Ethics Opinions from the Bar Association of San Francisco
INFORMAL OPINION 1973-22
An attorney who acted in the sale of a business at the request of the broker under an arrangement whereby the buyer was to pay the attorney's fee may not later represent the seller against the buyer for breach of the sales contract, even though no element of confidentiality is present.
A real estate salesman requested an attorney to handle the legal work necessary for completing a sale of a bar and restaurant, which involved a transfer of stock between the selling and buying corporation. As part of the transaction, the buyer and seller agreed that the buyer should pay the attorney's fee. The seller gave possession to the buyer before escrow closed. The buyer operated the business for a short while and then walked away from the deal. The seller wants to retain the attorney to represent him in a breach of contract action against the buyer. May the attorney represent the seller?
No. Although California case law has long required the element of confidentiality as a prerequisite to attorney disqualification, recent cases have abandoned the requirement, thus bringing the California rule into harmony with the broad rule of other state courts and federal courts.
Rules 5 and 7 of the Rules of Professional Conduct of the State Bar of California, and Canon 5 of the ABA Code of Professional Responsibility fix the general requirements applicable to the situation presented by the Question.
Rule 5 prohibits employment adverse to a client or former client. The language of the Rule is as follows:
A member of the State Bar shall not accept employment adverse to a client or former client, without the consent of the client or former client, relating to a matter in reference to which he has obtained confidential information by reason of or in the course of his employment by such client or former client.
Rule 7 prohibits the representation of conflicting interests. The language of the Rule is as follows:
A member of the State Bar shall not represent conflicting interests, except with the consent of all parties concerned.
Canon 5 states that:
A lawyer should exercise independent professional judgment on behalf of a client.
Ethical Consideration 5-1 there under provides that:
The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.
Ethical Consideration 5-14 provides that:
Maintaining the independence of professional judgment required of a lawyer precludes his acceptance of continuation of employment that will adversely affect his judgment on behalf of or dilute his loyalty to a client. This problem arises whenever a lawyer is asked to represent two or more clients who may have differing interests, whether such interests be conflicting, inconsistent, diverse, or otherwise discordant.
Ethical Consideration 5-15 provides that:
If a lawyer is requested to undertake or to continue representation of multiple clients having potentially differing interests, he must weigh carefully the possibility that his judgment may be impaired or his loyalty divided if he accepts or continues the employment. He should resolve all doubts against the propriety of the representation. A lawyer should never represent in litigation multiple clients with differing interests; and there are few situations in which he would be justified in representing in litigation multiple clients with potentially differing interests. If a lawyer accepted such employment and the interests did become actually differing, he would have to withdraw from employment with the likelihood of resulting hardship on the clients; and for this reason it is preferable that he refuse the employment initially. On the other hand, there are many instances in which a lawyer may properly serve multiple clients having potentially differing interests in matters not involving litigation. If the interests vary only slightly, it is generally likely that the lawyer will not be subjected to an adverse influence and that he can retain his independent judgment on behalf of each client; and if the interests become differing, withdrawal is less likely to have a disruptive effect upon the causes of his clients.
Disciplinary Rule 5-105(A) provides in part that:
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 profferred employment . . .
The basic California rule on the question is grounded upon two oft--cited cases, Murphy v. Waterhouse, 113, Cal. 467 (1896), and Croce v. Superior Court , 21 Cal. App. 2d 18 (1937). The reasoning of these decisions has been criticized (see E. F. Hutton v. Brown, infra ) as relying too narrowly on the attorney-client evidentiary privilege. The logic for the California rule is expressed in Murphy , supra , at 470-471:
When two persons address a lawyer as their common agent, their communications to the lawyer, so far as concerns strangers, will be privileged, but, as to themselves, they stand on the same footing as to the lawyer, and either can compel him to testify against the other as to their negotiations [citations omitted]. The rule, however, is the same where the witness is attorney for only one of the contracting parties. Where two persons are negotiating with each other in the presence of the attorney of one of the parties, the very nature of the transaction, and the circumstances surrounding it, are inconsistent with the notion of a confidential communication between one of the parties and his attorney who happens to be present. The rule deducible from the authorities is that all communications made by a client to his counsel for the purpose of professional advice or assistance, are privileged, whether such advice relates to a suit pending, one contemplated, or any matter proper for such advice or aid; that where the communications are made in the presence of all the parties to the controversy, they are not privileged, but the evidence is competent between such parties.
From this authority, subsequent California cases have held that the ethical considerations attending representations adverse to a former client constitute no bar, where the element of confidentiality does not exist. E.g., Arden v. State Bar , 52 Cal. 2d 310 (1959); Hillman v. Stults, 263 Cal. App. 2d 848 (1968)); Petty v. Superior Court , 116 Cal. App. 2d 20 (1953); Croce v. Superior Court, supra .
In accord, the California Rules of Professional Conduct 5 and 7, set out above, seem to prohibit the subsequent representation of an adverse interest if confidential information has been disclosed, and the concurrent representation of opposing interests without full consent, but not the subsequent representation of an interest adverse to a client who disclosed no confidential information to his former attorney.
The case of Petty v. Superior Court , supra , represents more recent statement of California law, but continues to draw the line along the boundaries of the attorney-client privilege rationale found in the older decision. In Petty , the attorney was employed by two clients to reduce to writing an agreement between them respecting an oil well lease. The court stated that the determination of the question of whether the attorney was qualified to represent one of the parties to the agreement against the other party depended upon, whether or not, in preparing the oil well agreements, there was any communication to the attorney by his client which was confidential as against the other client. The court stated the California rule as the embodiment of the old cases:
Where two persons mutually employ the same attorney to represent them as their common agent and attorney in a particular transaction, the communications made by either of them in the presence of the other to the attorney are privileged as to strangers to the transaction, but are not privileged as between either of them and the attorney. [Citations omitted) Petty , supra , at 29.
The court in Petty found that the communications between the attorney and his former client (the subsequent adverse party) were not privileged communications, and held that the attorney was therefore not disqualified to be attorney for his client against the former client in the action on the contract.
As the District Court notes in the Hutton opinion, cited infra , at 393, n. 59, the Croce rule has not been followed in any other state, and several more recent cases suggest that its rule may no longer be followed in California. See, e.g., Big Bear Municipal Water Dist. v. Superior Court , 269 Cal. App. 2d 919 (1969); Earl Scheib, Inc., v. Superior Court , 253 Cal. App. 2d 703 (1967); Jacuzzi v. Jacuzzi Bros., Inc., 218 Cal. App. 2d 24 (1963).
The Ninth Circuit, in Cord v. Smith, 338 F.2d 516 (1964), at 524-525, rejected the reasoning of the Croce line of California cases:
In our opinion, the rule that an attorney who has represented one party in a transaction may not thereafter represent the other party in an action against his former client, arising out of or closely relating to the transaction, does not depend for its operation upon a subsidiary decision as to whether the attorney would or might be using or misusing confidential information derived from his former client. We think that the famous words of Judge Cardozo in Meinhard v. Salmon [citation omitted], in which he was defining the duties of a trustee, are equally applicable to an attorney-at-law in relation to his conduct in the federal courts:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.
Moreover, the Court in Cord, at 524, noted that the nature of the services for which the attorney is retained does not avoid the ethical responsibilities of the attorney to his clients:
It does not make any difference that the particular transaction is one which could have been handled on the client's behalf by a layman, i.e., one in which his activity is not necessarily the practice of law. Lawyers customarily render both legal and nonlegal services without distinction, and bill their clients for those services on the basis that all of them are legal services. Clients repose special confidence in, and retain their lawyers because they are lawyers. They are entitled to expect that their lawyers will act as they are supposed to act, without quibble as to what particular services may have been technically legal services. [See In re Soale , 31 Cal. App. 144, 153, 159 P. 1065, 1069 (1916)].
In the case In Re Aqua Hotel Corporation, 251 F.2d 138 (1957), the Ninth Circuit was presented with a motion to disqualify as an attorney for a trustee in bankruptcy an attorney who had formerly appeared for one of the bankrupt's principal stockholders. The Court noted that the attorney had received no compensation for the services but had done them only as an accommodation for one of the stockholder's regular attorneys, had not come into possession of confidential information, and had not provided the stockholder with legal advice. The Court denied the motion to disqualify, but took advantage of the fact situation to express its opinion that the attorney concerned was nonetheless "ill-advised" in representing the trustee after having performed the services for the stockholder. Stressing the closeness of the question, the Court said that "The breach of a confidential relationship between the attorney and client is a matter of such seriousness that any appearance of such a breach is to be avoided. " [Emphasis added] Id., at 141.
A recent Connecticut case, Grievance Committee v. Rattner, 152 Conn. 59, 65, 203 A.2d 82, 84, (1964), cited in footnote 1 to ABA Ethical Consideration 5-1 set out above, includes language which is particularly appropos to the facts of the Question situation:
When a client engages the services of a lawyer in a given piece of business he is entitled to feel that, until that business is finally disposed of in some manner, he has the undivided loyalty of the one upon whom he looks as his advocate and champion. If, as in this case, he is sued and his home attached by his own attorney, who is representing him in another matter, all feeling of loyalty is necessarily destroyed, and the profession is exposed to the charge that it is interested only in money.
Perhaps the most persuasive rationale behind an opinion that the attorney in the Question situation should not represent the seller against the buyer, is expressed in an opinion of the Ethics Committee of the New York County Bar Association, noted by the Court in E. F. Hutton & Co. v. Brown, 305 F. Supp. 371 (S.D. Tex. 1969):
The matter is not to be determined by such facts as, that the original services were rendered on the employment of another lawyer, or that the services may have no particular bearing upon the phase of the litigation contemplated to be conducted in behalf of the new employer, or that it is probable that no information was acquired in the first employment that might prove useful in the subsequent employment. Irrespective of any actual detriment, the first client might naturally feel that he had in some way been wronged when confronted by a final decree obtained by a lawyer employed in his behalf in an earlier part of the same litigation. To maintain public confidence in the Bar it is necessary not only to avoid actual wrong doing but an appearance of wrong doing. [Emphasis added] 305 F. Supp. at 395, fn. 68.
Thus it appears that the California rule is a narrow one, not in harmony with the ethical decisions of other states and the federal courts, and not followed by recent California decisions. Notable among recent California decisions is Big Bear Municipal Water Dist. v. Superior Court , 269 Cal. App. 2d 919 (1969). In that case, confidentiality was not mentioned as a basis for disqualifying an attorney from assuming an adverse position. Notably, such old cases as Croce and Murphy were not cited. Construing Rule 5 of the Rules of Professional Conduct, Big Bear holds that the test of inconsistency is:
[W]hether the acceptance of the new retainer will require the attorney, in forwarding the interest of his new client, "to do anything which will injuriously affect his former client in any matter in which he formerly represented him, and also whether he will be called upon, in his new relation, to use against his former client any knowledge or information acquired through their former connection". [Citations omitted] Generally recognized exceptions to the rule exist (1) where the relationship of attorney and client between the attorney and the complaining party never existed; (2) where a representation of the new client is not inconsistent with his former employment; and (3) where the former client expressly or impliedly consented to the adverse representation. [Citations omitted] Id., at 927.
Although the old California cases requiring confidentiality have not been expressly overruled, Big Bear omits from the test the element of confidentiality upon which the old cases were based. If a gap between the law of California and that of other states and the federal courts still exists, then it has narrowed enough to allow an opinion that, in California as well as in other jurisdictions, the attorney in the Question situation should not represent the seller against the buyer.
All opinions of the Committee are subject to the following disclaimer:
Opinions rendered by the Ethics Committee are an uncompensated service of The Bar Association of San Francisco. Opinions are advisory only, and no liability whatsoever is assumed by the Committee or The Bar Association of San Francisco in rendering such opinions, and the opinions are relied upon at the risk of the user thereof. Opinions of the Committee are not binding in any manner upon the State Bar of California, the Board of Governors, any disciplinary committee, The Bar Association of San Francisco, or the individual members of the Ethics Committee.
In using these opinions you should be aware that subsequent judicial opinions and revised rules of professional conduct may have dealt with the areas covered by these ethics opinions.