ETHICS DOCKET NO. 2000-40

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2000-40

Ethical Propriety of Law Firm’s Proposed Relationship with a Real Estate Consulting Brokerage Firm

Your law firm proposes to form a separate limited liability company which will provide real estate consulting and brokerage services. That company will be owned 50 percent by the firm and 50 percent by an individual non-attorney with experience in the real estate industry. The non-attorney member is not currently and will not in the future be an employee of the firm and will perform the real estate consulting and brokerage services provided by the LLC. The firm and the non-attorney member will each receive 50 percent of the LLC's profits.

The consulting and brokerage services offered by the LLC will include the customary services offered by traditional firms, such as advertising and soliciting property purchasers. The LLC will also offer additional services, such as evaluation of the market potential for property, identification of alternative strategies for the sale and marketing of property, and consulting regarding strategies for increasing fair market value of property.

The offices of the LLC may be located in the firm's administrative offices.

You indicate that if the firm is advising clients who are interested in selling real property and if the firm's client's needs were compatible with the services offered by the LLC, the firm will identify the LLC as one of the alternatives that the client might want to consider as a means to effectuate a sale of their property. The LLC may also have clients which are not clients of the firm. The firm will not receive any referral or finder's fee for referring a client to the LLC, and the LLC will not receive any type of referral or finder's fee in the event the LLC refers a client to the firm.

Prior to referring any of its clients to the LLC or allowing a client of the firm to retain the services of the LLC, the firm will evaluate on a client-by-client basis whether or not (i) the firm reasonably believes that its representation of the client will not be adversely affected by its hiring of the LLC, and (ii) the fees and terms of the consulting agreement with the LLC are fair and equitable to the client. If the firm determines that the fees are not fair and equitable to the client or if the firm's representation of the client will be adversely affected by its hiring of the LLC, then the client will not be referred to or retained as a client by the LLC. You further indicate that the firm will adhere to the following procedures.

1. The firm will disclose to its client that the firm owns fifty percent (50%) of the LLC, and that it receives fifty percent (50%) of the profits of the LLC.
2. The firm will explain the potential conflicts of interest for the firm that may arise from the client's hiring of the LLC and the potential advantages and risks involved relating tot he conflict of interest.
3. The firm will advise the client to seek the advice of independent counsel in reviewing the client's contract with the LLC for real estate consulting services, and the transaction as a whole, and the client will be given reasonable opportunity to do so.
4. The firm will advise the client that the LLC is not engaged in the practice of law.

You indicate that all of the foregoing disclosures will be made both verbally and in writing to the firm's client. The firm will also have a written acknowledgement and consent form for the client which will include a waiver of any conflicts, and which will be required to be signed before the LLC begins providing services to the client, along with a written fee/service agreement between the clients and the LLC. The firm will not disclose to the LLC any information relating to its legal representation of the client referred to or retained as a client by the LLC unless the client expressly consents after consultation. None of the firm's lawyers or other personnel will be involved in rendering the LLC's consulting services; however, the firm may represent the client in the client's sales transaction that is the subject of the real estate consulting services rendered by the LLC.

You request the Committee's opinion on this proposed arrangement.

This Committee has, on numerous occasions, dealt with ethical issues that are raised from the conduct of an ancillary business by a lawyer or a law firm. The Committee's opinions on the subject of ancillary businesses, include Docket 78-7, 86-23, 88-84, 89-18, 92-13, 94-22, 95-14, 95-15, 96-17, 96-35, 97-23, 99-10 and 99-31. This list is not intended to be exhaustive and, in fact, there are other opinions which touch upon various issues that may be involved in the setting up of an "ancillary business." The Committee has previously opined that the conduct of an "ancillary business" by an attorney is not per se unethical and in our prior opinions, the Committee has described the various ethical issues and concerns which arise from the conduct of such an ancillary business. Those issues are spelled out specifically in Docket 96-35 which is an opinion dealing with a law firm's desire to create an "affiliated" pension and retirement plan administration business. The concerns addressed in that opinion include:

1. Compromise of the lawyer's independent judgment;
2. Conflicts of interest;
3. Client confusion as to provider of services;
4. Potential loss of confidentiality;
5. Compelling legal clients to use the business;
6. Impermissible feeding of the law practice by employees of the business;
7. Sharing of fees with non-lawyers'
8. Responsibilities concerning non-lawyer assistants.

Because of the wide-ranging affects of this type of arrangement, there are multiple rules in the Maryland Lawyer's Rules of Professional Conduct which must be addressed in this type of situation. Those Rules include Rule 1.4 - Communication, Rule 1.5 - Fees, Rule 1.6 - Confidentiality of Information, Rule 53 - Responsibilities Regarding Non-lawyer Assistants, Rule 5.4 - Professional Independence of a Lawyer, Rule 5.5 - Unauthorized Practice of Law and Rules 7.1-7.5 - Information abut Legal Services. This list of applicable rules is not intended to be exhaustive, but is merely set forth to point out the numerous issues that must be addressed when entering into the type of arrangement which you propose.

It appears from your inquiry that you have attempted to address many of the more serious issues which often arise in the conduct of an ancillary business, including the handling of referral issues, disclosure issues, fee issues, confidentiality issues, advertising issues and unauthorized practice of law issues.

We strongly recommend that you review our prior opinions so that you may identify and address the many issues which are involved in the type of arrangement you propose.

Lastly, we must point out that the issue of multi-disciplinary practice is an area which is currently under thorough investigation and review by Bar Associations across the country. The Commission on Multi-Disciplinary Practice of the ABA has recently issued a report recommending against Multi-Disciplinary Practice which was accepted by the ABA, whereupon the Committee was disbanded. The Multi-Disciplinary Task Force of the MSBA has recently proposed recommendations approving a limited form of Multi-

Disciplinary Practice which has yet to be considered by the MSBA. If any changes to the existing Rules will be forthcoming, it will not be in the foreseeable future and it is the suggestion of the Committee that you stay abreast of this revolving area as it relates to the many ethical issues involved.