The OBA Board of Governors at its April 20, 2007, meeting voted to withdraw 2006 OK LEG ETH 01 issued by the OBA Legal Ethics Advisory Panel.

Advisory Opinion 2006-OK LEG ETH 01

Inquiry: May a lawyer advise both a state agency, regarding the issuance of bonds (to generate money, to be placed in a revolving fund), and a local government entity, regarding the borrowing of such funds generated by the bond issue?

OPINION: The answer to the Question of the Inquiry is in the negative. The interests of the lender and borrower in a bond transaction carry substantial risks of a division of loyalty owed by the attorney to each party, inimical to the interests of both parties and thus contrary to Rules 1.7 and 1.8 of the Rules of Professional Conduct, codified as 5 O.S. Chapter 1, Appendix 3-A, Rules 1.7 and 1.8. 1

There may be circumstances in which a lawyer may represent both parties in a negotiation or a court proceeding, when it is highly unlikely that a conflict of interest between the nominally adverse parties will actually materialize. In such situations, of course, consent of the parties, after appropriate and specific cautions have been communicated, is essential, and the prudent attorney will require such consent to be in writing and signed. 2

The inquiry here is whether conflicts between a state agency issuing bonds, and a local entity borrowing money for public projects using such bonds as the source of the money borrowed, are inherently foreseeable, or cause for sufficient apprehension, to prohibit dual representation in Oklahoma even where both parties consent.

This inquiry concerns the propriety of an attorney’s representation of other parties to a related bond transaction, beyond the basic scope of bond counsel representation, which typically would be circumscribed by sole representation of the State Agency acting to authorize borrowing from the revolving fund. Undertaking dual or multiple representation in a bond transaction is both more extensive and more problematic than what the legal community and public would understand to be the duties of bond counsel, and thus merits this ethical review.

Rule 1.7(b) of the Rules of Professional Conduct provides:

A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

There appear to be three potential conflicts which may arise out of dual or multiple representation of parties in the bond law transaction and related transactions:

1. Will the attorney experience a division of loyalty owed to both clients in the event of a default, which would require her to withdraw from representation from each and every client?
2. Would the attorney’s knowledge of the financial condition of the local entity/borrower provide an unfair advantage to the lender regarding the terms she would negotiate on behalf of the lender, who would be only one of several lenders in the market?
3. In a market situation where the lawyer’s lender-client is not a sole source lender, are there issues of “steering” the local entity/borrower client to a particular lender-client, inherent in the practice by virtue of fee–savings enjoyed by both parties, such that the parties are led by this initial cost-saving benefit to assume unacceptable future risks which a Rules-compliant lawyer should advise them not to assume?

DISCUSSION OF POTENTIAL CONFLICTS OF INTEREST

1. Division of loyalty: “Loyalty is an essential element in the lawyer’s relationship to a client.” 3 On the one hand, it is a risk foreseeable prior to undertaking representation that the local entity may default on a bond, suggesting that a lawyer representing a state lender should never represent a local entity in the same bond transaction. On the other hand, defaults on bonds by local communities are relatively rare, at least in prosperous times, and the Comment to Rule 1.7 implies that it is not necessary to have a blanket rule against joint representation where the “clients are generally aligned in interest even though there is some difference of interest among them.” 4

The Comment to Rule 1.7 further states that consideration should be given to the frequency with which such situations may arise; the potential intensity of the conflict; the effect of the lawyer’s withdrawal from representing anyone in the transaction should antagonism materialize – and the degree of additional expense the parties may incur when replacement conflict counsel (at least two new lawyers) must take the baton from the suddenly conflicted lawyer. “If there is material risk that the dual role will compromise the lawyer’s independence of professional judgment,” the lawyer should not represent both clients.

In the event of default, will adversity likely arise regarding 1)the determination that a default has or has not in fact occurred, and/or 2) what recourse is available to the borrower, and/or 3) what defenses are available to the lender? These are issues which a non-conflicted attorney should anticipate and provide for in considering whether dual or multiple representation conforms to the Rules of Professional Responsibility.

An article by counsel for the National Association of Bond Lawyers (NABL) details many disastrous scenarios crammed with cautionary tales and object lessons. 5 Can a bond lawyer give loyal advice to a lender on how best to recoup losses, and also to a borrower on how best to minimize losses?

Because these questions raise substantial, rather than ephemeral, issues, it cannot be said that dual representation contains little risk for conflict inimical to the interests of the parties. The question remains whether withdrawal from the dual role, and the need for two new lawyers to take over, is a prohibitive pitfall when weighed against the advantages the parties enjoy by single representation with consent of the parties.

In the criminal defense arena, 6 by way of rough analogy, two defendants may not at first appear to have conflicting defenses and may not initially point fingers at one another. However, circumstances may change suddenly, and the lawyer who represents two co-defendants on Monday may be representing neither on Tuesday. Further, that lawyer may have to remain silent about certain facts she has learned, which may cause an innocent defendant to be convicted because it more firmly inculpates the guilty client. What attorney would care to find herself in this situation?

Similarly, a lawyer representing two antagonistic clients in a default situation may learn of chicanery or poor practices, the withholding of which information from either client is necessary but which thus creates an unfair advantage for one of the parties by virtue of the necessity for observing attorney client privilege. Public harm could result.

The potential for actual or suspected duplicity by one of the party-clients (raising the unpleasant question whether the attorney is complicit in such duplicity), or the potential for favoritism toward one of two or more clients (whether unwitting or otherwise), is inherently disruptive to the lawyer’s obligation to ensure that the transaction will not be both compromised and destructively complicated by client loyalty and reliance issues, and for this reason dual or multiple representation in the bond transaction context is an intolerable risk.

For these practical reasons, it is the opinion of this panel that the potential for harm to the parties (and even to the lawyer) weighs more heavily in the scale than the relative infrequency of the occurrence and the near-term advantages of multiple representation, and thus a lawyer should not be ethically permitted to request mutual consent to dual representation in bond transactions between the borrower and lender.

2. Unfair Negotiation Advantage:

Rule 1.8(b) provides:

A lawyer shall not use information relating to the representation of a client to the disadvantage of the client unless the client consents after consultation. . . .

The lawyer is obligated to get the best loan terms both for the lender and the borrower. Even where there is a prevailing “going rate,” there are sometimes other factors which will drive interest rates up or down, as well as dictate other contractual terms. If the lawyer has knowledge of the weakened condition of a borrower, withholding that information from the lender may prove unfavorable to the lender. Conversely, if the lawyer has information that the lender is overextended, withholding that information from the borrower may be inimical to the borrower’s interests.

How can a lawyer ethically advise both clients while giving full loyalty and vigor of representation to both? And how can either the State Agency or local borrowing entity ethically consent to such disclosures adversely affecting their constituents? The clear answer is that in this situation such consent should not be countenanced, because it may betray the interests both of the consenting client and of the public served by the agency or local entity.

If it is argued that the bond attorney represents the transaction itself, rather than the interests of the parties, and as such acts more as an intermediary, then the response of this panel must be that there is no need to withhold information from an intermediary; all such information should be on the table and open to both sides. Otherwise the lawyer acts more as an alchemist, possessing secret information and professing that she is somehow turning the lead of less than full loyalty to both clients into the alleged gold of the higher good of the transaction. This is an alchemy that Rule 1.7 does not countenance.

The National Association of Bond Lawyers has indicated a proposed solution to this problem: 7

When a lawyer acts as intermediary in the situations described above, there comes into play an important principle known as the "joint confidences" or "co-client" rule, the full implications of which are not yet fully understood. Basically, the rule is that, unless the clients agree otherwise, there is no attorney-client privilege, and no confidentiality obligation on the part of the lawyer, between and among clients jointly represented by the same lawyer in a common enterprise with respect to all matters relating to that enterprise. . . . [citations to other jurisdiction cases omitted]. Of course, the normal attorney-client privilege and confidentiality obligation applies with respect to the entire world outside the joint client group. The effect of the joint confidences rule is that, if one of the clients suddenly discloses to the lawyer that he has done or intends to do something that might adversely affect the others, the lawyer not only is permitted to but is probably required to disclose that information to the others in the joint client group. Failure to disclose could make the lawyer liable to the party who was entitled to receive the disclosure.

The position of the authors of this proposed palliative, who serve in the Loss Prevention Counsel’s office of the National Association of Bond Lawyers, is that despite the potential for conflicts, and the anecdotes of devastating losses attributable to joint representation problems, joint representation in the ordinary bond transaction should be consentable when accompanied by full disclosures, including spelling out who is the lawyer’s client, and what will happen when the lawyer learns information disclosure of which would benefit one party and harm another. We see problems in this delicate dance of juggling responsibilities.

Under the Rules, certain disclosures are discretionary, and certain other disclosures must not be made. For example, Rule 1.6(a) forbids disclosure of non-criminal fraud in Oklahoma. This creates an immediate loyalty problem in joint representation, as well as a labyrinth of disclosure- situation contingencies which somehow must be anticipated and carefully tracked.

On the other hand, a party’s intention to commit a crime, or to commit criminal fraud, may be disclosed under Rule 1.6(b)(1). How does the dual-role lawyer decide this question even where there is a written understanding of the NABL’s “joint confidences rule?” What if the lawyer is mistaken – and makes a disclosure that is not correct but which results in an end to the transaction? On the other hand, under Rule 4.1(b) and 1.2(c), ongoing client misrepresentation or concealment must be disclosed as a matter of rectification if the client refuses the lawyer’s demand to confess.

In short, the lawyer who would assume the risks of dual or multiple representation would need to be a highly skilled navigator to negotiate the matrix of may disclose, must disclose and must not disclose requirements of the Rules of Professional Conduct, and would be constrained to spell all this out in representation agreements or consent agreements for every party represented or relying directly, or even indirectly, 8 on his advice.

Even if feasible, is the risk of inadequate disclaimer before representation begins, or the risk that the consent may be to a non-consentable conflict, worth the candle of preserving the option of joint representation? Is not a simpler rule – that joint representation of the state agency and the local entity is impermissible under the Rules of Professional Conduct – the safer and better rule both for protection of the public and for protection of the attorney? We conclude that joint representation should not be permitted under the rules of ethics. 9

3. Steering: If the bond attorney is in a dual or multiple representation role, and is retained by one of several lenders in the public bond market, how is it possible that there is no impact on the local entity/borrower in its procedure for selecting an appropriate lender source? As noted above, the bond attorney gets information through the lender about the financial condition of the local entity in advance. If the local entity’s condition is weak, this may affect the local entity adversely by discouraging inquiry into better terms from other lenders. If the local entity’s condition is strong, the same problem arises: the first offer may not be the best offer, but dual representation may inherently chill the shopping initiative of the local entity, thus resulting in some public harm. This is an up-front, inherent, and clearly anticipated problem militating against any special exemption from Rule 1.7 for bond counsel. The practice of bond law may be limited to specialists, and substantively as unique as it is arcane, but still it cannot be treated as different in kind from the type of ethical analysis governing other areas of the law.

* * *

For these reasons it is the opinion of the Legal Ethics Advisory Panel that the Inquiry must be answered in the negative, and that a lawyer should not accept representation both of the agency and the potential borrower in the same bond transaction.

1. It should be noted that this is an entirely different issue than that addressed in Oklahoma Bar Association Ethics Opinion No. 284, 2/17/75, where the opinion was that a lawyer may not accept representation of a bond purchaser who has been required by the agency generating the bonds to hire that specific lawyer to issue an opinion on the legality of the bond issue.

2. A new proposed change to Rule 1.7, to be considered at the 2006 annual meeting of the OBA House of Delegates, will require informed written consent. The rule at this writing is summarized thus: “While the Rules do not require it, the Legal Ethics Committee recommends that the attorney's disclosures be made in writing. If the disclosures are full and complete, then the parties may consent to the common representation. Rules 1.2 and 1.7. The consent does not have to be in writing, and can be manifested by the Client's act of retaining the attorney after a full disclosure has been made.” Oklahoma Bar Association Ethics Opinion No. 318, 12/13/2002.

3. Comment to Rule 1.7, opening sentence.

4. Comment, under heading “Other Conflict Situations,” 2 nd paragraph.

5. “Liabilities and Professional Responsibilities o f Bond Lawyers: An Overview,” William Freivogel and Karen Phillips, found at www.nabl.org/library/topicalmats/alas/alasov1.html .

6. See , e.g., State ex rel. Oklahoma Bar Association v. McNaughton, 719 P.2d 1279, 1986 OK 25.

7. “Liabilities and Professional Responsibilities of Bond Lawyers: An Overview,” supra, Appendix B.3.

8. See Bradford Security Processing Services , Inc. V. Plaza Bank & Trust, 653 P.2d 188 (Okla. 1982):(A pledgee foreclosing on worthless industrial revenue bonds states a cause of action against bond counsel for negligence, even though pledgee was not a client of the lawyer, because the lawyer knew the pledgee/purchaser would rely on his bond opinion, and such reliance in fact occurred.) See alsoCronin v. Midwester Development Authority, 619 F.2d 856 (10 th Circuit 1980)(Attorney for bond issuer may owe a fiduciary duty to the bond purchasers).

9. The situation is not alien in ethical analysis from the issue addressed in Oklahoma Bar Association Ethics Opinion 314 , 12/15/200, where the inquiry was, where an attorney’s client, an insurance carrier, submitted the attorney’s bills to an outside auditor, may the attorney also represent the insured whose invoices would contain confidential information crucial to the insured: “This procedure would result in an unwieldy process which, in itself, is impermissible because it would materially limit Attorney’s representation of Client in violation of ORPC 1.7(b). Seeking informed consent from the Client to submission of Attorney’s bills to an outside Auditor would potentially place the protections of client confidences in jeopardy, and would give rise to an appearance of impropriety which is particularly striking because Client receives no benefit from the audit procedure separate from the Client’s right to defense and indemnity for which Client has already paid premiums to the Insurer. Attorney may not therefore, agree to the representation described herein without violating the ORPC.” In short, the attorney cannot ethically accept employment which necessarily may entail the revelation of confidential information regarding one of his two or more clients, even if the client owning the confidential information consents.