If a lawyer represents a partnership, is the general partner also a client for conflict purposes when the lawyer takes a case against a corporation that partner owns?

Plain-English summary

A lawyer represented a partnership, of which P was a general partner, in a single ongoing litigation matter. He was then asked to represent D in an unrelated action brought by C, a close corporation 95% owned by P, of which P was president and treasurer. The lawyer had never represented C or discussed C's affairs with P. P objected to the second representation on the ground that the lawyer represented P.

The committee analyzed the question under Rule 1.7, which bars representing a party directly adverse to a client (1.7(a)) or a client whose representation may be materially limited by the lawyer's responsibilities to another client (1.7(b)), absent consent. The threshold issue was whether P should be treated as a client in the first matter even though the lawyer was technically hired to represent the partnership entity. The committee noted Rule 1.13 provides that a lawyer for an organization represents the organization acting through its constituents, so a lawyer may represent a partnership without necessarily forming a lawyer-client relationship with individual partners, but said it is inadequate to look only at the technical legal form.

Surveying authority (Margulies v. Upchurch, In re Banks, McCarthy v. John T. Henderson, Inc.), the committee adopted the approach of asking whether the lawyer's representation of the partnership might reasonably be perceived by the general partner as also representing the partner's interests, considering the partner's active management role, his potential exposure, the isolated rather than ongoing nature of the representation, and the degree of individual legal assistance provided. It concluded that, given P's degree of ownership and participation as an officer of C and the likelihood that P does not differentiate between his own interests and the corporation's, the circumstances likely could reasonably be read to treat P as a client for Rule 1.7 purposes; if so, a subsequent action against a corporation 95% owned by P appears to conflict impermissibly with P's expectation of loyalty. If P were not a client, the committee said the lawyer could represent D under Rule 1.7(b) unless other circumstances limited his ability to handle both matters effectively.

Currency note

This opinion was issued in 1991, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Does representing a partnership make the general partner a client?

A: The committee said not automatically; under Rule 1.13 the lawyer represents the entity, but the technical form does not control. The test is whether the partner could reasonably perceive that the lawyer also represents his interests.

Q: What factors decide whether the partner is treated as a client?

A: The committee weighed the partner's active management role, his potential exposure in the partnership matter, the isolated versus ongoing nature of the representation, and how much individual legal help the lawyer gave the partner.

Q: Could the lawyer take the case against the partner's corporation?

A: The committee said on these facts there likely was an impermissible conflict, because P's 95% ownership and officer role made it likely he did not separate his own interests from the corporation's, implicating his expectation of loyalty under Rule 1.7.

Background and rules framework

The opinion interprets Rule 1.7 (conflicts of interest), corresponding to Model Rule 1.7, in light of Rule 1.13 (organization as client), corresponding to Model Rule 1.13. The committee treated Rule 1.7 as protecting both confidential information and a client's reasonable expectations of loyalty, and looked past the entity form to the partner's reasonable perception.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.7 / Model Rule 1.7: a lawyer shall not represent a party directly adverse to a client, or a client whose representation may be materially limited by duties to another, absent consent.
• South Carolina RPC 1.13 / Model Rule 1.13: a lawyer employed by an organization represents the organization acting through its constituents.

Cases:

• Margulies v. Upchurch, 696 P.2d 1195 (Utah 1985), representing a limited partnership does not automatically make counsel for individual limited partners.
• In re Banks, 584 P.2d 284 (Or. 1978), controlling shareholder of a close corporation may be treated as a client.
• McCarthy v. John T. Henderson, Inc., 587 A.2d 280 (N.J. Super. 1991), whether individual shareholders are former clients turns on personal services and insight gained.

See also

• SC Bar Ethics Op. 91-34: Bankruptcy Trustee Representing a Creditor
• SC Bar Ethics Op. 91-33: Divorce Conflict Involving an Alleged Paramour

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-91-24/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 91-24

Lawyer represents a partnership, of which P is a general partner, in a single on-going litigation matter. Lawyer has been asked to represent D in an unrelated action in which D is a defendant. The plaintiff in the second matter is C, a close corporation. P owns 95% of the stock of C and is president and treasure of C. Lawyer never has represented C and has never discussed the affairs of C with P. P objects to Lawyer representing D on the grounds that Lawyer represent P.

Question:
May a lawyer who represents a partnership, of which P is a general partner, in one litigation matter simultaneously represent another client in an unrelated litigation matter, when the interests of the second client would be directly adverse to a close corporation substantially owned and operated by P?

Summary:
Lawyer's ability to handle the second matter against C depends upon whether Lawyer's representation of the partnership might reasonably be perceived by the general partner as also representing the general partner's interest. In answering that question, Lawyer should consider the active management role typically held by a general partner, the potential exposure of P in the partnership matter, the isolated nature of the partnership representation, and the degree to which Lawyer has provided individual legal assistance to the partner. We believe, given the facts presented, that there likely is an impermissible conflict in this situation.

Opinion:
Under 1.7 (a) Rule 407, SCACR, a lawyer may not, without the consent of clients, represent a party with interests directly adverse to another client. Nor may a lawyer, without consent, represent a client if the representation may be materially limited by the lawyer's responsibility to another client or to a third person. Rule 1.7 (b). Thus, Lawyer could not simultaneously represent P in one litigation matter, while representing another client against P in a second matter. The question here is whether the conflict of interest provisions of Rule 1.7 require a similar conclusion when P is not individually a party in either matter, but maintains a significant ownership and management interest in entities that are parties in the two matters. In the first matter, Lawyer represents a partnership of which P is a general partner. In the second matter, the party adverse to Lawyer's client is a closely held corporation that is 95% owned by P. The threshold question in determining the applicability of Rule 1.7 is whether P should be treated as a client in the first matter even thought the Lawyer was hired technically to represent the partnership entity. If P is a client, then would an action against a close corporation 95% owned by P be considered to be directly adverse to P under Rule 1.7 (a). Even if P is not a client, might Lawyer's representation of D be impermissibly limited, for purposes of Rule 1.7 (b), by Lawyer's obligations to P. The Rules of Professional Conduct offer little definitive guidance as to the threshold issue of whether P is a client in the first representation. Rule 1.13 does provide that a lawyer employed "by an organization represents the organization acting through its duly authorized constituents." Thus, a lawyer may serve as counsel for a partnership entity without necessarily creating a lawyer-client relationship between the lawyer and individual partners. However, it is inadequate to look merely at the technical legal form of the client. Courts may look beyond legal form to ascertain whether individual partners reasonably believe that the lawyer is acting for their interests as well as those of the entity. In Margulies v. Upchurch, 696 P. 2d 1195 (Utah 1985), a law firm represented a limited partnership in one matter while representing another client in a separate action against three of the limited partners. In considering whether an impermissible conflict existed, the court found that a lawyer who represents a limited partnership does not automatically become counsel for individual limited partners. If the limited partners stand to gain nothing more from the attorney's representation of the limited partnership than the incidental gain which will accrue to them as partners, and not in their individual capacities, no attorney-client relationship should be implied. When, however, the individual interests of the limited partners are directly involved,..., there may be sufficient grounds for implying the existence of an attorney-client relationship. 696 P.2d at 1200-01. Oregon courts have held that when a client is a close corporation the controlling shareholder may be treated as a client for conflict of interest purposes if "the operator of the corporation either owns or controls the stock in such a manner that it is reasonable to assume that there is no real reason for him to differentiate in his mind between his own and corporate interests." In re Banks, 584 P.2d 284, 292 (Or. 1978) (emphasis in original).

More recently, the New Jersey Supreme Court considered whether a law firm which represented one closely held corporation could, under Rule 1.9, subsequently represent another client in an action against a second closely held corporation having the same principle shareholders and officers as the first. The court noted that a literal application of Rule 1.13 would require a finding that the second corporation was not a former client since the two entities were legally distinct. The relevant issue, according to the New Jersey court, however, was whether the first representation "would lead"' an ordinary knowledgeable citizen acquainted with the facts'" to conclude" that the individual shareholders of the corporation, and not just the entity, should be considered former clients. McCarthy v. John T. Henderson, Inc., 587 A.2d 280, 283 (N.J. Super. 1991). To answer that question, the court considered whether the lawyers had performed personal legal services for individuals during the earlier representation and also considered the likelihood that the lawyers had gained relevant insight into the personal attitudes of the shareholders toward litigation strategy. Finding no indication that the lawyers had obtained information that could be used to the disadvantage of the individuals in the second case, the court found no impermissible conflict. Id. We agree with these authorities that Rule 1.13 does not mean that the legal form of the parties necessarily controls the disposition of the question presented. Nor should we necessarily disregard the separate and distinct legal identities of the parties and assume automatically that P is the real party at interest in both matters. The better approach seems to be to determine whether Lawyer's representation of the partnership might reasonably be perceived by the general partner as also representing the general partner's interests. Because of the more active management responsibilities associated with the position, a general partner might well be more likely to hold that view than would limited partners as in Margulies. Also, Lawyer should consider that in the case presented, the representation of the partnership is an isolated, rather than ongoing, relationship. In these circumstances, it may be less likely that the general partner relied upon the lawyer's professional expertise for matters beyond the scope of the single representation of the entity. We are mindful that, in addition to the protection of information gained in the course of representing the partnership, Rule 1.7 is designed to protect reasonable expectations of loyalty on the part of the client. It would appear that the circumstances of the partnership representation likely could be construed reasonably to reach the conclusion that Lawyer is protecting the interests of the general partner as well as the interests of the partnership. We, therefore, believe that loyalty interests are best served by treating the partner as a client for purposes of Rule 1.7. If P is a client of Lawyer for purposes of Rule 1.7, a subsequent action against a corporation 95% owned by P appears to conflict impermissibly with P's expectation of loyalty. In reaching that conclusion, the Committee is influenced particularly by degree of P's ownership and participation as an officer in C and by the likelihood that, in obtaining legal services, P does not differentiate between his own interests and those of the corporation C. On the other hand, if P were found not to be a client for Rule 1.7 purposes by virtue of being general partner, then we believe, on balance, given the authorities cited, that under Rule 1.7 (b), Lawyer could represent D in defending the action by C unless other circumstances existed to limit Lawyer's ability to handle both matters effectively.