Recorded on: Apr. 20, 2016
JOSHUA STEIN: OK. This is our last segment today. Thanks for making it through to the end of the day. I have some very important business to conduct before we start our last segment. You may remember that there was a raffle where if you put your business card into a certain place, your name might be drawn and you would win a copy of Jerome Wayland's book on ground leases, which I mentioned at the beginning of the program yesterday.
We've now conducted that drawing and the book will be mailed to our lucky winner, who is Rocco M. [? Sanato. ?] Is Rocco here? No Rocco. Well, Rocco still gets the book. So Rocco [? Sanato ?] will be receiving a copy of Jerome Whelan's book on the ground leases. Congratulations. OK. And my apologies to everybody else in the room. You can order my book. Anyway. All right.
Our next speaker is Devika Kewalramani, who's a general counsel at Moses & Singer. Devika limits her practice to ethics and disciplinary issues. She is a frequent lecturer, panelist, and author on legal ethics and is the chair of the Committee on Professional Discipline of the New York City Bar Association. Devika.
DEVIKA KEWALRAMANI: Thank you, Joshua. Welcome to the ethics segment and good afternoon to everybody. For real estate practitioners, ethics issues, again, sometimes get tricky. And it's really important to look at the issues because before they become problems, you really want to be able to resolve them. And there are a lot of ethics issues we could be talking about. Today we're going to focus really on four issues.
Some of them kind of can be grouped together, but essentially we're going to talk about who the client is, direct communications with those who are not your clients, conflicts of interest, waivers or conflicts waivers of consent as they're referred to now in the rules, and we'll end with some tips on how to avoid malpractice issues which sometimes can arise from ethics problems. Now, your practices are perhaps in different states, New York and elsewhere around the country, but every state in the country has a set of professional responsibility rules.
The ones that we're going to speak to today are the American Bar Association Model Rules of Professional Conduct. And we'll be touching on a few of the rules as we discuss these different topics that I mentioned. The rules do not break down the responsibilities of lawyers based on the practice area they're in-- real estate, finance, litigation, employment. They're very neutral, except perhaps in certain areas where the duties are owed in the context of a litigation or [? candor ?] to the court.
But otherwise, the rules apply almost equally, regardless of the area of your practice, whether you're a junior or a senior lawyer, and also regardless of the structure of your practice, whether you're in-house or you're practicing at a big law firm or as a solo practitioner. However, there are two sets of rules that you should be aware of that clearly include lawyers who are junior lawyers and lawyers who have supervisory or management responsibility at the organization.
Rule 5.2 deals with a junior lawyer's responsibilities as a lawyer. And it says that all junior lawyers, it refers to them as subordinate lawyers, are independently responsible for their conduct and are bound by the rules, regardless of who is instructing them. And for a junior lawyer, oftentimes the instructions come either from a more senior associate or a partner or a senior lawyer in-house or perhaps from the client directly.
The other rule that you should keep in mind is the rule that deals with responsibilities of law firms and management and supervisory lawyers, and that's in Rule 5.1. Firms and partners and their equivalents in-house are tasked with making sure that all lawyers at that organization conform do the ethical rules. And by the way, in the terminology section of the rules, especially the rules in New York, the New York Rules of Professional Conduct, there's a section describing firms or law firms and that really includes both traditional law firms as well as in-house legal departments of corporations and even within governmental organizations.
Now, we spoke a little bit about the rules. What happens if you violate a rule? Well, violation of a rule can subject a lawyer and sometimes a law firm to professional discipline. And that is a whole other system of regulation with its own set of disciplinary rules which are separate from the rules of professional conduct. There are other adverse consequences that can also arise from an ethical violation. The lawyer or the law firm could be subject to malpractice action, they could be disgorgement of fees, the lawyer or the law firm could be disqualified, for example if there's a conflict of interest situation, and there could be other economic consequences such as loss of fees, loss of a client, or even other reputational injury.
So let's jump into the first topic that we're going to look at, which is who is the client? Sounds like a simple question and sometimes it is, if you're really only dealing with an individual in a matter. But often, it's not so easy an answer. And the reason is because you're required to really identify the client, especially in situations that you may face where you might be representing lending institutions. There may be affiliates involved, there may be subsidiaries involved, sister corporations, parents. And before you actually start doing the work and you're getting ready to do the engagement letter, you may have to sit down and think about who the client is.
Now, you may have in some instances had a longstanding relationship with this particular client going back many years and you may still have that engagement letter in your file. However, many clients, especially financial institution clients, have over the years developed their own outside counsel guidelines and they may have sent you and you may have already acknowledged to them agreeing to their guidelines who you represent. So they may include in their outside counsel guidelines a list of subsidiaries and affiliates and may expect you to be protecting their interests in the representation that you take on.
So that's something to look out for to make sure that if you do have that engagement letter from many years ago and now you have the outside counsel guidelines from that very client that the interests that you're protecting are of the same entities. The rules here-- our ethics rules don't define who a client is, but there is one rule which relates to organizational clients which do come close to telling us who the client is, and that's Rule 1.13. That says that you represent an organizational client, you represent the organization acting through its constituents.
So the directors, officers, employees are really the constituents who are not your client unless, of course, you have separately been engaged to represent them. And the rule does deal with that situation of dual representation. But otherwise, the client is literally the organization. There is a related rule that you should keep in mind, which is Rule 4.3, that we will speak to a little bit more as we speak about direct communications. That's the rule about not speaking and not advising or giving legal advice to an entity or a person who is not your client unless you are advising them to seek separate independent counsel for their matter.
And I realize that in Rule 4.3 in connection with Rule 1.13 because we're really talking about who the client is, but more importantly what's behind that. There are duties that you oew a client. So the lawyer should tell you know who those duties are being owed to and so should the client. And very generally speaking, the duties that we are really talking about here are really important duties like the duty of loyalty, the duty of confidentiality, the duty to exercise competence and diligence, and the duty to avoid conflicts of interest.
Now, while you might be representing institutions, corporate entities, there may be individuals involved, sometimes you might have a dual representation or a joint representation. And again, the question there is, who is the client? You want to make sure that these separate entities or individuals who are jointly represented understand what duties you owe them jointly because that is quite different from when you have a separate representation.
JOSHUA STEIN: Quick question. How do you feel about the common situation where you've got a couple of people, they're buying a relatively small building, they want you to do the LLC agreement for them and maybe one of them is providing the money, one of them is providing the deal, another one is providing some money. And they say, just go ahead and do the documents for us, please. How do you feel about that and what do you recommend?
DEVIKA KEWALRAMANI: So the question is you're being approached by several different--
JOSHUA STEIN: It's a group that's buying a building. They say, represent us on the acquisition and by the way, can you do our LLC agreement between the three of us.
DEVIKA KEWALRAMANI: Yeah. And that's not an uncommon situation because now the entity hasn't yet been formed. You're being asked by the formers of that entity to represent them. And that actually segues really well into what I was going to say, which is they must understand that that is a joint representation. And the reason that's different from when you're represented separately is that there are three things to think about-- confidentiality, conflicts of interest, and privilege.
The privilege does not apply to individuals A, B, and C that are forming this entity vis a vis themselves. But it does apply as to third parties. Let's say there's litigation, they jointly have that privilege. Confidentiality, this is a very important issue to raise. They may be family members, they may be individuals who have been friends for many years that are forming this entity. If one of them says to you, I'm telling you this about my financial situation or something else but I don't want you to share that with B and C, and let's B and C approach you with other things about thier--
JOSHUA STEIN: They don't like A.
DEVIKA KEWALRAMANI: Yeah, they don't like A. And if they're running into problems with A and once they form this entity, they might try to get A out of this, there could be all kinds of issues, read? These kinds of confidences that they may want to give you, they must understand that because it's a joint representation you don't have an obligation to each of them but to all of them together and that you cannot be prevented from sharing this information with everybody.
So the confidentiality issue, it can be tricky, and it's important that the parties recognize and understand that before you get into that relationship. And finally, conflicts of interest is another issue. So when you take this on, if you real if you feel A, B, and C's interests are fully aligned and that you can provide this representation, then you go ahead with that and you want to indicate that in the engagement letter. But if you know of situations before you've taken it on that make it clear that their interests are not really aligned, they're differing, and that there might be a problem, you may have to deal with the issue of well, will you have to withdraw from the entire representation, will you be representing one or more of them and not the others?
That's something you have to think about. And then you'll want to get a consent from them as to these issues. Down the road you may then, if everything goes well, you may actually end up doing work for the entity. And by the way, I'm happy to take any questions as we go along so please feel free to raise your hand through the course of the talk. Now, sometimes an issue comes up with a third party who will be paying the legal fees for a particular transaction.
Sometimes this comes up in the context of those who do insurance related work. But it does come up and the question is, is the paying entity the client an additional client or the only client? And depending on what the circumstances are, usually the client remains the client, the entity that is paying the legal fees. The concern there is to make sure that they are not in any way controlling the representation and the lawyer continues to be able to exercise independent professional judgment.
One last thing on who's the client and then we'll move on to the next subject. Keep in mind that about five or six years, ago at least in New York, one of the new rules that became part of our rule book is Rule 1.18. And that's a rule that's in the ABA Model rules and rules around the country, the prospective client rule. And these are individuals or companies that may consult with a lawyer but may not eventually formally retain the lawyer or the law firm.
And so the question becomes, what you learn in that discussion or that consultation, what do you do with that information? Can you take on a client directly adverse to that prospective client who never hired you? Well, in some cases you might be able to, but in others you have to be very careful because there is a duty of confidentiality that's owed to prospective clients if you've learned something that you certainly cannot use against them in another matter. And the other issue is conflicts of interest. Again, that duty to avoid conflicts are owed, especially if you've learned significantly harmful information that may hurt that prospective client and help another client in the matter that involves that very same set of circumstances.
So along those lines, I'll mention unintended and accidental clients because they kind of all fall within that framework of when you're trying to analyze who the client is and making that decision before you embark on the relationship. Remember it's really important to clarify the lawyers rule, not just as to what the lawyer is doing but as to who the lawyer is going to represent. That protects the lawyer, that predicts the lawyer-client relationship, it protects others who are non-clients and clears up any confusion before any trouble can come on the way.
Let's shift now to what is popularly referred to as the no contact rule. This is Rule 4.2 and that relates to direct communications with non-clients. And specifically here those who are not your client but they really are the opposing party. The rule there is that lawyers are not allowed to discuss the subject matter of the representation on which you are representing your client with the opposing party without the prior consent of the opposing party's counsel. The companion rule on direct communications is Rule 4.3, which is about communicating with those who are not represented by counsel.
And that probably doesn't come up so much in your practice area. There the lawyers can certainly negotiate with non-represented persons, but they cannot give them advice and they have to be careful if there is a potential conflict or if the other person doesn't understand the lawyers rule to explain that they are not their lawyer and that they should really obtain separate counsel. The rule that perhaps does come into play more often in your practice area is Rule 4.2, which is the rule prohibiting contact with a represented party's lawyer.
And often, even if it does come up in your practices, given that many of your practices really involve clients who are experienced users of legal services and their adverse party is also right in that situation, the risks are probably not ones that you see quite so often. Now typically, parties communicate with each other and if the client asks the lawyer and initiates a conversation about a communication that your client and the other party are going to have, the lawyer is free to discuss, advise, and counsel the client on those issues.
But what happens when the non-client, let's say the adverse party, reaches out to you, who represents your client, and the adverse party calls you up or sends you an email? They're really trying to get the transaction to close or they really want to kind of cut through the hoops and get somewhere and they think that they can reach out to you. And again, it's an issue with the no contact rule. Even if the opposing party reaches out to you directly and you haven't initiated it, it's still a problem under Rule 4.2.
Let's look at another situation. Let's say that the opposing party tells you that they have received their counsel's consent to speak with you directly. Again, you still have the same problem because while there is consent it's not actual consent, it's not express consent, and it may be prior consent, you just don't know. So again, it's something that you want to be really, really careful about. And I think another thing to think about is when you represent represented organizations and there are represented organizations on the other side the issues can get even more complex in the sense that there are clearly constituents who are acting for those entities.
There may be inside counsel involved and outside counsel and perhaps former employees who may need to be spoken about on certain issues. So now for each of these, what do the rules and ethics opinions say? Well, for constituents there is commentary under the rules, as well as ethics opinions, that are more or less consistent in stating that if the constituent happens to be in a supervisory or a management role at the opposing body's organization, then there can be no contact with them because their actions bind the organization. As to inside counsel, when there is outside counsel available but you're looking to reach out let's say to inside counsel, the concerns surrounding the no contact rule really disappear.
Because again, the concerns with contacting a represented party without the consent of the represented party's counsel is that somehow the party will make an uncounsel disclosure or reveal some confidential information that they really would not have revealed had counsel been present or that the lawyer might be overreaching in some manner. You may be in a situation where you're are a conference room trying to discuss certain issues on a particular transaction, you and your client are on one side of the table and you have opposing party and opposing counsel on the other side.
And in that situation, again Rule 4.2 is at play. You clearly want to avoid without discussing previously with the other side's counsel raising an issue with the opposing party. If the opposing party's lawyer steps out to make a phone call, you're not going to step in and start speaking to the opposing party about the subject of the representation and trying to either resolve a particular legal or business issue or otherwise. Similarly, if you apply that in the context of what we do every day, which is using e-mail-- because how many of us actually sit face to face in a conference room every day and try to resolve issues that we're trying to close on?
So if I decide to send an e-mail to an opposing party and I don't really call counsel ahead of time to clear it but I decide to copy opposing counsel and send that e-mail anyway, there are some ethics opinions on that. Actually, there is 2009-1, it's a New York City Bar opinion that deals with this issue of simultaneous communications with the opposing counsel and the opposing party. And the analysis is interesting and the opinion concludes that that does violate the no contact rule.
And it's possible that the e-mail would be read at different times by counsel and the opposing party, it may reach them at different times. The opposing party might decide to respond to you about the matter without speaking to counsel. So there are all kinds of vagaries of the mail system and e-mail and when and how people read messages. So the prior consent requirement of the no contact rule is not satisfied in that situation. Yes, there's a question.
AUDIENCE: --counsel sends you an e-mail and CCs their client. Can you respond all, or do you have to delete them from the e-mail chain in your response?
JOSHUA STEIN: The question is, if you get an e-mail from opposing counsel where they've copied their client, can you safely reply all or should you make sure that response does not go to the attorney's client?
DEVIKA KEWALRAMANI: That's a great question and thank you for it. It really raises the question of whether this reply all feature satisfies consent, is consent implied really? And I think that we really should think about what the context in which that e-mail came. And again, if you're responding, what is the situation? Is this in a very collaborative setting, where all the parties were involved who would be part of the reply all would somehow expect this response and everybody would be fine with it?
Or is it in a more confrontational, acrimonious setting? Maybe there's litigation, maybe the parties while the first e-mail had a chain of different recipients, I think it's really important to think about the setting, the group, and other things before the lawyer hits the send button in that instance.
JOSHUA STEIN: When I'm in that situation, sometimes my work is all transactional, at least when it involves a lot of people, what I'll do is I'll say, I'm replying all to everybody, but by the way the client on the other side should not respond to me until they've talked to their lawyers. And then that way I think I've served the purpose of the no contact rule. I've communicated in a way that I think people want me to and I've protected that client on the other side from whatever nefarious things I might be up to by communicating directly with them.
DEVIKA KEWALRAMANI: I think that's a practical way of dealing with it, rather than not doing anything about it and letting it sort of just be there as an e-mail that people didn't deal with. Let's move on to conflicts of interest. And that's sort of going to be the main-- the rest of the time we're going to spend on conflicts and conflicts waivers, which are really tied to that issue. And when we think about conflicts of interest, I think it's always good to step back and say, you know these are client relationships that we're talking about.
Some of them are longstanding relationship, some of them have developed over a shorter period of time. And at law firms, conflicts of interest can arise very easily if there are many different practice areas, when you represent individuals, you represent entities, and your offices may be far flung. And the risks in not carefully analyzing these issues and coming to a sound solution are, in many cases, quite devastating.
You can go from disqualification from a matter to a malpractice case. Many malpractice cases include allegations of conflicts of interest, professional discipline, we talked about loss of fees. There could be sanctions placed by a court. And often, these conflicts of interest issues are-- we could talk a little bit about the complexity of the rules and the ethics opinions and so on, but sometimes it's as I don't want to say simple, but it really is as ordinary as I don't know whether many of you have this anymore, but in the old, old days-- today these things are all electronic-- there would be new matter memos coming around the office every day in pink or yellow or green, these sheets that would appear first thing in the morning that many of you would look at. Does that sound familiar to anyone in the offices?
And that would be what you would look at, probably one of the first things in the morning, to see what new matters the firm has just taken on. And there have been cases where a partner forgot or got very involved in the day's conference calls and so on, forgot to take a look at that. Having looked at that would have solved a very major conflict that didn't get detected because that lawyer never looked at it and it got missed you know and forgotten. Now, when it comes to transactional matters, many of you represent financial institution clients, right?
And from time to time, depending on your firm's practices, you're going to be adverse to borrowers in those instances but your firm may have matters that are coming from those same borrowers in other areas. So these would be unrelated conflicts, perhaps, which are resolvable under the rules on curing conflicts, and we'll get to that. But essentially, the ABA Model Rules speak of conflicts and they call them concurrent conflicts in a representation.
And that means that a law firm is prohibited from representing one client directly adverse to another client. So it's a client to client direct adversity. Another piece of that rule is well, yes, it's direct adversity of two clients or if there is a significant risk that your representation of one client will be materially limited by the responsibilities that you owe to another client or to a former client or someone else.
The way to cure both current client conflicts-- and we'll speak of former client conflicts in a second, it's the same mechanism for curing them, and that is obtaining client consent, which must be informed. And there's a mechanism for it, different states may have slightly different rules, and we'll look at that. But essentially, conflicts are either consentable or non-consentable. And we know that certain types of litigation conflicts are non-consentable, they're prohibited.
But even in the transactional context, some conflicts may be non-consentable, meaning there is no way that even if you get consent from the client, which you probably should not even try to get because if you've done an internal analysis of the conflict, you will realize that you may not be able to adequately protect and represent that client's interest in that particular representation. Now, conflicts of interest is an area that we can spend a vast amount of time on, which we don't have, but let's at least identify the different types of conflicts of interest.
One of them we just did, which is current client conflicts. But there are also conflicts that can arise with a former client. But that rule is slightly less rigid than the current climate conflict rule. It's limited more to-- well, clearly there are-- with current clients you have the issue of loyalty, the duty of loyalty, the duty of confidentiality. With the former client conflict rule, the issue becomes more of protecting confidential information.
So the rule is focused on prohibiting materially adverse representations if the matters are going to be substantially related. So that's the test you have to meet. It's more a test of the matter, the substantially related matter, than a test so much of the client, the direct adversity between current clients. So keep that in mind, the client versus matter, although I'm kind of oversimplifying things here for a second.
And then we met the prospective client a little while ago and we were speaking about on the first topic. And then there can be lateral lawyer conflicts of interest, lawyers who might be bringing conflicts baggage into a new firm where they represented, let's say, the buyer in a transaction or in many transactions, many of which are handled at the new firm on behalf of the seller. So you may be directly adverse in that sense and so those conflicts have been brought over. The ABA Model Rules allow for some amount of lateral lawyer screening and there's a mechanism for that.
Essentially, though, with law firms, one of the things that's a reality is that anyone lawyer who has a conflict, whether it has to do with a former client conflict or a current client conflict, every lawyer in the firm is imputed that same conflict. So if one lawyer cannot handle it, no one at the firm can. And that's the conflicts imputation rule in Rule 1.10. But again, the thing to keep in mind is that there is no clear definition of who a current client is or who a former client is.
We do have a definition for a prospective client, someone who consults on a matter with a client with the expectation of an attorney-client relationship that does not eventually develop. But keep in mind when a current client may become a former client, it's something that's totally dependent on the facts of the situation that will have to be analyzed. Now, let's turn for a second to identification of a conflict. How does that happen?
And that really is quite a process. Many of your firms will have a conflicts checking department and conflicts analysts who will be provided conflicts information that they will check on the system. And they will analyze it and there will be a searched report that is created based on the database, the conflicts database. And that is often analyzed by a conflicts committee of the firm or an ethics committee and if there are issues that goes up to the firm's management for resolution.
Separately from that, daily many of your firms will be sending out e-mails about a conflicts check. And there will be many e-mails that are listed. The idea is to close the gap between what the database knows about the clients you want to represent, the adverse parties you want to be opposing, and other related parties, and the information that is in the memory of your colleagues, your partners, your associates, and others at the firm. And together, the two worlds of information then come together to give you more correct information about whether this firm can take on the representation or not.
So it really is a two track system. In fact, New York is, I think, unique among the states for having a mandatory conflicts checking rule. And there are also ethics opinions in New York that are helpful. One is 2003-3 from the City Bar that explains what kind of-- well, it really provides guidance on conflicts checking depending on what type of practice you have, what practice structure or organization, et cetera.
So let's turn to outside counsel guidelines for a second. We talked about that earlier when we were looking at who the client is because the outside counsel guidelines will identify that. Well, outside counsel guidelines will also tell us what the client's conflicts policy may be. And those policies are often more strict than the rules themselves. Those policies will also tell us that annexed to the policy are a whole list of the entity's subsidiaries, affiliates that really it's important to sort of dig that out of the outside counsel guidelines and walk it over, perhaps, to your conflicts department and make sure all those entities are fed through your conflicts database so that the next time a conflicts check is run, it will be checking all those names. And that's really important.
Now, for all of you who represent organizations, you may be representing Corporation A, which is part of a large corporate conglomerate. Do you represent, or does your firm represent, an affiliate of that organization? It's a question that most of us ponder over. And there has been a fair amount of discussion about whether or not those other entities that you are not represented in the particular matter you're handling, whether they are also your client.
And this really gets us to the topic of corporate family conflicts. The issue there is really to look at a lot of different factors and that's what some of the court decisions have actually said. How closely are those other entities and the client that you're representing actually related? What is the nature of the work that you're doing? What are the dealings with those other entities? Are they headquartered at the same place> ...