") represents a bank (the "Bank") on certain legal matters, but she is not the Bank’s primary outside counsel. She often represents the Bank in its fiduciary capacity as trustee for the lawyer’s clients.2 On other occasions she assists the Bank in the documentation of loan transactions, usually when primary outside counsel faces a conflict. The Bank is a current client and, because of its leadership in the market, is also a creditor in most of the sizeable bankruptcies in which the outside counsel is involved.
The outside counsel also represents, or may wish to represent, persons who have, or who may wish to have, lending relationships with the Bank; debtors who may seek a voluntary arrangement of creditors or bankruptcy relief; and creditors who compete for priority of security interests. Hence, the outside counsel from time to time seeks a waiver of conflict of interest from both the Bank and the person to whom the inquiring lawyer refers as the "Conflicting Client."3
The Bank’s house counsel has required that, as a condition to the Bank’s waiving of any conflict (even in unrelated matters or in matters involving different departments or different related entities), the outside counsel must agree that she will not:
- take an "adversarial" position to the Bank;
- assist the Conflicting Client in challenging a security interest;4
- assist the Conflicting Client in asserting a priority over the Bank’s security interest;
- assist the Conflicting Client in asserting a claim of lender liability against the Bank; or,
- represent the Conflicting Client in litigation with the Bank (collectively, "the Bank’s Conditions").
The question presented is whether an outside counsel, who periodically and currently represents the Bank5 and wishes to represent others whose interests might conflict with the Bank’s, may ethically do so with the Bank’s Conditions in place.
At the outset, it is important to note that, if "adversarial" as used in the Bank's Conditions has the same meaning as "adverse" as used in MRPC 1.7(a), then the waiver proposed by the Bank, which prohibits outside counsel from "tak[ing] an 'adversarial' position to the Bank," is illusory and not a waiver at all. In that circumstance, outside counsel may not proceed further and must decline representation of the Conflicting Client.
If "adversarial" means something different than "adverse" as used in MRPC 1.7(a), the Rules principally implicated by the facts as presented include: MRPC 1.1 (competence); MRPC 1.2 (limitations on the scope of representation); MRPC 1.6(a) (duty to maintain client confidences and secrets); MRPC 1.7(a) and (b) (concurrent client conflicts); and MRPC 1.8(b) (duty not to use information to the disadvantage of a client).
MRPC 1.2(b) permits a lawyer to choose to limit the objectives of a representation, subject to the informed consent of the client, so long as the lawyer can competently handle the matter so limited. In Informal Opinion RI-347 (April 23, 2010),6 this Committee opined that:
Limitation on the scope of representation must be reasonable. Comment to Rule 1.2 notes that the limitation on scope may not be such that would result in the lawyer's violation of Rule 1.1 on providing competent representation, meaning that the lawyer cannot define the scope to permit performance of services inadequately, or fail to do that which is required to perform the work agreed upon competently.
Informal Opinion RI-348 (July 26, 2010), which discusses how a lawyer is to determine whether a limitation in scope is ethically permissible, states in pertinent part:
MRPC 1.1 provides "[a] lawyer shall provide competent representation to a client."Accordingly, a lawyer wishing to limit the scope of representation in the manner described above must determine objectively whether the client would be competently represented in light of the proposed limitations.
The Committee noted that the "disinterested lawyer" standard should be applied in making this objective determination and concluded that:
To determine whether as a matter of legal ethics the limitations proposed by the requestors may be agreed upon, the lawyer must first ascertain whether a lawyer could conclude that the client could agree to the limitation and be competently represented . . . with those restrictions on the scope of representation in place.7
The lawyer may not seek client consent to a limited scope of representation if the disinterested lawyer standard cannot be satisfied.8 That is, would a disinterested lawyer reasonably conclude that the clients should agree to the limited representation under the circumstances?9 The disinterested lawyer standard applicable under MRPC 1.2 is the same standard applicable in a MPRC 1.7 analysis.10
There must be full disclosure to the Conflicting Client of the Bank’s Conditions in order for the Conflicting Client to give informed consent. Hence, in the course of making the required assessment, and prior to consulting with the Conflicting Client, the outside counsel should engage in sufficient consultation with the Bank’s house counsel to gain a clear understanding of the Bank’s intended meaning of the terms in the Bank’s Conditions, particularly where, as here, the meaning of various terms is unclear (e.g. "adverse position," "assist," "in litigation with").11 Such an understanding of the Bank’s intent as to these terms is essential before the lawyer can determine whether she would be able to provide competent and zealous representation to the Conflicting Client if the Bank’s Conditions were accepted.12 If a clear understanding results in a conclusion by outside counsel that, for example, "tak[ing] an ‘adversarial’ position to the Bank" is so broad in scope that a disinterested lawyer would reasonably conclude that the Conflicting Client should not agree to the representation with Bank’s Conditions, then the outside counsel may not seek consent of the Conflicting Client and must, therefore, decline the representation.
Inherent in this assessment is a determination of whether the Bank’s intent includes a limitation on the right of the outside counsel to fully disclose to her Conflicting Client facts or issues that may be relevant to protecting the Conflicting Client’s rights regardless of whether the outside counsel would be able to represent the Conflicting Client as to such matters. The outside counsel would clearly violate her ethical obligations to the Conflicting Client if she were to agree in advance not to reveal to or discuss with the Conflicting Client the implications of matters that might be discovered during the course of her representation of the Conflicting Client because of their potential impact on the interests of the Bank. On the facts presented, examples would include remaining silent and neither informing the Conflicting Client nor advising the Conflicting Client to seek independent counsel for advice when the outside counsel becomes aware of any circumstance that suggests the Conflicting Client should take an adversarial position to the Bank and/or might have a basis to challenge the Bank’s security interest, assert a priority, assert a claim against the Bank, or bring suit against the Bank.13 If such an agreement were in place, the outside counsel could neither provide competent representation to the Conflicting Client consistent with MRPC 1.1 nor discharge her obligations to properly communicate with the Conflicting Client consistent with MRPC 1.4(b). It would also be impossible for the Conflicting Client to give informed consent to limitations on the scope of representation if the full extent of those limitations were undisclosed.
Consistent with a lawyer’s duty of loyalty to a client, MRPC 1.7(a) prohibits the lawyer from undertaking a representation directly adverse to a current client, regardless of whether the two matters are factually unrelated, unless the lawyer reasonably believes that the prospective representation will not adversely affect the lawyer’s relationship with the other client (here, the Bank) and each client consents after consultation. Even in the absence of direct adversity, if representation of one client might materially limit the lawyer’s ability to represent another client, MRPC 1.7(b)(1) prohibits the lawyer from undertaking a representation, unless the lawyer reasonably believes that the representation will not be adversely affected, and the prospective client consents after consultation. Loyalty to a client is impaired, and a material limitation is deemed to exist, when a lawyer is prohibited from considering, recommending or carrying out an appropriate course of action for a client because of the lawyer’s responsibilities to another client or a third person or the lawyer’s own interests.
Application of the disinterested lawyer standard requires the outside counsel to determine whether a disinterested lawyer could reasonably conclude that the clients should agree to the representation under the circumstances;14 it is ethically impermissible for the outside counsel to seek the consent of either the Conflicting Client or the existing client, and she must decline to undertake the Conflicting Client’s matter, if this threshold is not satisfied. If the disinterested lawyer standard is satisfied, the outside counsel must seek the informed consent of each client. Informed consent requires full disclosure of the limitations to be imposed and the legal and practical implications of that consent.
In order for the outside counsel to discharge her disclosure obligations to both the Conflicting Client and the existing client, each must first consent to the specific disclosure of whatever confidential information, if any, is necessary to give informed consent. The lawyer should explain in detail the confidences she will disclose.15 If either declines to consent to the disclosure of the confidences, the lawyer is ethically prohibited from engaging in the consultation and must, therefore, decline the representation.
If the lawyer (1) satisfies the disinterested lawyer standard and (2) obtains the consent of both the Conflicting Client and the existing client to the disclosure of sufficient confidential information to seek informed consent, the lawyer must then undertake consultations with each party as a predicate to securing the effective consent of each. The term "consultation" denotes "communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question."16 Thus, in the context of the question asked, the consultation with the Conflicting Client must involve an adequate explanation to enable the Conflicting Client to understand the risks involved -- that is, what it would mean to take an adversarial position to the Bank, assist in challenging a security interest, assert a priority over a security interest, assert a claim of lender liability, or represent the Conflicting Client in litigation with the Bank. The Conflicting Client would also need to be informed that, should it be in the client’s interest to take an adversarial position to the Bank, challenge a security interest, assert a priority over a security interest, assert a claim of lender liability, or represent the Conflicting Client in litigation with the Bank, the Conflicting Client must be referred to independent counsel for an evaluation and recommendation and that such a referral could result in delays and additional legal fees to the Conflicting Client.
Even if the Conflicting Client consents to the representation after consultation, the Bank, as the other client, must independently consent after consultation before the outside counsel may take on representation of the Conflicting Client.
If representation of the Conflicting Client does not ensue for any reason, the outside counsel, having acquired information that may be covered by MRPC 1.6 as a result of the consultation, even though the representation is declined, would be precluded by MRPC 1.8(b) and 1.9(c) from using the information to the Conflicting Client’s disadvantage and from representing the Bank in the same or substantially similar matter by MRPC 1.9(a) in the absence of the Conflicting Client’s informed consent.
In summary, on the facts presented, in order for the outside counsel to ethically limit the scope of her representation of the Conflicting Client by accepting the Bank’s Conditions, she must be able to (1) obtain the necessary clarity as to the Bank’s intentions regarding the terms used in its Conditions, (2) reasonably determine that she will be able to provide competent representation to the Conflicting Client subject to the Bank’s Conditions (MRPC 1.1 and 1.2(b)), (3) reasonably determine that her relationship with the Bank will not be adversely affected by her representation of the Conflicting Client (MRPC 1.7(a)), (4) reasonably determine that the representation of the Conflicting Client will not be adversely affected (MRPC 1.7(b)), and (5) obtain informed consent from both the Conflicting Client and the Bank as discussed above. In the course of meeting her duties to the Conflicting Client, the lawyer may not agree to a limitation that would preclude her from disclosing to the Conflicting Client information necessary to pursue the objectives of the representation of the Conflicting Client. The outside counsel must remain free to advise the Conflicting Client as to any facts and issues adverse to the Bank discovered by outside counsel during the course of representing the Conflicting Client and, as appropriate, to withdraw from the representation and refer the Conflicting Client to other counsel. Any disclosure necessary to competent representation must be made promptly.
1 The lawyer also asked whether the Bank's house counsel acts ethically in seeking to impose the stated conditions as a prerequisite to granting a conflicts waiver. This opinion is limited to discussion of the conduct of the outside counsel as to the proposed limiting conditions.
2 In Informal Opinion RI-350 (July 26, 2010), the Committee considered the ethical obligations of a lawyer engaged by a fiduciary of a person, an estate or trust and concluded that "[i]t is a conflict of interest for a lawyer to represent both the fiduciary and a beneficiary unless the personal interests of the beneficiary are fully consistent with the obligations of the fiduciary and both parties have consented, as required under MRPC 1.7. Whether the fiduciary and the beneficiary are the same person or different persons makes no difference."
3 In this opinion, the Committee adopts the inquiring lawyer's nomenclature and refers to the person on whose behalf a conflict waiver is sought as the "Conflicting Client." The person from whom the waiver is sought is referred to alternately as either the "Bank" or the "existing client," even though the Conflicting Client may also, in fact, be an existing client.
4 The Committee assumes that this condition refers to the Bank's security interest.
5 In the facts presented by this inquiry, the Bank is a current client of outside counsel. However, if the Bank's house counsel were to present specified conditions (a-e) to the outside counsel during initial discussions before the outside counsel is engaged by the Bank (presumably in the context of submitting to the outside counsel the Bank's standard terms for engagement of outside counsel), the outside counsel would, of course, be free to refuse to undertake representation of Bank. The Bank's house counsel might advise the outside counsel during such pre-engagement discussions that, given the quantity of legal work the Bank expects to refer and the extent to which the Bank will educate the lawyer on its internal processes, policies and other confidential matters, the Bank will not waive any conflicting representations whatsoever. Such a position would clearly pose no ethical issue.
When the discussion between the outside counsel and the Bank's house counsel concerning the imposition of conditions (a-e) in a conflict waiver occurs after the outside counsel has commenced his or her relationship with the Bank, the outside counsel is free to inform the Bank that, given the Bank's restrictive conditional waiver policy, the outside counsel will conclude his or her existing representations for the Bank but not accept any new representations. In that circumstance, the outside counsel must refuse potential conflicting representations until such time as outside counsel has completed his or her final pending representation of the Bank. Once the Bank becomes a former client, MRPC 1.9 applies.
6 Informal Opinion RI-347, discussing the concept of "unbundled" legal services where a lawyer sought to perform only specific, limited tasks instead of handling all aspects of a matter.
7 Informal Opinion RI-348 (July 2, 2010).
8 See MRPC 1.7, Comment regarding "Consultation and Consent."
9 A lawyer cannot satisfy the disinterested lawyer standard where she "must choose one client over another or aid one against the other." ABA/BNA Lawyers' Manual on Professional Conduct §51:116.
10 See also, MRPC 1.7, Comment, "Consultation and Consent. "However, as indicated in [MRPC 1.7] paragraph (a)(1) with respect to representation directly adverse to a client, and paragraph (b)(1) with respect to material limitations on representation of a client, when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent."
11 For example, the limitation precluding outside counsel from taking an "'adversarial' position to the Bank" does not sufficiently explain the limitation sought to be imposed. Since the limitation described in paragraph (e) refers to litigation, the term "adversarial" in paragraph (a) must mean something else and could be interpreted to refer to transactional matters. This might include negotiating changes to loan documents, which may be the very purpose for which the Conflicting Client seeks to retain the outside counsel.
12 At whatever point the outside counsel consults with the Conflicting Client, she must be satisfied that the Conflicting Client shares a similar understanding of, and agrees to, the terms in the limiting conditions.
13 Outside counsel would also need to advise the Bank's house counsel that imposing such conditions (a-e) on a conflict waiver would require the outside counsel to explain during an adequate consultation with the Conflicting Client the risks of accepting such conditions and the alternative of employing other counsel or seeking a relationship with a different bank. The consultation could well alert the Conflicting Client to the possibility of asserting a claim or adversarial position the Conflicting Client had not previously entertained. If the Bank wishes to avoid the risk of such an outcome, the Bank's house counsel should advise the outside counsel that no conflict waivers will be granted.
14 A lawyer cannot satisfy the disinterested lawyer standard where she "must choose one client over another or aid one against the other." ABA/BNA Lawyers' Manual on Professional Conduct §51:116.
15 MRPC 1.6(c)(1).
16 As defined in the Preamble under the Terminology subheading. See MRPC 1.0.