Ethics Opinion 68: Conflicts of Interest: Propriety of Multiple Representation, 04/20/85

Introduction

On several previous occasions, the Ethics Committee has issued opinions regarding an attorney's role in resolving conflicts of interest. Despite the general guidelines provided in previous opinions, there is continuing concern over the application of these guidelines to specific conflict situations. In order to further clarify this difficult area, the Ethics Committee has decided in this Opinion to consider the propriety of multiple representation in several of the most common conflict situations. This Opinion will address situations where an attorney agrees to represent:

 

1. The buyer and seller in a residential real estate transaction;

    

2. A husband and wife in drafting an uncontested settlement agreement;

    

3. The buyer and seller to a sale of a business; and

    

4. A partnership in drafting the partnership agreement.

Canons 5 and 7 of the Code of Professional Responsibility provide basic guidelines for an attorney in multiple representation situations. DR 5-105 provides:

(A) A lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).

(B) A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).

(C) In the situations covered by DR 5-105(A) and (B), a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.

(D) If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner or associate or any other lawyer affiliated with him or his firm may accept or continue such employment.

Syllabus

While attorneys are frequently requested to act as the attorney for multiple parties in drafting an agreement, the Committee does not recommend multiple representation because this situation places an attorney in the clearest of conflicts regarding client confidentiality and the ability to exercise professional judgment free of compromising influences. In those situations in which an attorney agrees to accept such a role, the attorney may do so only after fully disclosing the risks of multiple representation and obtaining the consent of each party. Furthermore, prior to accepting employment, the attorney must determine if it is obvious whether the attorney can adequately represent the interests of each party to the transaction. The nature of the disclosure required and the ability adequately to represent each party will depend on the agreement in question. However, regardless of the agreement in question, representing both parties requires adherence to the full range of duties accompanying the attorney-client relationship and under no circumstances is multiple representation to be considered a "scrivener's" role.

Opinion

Representation of a Buyer and Seller in a Residential Real Estate Transaction. The residential real estate industry has undergone numerous changes in recent years requiring a thorough examination of the attorney's role in residential real estate transactions.⁽¹⁾ Despite such changes, the conduct of an attorney may not depart from the standards set forth in the Colorado Code of Professional Responsibility requiring an attorney zealously and competently to represent his clients' interests free of compromising influences.

In a real estate transaction, the positions of purchaser and seller are inherently susceptible to conflict. In re Kamp, 40 N.J. 588, 194 A.2d 236 (1963). Therefore, prior to agreeing to represent both parties, the attorney must first ascertain whether the parties have substantially agreed on all of the material terms of the agreement. These terms include, for example, the price, time and manner of payment, status of title upon transfer, whether any personal property is to be included, status of any present leases or tenancies, amount of earnest money deposit and the treatment of amounts so deposited upon the default of either party.

If the parties have substantially agreed on the material terms of purchase, the attorney must disclose to each party the risks involved in multiple representation and the possible effect of such representation on the exercise of the attorney's independent professional judgment on behalf of each. DR 5-105(C). Specifically, the attorney must disclose that as between commonly represented clients, the attorney-client privilege does not attach and if subsequent litigation develops, the privilege will not protect any communications between the attorney and each party. See Model Rules of Professional Conduct Rule 2.2 comment. The attorney must also disclose that, in the event a dispute does develop, the attorney will have to withdraw from representing either party absent knowing consent of both sides. The net effect of such a withdrawal is that each party will incur higher legal costs than if separate counsel had been secured at the outset of the transaction.

The last step prior to agreeing to represent each party is acquiring the consent of each party and determining whether, in the attorney's opinion, it is obvious that the interests of each can be adequately represented. DR 5-105(C). In weighing the ability to represent the interests of each, the attorney must resolve all doubts against the propriety of the representation. EC 5-15. There is an ongoing debate as to whether the word "obvious" is subject to an objective or subjective determination. See Annotated Code of Professional Responsibility 243 (American Bar Foundation, 1979). However, the Committee is of the opinion that an objective determination is more consistent with the policy of DR 5-105 in discouraging multiple representation. This is particularly true in light of the Colorado Supreme Court's decision in People v. Gibbons, 685 P.2d 168, 174 (Colo. 1984), where it specifically rejected an attorney's "no harm, no foul" defense to improper multiple representation of criminal defendants.

A further consideration in resolving the issue of adequate representation is whether either party has previously utilized the services of the attorney. If the attorney has represented either party in the past, this fact must be fully disclosed and a determination made as to the effect the previous relationship will have on the present representation.⁽²⁾

A final cautionary note must be given regarding the duties accompanying acceptance of multiple representation. Upon agreeing to prepare the necessary documentation, the attorney must fulfill the full range of duties accompanying the attorney-client relationship. See CBA Ethics Opinion 29 (January 18, 1964) (the lawyer is "representing" these parties if he prepares documents affecting their rights and liabilities for a fee as in the instant case); The Florida Bar v. Teitleman, 261 So.2d 140, 143 (Fla. 1972) (preparation of legal documents for a fee constitutes representation; suggestion that it is merely a "scrivener's" task borders on the presumptuous). To permit otherwise would allow an attorney to limit liability for acts in violation of DR 6-102. People v. Goode, 195 Colo. 77, 576 P.2d 1020 (1978). Therefore, rather than delineate a special rule for the role of a scrivener, we will treat such a situation as any other conflict of interest where the attorney has agreed to represent both parties to a proposed transaction.

If the conditions above have been met, the Committee is of the opinion that acceptance of multiple representation in such a limited circumstance is not improper. However, meeting the standards for accepting multiple representation is only the start; the most difficult task is appropriately carrying out the duties accompanying multiple representation.⁽³⁾

Two difficult issues frequently develop in multiple representation. First, how does the attorney resolve material issues which the parties have failed to consider? Second, how does the attorney resolve a situation where, in light of information acquired during the representation, a term is fraudulent or materially misrepresents the true state of affairs?⁽⁴⁾

The first issue cannot be resolved solely by the unilateral decision of the attorney. The attorney must inform the parties of the variety of alternatives in resolving such issue and the effect each alternative will have on the parties. Regardless of the attorney's professional judgment regarding resolution of the issue, the issue must be resolved solely by a decision of the parties.

The second issue most frequently arises when an attorney discovers a defect in title. Failure to disclose such a defect would violate Canon 7, requiring an attorney to represent a client zealously within the bounds of the law, from the purchaser's perspective, and disclosing the defect would violate Canon 7 from the seller's perspective. Therefore, each party should realize when he/she starts that any difficulty or defect discovered concerning the real estate or the transaction itself will necessarily be raised for their mutual consideration.⁽⁵⁾ If the attorney can appropriately resolve these issues and has complied with the standards outlined above regarding the propriety of agreeing to represent each party, the Committee is of the opinion that multiple representation is not improper.

In reaching its conclusion, the Committee has relied in part upon its prior Opinion 29, adopted January 18, 1964, and Opinion 57, adopted March 21, 1981.

Representation of a Husband and Wife in Preparation of an Uncontested Separation Agreement. In Opinion 47, adopted February 26, 1972, the Committee stressed that a lawyer may no more ethically represent both parties to an action under the Colorado Uniform Dissolution of Marriage Act than he can in any other matter. This result follows from the fact that the parties, even though they may not be aware of it, will have conflicting interests on matters such as property, support, custody or spousal maintenance. Opinion 47 concludes that if no interests of the parties are conflicting, the lawyer may represent both parties absent knowing consent of both parties. However, in the event conflicting interests develop after dual representation has commenced, the lawyer must withdraw entirely from the case and thereafter decline to represent either party.

These considerations have led more jurisdictions to either prohibit the multiple representation of spouses⁽⁶⁾ or permit it in only extremely limited circumstances.⁽⁷⁾ The Committee is of the opinion that the latter approach is more realistic because of the emerging trend toward alternative methods of dispute resolution in the divorce area. Therefore, the purpose of this portion of the Opinion is to further delineate under what circumstances multiple representation of spouses is appropriate.

The procedure previously outlined for resolving the propriety of multiple representation in a real estate transaction applies with equal force to representation of both spouses. However, the unique aspects of marital dissolution require a further explanation of the issues created in applying these standards for determining the propriety of representing each spouse.

The prior resolution of the material elements of a separation agreement is an essential requirement prior to accepting dual representation. Even where the parties have tentatively resolved such issues, the attorney must examine the results agreed upon to determine whether the spouses are overestimating their ability to proceed on an amicable basis.

In resolving the issue of consent, it is important for the attorney carefully to examine the present ability of each spouse to exercise the emotional maturity and independence necessary to conduct settlement negotiations.⁽⁸⁾ Furthermore, each spouse must comprehend the risks of multiple representation and be capable of analyzing the impact of such representation on the attorney-client privilege if litigation develops.

Consent is a crucial issue in a marriage dissolution because frequently the attorney will have acted previously for one of the spouses. In such a situation, an attorney must carefully carry out the attorney's role in order to avoid even the appearance of professional impropriety. The attorney's inability to advocate the best possible deal for each spouse, as well as the possibility that one of them may become dissatisfied with the final agreement, must be carefully explained to each spouse.

If any of the considerations above instills doubt in the attorney regarding the individual's capacity for either informed or voluntary consent, multiple representation must be declined. If, however, there are no factors indicating a lack of capacity, and the attorney is confident the interests of each can be adequately represented, the Committee is of the opinion that while dual representation is strongly discouraged, it is not professionally improper for an attorney to act in such a capacity.

It should be carefully noted that the considerations above have concerned dual representation and not mediation. The distinction is that mediation contemplates a neutral third party who will guide the parties towards resolution of their marital dispute. Thus, in divorce mediation, the situation is different from dual representation because, in one sense, the mediator represents neither of the parties.⁽⁹⁾ This result causes great concern because it significantly departs from the traditional notions of the attorney-client relationship and presents numerous ethical issues to be resolved.⁽¹⁰⁾ The ability of an attorney to act as a mediator in a marital dispute is not the subject of this opinion. A formal opinion concerning mediation may be considered by the Committee at a later date.

Representing the Buyer and Seller to the Sale of a Business. The representation by a lawyer of both the buyer and the seller in a business transaction has been characterized as one of the clearest cases of improper representation of conflicting interests. In re Boivin, 271 Or. 419, 533 P.2d 171, 174 (1975). Even where the attorney's role is merely to set forth the parties' understanding,⁽¹¹⁾ few agreements are so simple that they do not involve situations where provisions could be added, conditions imposed or terminology shaded so as to favor one of the parties. Therefore, the Committee is of the opinion that only in the rarest of circumstances will it be obvious that an attorney can adequately represent the interests of the buyer and seller to a proposed sale of a business. DR 5-105(C).

The difficulty in representing both parties to a sale of a business stems from the numerous legal decisions which must be made regarding the entity owning the business, the status of employees, tax implications of the transaction, appropriate default provisions and other issues which go far beyond the basic terms and condition of payment.⁽¹²⁾ If these difficult issues are considered in light of the requirement set forth in EC 5-15 that an attorney "must resolve all doubts against the propriety of representation," it is difficult to perceive a situation justifying dual representation in the sale of a business. Thus, while the Committee hesitates to adopt a per se rule prohibiting an attorney from representing both parties to a sale of a business, an attorney who undertakes dual representation in the context of a sale of a business must do so aware of the heavy burden that he or she must meet.

Representation of a Partnership in Drafting a Partnership Agreement. Representation of a partnership in the drafting of the partnership agreement involves numerous potential conflicts of interest which attorneys often overlook. EC 5-18 addresses these concerns by stating:

A lawyer employed or retained by a corporation or similar entity owes his allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity. In advising the entity, a lawyer should keep paramount its interests and his professional judgment should not be influenced by the personal desires of any person or organization. Occasionally a lawyer for an entity is requested by a stockholder, director, officer, employee, representative, or other person connected with the entity to represent him in an individual capacity; in such case, the lawyer may serve the individual only if the lawyer is convinced that differing interests are not present.

These potential conflicts are most apparent in the formation of the partnership because it is at this stage that crucial decisions regarding the operation of the entity will be made. Furthermore, it is often at this stage that an attorney is representing one or more of the partners requiring the attorney, prior to agreeing to draft the partnership agreement, to consider the implications of DR 5-105(A). That disciplinary rule provides:

A lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).

An important consideration in evaluating the degree to which the partners understand the potential conflicts of the attorney's role is the sophistication of the parties involved in business and legal matters. Often they are much more capable of appreciating the potential conflicts, and of weighing them, during the drafting stage and throughout subsequent dealings, than are parties to a divorce proceeding who may have had little or no prior contact with the legal process. But, the possibility that the partners may have experience in legal matters cannot be assumed; frequently the partners will seek not only the attorney's legal advice, but also the attorney's business judgment in formulating the direction of the proposed partnership. In any event, the attorney should feel confident that the partners perceive the differing interests and acknowledge the possibility that if a dispute arises, the attorney may be unable to represent either the individual partners or the partnership. DR 5-105(B).

1. See ABA Special Committee Report on Residential Real Estate, The Proper Role of the Lawyer in Residential Real Estate Transactions and Appropriate Methods of Compensating Him for His Services (1974).

2. See Comment, "Conflicts of Interest in Real Estate Transactions; Dual Representation - Lawyers Stretching the Rules," 6 W. New Eng. L. Rev. 73 (1983).

3. For a thorough discussion of the difficulties involved, see Matter of Dolan, 76 N.J. 1, 19, 384 A.2d 1076, 1085 (1978) (Pashman, J., concurring and dissenting).

4. These issues emphasize the fact that an attorney accepting multiple representation must assume the role of an adviser, rather than that of an advocate. For an illustration of the differing roles, see EC 7-3.

5. See Note, "Simultaneous Representation: Transaction Resolution in the Adversary System," 28 Case W. Res. L. Rev. 86, 114 (1977).

6. See, e.g., Conn. B. Ethics Comm., Formal Op. 27, reprinted in 4 Fam. L. Rep. (BNA) 2029 (1977); Mo. S. B. Advisory Comm. on Bar Ad., Op. 109, summarized in 3 Fam. L. Rep. (BNA) 2154 (January 4, 1977); Ohio B. Comm. on Legal Ethics and Professional Conduct, Formal Op. 30, reprinted in 1 Fam. L. Rep. (BNA) 3109 (July 15, 1975).

7. See, e.g., Ariz. S.B.A. on Legal Ethics, Op. 76-25 (1976), discussed in Silberman, "Professional Responsibility Problems in Divorce Mediation," 7 Fam. L. Rep. (BNA) 4001 (Feb. 1, 1981) (dual representation permissible if no conflict exists, the divorce is uncontested, there are no children, and there are few assets); Or. S.B.A. Op. 218 (1972), reported in O. Maru, 1975 Supplement to Digest of Bar Association Ethics Opinions at 448-49 (attorney may represent husband and wife in joint petition for dissolution, only if both parties have agreed on divorce, there are no minor children or substantial properties, the disposition of assets and debts was fully settled before consulting attorney, and there are no other potential conflicts).

8. See generally, Crystal, "Ethical Problems in Marital Practice," 30 S.C. L. Rev. 321 (1979).

9. Silberman, "Professional Responsibility Problems in Divorce Mediation," 7 Fam. L. Rep. (BNA) 4001.

10. For example, does mediation discharge the entire range of duties accompanying the attorney-client relationship? To what extent can an attorney mediate with the aid of professional counselors without violating the unauthorized practice of law rules? If an attorney can mediate with the aid of professional counselors, how should fees be divided? These issues and several others require a separate examination of the propriety of mediation.

11. As previously discussed in the residential real estate portion of this Opinion, agreeing to set forth the parties' understanding, or acting as a scrivener, does not discharge the range of duties accompanying the attorney-client relationship.

12. For a recent illustration of the dangers inherent in multiple representation in the context of a sale of a business, see the Colorado Supreme Court's opinion in People v. Razatos, 636 P.2d 666 (Colo. 1981), appeal dismissed, 455 U.S. 930, 71 L.Ed.2d 639, 102 S.Ct. 1415 (1982).