Monday, April 1, 2019

One-Half Is Not A Majority; California Court Disqualifies Attorney Hired For Partnership by a 50% Partner

One-Half Is Not A Majority; California Court Disqualifies Attorney Hired For Partnership by a 50% Partner

      In a March, 2019 decision, the California Court of Appeals affirmed the trial court’s determination disqualifying counsel hired on behalf of a partnership by one of the 50% partners. Because actions on the partnership's behalf needed to be approved by a majority of the partners, and that one partner was not a majority, the attorney had not been validly retained. Jarvis v. Jarvis, H044930, 2019 WL 1254013, ___ Cal. Rptr. 3d ___ (Cal. Ct. App. 6th Dist. March 18, 2019).
      Todd Jarvis and James Jarvis, brothers, hold certain family assets in a variety of legal structures, including the limited partnership that is the subject of this dispute. The brothers, Todd and James, are the two general partners of that limited partnership, Jarvis Properties. It would appear that each was as well a 50% limited partner. After James filed an action for partition by sale of the limited partnership’s property, Todd hired not only counsel for himself but also another lawyer, Roscoe, to represent the interests of the limited partnership. In turn, James objected to Roscoe representing the limited partnership and sought his disqualification on the grounds that his retention as counsel to the limited partnership had never been authorized by the necessary majority of the general partners. Roscoe, who stated that he was being paid by Todd, indicated that he was not subject to the direction of either general partner in representing the interests of the limited partnership.
      As did the trial court, the Court of Appeals held that Roscoe had not been properly retained on behalf of the partnership and therefore was disqualified from serving as its legal counsel. By reference to an ethics opinion, the court as well observed that he was in a precarious position in representing the interest of the limited partnership when he could not take instruction from either of the two equal general partners, setting up the untenable situation where he would determine himself the interests of the limited partnership.
      In the course of its opinion, the court considered and rejected the suggestion that there needed to be an attorney-client relationship between Roscoe and James in order for James to bring a disqualification motion. The court acknowledged that requirement in the context of a conflict-of-interest case, but went on to determine that this is not such a circumstance. Rather:
In summary, we conclude that because this is not a conflict of interest case, James was not required to have an attorney-client relationship with Roscoe to move to disqualify him. Since James moves to disqualify Roscoe based on a lack of authority for Roscoe to act on behalf of the Partnership, we conclude that because a majority of the partners have not agreed to retain Roscoe and James is a general partner with a fifty percent ownership interest in the Partnership because Roscoe owed a duty to protect the Partnership’s interests, which benefits all of the partners, James's interest was sufficient to challenge Roscoe's authority to represent the Partnership. Slip Op. at 18.

      In its citation to State Bar Opinion 1994-137, the court quoted:
Accordingly, in representing a partnership a lawyer represents the partnership itself acting through the partner authorized to oversee the representation. Ordinarily, that means that the lawyer representing a partnership takes direction from its general partner, since limited partners cannot take part in the control of the partnership and retain the limited liability of a limited partner [citations.] However, in determining who oversees the representation in any given situation, a lawyer must conform to the requirements of the applicable statutes, the partnership agreement and any other pertinent agreements between the partners.
Lack of clarity over who is authorized to oversee the engagement of the attorney for the partnership places the lawyer “in a position where he or she cannot follow one partner’s instruction without violating the other partner’s instruction.” It is not a conflict of interest, because the lawyer has only one client, the partnership. It is, instead, a conflict of authority within the partnership over who oversees and instructs the partnership’s lawyer. Slip op. at 22-23.
       In these circumstances, the opinion observed that a “lawyer in this situation is adrift in perilous waters. The lawyer’s duty of loyalty requires a lawyer to act at a client’s direction. A lawyer cannot act without the client's authorization. Nor can the lawyer take over the decision-making for a client absent authority to do so. At the same time, a lawyer has a duty to competently represent the partnership as a client” and “cannot abdicate [that duty] in the face of a dispute among the partners.” Slip op. at 23.

      In reliance upon this opinion, the court turned to the Jarvis Properties partnership agreement to address the question. Ultimately, that would be a futile act as:
Here, the Partnership agreement is silent on this point. It does not delegate the selection of counsel or decision-making regarding litigation to either of the general partners. It does not say what happens when the general partners are deadlocked. When the Partnership was formed, there was only one general partner - who had the right to make decisions for the Partnership - and three limited partners. With that structure, no one envisioned deadlocked. There is no evidence the partnership agreement was amended to address the possibility of deadlock after the brothers each acquired a fifty percent ownership interest in the Partnership. Slip op. at 24.
      With respect to Roscoe’s declaration that he would act without taking instruction from either of the limited partnership’s general partners, it was observed that:
[B]y eschewing direction from either partner, Roscoe may have assumed the client’s role in the attorney-client relationship. The fact the Roscoe took the position that he could represent the Partnership without direction from either partner is troubling in light of the relevant law under the ULPA and guidance provided by the State Bar. Slip op. at 27.
      This decision parallels that of the Delaware Chancery Court in Maitland v. International Registries, LLC, 2008 WL 2440521 (Del. Ch. June 6, 2008), in which it was held that counsel hired on behalf of the LLC by on 50% member and without the consent of the other member could not represent the interests of LLC and would be disqualified. In that instance, the suit was brought by one member against the LLC. The court directed that the second member could intervene in the lawsuit to protect not only his interests but those of the LLC.

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