Vol. 6, No. 1, Pg. 37. Ethical Considerations for Transactional Lawyers.

• Author: By Burnet Maybank III and Cathy Black

South Carolina Lawyer

1994.

Vol. 6, No. 1, Pg. 37.

Ethical Considerations for Transactional Lawyers

37Ethical Considerations for Transactional LawyersBy Burnet Maybank III and Cathy BlackLawyers in general are under the gun today. Transactional and securities lawyers in particular face huge increases in malpractice insurance costs, decreases in the volume of commercial transactions and decreases in the fees their clients are willing to pay.

Human nature dictates that, when increasing numbers of corn petitors seek a decreasing number of opportunities, the temptation to cut corners will become irresistible to some. And today's lawyers are far less reticent than their predecessors about bringing malpractice actions against other lawyers. When deals go bad, the unfortunate lawyer who drafted the documents is all too likely to find his or her name on the civil docket as a defendant.

Given this dire background, it is more important than ever for transactional lawyers to become extremely familiar with the ethical rules, particularly the rules that are relevant to their specializations. A working knowledge of these rules is obviously helpful in keeping the Grievance Board at bay. In addition, although the ethics rules do not explicitly define a lawyer's duty of care, many malpractice suits filed against transactional lawyers allegea breach of the ethics rules, particularly the rules dealing with conflicts of interest.

Identifying the Client

The lawyer's first ethical concern when forming a partnership or corporation is to decide who the client is. According to Rule 1.13 of the South Carolina Rules of Professional Conduct, "[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents."

This is a simple rule to state. However, as George S. King Jr. said in Understanding and Managing the Tension Between the Rules of Profes- sional Conduct and Statutory or Regulatory Standards (S.C. Bar CLE Division, 1993), "Applying [the rule] to common situations is somewhat more difficult, particularly in light of the corollary that corporations don't write checks, people do."

The lawyer obviously cannot consult with the legal entity itself; which is nothing more than a piece of paper filed with the Secretary of State's Office. The lawyer must, as the rule indicates, deal with the individuals who are involved with the entity. In dealing with them, it is easy to see these individuals, rather than the corporation or the partnership, as the clients. But Rule 1.13 makes it clear that the lawyer who is organizing a corporation or partnership is the lawyer for the entity he or she is creating, not for the individuals involved, unless the lawyer chooses to represent them as well.

In addition, the lawyer's fiduciary duty to the entity may well involve duties to the shareholder, officers or partners. "[I]n representing an organization, a lawyer necessarily shares in the fiduciary duties that the organization itself owes to its constituents or even to outside third parties," according to the ABA/BNA Lawyer's Manual on Professional Conducts 91:2004 (1988).

The lawyer also may owe duties to the corporate officers or partners, in addition to the entity. See South Carolina Legal Ethics § 2.1.1. The S.C. Bar Ethics Advisory Committee noted in Advisory Opinion 91-24 that "the legal form of the entity does not necessarily determine who is the client." The issue is "fact specific," often turning "not on the subjective understanding of the lawyer as to who should be the client, but upon the expectation of the would-be client." South Carolina Legal Ethics § 2.1.1.

With this in mind, it is easy to see that a partnership or close corporation might present more problems

38than a larger corporation when it comes to determining who the client is. The larger organization has many shareholders, and it may be quite obvious that the lawyer does not represent the individual shareholders. But the line between client and non-client becomes fuzzier when smaller, close-knit business organizations are involved. See ABA/BNA Lawyer's Manual § 91:2005.

Implied Intent

ABA Formal Opinion 91-361 points out that intent to form an attorney-client relationship does not have to be manifested by formal document or agreement. Intent can be implied from the conduct of the parties. S.C. Ethics Advisory Opinion 91-03 says that an attorney-client relationship may exist even in the absence of a formal contract or payment of a fee. In

In re Pyatt, 290 S.C. 302, 312 S.E.2d 553 (1984), the South Carolina Supreme Court said simply because the lawyer did not understand that the sellers of real estate were his clients did not mean they were, in the eyes of the law, not his clients. The determining factor was the sellers' belief that they were being represented by the lawyer.

Communications on Client Identity

Communication with clients is vital to avoid situations where the lawyer finds out his or her definition of the client and the court's definition are two different things. Because a formal agreement is not needed for the lawyer to be considered counsel for a particular party, the lawyer should make his or her intentions in representation clear at...