Ethical Issues in Representing Closely Held Entities in Ga.

• Citation: Vol. 30 No. 1 Pg. 0019
• Publication year: 2024
• Pages: 0019

Ethical Issues in Representing Closely Held Entities in Georgia No. Vol. 30 No. 1 Pg. 19 Georgia Bar Journal August 2024

GBJ | The Legal

Learn to navigate potential ethical pitfalls in accordance with the Georgia Rules of Professional Conduct.

BY TRENT L. COGGINS

Advising clients interested in forming new businesses can be one of the most rewarding aspects of a lawyer's career. Georgia, in particular, is with ripe with opportunity for counsel seeking to represent new business ventures. For instance, according to the Georgia Chamber of Commerce, in 2024 Georgia cultivated 274,358 new business applications ranking the state the fifth highest in the nation. ^[1] In many situations, the lawyer has an exciting front row seat to the entrepreneurial cycle: from concept to creation. However, many ethical pitfalls bely the unwary lawyer that may lead to running afoul of the Georgia Rules of Professional Conduct (GRPC). This article will discuss many common ethical issues faced by the new business advising lawyer in Georgia.

Who Is My Client?

The first issue a lawyer must consider in advising a new business is who the lawyer represents: the owner(s), the entity or both? Rule 1.13 (a) of the GRPC states "[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." Here, an "organization" is not limited to merely incorporated entities but includes unincorporated associations as well.^[2] In many situations, no ethical quandary exists. For instance, the legal issues involving a single-member limited liability company and the sole owner are generally aligned. Therefore, the lawyer's representation of the entity alone is a mere formality.

Multiple Representation

In other instances, when the entity has an ownership group, the lawyer will have to consider representing multiple clients. Although Rule 1.13 (a) makes it clear that the lawyer represents the entity, a lawyer "... may also represent any of its directors, officers, employees, members, shareholders or other constituents."^[3] Therefore, in Georgia, multiple representation is anticipated especially in situations where there is no dispute among the ownership group. Problems can arise, however, when the entity and one or more owners have conflicting interests. Accordingly, Rule 1.13 (g) is specifically subjected to the conflict-of-interest standards found in Rule 1.7.

Rule 1.7 (a) provides that "[a] lawyer shall not represent or continue to represent a client if there is a significant risk that ... the lawyer's duties to another client ... will materially and adversely affect the representation." It is important to note that the GRPC does not define what constitutes a material and adverse effect upon representation. Therefore, a lawyer should use caution when evaluating each individual situation keeping in mind that a conflicted attorney breaches the most basic duty of the profession: the duty of loyalty.^[4]

Nonetheless, conflicted representation is still permitted even in a situation involving a significant risk of a material and adverse effect if the client (1) gives informed consent^[5] in writing, (2) receives consultation by the lawyer, (3) receives reasonable and adequate information about the material risks of and reasonable available alternatives to conflicting representation in writing, and (4) receives opportunity to consult with independent counsel.^[6] In the event consent of an entity is required, consent can only be given by an "appropriate official of the organization other than the individual who is to be represented, or the shareholders."^[7] In addition, the client's "waiver must be knowingly made after full disclosure of all facts" included as part of the written disclosure to the client.^[8]

A lawyer's requirement to evaluate conflict is continuous throughout the scope of representation.

In In the Matter of Oellerich, counsel for an estate procured an unsecured loan of $120,000 from the estate to a corporation where counsel was the sole shareholder.^[9]Following the corporation's bankruptcy, the State Bar initiated disciplinary proceedings against Oellerich alleging he had failed to obtain written consent of the conflict from his client.^[10] Oellerich contended that the executor's signature on the loan check, coupled with acceptance of the loan documents, satisfied the requirement of written consent.

In holding that the written consent requirements are not "mere formalities,"^[11]the Supreme Court of Georgia required that disclosure must be clear enough to:

"evidence to an objective third party that the client has consented to legal representation despite the disclosure of a conflict of interest. Such informed consent cannot be shown by a mere signature on a check or promissory note. The existence of the potential conflict must itself be expressed in writing, and the mere client's signature on a document which does not make that disclosure will not suffice."^[12]

Ultimately, Oellerich was disbarred from the practice of law in Georgia and repayment of the loan in full was made a condition precedent to any petition for reinstatement.^[13]

There is an exception to the informed consent safe harbor. Informed consent is not permissible if: (1) prohibited by law or the GRPC; (2) includes a claim by one client against another in the same or substantially related proceeding; or (3) involves circumstances where it is reasonably unlikely that the lawyer is able to provide adequate representation to one or more affected clients.^[14]

Finally, a lawyer is required to proceed in the best interest of an organization in situations where a person associated with an organization is: (1) engaged in action; or (2) intends to act or refuses to act in a manner that is related to the lawyer's representation that is a violation of a legal obligation to the organization or is a violation of law that might be imputed to the entity resulting in substantial injury to the entity.^[15] For instance, a lawyer, representing an officer and the entity simultaneously, who knows that the officer intends to proceed against the lawyer's advice and contrary to law resulting in a pejorative position for the entity has a duty to notify a higher authority within the entity of the officer's intent.^[16] The lawyer may first attempt to rehabilitate the officer by asking the officer to reconsider the officer's position or educating the officer for possible misunderstanding of the law.^[17] If the officer the acquiesces, the lawyer may conclude that notification is not warranted.^[18]

A Conflict Arises

A lawyer's requirement to evaluate conflict is continuous throughout the scope of representation. There are instances where a lawyer might initially, and correctly, evaluate that no conflict exists, thereby justifying multiple representation...