CHAPTER 4 ETHICAL CONSIDERATIONS IN THE CONTEXT OF POOLING AND UNITIZATION

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 4
ETHICAL CONSIDERATIONS IN THE CONTEXT OF POOLING AND UNITIZATION
John W. Morrison
Attorney
Fleck, Mather & Strutz, Ltd.
Bismarck, North Dakota

JOHN W. MORRISON

John W. Morrison is a shareholder with the firm of Fleck, Mather & Strutz, Ltd. in Bismarck, North Dakota. He received a Bachelor of Arts degree from Mary College (now the University of Mary), in Bismarck in 1975 and a Juris Doctor degree from the University of North Dakota in Grand Forks in 1978. After graduation from law school, he was employed by the North Dakota Legislative Council, the North Dakota State Land Department and the North Dakota Attorney General's Office. In 1981, he began his employment with Fleck, Mather & Strutz, Ltd. and since that time has specialized in oil and gas law, including litigation and administrative matters.

He has authored papers for special and regular institutes of the Foundation, including "Horizontal Drilling -- The Changing Role of Traditional Conservation Principles," Federal Onshore Pooling and Unitization II, Paper 5; "Regulation of Gas Gathering Systems," 39 Rocky Mtn. Min. L. Inst. 18 (1993); and "Doing the Lateral Lambada: Negotiating the Technical and Legal Challenges of Horizontal Drilling," 43 Rocky Mtn. Min. L. Inst. 16 (1997). He is also the North Dakota author of Lobbying, PACs and Campaign Finance and Doing Business in States Other than the State of Incorporation.

John is admitted to practice before state and federal courts in North Dakota, the Eighth Circuit Court of Appeals and the United States Supreme Court. He has served as Chairman of the Executive Committee of the North Dakota Petroleum Council, North Dakota Vice-president and President of the Rocky Mountain Oil and Gas Association, a director of the American Petroleum Institute, and a trustee of the Rocky Mountain Mineral Law Foundation. He currently serves as a North Dakota representative to the Interstate Oil and Gas Compact Committee and is the Chairman of the Ethics Committee of the Landman's Association of North Dakota. He has been included in the Best Lawyers in America since 1995 and is also named as one of the Leading Lawyers for Business in Chambers USA.

1. Introduction

While other ethical issues for the lawyer and land professional obviously arise in the course of forming and administering a federal unit, the most obvious problem area in this age of an ever-decreasing population of operators and lessees as a result of mergers and consolidation is that of conflicts of interest. Lawyers and land professionals are subject to sometimes complex, and frequently somewhat vague, ethical codes which may result in less-than-obvious conflict issues arising which are incapable of certain resolution. This paper will attempt to identify the ethical rules governing the activities of lawyers and land professionals, discuss briefly the nature and status of a federal unit and its participants and the duties of a unit operator, and then suggest some steps to avoid, or at least minimize, the occurrence of conflicts.

2. Duties of Lawyers and Land Professionals

2.1 Lawyers

Codes of ethical conduct for lawyers have been the subject of nearly continuous activity by the American Bar Association (ABA) during the past century. In 1908, the ABA adopted thirty-two canons of ethics for lawyers, which were revised four times between 1908 and 1940.¹ In 1969, the ABA adopted the Model Code of Professional Responsibility, which included canons setting forth theoretical policy, ethical considerations addressing specific dilemmas, and disciplinary rules, the breach of which gave rise to disciplinary action.² Following the work of the Kutak Commission in the late 1970's and early 1980's, the ABA adopted the Model Rules of Professional Conduct (Model Rules) in 1983. Today, the Model Rules have been adopted, in one form or another, with or without modifications, by all of the states other than California, Maine and New York.³

Rule 1.7, which was substantially rewritten in 2000, provides as follows:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

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(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

The bolded words are intended to demonstrate provisions which import a degree of subjectivity into the process of determining and resolving conflicts.

The Comment to Rule 1.7 describes a four-step process to resolve conflicts issues, and requires the lawyer to "1) clearly identify the client or clients; 2) determine whether a conflict of interest exists; 3) decide whether the representation may be undertaken despite the existence of a conflict, i.e., whether the conflict is consentable; and 4) if so, consult with the clients affected under paragraph (a) and obtain their informed consent, confirmed in writing."⁴

The Model Rules provide that a conflict exists if (1) the interests of two clients, whether in litigation or a non-litigation setting, are "directly adverse" or (2) there is a "significant risk" that a lawyer's representation of one client will be "materially limited" by responsibilities to another client.⁵ Most conflicts are "consentable," meaning that they can be waived by the "informed consent" of all involved clients; however, "direct conflicts" in which one client is asserting a claim against another client in the same proceeding before a "tribunal," are not waivable.⁶ The term "tribunal" includes "a court, an arbitrator in a binding arbitration proceeding or a legislative body, administrative agency or other body acting in an adjudicative capacity" and an administrative agency acts in an adjudicative capacity

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"when a neutral official, after the presentation of evidence or legal argument by a party or parties, will render a binding legal judgment directly affecting a party's interests in a particular matter."⁷

While 47 states have adopted a version of the Model Rules, there is considerable variation in the specifics of the state rules.

For example, in 2004, Montana revised its Rule 1.7 to mirror the 2000 amendments to the Model Rule.⁸ Utah adopted the 2000 amendments in 2005 and Wyoming did the same in 2006.⁹

North Dakota's rules, however, which were revised in 2006, follow more closely the pattern of Model Rule 1.7 before its revision in 2000, and provide that a lawyer shall not represent a client if the lawyer's ability to represent the client "will" be adversely affected by the lawyer's responsibilities to another client and shall not represent a client if the representation "might" be adversely affected unless the lawyer "reasonably believes" the representation will not be adversely affected and the client "consents after consultation."¹⁰ The comments make it clear that North Dakota does not distinguish between litigation and non-litigation matters, and the same rules apply in transactional or other non-litigation matters.¹¹

Colorado's rules are identical to the Model Rules before their 2000 revision and provide that a lawyer shall not represent a client if the representation either "will be directly adverse" or "might be materially limited" unless the lawyer reasonably believes representation will not be adversely affected and each client consents after consultation; however, Colorado embellishes the Model Rules by providing that consent cannot be obtained if "a disinterested lawyer would conclude that a client should not agree ... under the circumstances of the particular situation."¹²

New Mexico prohibits representation that "will be directly or substantially adverse to another client" or that "may be materially limited by" responsibilities to another client unless the lawyer "reasonably believes" there will be no adverse effect and the client consents after consultation.¹³

The lesson is that any lawyer considering whether a conflict exists must carefully consider the rules adopted in the jurisdiction or jurisdictions which govern the lawyer's practice of law. Although there are subtle variations between each of the adaptations, it appears that a rule of reason governs the ultimate decision. If a "direct conflict" exists in which two or more clients are asserting directly conflicting positions in the same litigation

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or administrative proceeding, simultaneous representation of multiple clients is probably not possible, regardless of whether the clients consent. If the conflict is "indirect," in that multiple clients have differing positions in different litigation or administrative proceedings, or a client in one proceeding is adverse to another person or company who is a client in an unrelated proceeding, simultaneous representation is probably possible so long as the lawyer in good faith concludes that representation will not be adversely affected and all affected clients consent. Although the rules vary on whether such consent must be "informed" or given "after consultation" and "in writing" or "confirmed in writing,"...