Beware of Ethical Perils in Representation of a 50/50 Partnership

By Carole J. Buckner, Partner and General Counsel of Procopio, Cory Hargreaves and Savitch LLP

Carole J. Buckner is a partner and the general counsel with Procopio, Cory, Hargreaves & Savitch, LLP where her practice focuses on professional responsibility and legal ethics.  She can be reached at carole.buckner@procopio.com.

What are an attorney's ethical obligations in representing a partnership with 50/50 general partners, when they cannot agree on how to proceed? In the recent case of Jarvis v. Jarvis,[1] the court shed some light on this issue and endorsed guidance from a California State Bar ethics opinion indicating that the lawyer cannot step into the position of the client, and must take guidance from the partnership, here a limited partnership of two brothers each of whom owned 50 percent interest and served as a co-general partner.[2]

One of the partners, James Jarvis, sued the other partner, Todd Jarvis, and also named Jarvis Properties, the partnership itself, as a defendant in an action seeking partition of a parcel of property.[3] Todd Jarvis hired one attorney to represent him personally and a second attorney, William Roscoe III, to represent the partnership. James Jarvis sought disqualification of Roscoe claiming that Todd hired Roscoe over James' objection and that Roscoe's representation of the partnership, directed solely by Todd Jarvis, was biased in favor of Todd and wasteful.[4]

Roscoe, the attorney representing the partnership, took the position that as counsel representing the partnership he was "not subject to the direction of either partner."[5] Roscoe opposed James' motion to disqualify him, asserting that he was representing the partnership only and not Todd Jarvis, and that Todd had signed Roscoe's retainer agreement as a general partner. Roscoe further argued that James Jarvis could not participate in the representation of the partnership because James had sued the partnership and therefore had a conflict of interest.[6] James Jarvis replied that Roscoe's representation of the partnership could not be left to Roscoe without input from the general partners, and that the majority of the partners were authorized to decide upon counsel. The trial court granted the motion to disqualify Roscoe from representing the partnership and the appellate court affirmed.[7]

Ethical rules regarding conflicts of interest did not drive the court's decision.[8] Instead, the court exercised its inherent power to decide whether disqualification was required to preserve the interests of justice.[9] The core ethical premise underlying the court's decision is the longstanding rule that, in representing an organization, a lawyer must conform his or her representation to the concept that the client is the organization itself, acting through its duly authorized officers, members, shareholders, or other constituents who oversee the particular engagement.[10] Pursuant to this rule, an attorney representing the partnership must treat the entity as the client.

The court turned for guidance to an ethics opinion by the California State Bar's Standing Committee on Professional Responsibility and Conduct (COPRAC), Formal Opinion 1994-137. This opinion provides direction to attorneys who are representing partnerships in situations where the lawyer receives conflicting instructions from the partners, leaving the attorney unclear as to which of the instructions the attorney must follow. Normally, the lawyer may take direction from the general partner, since limited partners cannot control the partnership. In addition, the lawyer must take direction from the partnership according to applicable statutes, the partnership agreement, and any other pertinent agreements between the partners.[11] However, in Jarvis, the partnership agreement did not address the issue because it did not say what happens when the partners are deadlocked. This was probably because at the time of the creation of the partnership, there was only one general partner. When Todd and James Jarvis became co-equal general partners, the partnership agreement was not amended to address the deadlock that eventuated.

All this may leave the lawyer with a lack of clarity as to which instructions to follow when there is a conflict of authority within the partnership over who oversees and instructs the partnership's lawyer, leaving the lawyer "adrift in perilous waters."[12] What is the lawyer to do? The court affirmed several key determinations from COPRAC's opinion. First, the lawyer has a duty of loyalty to the entity client, to act at the direction of that client. Second, the lawyer cannot take over the decision-making for the client absent some authority to do so. Thirdly, the lawyer cannot act without the authorization of the client.

Rule 1.13 also indicates that if a constituent takes action harmful to the organization, the lawyer is obliged to act in the best interest of the organization. However the Jarvis court cautioned that the "lawyer must recognize the limits of his or her function," and "must be careful to maintain the role of a servant" of the organization, and cannot assume the client's role.[13] Although the lawyer can render advice, the lawyer cannot take over decision-making on issues that are the client's to make. The court found that Roscoe may have assumed the role of the client when he took the position that he could represent the partnership without direction from either partner, which the court described as "troubling."[14]

When the partners cannot agree, and the lawyer has no basis under the applicable law or the partnership agreement to determine which partner's instructions to follow, what is the lawyer to do? The lawyer must not take any action and wait for the partners to resolve their dispute.[15] This was not a practical option for Roscoe, as the Jarvis brothers had been embroiled in multiple lawsuits for many years. At such point that the lawyer determines that it is no longer feasible to represent the partnership effectively, the lawyer may withdraw.[16]

To resolve the disqualification motion, the court turned to partnership law. Under the applicable law each general partner has equal rights in management and conduct of the activities of a limited partnership and any matter relating to the activities of the partnership must be decided by a "majority" of the general partners. Accordingly, because the majority would include both Todd and James Jarvis, the court concluded that Roscoe was not authorized by a majority of the partners to represent the partnership, and must be disqualified.[17]

The court's disqualification of Roscoe left the partnership without legal counsel. The appellate court deferred to the trial court as to how the case should move forward with the possibility of appointing a provisional partner pursuant to principles of law and equity preserved by the Uniform Limited Partnership Act, appointment of a receiver or neutral, or leaving the partnership without counsel.

Lawyers engaged by partnerships should be mindful of the lessons of Jarvis. When a partnership disagrees internally, the lawyer for the entity must look to the partnership agreement itself, and to the applicable law for guidance as to which directions to follow, rather than taking on the role of the client in decision-making. When partners disagree, as they did in Jarvis, with no mechanism for resolving the disagreement, the lawyer must await resolution, and may withdraw. 

[1] 244 Cal.Rptr.3d 722, 19 Cal. Daily Op. Serv. 2498 (2019).

[2] For this reason, the teachings of the case would apply in the general partnership setting and likewise in the context of a member-managed limited liability company.

[3] The claim was ostensibly a direct claim, but clearly had overtones of a derivative claim which suggests a broader application of the court's teachings. As the court stated: "We note also that although James has filed a direct action for partition of partnership property, some of his concerns in the disqualification motion are derivative in nature: protecting the Partnership's assets from being squandered on unnecessary litigation and insuring that partnership counsel acts in the best interests of the Partnership." Id. at 741. In the classic derivative setting, the entity is a nominal defendant and cannot be defaulted even if it does not hire counsel and does not respond to the complaint.

[4] Id. at 725.

[5] Id. at 725.

[6] Id. at 729.

[7] Id. at 725.

[8] Id. at 733.

[9] Id. at 731.

[10] Cal. R. of Prof. Conduct, R 1.13(a) and former R. 3-600(A).

[11] Jarvis v. Jarvis, supra, 244 Cal. Rptr.3d at 738.

[12] Id. at 738.

[13] Id.

[14] Id. at 741.

[15] Id. at 738.

[16] Id.

[17] Id. at 741.