COLORADO BAR ASSOCIATION
Combined Meeting of the
TAX, BUSINESS, REAL ESTATE, AND TRUST AND ESTATE SECTIONS
RECENT DEVELOPMENTS THAT AFFECT
THE LAWYER’S ETHICAL OBLIGATIONS
12 December 2007
By Brooke Wunnicke
Of Counsel, Hall & Evans LLC
A. Well-known by
· The revised Colorado Rules of Professional Conduct (Colo. RPC ) become effective January 1, 2008, and only a few “stones have been left unturned” in the revision.
· A flurry of accredited CLE presentations about the Colo. RPC has ensued and continues unabated to and including today’s presentation.
Effect of differences between former and revised
I. A PERSONAL SELECTION OF NOTABLE DIFFERENCES
BETWEEN THE OLD AND THE NEW
· Although violation of a Rule does not ipso facto, under either the old or new Preamble, give rise to a cause of action, the new Preamble provides:
Nevertheless, since the Rules do establish standards of
conduct by lawyers, in appropriate cases, a lawyer’s
violation of a Rule may be evidence of breach of the
applicable standard of conduct. [Emphasis added.]
· “Terminology” is no longer tucked away at the end of the Preamble, but is new Rule 1.0 in the revised Colo. RCP. Especially noteworthy:
§ Replacement of “consult” and “consultation” with “Informed consent.”
§ “Screened” eases the rigorous application of disqualification by permitting “screening” in more liberal circumstances.
Rule 1.5 [Fees]
Caveat: you may be subject to complying with Rule 8(a) [conflict of interest with current client constraint] if you want to change the fee agreement in the course of representation.
· Rule 1.6 [Confidentiality of Information] The revised Colo. Rule 1.6 relating to the lawyer’s duty of confidentiality is important and substantially revised. Rule 1.6 has added five additional specific exceptions to non-disclosure for a total of 7 (the ABA Rule 1.6 has 6 exceptions).
The Comment for
Rule 1.6 differs substantially from that for the ABA Rule 1.6. For example,
[15A] The interrelationships between this Rule and Rules 1.2(d), 1.13, 3.3, 4.1, 8.1 and 8.3, and among those rules, are complex and require careful study by lawyers in order to discharge their sometimes conflicting obligations to their clients and the courts, and more generally, to our system of justice. The fact that disclosure is permitted, required, or prohibited under one rule does not end the inquiry. A lawyer must determine whether and under what circumstances other rules or other law permit, require, or prohibit disclosure. While disclosure under the Rule is always permissive, other rules or law may require disclosure. For example, Rule 3.3 requires disclosure of certain information (such as a lawyer’s knowledge of the offer or admission of false evidence) even if this Rule would otherwise not permit that disclosure. In addition, Rule 1.13 sets forth the circumstances under which a lawyer representing an organization may disclose information, regardless of whether this Rule permits that disclosure. By contrast, Rule 4.1 requires disclosure to a third party of material facts when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless that disclosure would violate this Rule. See also Rule 1.2(d) (prohibiting a lawyer from counseling or assisting a client in conduct the lawyer knows in criminal or fraudulent). Similarly, Rule 8.1(b) requires certain disclosures in bar admission and attorney disciplinary proceedings and Rule 8.3 requires disclosure of certain violations of the Rules of Professional Conduct, except where this Rule does not permit those disclosures.
· Conflict of Interest Rules
· Six Rules address conflict of interest:
Rule 1.7 - Conflict of Interest: Current Client (now “In General”)
Rule 1.8 - Conflict of Interest: Current Clients – Specific Rules
Rule 1.9 - Duties to Former Clients
Rule 1.10 – Imputation of Conflicts of Interest: General Rule
Rule 1.11 - Special Conflicts of Interest for Former and Current
Government Officers and Employees
Rule 1.12 - Former Judge, Arbitrator or Other Third-Party Neutral
· The conflict rules and their Comments have many substantial additions and other changes from the current version. For example, Paragraph  in the Comment to Rule 1.9 (Duties to Former Client] has better guidance for determining whether a matter is “substantially related.” Rule 1.10 modifies the present automatic “imputation” rule.
Note: If the lawyer-author of this outline could read only two of the revised Rules before their effective date, the choice would be Rule 1.6 (Confidentiality of Information) and Rule 1.7 (Conflict of Interest: Current Clients) and its extensive Comment.
· Rule 1.13 [Organization as Client]. This Rule is the lawyer’s polestar for the ethical obligations attributable to representation of an entity. The most noteworthy change is that the lawyer employed or retained by an organization now has a choice when the entity, despite the lawyer’s advice, has persisted in conduct violative of law. Under the new Rule the lawyer in that circumstance either (1) may resign, or (2) may reveal, notwithstanding Rule 1.6, information relating to the representation “only if and to the extent that the lawyer believes necessary to prevent substantial injury to the organization.” [The steps prescribed for the lawyer to take in reporting the corporate-client’s misconduct are colloquially referred to as “up-the-ladder.”
· Rule 1.18 [Duties to Prospective Client] This is a new – and for this outline’s author-- a troublesome – rule. Rule 1.18 is broadly worded, e.g., the definition of “prospective client” in subsection (a): “A person who discusses with a lawyer the possibility of forming a client-lawyer relationship with respect to a matter is a prospective client.”
Even though no lawyer-client relationship ensues, a lawyer who has had a discussion with a prospective client is (i) subject to the confidentiality strictures of Rule 1.6, except as Rule 1.9, relating to former clients, would permit, (ii) may not represent a client with interests materially adverse to those of the potential client, and (iii) may be disqualified from representation of the lawyer’s client, unless the lawyer takes specified curative steps.
A study of the Comment to Rule 1.18 offered little solace and more concern to this lawyer. For example, the lawyer is cautioned that at the initial interview the lawyer needs to learn enough information to decide if a conflict of interest exists with an existing client or if the lawyer wants to undertake the representation. The Comment makes plain that the lawyer’s task with a potential client is not an easy one:
 In order to avoid acquiring disqualifying information from
a prospective client, a lawyer considering whether or not to
undertake a new matter should limit the initial interview to only
such information as reasonably appears necessary for that
The language of Rule 1.18’s Comment that ostensibly protects the lawyer is unfortunately subjective. For example, note these phrases from the Comment:
Not all persons who make unilateral communications
to a lawyer are prospective clients. The test according to Comment : “if they are without reasonable expectation” that the lawyer will be willing to discuss the matter.
From Comment : “It is often necessary for a prospective client to reveal information to the lawyer during the initial consultation …”
From Comment : The lawyer should limit the initial interview “to only such information as reasonably appears necessary …”
The lawyer is not prohibited from representing a client with interests adverse to those of the prospective client in the “same or substantially similar matter” unless the lawyer has received from the prospective client “information that could be significantly harmful if used in the matter.”
A final comment on new Rule 1.18: The prohibition in this rule resulting in disqualification is imputed to all members of the lawyer’s firm unless an informed consent, confirmed in writing, is received from both the client and the prospective client, or if reasonable steps (such as timely screening) have been taken to avoid disclosure of disqualifying information have been taken.
Rule 4.1(a) (Truthfulness in Statement to Others) has been changed to match the
(1) In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third
person; or … (Emphasis added.)
Apparently, ”minor” falsities will now be overlooked.
Summary. The revised Colorado Rules of Professional Conduct and their respective Comments have many changes from their predecessors. The foregoing rules were selected to include here because of their pertinence for the members of the Tax, Business, Real Estate, and Estate and Probate sections of the Colorado Bar Association.
II. ETHICS-RELATED RECENT DEVELOPMENTS
IN TAX, BUSINESS, REAL ESTATE, AND
ESTATE AND PROBATE AREAS OF LAW
rules of ethics are particularly relevant to transactional lawyers, who comprise
our attendees today. For example,
Many years ago, the author of this outline wrote a book, “Ethics Compliance for Business Lawyers”, published by John Wiley & Sons in 1987. In the course of my research I read a then recent opinion, Polydoroff v. v. Interstate Commerce Commission, 773 F.2d 372 (D.D.C. 1987), which stated the following rationale for a separate administrative code of ethics applicable to lawyers:
Whether agency or court, any institution engaging in the
adjudicative process must have the power to police the
professionals who practice before it. There is no more important
area for such policing than guaranteeing that the professional
advocates give their causes ‘warm zeal’ unfettered by conflicting
loyalties or interests.
A. The Tax Lawyer and IRS Circular 230
. 1. In General. Tax lawyers have long been subject to IRS Circular 230, which governs the right of persons to practice before the Internal Revenue Service (IRS). The Treasury and the IRS deem the providing of written tax advice by an attorney or CPA is “practice” before the IRS.
2. Circular 230: New Regulations Effective September 26, 2007.
(T.D. 9359; 2007 IRB LEXIS 859; 2007-45 I.R.B. 931, September 25, 2007). The IRS has made some recent important changes in its Circular 230; and, a summary of some of the key new final regulations effective September 26, 2007 follows:
· “Practice” before the IRS is defined very broadly to include all matters connected to a presentation to the IRS, preparing and filing documents, corresponding and communicating with the IRS, rendering written advice having a potential for tax “avoidance or evasion.” (Sec. 10.2)
· Clarification is provided that an attorney or CPA does not have to file a Form 2848, Power of Attorney, before rendering a “covered opinion”, i.e., an opinion covered by Circular 230. (Sec. 10.3).
· Contingent fees are allowable but only for services rendered in connection with (a) an IRS examination of, or challenge to an original tax return or an amended tax return or claim for tax refund (if filed within 120 days of taxpayer’s receipt of written notice from the IRS of the examination or challenge to the original tax return); (b) interest and penalty reviews; or (c) any judicial proceeding. (Sec. 10.27).
· Conflicts of interest are not prohibited but written consent of the affected clients must be obtained to the conflicted representation. The consent must be countersigned by the clients and returned to the lawyer within 30 days. (Sec. 10.29).
· Sec. 10.34 lists the “Standards with respect to tax returns and documents, affidavits, and other papers.” This section has a controversial provision that mandates the tax practitioner to inform a client of any penalties that “are reasonably likely to apply to the client with respect to a position taken on a tax return if the practitioner advised the client about that position or the practitioner prepared or signed the client’s return.
B. The Business Lawyer
Business lawyers, by the nature of their practice, are prone to encounter issues raised by multiple client representation, e.g. when forming or acquiring a business entity. The securities lawyer is belabored with Section 307of the Sarbanes-Oxley Act (“SOX”). Some remarks are included here addressing the issue of tension between Section 307 and the applicable state code of ethics.
1. In General. The revised Colo. RPC especially relevant for the business lawyer to review are these:
· Rule 1.6 – Confidentiality of Information
· Rule 1.7 – Conflict of Interest – Current Clients
including “informed consent” to “consentable” conflicts
Comment  is a useful guide in dealing ethically with multiple representation.
Reminder: If the common representation fails, the lawyer
will be forced to withdraw from representing all the clients of that representation.
2. Securities Lawyer. The lawyer who “practices” before the Securities and Exchange Commission (SEC) is subject to regulation by the SEC. The current authority for this regulation is found in Section 307 of the Sarbanes-Oxley Act (SOX) and Rule (102(e)).
a. Some argue that the SEC should not be enforcing ethics rules in proceedings before the Commission, but enforcement should be by state bar proceedings. Others contend that attorney misconduct in SEC practice should be enforced by the SEC because: (i) the SEC’s concern is to protect its proceedings from unethical conduct, and (ii) the SEC can better protect investors by suspending a lawyer’s appearance before the Commission.
The issue of
preemption is not yet resolved. The SEC currently seems to take the position
that its rules regulating lawyer conduct preempt state ethics rules. Several
states, e.g., State of
b. Some recent case examples of SEC enforcement against lawyers for misconduct:
· In re Rasmussen, Opinion and Order, Securities and Order, Securities Exchange Act Release No. 53662 (Apr. 17, 2006). A former senior lawyer at Enron was found, under Rule 102(e), to have improperly accelerated recognizing revenue from sale of a construction contract, resulting in filing a false Form 10K. Penalty imposed: 3-year suspension.
· In re Brown, Opinion and Order, Securities Exchange Act Release No. 52864 (Dec. 1, 2005). Also charged under Rule 102(e), the former general counsel of Management Systems Corporation, was found to have reviewed the company’s financial statements filed with the SEC that materially misstated the results of the company’s operations. Penalty imposed: 5-year suspension.
· In re Google, Opinion and Order, Securities Act Release No. 82435 (January 13, 2005). The SEC issued a cease-and-desist order against the general counsel for allowing the company to issue unregistered securities under its stock option plan. Penalty imposed: cease-and-desist order.
3. The Transactional Lawyer. In the course of drafting necessary documents for a business transaction, a “third-party closing opinion” is often involved, e.g., the borrower’s counsel to the lender for a loan secured by UCC collateral.
Rule 1.1 (Competence)
Rule 1.2 (Scope of Representation)
Rule 1.6 (Confidentiality of Information)
Rule 1.7 (Conflict of Interest: Current Client)
Rule 2.3 (Evaluation for Use by Third Persons)
Rule 4.1 (Truthfulness in Statements to Others)
b. Third-party legal opinion practitioners who seek to comply with customary practice in their area of law are justifiably proud that they have adopted the Golden Rule in substance in 3.1 of the ABA Guidelines for the Preparation of Closing Opinions (ABA Business Law Section Committee on Legal Opinions (2002):
An opinion giver should not be asked to render
an opinion that counsel for the recipient would not render if it were the opinion giver and possessed the requisite expertise. Similarly, an opinion giver should not refuse to render an opinion that lawyers experienced in the matters under consideration would commonly render in comparable situations, assuming that the requested opinion is otherwise consistent with these Guidelines
and the opinion giver has the requisite expertise and
in its professional judgment is able to render the opinion.
Opinion givers and counsel for opinion recipients should
be guided by a sense of professionalism and not treat
opinions simply as if they were terms in a business negotiation.
A final and probably unnecessary caveat for the business lawyer:
The Colo. RCP and the many helpful
guidelines from professional organizations, such as the
According to a 1984 survey (Gates, The Newest Data on Lawyers’ Malpractice Claims, ABA J., Apr. at 78), real estate transactional practice caused a higher percentage of legal malpractice claims than any other area of practice: 25% (personal injury claims were a close second with 24%).
In the 1940’s and 1950’s, real estate lawyers generally were limited in their practice to conveyancing and traditional mortgage transactions. Since then,
real estate lawyers have greatly expanded the scope of their practice – with increased exposure to potential liability and ethical constraints.
1. The Real Estate Lawyer as Escrow Agent. The real estate lawyer is often asked to serve as escrow agent. This may pose no problem with escrow instructions that require only ministerial services by the escrow holder. If, however, the escrow agent has discretionary powers and represents one of the parties, then ethical issues arise. For example, the lawyer’s fiduciary duty as escrow agent may conflict with the lawyer’s ethical duty to preserve client confidences.
2. Representation of Both Buyer and Seller in a Residential
Real Estate Transaction.
Ethics Opinion No. 68 (April 20, 1985) has not been amended and applies to four
of the most common conflict situations, including the buyer and seller in a
residential real estate transaction. Consistent with the ethical rule in most
states, the Syllabus to Opinion 68 declares that
· Before undertaking the multiple representation, the lawyer should ascertain whether the lawyer can adequately represent the interests of each party to the transaction;
· Before undertaking the multiple representation, the lawyer is required (1) to disclose fully what risks inhere in multiple representation; and, (2) obtain the consent of each party to the transaction. N.B. Under the revised Colo. RCP, Rule 1.7 prescribes the requirements for a consentable conflicted multiple representation, including “informed” consent [defined in Rule 1.0], confirmed in writing” by each client.
3. The Commercial Real Estate
Lawyer. The number and ever-changing variety of complex commercial real
estate transaction is beyond the scope of this outline – and indeed, even a
summary would be a program in itself. The
members of the CBA section on trusts and estates know, practitioners in these
area of law generally accept the
ACTEC Commentaries were made on
selected Model Rules, and a list of these revised Model Rules -- all of which list
· Rule 1.1 – Competence. The estate planning lawyer may generally rely on the information that the client provides unless “the circumstances indicate that the information should be verified.”
· Rule 1.2 – Scope of Representation and Allocation of Authority
Between Client an Lawyer. The Commentaries state that the nature and extent of the estate lawyer’s duties to the fiduciary and to the beneficiaries of the estate and trust is “one of the most controversial topics touched upon by the Commentaries.” The majority of cases dealing with this ethical issue have held that the lawyer’s duty to use reasonable care is owed only to the fiduciary client.
ACTEC Commentaries apparently take the position that representing multiple clients in appropriate cases “should be positively encouraged” because the nature of trusts and estate practice is usually non-adversarial.
The ACTEC Commentary to this rule, referring to Rule 1.8(k), disapproves the lawyer’s drafting a document or a will designating the lawyer or law firm to serve as counsel to the fiduciary or instructing the fiduciary to use a particular lawyers.
In sum, the trust and estate planning has special ethical issues with which to deal, including identification of the client, the frequency of multiple representation, and the ever looming potential conflict of interest. The ACTEC Commentaries to the revised ABA Model Rules of Professional Conduct, equally pertinent to the Colo. RPC, are a recommended reference for lawyers in the CBA Trust and Estates Section of the Colorado Bar Association.
several weeks, January 1, 2008,
fourth set of ethics rules that have been applicable to this outline’s author during 61-plus years of practice:
My conclusion from this plethora of ethical rules is this: changing times may compel changing the application of the basic standards of the American legal system, but the basic standards of integrity and competence remain unchanged.
Ethical and moral precepts cannot be precisely defined, but centuries ago, Quintus Horatius Flaccus gave us a guide: “There are certain limits, on either sides of which right cannot exist.”
My personal credo is derived from Marcus Aurelius: “Never esteem aught of advantage which will oblige you to break your faith, or to desert your honor.”
Finally, I leave you with the hope that my remarks have kindled in each of you a renewed pride in being a lawyer and dedication to the law, because as John Locke, whose ideas undergird our Constitution declared: “Where law ends, tyranny begins.”