RI-138
June 22, 1992
SYLLABUS
When a client or former client of a lawyer offers to tailor testimony in exchange for compensation regarding the representation matter, is properly counseled regarding the impropriety of the conduct but nevertheless refuses to rectify the consequences of the illegal act, the lawyer has discretion to reveal the offer to the court.
When a lawyer has represented multiple clients in a transaction which is later challenged, and one former client will be testifying against other former clients about matters substantially related to the original representation, the lawyer may not represent any of the parties in the subsequent matter. Other members in the lawyer's firm are imputedly disqualified from representation in the subsequent matter.
When a lawyer has been required to disclose illegal conduct on behalf of a client or former client, the lawyer may not continue to represent the client on unrelated matters. Other members in the lawyer's firm are imputedly disqualified from representation of the client in the unrelated matters.
References: MRPC 1.2(c), 1.6(c), 1.7(a) and (b), 1.9(a), 1.10(a), 3.4(b); RI-117.
TEXT
The law firm has represented a corporation and its two shareholders individually in a variety of matters. In a transaction to redeem one shareholder's corporate shares, the law firm represented the corporation and both shareholders; all parties consented to the multiple representation. The redemption price was negotiated between the parties upon advice provided by the corporation's accountant without the involvement of the law firm. A lawyer from the firm drafted all of the documents reflecting the terms of the transaction.
The Internal Revenue Service has initiated an audit of the corporation and is expected to challenge the valuation of the covenant in the redemption. In preparation for the tax dispute, the lawyer and the accountant met with the seller shareholder regarding the seller's testimony in the event of litigation. The seller asked the lawyer and the accountant to keep the conversation confidential, then seller offered to testify favorably to the corporation in exchange for compensation from the corporation. If not compensated, the seller threatened to testify adversely to the corporation.
The lawyer advised the seller that the proposed arrangement created serious ethical and legal problems, and that the lawyer would convey it, but not recommend it, to the purchasing shareholder. The purchaser rejected the offer, and the seller subsequently made statements to the IRS which were detrimental to the corporation. Both the lawyer and the seller are likely to be called as witnesses in the tax litigation.
The lawyer asks (a) whether the lawyer must disclose to the seller that the lawyer or the accountant may reveal the seller's offer to exchange testimony for money; (b) whether the lawyer or the lawyer's firm may represent the corporation in the matter; and (c) whether the law firm may continue representation of the corporation if the lawyer is called as a witness.
We address the conflicts questions first. The lawyer drafted the documents involving the redemption transaction, and represented both shareholders and the corporation in that transaction. The lawyer may represent the corporation in the tax matter only if the representation is not materially adverse to a former client, MRPC 1.9(a), and not directly adverse to a current client, MRPC 1.7(a), and not materially limited by the lawyers responsibilities to another client, a third party or to the lawyer's own interests, MRPC 1.7(b).
MRPC 1.7(a) states:
"A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
"(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
"(2) each client consents after consultation."
MRPC 1.9(a) and (c) state:
"(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation."
"(c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter:
"(1) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 or Rule 3.3 would permit or require with respect to a client, or when the information has become generally known; or
"(2) reveal information relating to the representation except as Rule 1.6 or Rule 3.3 would permit or require with respect to a client."
In the tax representation the lawyer will be called upon to cross-examine the seller shareholder regarding the details of the former representation, and impeach the seller's testimony regarding the valuation. Such tactics are clearly "directly adverse" if the seller is a current client, and a disinterested lawyer could not reasonably believe the representation would not be adversely affected. MRPC 1.7(a)(1). Such tactics are "materially adverse" if the seller is a former client, and the tax matter is substantially related to the redemption transaction. Therefore, MRPC 1.7(a) and 1.9(a) prohibit the lawyer from undertaking the tax representation. The lawyer's firm is imputedly disqualified from undertaking the tax matter under MRPC 1.10(a). The question involving the law firm's participation if the lawyer is called as a witness is moot.
The lawyer may continue to represent the corporation and the purchasing shareholder in other matters, but is prohibited by MRPC 1.7(b) from continuing representation of the selling shareholder. MRPC 1.7(b) prohibits representation if the efforts for the client would be materially limited by the lawyer's duties to another client, a third person, or by the lawyer's own interests. The lawyer's disclosure of the seller's offer to tailor testimony in exchange for compensation precludes the lawyer from continuing to represent the seller on other matters. The law firm is imputedly disqualified under MRPC 1.10(a).
With regard to disclosing the offer to tailor testimony in exchange for compensation, MRPC 3.4 states in part:
In RI-117 we opined that a lawyer who knows that a client and a witness have a private financial arrangement regarding the witness's testimony on behalf of the client shall advise the client regarding the limits of appropriate compensation and seek to persuade the client to restrict any financial arrangements to those parameters authorized by law and ethics rules. In that inquiry we noted that any collusive activity between the client and the witness is obviously prohibited. But in that opinion the witness merely corroborated the favorable testimony of two other wholly independent witnesses.
In this inquiry, the seller shareholder is willing to tailor testimony to the payment received. The lawyer approached the seller about the prospective testimony because the seller was one of the lawyer's clients in the transaction which was being challenged by the IRS. The substance of the meeting is thus within the parameters of the attorney-client relationship established when the redemption occurred. Although the lawyer has a general obligation to keep communications with clients confidential, that obligation is overcome when the communications disclose a client's illegal or fraudulent intentions. MRPC 1.6(c) states:
"(c) a lawyer may reveal:
"(1) confidences or secrets with the consent of the client or clients affected, but only after full disclosure to them;
"(2) confidences or secrets when permitted or required by these rules, or when required by law or by court order;
"(3) confidences and secrets to the extent reasonably necessary to rectify the consequences of a client's illegal or fraudulent act in the furtherance of which the lawyer's services have been used;
"(4) the intention of a client to commit a crime and the information necessary to prevent the crime; and
"(5) confidences or secrets necessary to establish or collect a fee, or to defend the lawyer or the lawyer's employees or associates against an accusation of wrongful conduct."
To offer to tailor testimony in exchange for compensation is illegal. By conveying the offer to the purchasing shareholder, the lawyer's services were used to further the illegal act of the client. Revealing the seller's offer falls within the MRPC 1.6(c)(3) and (4) exceptions to confidences and secrets.
The lawyer has discretion to divulge the seller's offer to exchange testimony for compensation.
MRPC 1.2(c) states:
"(c) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning or application of the law."
The lawyer should explain to both shareholders and the accountant that the lawyer is disqualified from representing any of them in the tax matter, and urge the seller to rectify the consequences of the illegal act. The lawyer should explain that the lawyer has discretion under MRPC 1.6(c)(3) and (4) to disclose the offer if the seller fails to rectify the consequences. The lawyer's testimony in the tax matter would contradict the proposed testimony of the seller, and would benefit the purchasing shareholder and the corporation. The lawyer's disclosure of the offer would benefit the lawyer by mitigating any culpability of the lawyer for conveying the illegal offer to the purchasing shareholder.