Can a parent corporation's in-house counsel perform legal work for affiliated subsidiaries and limited partnerships, with the parent billing those affiliates for the actual cost of the lawyer's time and overhead?

Plain-English summary

Corporation A employed in-house counsel and regularly served as a co-general partner, often the managing general partner, of limited partnerships formed to acquire investment property; on occasion the managing general partner role was instead held by a general partnership made up of all of Corporation A's stockholders. Subsidiary B, wholly owned by Corporation A, would acquire title to property and later transfer it to a limited partnership; in-house counsel performed the legal work for both the initial acquisition and the later transfer to the limited partnership, and again for a final transfer from the limited partnership to an unrelated third party. Under the proposal, Corporation A would be reimbursed for the actual direct cost of these legal services (the lawyer's allocated salary based on timekeeping records, plus a pro rata share of support-staff costs and overhead such as rent, library, and word-processing expense) by Subsidiary B for the first two transactions and by the limited partnership for the third. The inquiry posed five specific reimbursement scenarios, including two where the limited partnership's managing general partner was the stockholders' general partnership, in which case all the stockholders would consent to the reimbursement.

The opinion applied Tennessee Formal Ethics Opinion 83-F-52, which held there is no impropriety in in-house counsel for an affiliated group of corporations and partnerships performing legal services for all the affiliates, with the direct employer billing each affiliate for the services performed, provided in-house counsel does not let the employer or others practice law through the lawyer's actions, regulate or control the lawyer's professional judgment, or intervene in the attorney-client relationship. Quoting 83-F-52, the opinion required that in-house counsel exercise independent professional judgment on behalf of each client-affiliate under Canon 5, maintain a direct attorney-client relationship with each affiliate, devote complete loyalty to the affiliate being served rather than to the direct employer, comply with Disciplinary Rule 7-101(A) (zealous representation) and DR 4-101 (preserving confidences and secrets), and fully disclose the potential effect of the representation on independent professional judgment so each affiliate can evaluate the conflict, with doubts resolved against the propriety of the representation. Applying that framework to all five scenarios presented, including the reimbursement chains running through Subsidiary B and through the limited partnerships, the opinion found no impropriety in the corporation being reimbursed for the actual direct cost of the legal services described, including support-personnel cost and the pro rata overhead allocated to the attorney performing the work, provided there is strict compliance with those caveats.

Currency note

This opinion was issued in 1984, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility. 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: Can a corporation charge its subsidiaries and affiliated partnerships for legal work its in-house counsel performs for them?

A: Yes, for the actual direct cost of the services, including the attorney's allocated salary, support-staff cost, and a pro rata share of overhead, provided in-house counsel maintains independent judgment and a direct attorney-client relationship with each affiliate billed.

Q: Does it matter that the billing corporation is also the managing general partner of the limited partnership being billed?

A: The opinion found no impropriety in that scenario either, so long as the same conditions on independent professional judgment, direct attorney-client relationships, and disclosure are met.

Q: What must in-house counsel do to avoid an impropriety in this kind of multi-affiliate billing arrangement?

A: Counsel must exercise independent professional judgment for each client-affiliate, maintain a direct attorney-client relationship with each, give complete loyalty to the affiliate being served rather than the direct employer, comply with the duties of zealous representation and confidentiality, and fully disclose the potential conflict so each affiliate can decide whether to proceed.

Background and rules framework

The opinion applied Canon 5 of the Code of Professional Responsibility (independent professional judgment), Disciplinary Rule 7-101(A) (zealous representation), and DR 4-101 (confidentiality), as construed in Tennessee Formal Ethics Opinion 83-F-52's framework for in-house counsel serving multiple corporate affiliates. The modern correlates are Model Rule 1.7 (conflicts of interest with current clients) and Model Rule 5.4(c) (no interference with a lawyer's independent judgment by one who pays the lawyer), cited here as navigational cross-references rather than rules the opinion itself applied.

Citations and references

Other opinions cited:

• Tennessee Formal Ethics Opinion 83-F-52, in-house counsel for affiliated corporations may bill each affiliate for legal services if independent judgment is maintained

See also

• ISBA Op. 17-05: In-House Counsel Representing Multiple Subsidiaries of Same Corporate Parent
• Tenn. Ethics Op. 85-F-100: Attorney Employed by an Insurer to Defend an Insured (applies the same 83-F-52 third-party-payor independent-judgment framework)

Source

• Landing page: https://www.tbpr.org/ethic_opinions/84-f-80

Original opinion text

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

84-F-80 - Corporation billing clients for in-house counsel services

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 84-F-80

Inquiry is made concerning the propriety of in-house counsel to an affiliated group of companies performing legal services for certain affiliates and allowing the corporation that directly employs him to bill the affiliates for the legal services performed by him and the expenses related to the delivery of his legal services.

Corporation A is a corporation which employs in-house counsel. In the course of its business, Corporation A serves as a co-general partner and is often designated as the "Managing General Partner" of certain limited partnerships which Corporation A has formed for the purpose of acquiring property for investment. In addition, all of the stockholders of Corporation A comprise a general partnership which is often the other cogeneral partner of these limited partnerships and, on occasion, serves as the sole general and managing partner for such limited partnerships.

In the course of operations, Subsidiary B, a wholly owned subsidiary of Corporation A, acquires title to the property, which is subsequently transferred to the limited partnership. The necessary legal work for this initial acquisition is performed by the in-house counsel employed by Corporation A and Corporation A proposes that it be reimbursed by its subsidiary (Subsidiary B) for the actual direct cost of the performance of these legal services. This cost would be defined as the portion of the salary of the attorney devoted to the particular project (as calculated from timekeeping records) and would also include the cost of support personnel for that attorney; e.g., secretarial and paralegal expense (based on a pro rata portion of their salaries) and direct pro rata portion of overhead for such things as rent, law library, expense, word processing equipment, etc. insofar as those items are allocated to the lawyer performing the services set forth above.

When Subsidiary B transfers title to the property from itself to the limited partnership as described above, the legal services will again be performed by the in-house counsel employed by Corporation A. The cost of these legal services (again, as defined above) is, under the proposal, to be billed by Corporation A to its subsidiary (Subsidiary B) as set forth above. The price at which the limited partnership will acquire the investment property will equal Subsidiary B's purchase price cost, plus its cost of acquisition and holding. This latter cost would include, among other things, debt service during the period the property is held by Subsidiary B and all the legal costs described above.

In a typical situation, the property will be transferred by the limited partnership in later years to an unrelated third party. Again, the necessary legal work for this transaction would be performed by the in-house counsel. Under the proposal, the cost of these legal services (as described above) would be paid to Corporation A by the limited partnership.

(1) May Corporation A be reimbursed by Subsidiary B upon the initial acquisition for (a) that portion of the in-house lawyer's salary attributable to the time spent by such in-house attorney in connection with the acquisition transaction; and/or (b) the direct overhead cost attributable to that lawyer's services as described above?

(2) May Corporation A be reimbursed by Subsidiary B for the legal costs described above arising out of the transfer from Subsidiary B to the limited partnership in which Corporation A is the managing general partner?

(3) May Corporation A be reimbursed by Subsidiary B for the legal costs described above arising out of the transfer from Subsidiary B to the limited partnership in which the managing general partner is a general partnership consisting of all of the stockholders of Corporation A?

(4) May Corporation A be reimbursed by the limited partnership for legal costs described above associated with the transfer of the property by the limited partnership to a third party when Corporation A is the managing general partner of the limited partnership?

(5) May Corporation A be reimbursed by the limited partnership for legal costs described above associated with the transfer of the property by the limited partnership to a third party when the managing general partner of the limited partnership is the general partnership consisting of all of the stockholders of Corporation A?

With regard to issues (3) and (5) above, in which the managing general partner is a general partnership consisting of all of the stockholders of Corporation A, all of the stockholders would consent to the reimbursement of Corporation A.

Tennessee Formal Ethics Opinion 83-F-52 states that there is no impropriety in in-house counsel to an affiliated group of companies consisting of several corporations and partnerships performing legal services for all of the affiliates and allowing the corporation that directly employs him to bill the affiliate for the legal services performed, provided inhouse counsel does not allow his direct employer or others to practice law through his actions; or to regulate, direct or control his professional judgment; or to intervene in the attorney-client relationship. The opinion further states:

In order for there to be no impropriety, it is absolutely necessary that in-house counsel exercise independent professional judgment on behalf of each client-affiliate. Canon 5. He must have a direct attorney-client relationship with the client-affiliate in the delivery of his legal services and must not allow his direct employer, or anyone else, to regulate, direct or control his professional judgment. He should devote his complete loyalty to the client-affiliate and no loyalty to his direct employer. He is in the precarious position of having a potential, if not actual, conflict of interest in every instance. He is bound by Disciplinary Rules 7-101(A) to represent the client-affiliate zealously and 4-101 to preserve the confidences and secrets. There should be a full and complete disclosure of the possible effect of his representation on the exercise of his independent professional judgment and the client-affiliate should be given an opportunity to evaluate the need for representation free of any potential conflict and all doubts should be resolved against the propriety of representation.

There is no impropriety in the corporation being reimbursed for the actual direct cost for the performance of the legal services described in all the instances stated herein, including the cost of support personnel and direct pro rata portion of overhead expenses allocated to the attorney performing the services, provided there is strict compliance with the caveats stated herein.

This 17th day of October, 1984.

ETHICS COMMITTEE:

O. B. Hofstetter, Jr.

Jerry Colley

William R. Willis

APPROVED AND ADOPTED BY THE BOARD