NOTE: Various references in this ethics opinion to portions of the Michigan Code of Judicial Conduct are no longer accurate due to amendments effective August 1, 2013. Click here to review language added to (which is underlined) and language stricken from (which is indicated by strikethrough) Canons 2, 4, 5, and 7.
JI-89
April 8, 1994
SYLLABUS
Whether or not a lawyer may "assign" a law practice is a question of law.
A lawyer may not offer or make an agreement to transfer a law practice when:
(a) there is no provision for client consent to the transfer of the client's file and transfer of lawyer responsibility for the matter;
(b) the transferring lawyer assumes judicial office and continues to be actively involved in the law practiced by the transferred firm; or
(c) the transferring lawyer assumes judicial office and maintains a continuing financial or business interest in the former law practice.
A judge may not plan to utilize or utilize the library, secretary, conference room, or other assets of the judge's former law firm on a regular basis after assuming judicial office.
A judge may not allow the judge's name to remain in the name of the judge's former law firm, and members of the judge's former firm are prohibited from using the judge's name in the firm name or in professional notices.
References: MCJC 2C, 5C(2), 5F; MRPC 1.4, 1.6, 1.15(b), 1.16(d), 1.17; J-4, JI-6, JI-13; JTC A/O 109; MCR 2.003(B)(4), 2.117(C); MCL 440.9102; People v. Perkins, 193 Mich App 209 (1992).
TEXT
The inquirer practices law as a professional corporation ["P.C."] and is the sole owner. The P.C. has two full-time lawyer employees, namely; the inquirer and an associate lawyer ["Associate"]. The Associate has practiced law for three years and does not have assets sufficient to purchase the inquirer's law practice.
The P.C. and a general business corporation owned by the inquirer's spouse each own an undivided one-half interest in the building from which the law practice is conducted. The P.C. owns the usual office equipment and a substantial law library.
If elected to judicial office, the inquirer proposes to "assign" the law practice to the Associate for one dollar. The P.C. would be reorganized into a general business corporation and the general business corporation owned by the lawyer and spouse would lease the law building, equipment and law library to the Associate. Rental for the law building would be the sum of the mortgage payment on the inquirer's residence, (inquirer and spouse refinanced the marital home in order to pay off the mortgage balance on the law building), plus taxes, insurance and repairs. Lease payments for the law books and equipment would be nominal. However, the Associate would be required to maintain and update the library and keep the equipment repaired or replaced as needed. The initial lease term would be for six years and automatically renewable in the event of re-election, provided there has been no breach of the lease terms. During the first two lease years the Associate would be obligated to account for uncollected receivables earned by the inquirer prior to taking the bench. For this service, the Associate will be paid a modest collection fee. Some arrangement for an option to purchase the law practice is contemplated after twelve years. The inquirer proposes to retain access to the law building in order to use the firm's library for research and opinion writing purposes while holding judicial office.
A full time sitting judge is generally prohibited from practicing law. MCJC 5F. When elected or appointed to judicial office the lawyer must promptly discontinue the practice of law. Prior to assuming judicial office, the lawyer must notify all clients that the lawyer is leaving private practice, review the status of the representation with each client, provide all clients with an accounting, and turn over to the client all property to which the client is entitled. MRPC 1.4, 1.15(b), 1.16(d).
A lawyer or a law firm is permitted to buy or sell a private law practice subject to ethical standards and notice requirements of MRPC 1.16, MRPC 1.17 and MCR 2.117(c). MRPC 1.17(c) states:
"(c) Actual written notice of a pending sale shall be given at least 91 days prior to the date of the sale to each of the seller's clients, and the notice shall include:
"(1) notice of the fact of the proposed sale;
"(2) the identity of the purchaser;
"(3) the terms of any proposed change in the fee agreement permitted under paragraph (b);
"(4) notice of the client's right to retain other counsel or to take possession of the file; and
"(5) notice that the client's consent to the transfer of the client's file to the purchaser will be presumed if the client does not retain other counsel or otherwise object within 90 days of receipt of the notice.
"If the purchaser has identified a conflict of interest that the client cannot waive and that prohibits the purchaser from undertaking the client's matter, the notice shall advise that the client should detain substitute counsel to assume the representation and arrange to have the substitute counsel contact the seller."
Nothing in the inquirer's proposed "assignment" suggests client consent for the transfer of responsibility for the outcome of the client's matters to the Associate. A client/lawyer relationship for the delivery of legal services is a personal service contract and the client has the unfettered right to choose counsel of the client's liking. MRPC 1.16. An arrangement between lawyers which does not advise clients of their right to select counsel is unethical. MRPC 1.4 and 1.17. The comment to MRPC 1.17 is instructive regarding responsibilities of lawyers contemplating the purchase and sale of a law practice:
"A lawyer participating in the sale of a law practice is subject to the ethical standards that apply when involving another lawyer in the representation of a client. These include, for example, the seller's obligation to act competently in identifying a purchaser qualified to assume the representation of the client and the purchaser's obligation to undertake the representation competently, Rule 1.1, the obligation to avoid disqualifying conflicts and to secure client consent after consultation for those conflicts that can be waived. Rule 1.7, and the obligation to protect information relating to the representation, Rules 1.6 and 1.9.
"If approval of the substitution of the purchasing lawyer for the selling lawyer is required by the rules of any tribunal in which a matter is pending, such approval must be obtained before the matter can be included in the sale, Rule 1.16. See also MCR 2.117(C).
"All the elements of client autonomy, including the client's absolute right to discharge a lawyer and transfer the representation to another, survive the sale of the practice."
It is clear that a lawyer may not unilaterally transfer a client file to another lawyer, whether by sale or assignment, and that the affected clients must consent to any transfer of their file. Furthermore, unless the assignment is irrevocable, the judge continues to have an active, albeit limited, interest in a law practice in violation of MCJC 5F and a continuing financial interest in the business which requires disqualification from all cases in which members of the firm appear, even after the two year disqualification period set forth in MCR 2.003(B)(4). See J-4.
To the extent a transfer perpetuates the name of an elected judge's former law practice, the practice is not permitted. A lawyer who assumes judicial office may not allow the judge's name to remain in the former firm's name and members of the firm are prohibited from using the judge's name in the firm name or in professional notices. See JTC A/O 109; MRPC 7.1, 7.5; MCJC 2C.
MRPC 1.17 contemplates a sale, not an "assignment" of a law practice. "The seller remains responsible for handling all client matters until the files are transferred under this rule." Typically, when a party to a contract assigns all rights and delegates all duties, the assignor remains in privity of contract with the other party to the original contract and continues to have liability to that party if the assignor does not perform or performs improperly. However, contract law does provide for release of liability of a party to the original contract by novation, which is a substitution, by mutual agreement, of a new party for one of the original parties to a contract. In this case, the substitution of the Associate for judge-elect. Regardless of the form the transfer of responsibility for the representation of the inquirer's clients takes, ethics rules mandate that a full time judge sever all relations with the judge's former firm on taking the bench with the exception of payment by the purchaser for the reasonable value of the practice transferred by the seller. Where the arrangement calls for payment of the purchase price over time, the law permits the judge to hold a security interest in the assets, but a title retaining contract is no longer permitted by law or ethics rules. MCL 440.9102 and MCJC 5F.
The proposal to "restate the Articles of Incorporation" for the P.C. to transform it into a general business corporation for the purpose of owning and leasing the physical assets of the former law firm is a legal question. The Committee does not answer questions of law. We note that MCJC 5C(2) prohibits a judge from serving as director, officer, manager, advisor or employee of any business.
With regard to businesses and investments in which judges are permitted to engage, there are limitations. A judge may hold and manage investments, including real estate, and engage in other remunerative activity such as equipment leases, provided those financial and business dealings do not interfere with the proper performance of judicial duties or involve the judge in frequent transactions with lawyers or other persons likely to appear before the judge. A judge is required to manage investments and other financial interests to minimize the number of cases in which the judge is disqualified. When the judge's financial interests cause frequent recusal, divestiture is required. MCJC 5C. Subject to the foregoing, a judge may personally, or indirectly through a wholly owned business, lease property to a lawyer. However, the judge is required to disclose the rental relationship whenever a member of the lessee's law firm appears before the judge. People v. Perkins, 193 Mich App 209 (1992); J-4; JI-6, JI-13.
The continued use of the former firm's library by the judge creates problems. The inquirer proposes to return to the former law office to use the leased library and space for research and opinion writing. Regular and continuing contacts with the judge's former firm raises an appearance of bias and presents opportunities for others to improperly influence the judge's judicial judgment. It is one thing for a judge to request a local firm to share reference materials on occasion when needed, and quite another issue for the judge to utilize the assets of the judge's former firm on a regular basis. Such on-going contact and access to a private law practice raises questions regarding judicial impropriety in contravention of MCJC 2, 5C and 5F and opens the door to possible leaks of client confidences and secrets protected by MRPC 1.6. The Committee, therefore concludes that the judge's ongoing use of the judge's former private law facility is improper.
The arrangement as proposed by the inquirer, contemplates an on-going relationship with the lawyer's former firm after election to judicial office. Upon assuming judicial office, a judge is required to sever all ties with the judge's former firm, with the exception of payment by the purchasing lawyer or law firm, of reasonable value of the judge's financial interest in the judge's former firm.