Editor's Note:
State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
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What are a lawyer's ethical duties when in the course of representing a partnership the lawyer receives conflicting instructions from two of the partners in circumstances where it is unclear which partner's instruction the lawyer must follow.
Under rule 3-600 of the California Rules of Professional Conduct and case law, a lawyer represents the partnership itself acting through its highest authorized partner or other constituent overseeing the representation. A lawyer should follow the direction of the partner or other person or entity who is authorized to direct the actions of the partnership's lawyer. Where there is a dispute among the partners about who may oversee the lawyer's representation of the partnership and/or it is unclear whose instruction the lawyer should follow, the lawyer should work with the partners to resolve the dispute, while explaining the likely consequences to the partnership if the dispute is not resolved. If the dispute is not resolved, the lawyer may, and in some cases will, be required to withdraw.
Rules 3-110, 3-600 and 3-700 of the California Rules of Professional Conduct of the State Bar.
Lawyer is retained by A, a general partner of a real estate partnership ("Partnership") in connection with a dispute with a lender, which loaned money to the Partnership. The Partnership is a limited partnership with two general partners (Partners A and B) and several limited partners. Negotiations between the Partnership and the lender are beginning to break down and the Partnership is considering filing a lawsuit against the lender. The lawyer is confronted with the following two scenarios:
First Scenario: A instructs the lawyer to file the lawsuit against the lender. B then contacts the lawyer and countermands that instruction. The partnership agreement gives both A and B the authority to oversee the affairs of the Partnership. The agreement states that A is to oversee the daily operation of the Partnership, while B must approve major decisions. It is uncertain under the agreement whether the decision to file a lawsuit is a major decision or whether B's approval rights allow B to countermand A's instruction to the lawyer.
Second Scenario: The partnership agreement allows the limited partners to remove A and/or B as general partners on grounds specified in the agreement. The partnership agreement does not state how the removal power is exercised. The limited partners send notice to the lawyer that they are removing A as general partner for reasons stated in the notice. A disputes the limited partners' right to remove him and tells the lawyer that the limited partners' reasons for removing him are untrue. A insists that the lawyer must follow his direction. B and the limited partners insist that the lawyer must follow B's direction.
Rule 3-600(A)1 states that in representing an organization, ". . . a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement." Rule 3-600 applies to the representation of partnerships. (Responsible Citizens v. Superior Court (1993) 16 Cal.App. 4th 1717 [20 Cal.Rptr.2d 756].)
Accordingly, in representing a partnership a lawyer represents the partnership itself acting through the partner authorized to oversee the representation.2 Ordinarily, that means that the lawyer representing a partnership takes direction from its general partner, since limited partners cannot take part in the control of the partnership and retain the limited liability of a limited partner. (Corp. Code §§ 15507 and 15632.) However, in determining who oversees the representation in any given situation, a lawyer must conform to the requirements of the applicable statutes, the partnership agreement and any other pertinent agreements between the partners. (See, e.g., McCain v. Phoenix Resources, Inc. (1986) 185 Cal.App.3d 575, 579-580 [230 Cal.Rptr. 25] [noting that a limited partner's right of access to partnership information arises from the partnership agreement and applicable statutes].)3
Both of the scenarios presented above posit situations in which it is unclear who is authorized to oversee the engagement. Under both scenarios, the lawyer is in a position where he or she cannot follow one partner's instruction without violating the other partner's instruction. It is not a conflict of interest, because the lawyer has only one client, the partnership. It is, instead, a conflict of authority within the partnership over who oversees and instructs the partnership's lawyer.
A lawyer in this situation is adrift in perilous waters. The lawyer's duty of loyalty requires the lawyer to act at a client's direction. A lawyer cannot act without the client's authorization. Nor can the lawyer take over the decision making for a client absent authority to do so. At the same time, a lawyer has a duty to competently represent the partnership as a client. (Rule 3-110(A).) The duty to competently represent a client requires a lawyer ". . . to apply the 1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such [legal] service." (Rule 3-110(B).) A lawyer cannot abdicate those duties in the face of a dispute among the partners in the partnership. (See, e.g., L.A. Cty. Bar Assn. Formal Opn. No. 471.)
The committee believes that a lawyer caught in this situation must first determine whether the partnership agreement or applicable law provide an answer as to who has the authority to instruct counsel. For example, if the partnership agreement states which partner has the authority to oversee the representation, the lawyer must conform the representation to those provisions and take instruction from that partner.4
If the partners' agreements or applicable law do not answer the question, as is the case here, the lawyer should try to work with the partners to resolve the dispute, while explaining the likely consequences to the partnership if the dispute is not resolved. If the dispute is not resolved, under rule 3-700(C)(1)(d) the lawyer may withdraw if the dispute renders it unreasonably difficult for the lawyer to continue representing the partnership effectively or if there are other grounds for withdrawal under rule 3-700.
While not directly applicable, rule 3-600(B) provides a useful guide. The rule provides that when a member representing an organization knows that an agent of the organization is acting or intends or refuses to act in a manner that is or may be a violation of law reasonably imputable to the organization or which is likely to result in substantial injury to the organization, ". . . the member may take such actions as appear to the member to be in the best lawful interest of the organization." One such action is ". . . [u]rging reconsideration of the matter while explaining its likely consequences to the organization." (Rule 3-600(B)(1).) The rule further states that if, despite the member's actions, the highest authority in the organization insists on action or inaction that is a violation of law or likely to result in substantial injury to the organization, ". . . the member's response is limited to the member's right, and, where appropriate, duty to resign in accordance with rule 3-700." (Rule 3-600(C).)
As in the scenario envisioned in rule 3-600(B) and rule 3-600(C), the situation presented in this opinion involves actions which can be detrimental to the partnership. The same considerations found in rule 3-600(B) and rule 3-600(C) apply in approaching the dispute among the partners.
While rule 3-600 instructs a lawyer to take actions as appear to be in the best interests of the organization, a lawyer must recognize the limits of his or her function. A lawyer must be careful to maintain the role as a servant of the partnership and not assume the client's role in the lawyer-client relationship. Thus, the lawyer may render advice which he or she believes is in the best interests of the partnership. However, the lawyer cannot make decisions which are the partnership's to make.
Under the facts presented here, where the lawyer cannot reasonably determine which partner's instruction the lawyer may follow, the lawyer cannot take any action for the partnership in connection with the matters in dispute, until the dispute is resolved. Thus, the lawyer cannot file the lawsuit until the dispute is resolved. If the lawyer can continue to represent the partnership effectively in the negotiations with the lender in the face of the two scenarios presented here, the lawyer may continue representing the partnership. If the lawyer reasonably believes that he or she cannot effectively represent the partnership, the lawyer may withdraw.5
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibility or any member of the State Bar.
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