P RELIMINARY B USINESS D ECISIONS N ECESSARY FOR E VERY N EW
P RACTICE
H ANGING O UT Y OUR S HINGLE : F OR N EW L AWYERS AND L AWYERS IN
T RANSITION
C OLORADO B AR A SSOCIATION CLE
M ARCH 7, 2002
Robert R. Keatinge
555 17th Street, Suite 3200
Denver, Colorado 80202
303/295-8595
303/713-6207 (Fax)
rkeatinge@hollandhart.com
I.
Choice of Entity
A.
Introduction. In establishing a new practice, there are several issues that
must be addressed by the lawyer. These include:
1.
2.
3.
Establish a Separate Private Practice.
a)
Form of organization:
(1)
Sole proprietorship.
(2)
LLC.
(3)
S Corporation.
(4)
C Corporation.
b)
Structure of Practice.
(1)
Associates.
(2)
Employees.
(3)
Office Sharing.
Work with an Established Firm.
a)
Conventional associate (employee) status.
b)
Contract employment.
c)
Of counsel relationship.
d)
Office sharing.
If the Lawyer is to create a Firm.
Copyright Robert R. Keatinge 2016, all rights reserved.
B.
II.
a)
Form of organization:
(1)
General partnership.
(2)
LLP.
(3)
LLC.
(4)
S Corporation.
(5)
C Corporation.
b)
Structure of Practice.
(1)
Decision making
(2)
Profit sharing
(3)
Associates.
(4)
Employees.
Business Decisions and Ethics Compliance.
1.
Name.
2.
Engagement letters.
3.
Trust accounts.
4.
Malpractice insurance.
5.
Office location and leasing.
Choice of Organizational Forms and Relationships
A.
General Considerations.
In selecting a form of entity in which to practice law, 1 there are several
considerations that must be weighed including the number of members, 2 the tax
consequences of the form of operation, the desire of the member to limit liability for the
obligations of the Firm, and the ease of operation.
B.
C.
Alternative Organizational Forms for Law Firms
1.
Sole proprietorship
2.
General Partnership
3.
Professional Company.
Types of Professional Companies.
“Firm” is used in the outline to describe the lawyer’s form of practice, even if it is as a
sole proprietorship.
1
“Members” includes the sole proprietor, partners in a partnership, members in an LLC,
and shareholders in a P.C.
2
2
1.
Professional corporation. Unlike many states, Colorado does not
have a separate statute dealing with professional corporations. A
“professional corporation” is a corporation organized under the Colorado
Business Corporation Act. 3
2.
Limited liability company (“LLC”).
3.
Limited liability partnerships (“LLP”).
4.
Joint stock companies? Although Rule 265 authorizes joint stock
companies to organize as professional companies, there is no Colorado
statute describing a joint stock company.
D.
Special Rules for Professional Companies. Under Rule 265 there are
several requirements
E.
1.
Special liability rules.
2.
Insurance requirements.
Alternative relationships of a lawyer within a firm
1.
Partner (shareholder, member)
2.
Associate
3.
Of counsel/special counsel
F.
Single Lawyer - For one lawyer who is going into practice on his or her
own, there are three alternatives:
1.
Sole Proprietorship
2.
Single Member LLC (taxed as a sole proprietorship) - An LLC is a
legal entity formed under the Colorado Limited Liability Act 4 or the LLC
Act of any other state. It is a Professional Service Company within the
meaning of Rule 265, C.R.C.P. 5 and may practice law in Colorado in
compliance with that rule. For federal and state income tax purposes, a
single member LLC is disregarded as an entity separate from the member
who owns it unless the member elects that the LLC be treated as a
corporation.
3.
Professional Corporation (“P.C.”) - A corporation may practice law
if it complies with Rule 265 C.R.C.P. Unlike many states, Colorado does
not have a separate “professional corporation” or “professional
association” statute, so a corporation formed under the Colorado Business
3
C.R.S. § 7-101-101 et seq.
4
C.R.S. § 7-80-101 et seq.
Rule 265 (attached) is a Colorado Rule of Civil Practice. Most rules discussed in this
outline are Colorado Rules of Professional Conduct (C.R.C.P.) and will be referred to
simply as “Rules.”
5
3
Corporation Act may practice of law in Colorado if it complies with Rule
265 C.R.C.P. Like an LLC, and unlike a general partnership or limited
liability partnership, a professional corporation may have one owner.
G.
Multiple Lawyers
1.
Unincorporated Entities
a)
General Partnership - Any association of two or more
persons to carry on a business as co-owners is a partnership,
without the necessity of the partners filing any written
document with the secretary of state or even having a written
partnership agreement. 6 Although not included in the
definition of Professional Service Companies set forth in
Rule 265 C.R.C.P., there is no question that a general
partnership may practice law in Colorado. As with all multi member organizations, all of the members must be lawyers
who are either admitted in Colorado or admitted in some
other state. 7
b)
Limited Liability Partnership (“LLP”) - An LLP is a
partnership (and therefore must have at least two members)
that has registered with the Secretary of State. 8 As an
organization that limits vicarious liability or the members, an
LLP is a Professional Service Company subject to Rule 265
C.R.C.P.
c)
Limited Liability Company (“LLC”) - An LLC, like an
LLP, is an unincorporated business organization that affords
its members protection with respect to vicarious liability. As
such it is a Professional Service Company.
2.
Professional Corporation (“P.C.”) As noted above, a professional
corporation is a Professional Service Company. Unlike an LLC, the tax
treatment and organizational documents of a P.C. will be essentially the
same regardless of whether it has one or multiple members.
H.
Tax Differences
1.
Treatment of the Firm - As noted above, a single member LLC will
be disregarded as separate from its owner unless it elects to be taxed as a
corporation. Any multiple member unincorporated organizations (general
partnership, LLP and LLC) will be treated as a partnership for federal tax
Partnerships are formed under the Colorado Uniform Partnership Act, C.R.S. § 7-64101 et seq.
6
7
Colorado Rules of Professional Responsibility (“CRCP”) 5.4.
C.R.S. § 7-64-1002. Partnerships formed before January 1, 1998 may also register as
LLPs. C.R.S. § 7-60-145.
8
4
purposes unless it elects to be treated as a corporation. A corporation,
including an LLC electing to be treated as a corporation, will be treated as
either a “C corporations” or, if it so elects and meets the qualifications, as
an “S corporation.” A C corporation pays tax on its corporate income 9 and
the shareholder is taxed on any dividends paid to him or her. A
corporation may elect to be an “S corporation” if (1) it has only one class
of stock, (2) all of its owners are individuals (other than nonresident
aliens) or certain trusts or estates, and (3) it has seventy-five shareholders
or fewer. 10 An S corporation is generally not taxed on its income, and all
of the income, loss, and deduction are passed through to the shareholders
when earned by the corporation.
Treatment of the Members - A sole proprietor (including a member
of a single member LLC that has not elected corporate status) will
recognize income and expenses as they are paid or accrued. 11 Members in
LLCs and partners in general partnerships and LLPs are not “employees”
for purposes of federal employment tax. 12 Thus, if an individual is a
partner for federal tax purposes, that person will not be treated as an
employee, regardless of the terminology used to describe the relationship.
In contrast, an employee of a corporation will be treated as such for tax
purposes regardless of whether he or she is also a shareholder. Some of
the consequences of the characterization are set forth below :
2.
While normally a C corporation pays a graduated federal income tax rate on its income
ranging from 15% to 35%, a qualified personal service corporation will be subject to a
flat 35% on all of its income. IRC § 11(b).
9
10
IRC § 1361(b).
A professional services company will want to use the cash receipts and disbursements
method of accounting so that it does not recognize income until the bills are paid. An
accrual method taxpayer must recognize income when the bill becomes payable,
regardless of when it is paid. There was a question about whe ther an LLC or LLP would
be forced to use the accrual method, but, at least for personal services organizations in
which all of the owners actively participate in the business, the matter appears to be
resolved that an LLC or LLP may use the cash method of accounting.
11
12
Rev. Rul. 69-184, 1869-1 C.B. 256.
5
Item
Sole Proprietor
Tax Partnership 13
1
C Corporation
S Corporation
2 or more
1 or more
1 or more
Owner
Partner (in
General
Partnership and
LLP) or Member
in LLC
Shareholder
Shareholder
Sole proprietor
Partners (not
employees)
Employee
Employee (sort of
- see “Deductions
for Health
Insurance
Provided to the
Member by the
Firm”)
Number of
Members
Designation of
Owners
Characterization
of Service
Provider/Owner
for Tax Purposes
Withholding
Deduction of
expenses by
Owner
Partners and sole proprietors are not
subject to withholding, but are required
to pay estimated taxes. 14
A partner or sole proprietor who
expends funds that are not reimbursed
by the partnership, may be able to
deduct those expenses as necessary and
proper
The employer is obligated to withhold
certain amounts from the payments to
the employee. 15
Expenses paid by an employee are
unreimbursed business expenses, which
are subject to substantiation
requirements, 16 and must be taken as an
itemized deduction subject to the 2%
AGI floor 17 and the phaseout of
itemized deductions. 18
In 1997 there were 27,339 partnerships with 133,544 partners (for an average of
approximately 5 partners per firm.
13
IRC § 6654. See also, Treas. Reg. § 1.707-1(c) (“For the purposes of other provisions
of the internal revenue laws, guaranteed payments are regarded as a partner's distributive
share of ordinary income. Thus, a partner who receives guaranteed payments for a period
during which he is absent from work because of personal injuries or sickness is not
entitled to exclude such payments from his gross income under section 105(d).
Similarly, a partner who receives guaranteed payments is not regarded as an employee of
the partnership for the purposes of withholding of tax at source, deferred compensa tion
plans, etc.
14
15
IRC § 3402.
16
Treas. Reg. § 1.162-17.
17
IRC § 67, Temp. Treas. Reg. § 1.67-1T(a)(i).
18
IRC § 68.
6
Item
Sole Proprietor
Tax Partnership 13
C Corporation
S Corporation
Deductions for
Health Insurance
Provided to the
Owner by the Firm
Partners, and sole proprietors are
subject to limitations on deductibility of
health insurance premiums until 2003. 19
Personal use of
Firm Property and
other Fringe
Benefits
Partners, and sole proprietors are
generally not entitled tax favored fringe
benefits 22 such as employer provided
parking. Payments made on behalf of
partners are treated as guaranteed
payments to the recipient partners, 23
while similar payments are not
deductible to a sole proprietor. A sole
proprietor who uses property of Firm is
not subject to tax, but may reduce the
deductibility of the cost of the property.
The tax treatment of the personal use of
partnership property is unclear.
Employees are
entitled to receive
certain fringe
benefits such as
employer parking
tax-free. 24 Except
as provided in IRC
§ 132, personal
use of corporate
property by an
employee is
taxable as wages.
Employment
taxes 26 and self-
A general partner’s distributive share of
ordinary income and from a trade or
Wages are subject to employment taxes,
while dividends are not. Thus, in an S
19
Payments of health
insurance
premiums are
deductible to the
employer 20 and not
included in the
income of the
employee.
Some shareholders
of S corporations
are subject to
limitations on
deductibility of
health insurance
premiums until
2003. 21
Same as for C
corporation except
that a 2 percent
shareholder in an
S corporation is
treated as a
partner for
purposes of the
fringe benefit
rules. 25
Under IRC § 162(i), health insurance premiums are deductible as follows:
For taxable years beginning in calendar year
The applicable percentage is
2002
70 percent
2003 and thereafter
100 percent
20
IRC § 162.
21
Under IRC § 162(i), health insurance premiums are deductible as follows:
For taxable years beginning in calendar year
The applicable percentage is
2002
70 percent
2003 and thereafter
100 percent
22
IRC § 132 (f)(5)(E) (“employee” does not include persons who are self -employed).
23
Rev. Rul. 91-26, 1991-1 C.B. 184.
24
IRC § 132.
25
IRC § 1372(a)(2).
For 2002, each of the employer and the employee are subject to an employment tax of
6.2% on the first $84,900 of wages paid to the employee. IRC §§ 3101(a), 3111(a). In
26
7
Item
employment
taxes 27
Sole Proprietor
Tax Partnership 13
business conducted by the partnership
(other than dividends, interest, and real
estate rentals) is “net earnings from
self-employment” (“NESE”), and
subject to self-employment taxes. 28
NESE does not include a limited
partner’s share of income or loss,
except with respect to guaranteed
payments for services 29
C Corporation
S Corporation
corporation, the shareholders can within
certain limitations, allocate income
between amounts subject to selfemployment taxes and amounts that are
exempt. 30
addition, each of the employer and employee must pay a Medicare hospital tax on the
total (uncapped) amount of wages equal to 1.45%. IRC §§ 3101(b), 3111(b).
For 2002, self-employment taxes are imposed on net earnings from self-employment at
the rate of 15.3 on the first $84,900 and 2.9% on amounts in excess of $84,900. IRC §
1401, 66 Fed. Reg. 54,047 (October 25, 2001)) (fixing the Old-Age, Survivors, and
Disability Insurance (OASDI) contribution and benefit base to be $84,900 for 2001).
Self-employed persons are entitled to an above the line deduction equal to ½ of the self employment taxes. IRC § 164(f). This deduction, when applied to an individual at the
highest marginal rate (39.6%) reduces the effective rate for this tax to 12.2706% for
self-employment income to $84,900 and 2.3258% for self-employment income in excess
of $84,900.
28
IRC § 1402(a).
27
29
IRC § 1402(a)(13) currently provides:
there shall be excluded the distributive share of any item of
income or loss of a limited partner, as such, other than
guaranteed payments described in section 707(c) to that
partner for services actually rendered to or on behalf of the
partnership to the extent that those payments are established
to be in the nature of remuneration for those services;
The Limited Liability Company Task Force of the ABA Tax Section is considering
alternative legislative proposals for modifying the determination of a partner’s net
earnings from self-employment. The current suggestion for modifying IRC §
1402(a)(13) is as follows (Note, this proposal has not been approved by the ABA
Section of Taxation as of the date of this outline (June 1, 1999), and does not represent
a position of the Taxation Section):
IRC § 1402(a)(13)(A) there shall be excluded the distributive
share of net any item of income or of a limited partner, as
such, attributable to capital. other than guaranteed payments
described in section 707(c) to that partner for services
actually rendered to or on behalf of the partnership to the
extent that those payments are established to be in the nature
of remuneration for those services.
8
Item
Tax Treatment of
Compensation to
Members
Sole Proprietor
Tax Partnership 13
Self-employment
income
Self-employment
income (probably)
C Corporation
S Corporation
Wages (subject to
adjustment for
unreasonably high
Wages (subject to
adjustment for
unreasonably low
(B) Safe harbors For purposes of subparagraph (A), the
following amounts shall be treated as income attributable to
capital:
(i) the amount, if any, in excess of what would constitute
reasonable compensation for services rendered by such
partner to the partnership, or
(ii) an amount equal to a reasonable rate of return on unreturned
capital of the partner determined as of the beginning of the taxable
year.
(C) Definitions. For purposes of subparagraph (B) –
(i) Unreturned Capital. The term “unreturned capital” shall mean the
excess of the aggregate amount of money and the fair market value
as of the date of contribution of other consideration (net of liabilities)
contributed by the partner over the aggregate amount of money and
the fair market value as of the date of distribution of other
consideration (net of liabilities) distributed by the partnership to the
partner, increased or decreased for the partner’s distributive share of
all reportable items as determined in section 702. If the partner
acquires a partnership interest and the partnership makes an election
under section 754, the partner’s unreturned capital shall take into
account appropriate adjustments under section 743.
(ii) Reasonable rate of return. A reasonable rate of return on
unreturned capital shall equal 150 percent (or such higher rate as is
established in regulations) of the highest applicable federal rate, as
determined under section 1274(d)(1), at the beginning of the
partnerships tax year.
(D) The Secretary shall prescribe such regulations as maybe
necessary to carry out the purposes of this paragraph;
The American Institute of Certified Public Accountants is considering a similar
proposal.
The Service has assessed employment taxes where S corporation shareholders have
paid themselves unreasonably low salaries (actually, the cases deal with situations in
which no wages were paid). Spicer Accounting, Inc. v. United States, 918 F.2d 90 (9th
Cir. 1990); Radtke, S.C. v. United States, 712 F. Supp. 143 (E.D. Wis. 1989), affd. per
curiam 895 F.2d 1196 (7th Cir. 1990); Dunn & Clark v. Commissioner, 853 F. Supp.
365, 367 (D. Idaho 1994); Joly v. Commissioner, T.C. Memo 1998-361 (1998).
30
9
Item
Sole Proprietor
Tax Rates on
Business Income 31
Withholding on
Payments to
Members
I.
Tax Partnership 13
Federal individual tax rates run between
15% and 38.6%. 32
Members required to make estimated
tax payments.
C Corporation
S Corporation
compensation)
compensation)
Federal corporate
tax rates run a flat
35% on all income
and federal income
taxes on dividends
and wages run
between 15% and
38.6%. 33
Federal individual
tax rates run
between 15% and
38.6%. 34
Corporation required to withhold on
amounts characterized as wages.
Liability Protection and Rule 265
1.
Entities not providing Liability Protection. Two business
organizations, the general partnership and the sole proprietorship, expose
their members to full vicarious liability for the obligations of the Firm.
Thus, a general partner or a sole proprietor will be personally obligated to
repay any liability of the Firm, regardless of whether the Firm’s obligation
arises out of an error or omission in representing a client or is simply an
obligation to a business creditor. 35
2.
Professional Service Companies. Rule 265 C.R.C.P. sets forth the
rules with which a Professional Services Company must comply in order to
practice law in Colorado. A “Professional Service Company” is an LLP,
LLC, or P.C. (or joint stock company) that is engaged “solely in the
practice of law,” and which maintains a certain level of insurance.
3.
Hybrid Organizations. Because Rule 265 allows Professional
Service Companies to be members in another Professional Service
Company, and because it is possible for Professional Service Companies to
31
Income of the business after deducting wages to Members.
The top marginal individual rate is 38.6% for 2002 and 2003, 37.6% for 2004 and
2005, and 35% until at least 2010.
32
The top marginal individual rate is 38.6% for 2002 and 2003, 37.6% for 2004 and
2005, and 35% until at least 2010.
33
The top marginal individual rate is 38.6% for 2002 and 2003, 37.6% for 2004 and
2005, and 35% until at least 2010.
34
CUPA does require that, in the absence of other agreement, a creditor of a firm
organized as a partnership must first try to collect the Firm’s obligation from the Firm
before proceeding against the partner individually. C.R.S. § 7 -64-307(4).
35
10
be partners in partnerships. 36 As such, it is possible to have a partnership
with professional corporations as members. While many of the tax reasons
for such an arrangement no longer obtain, this arrangement may be useful
to allow different partners to have differing economic and liability
arrangements. Although partners are individually liable for the obligations
of the partnership, if a P.C. is a partner in a partnership, the P.C.’s policy
only has to protect against the errors and omissions of the employees of
the P.C., not against the errors and omissions of employees or other
partners of the partnership. 37
J.
Alternative Business Relationships
1.
Employment Relationships.
a)
Issues for employed attorney. The employment
agreement between an employed attorney should address
many of the same issues addressed in the partnership
agreement such as compensation, performance expectancies,
as well as certain matters that may be important to the
attorney such as: Amount and type of errors and omissions
coverage;
b)
The support that the attorney will get, including
secretarial services, library access, continuing education,
vacation arrangements, marketing support;
c)
Compensation, including bonuses.
2.
Employees. Attorneys other than members of the Firm are
generally employees, subject to the terms and conditions of the
employment agreement between the Firm and the attorney.
a)
Contract Attorney. This term is often used to describe
an attorney who is not a partner and generally is not on
partnership track. It is sometimes used to characterize a
relationship different than that of an associate.
b)
Contract Partner/Non-Equity Partner - This term
describes an attorney who does not share in the profits of the
partnership but is given the title “partner” in order to obtain
the prestige that accompanies the title.
3.
Of Counsel/Special Counsel. The term “of counsel” is defined
under the ABA Model Code of Professional Responsibility as a
relationship other than that of a partner or associate. 38 The Model Rules of
36
Colorado Bar Association Ethical Opinion 55 (undated with an add endum dated 1995).
37
Gutrich v. LaPlante, 942 P.2d 1266 (Colo. App. 1996).
ABA Model Code of Professional Responsibility Disciplinar Rule 2 –102(A)(4)
defined the “of counsel” relationship as follows:
38
11
Professional Conduct have no similar provision. ABA Formal Opinion
90–357 defines an “of counsel” relationship as that of: (1) the part-time
practitioner; (2) a retired partner of the firm who is not an active
practitioner but remains associated with the firm on a consultant basis; (3)
a probationary partner, usually a person who comes into the firm laterally
with the expectation of being a partner after a short time; and (4) the
permanent status of a person who is more than an associate but less than a
partner.
4.
Temporary Attorney - Some lawyers and law firms engage
temporary attorneys who are not regular members of firm. An ABA formal
opinion provides that where the temporary lawyer is performing
independent work for a client without the close supervision of a lawyer
associated with the law firm, the client must be advised of the fact that the
temporary lawyer will work on the client's matter and the consent of the
client must be obtained. This is so because the client, by retaining the
firm, cannot reasonably be deemed to have consented to the involvement
of an independent lawyer. On the other hand, where the temporar y lawyer
is working under the direct supervision of a lawyer associated with the
firm, the fact that a temporary lawyer will work on the client's matter will
not ordinarily have to be disclosed to the client. A client who retains a
firm expects that the legal services will rendered by lawyers and other
personnel supervised by the firm. Client consent to the involvement of
firm personnel and the disclosure to those personnel of confidential
information necessary to the representation are inherent in the act of
retaining the firm. 39
5.
K.
Office Sharing
a)
Ethical Issues, see Formal Opinion 89 (attached)
b)
Office Sharing Arrangement
(1)
Rent
(2)
Secretarial Staff
(3)
Phone and Utilities
(4)
Listing of Names
(5)
Equipment
The Agreement of the Members - See Partnership Agreement Attached
1.
Partnership Agreement or other Agreement of the Members
A lawyer may be designated "Of Counsel" on a letterhead if he has a continuing
relationship with the lawyer or law firm other than as a partner and associate.
American Bar Association Standing Committee on Ethics Formal Op. No. 88 -356, at
10 (Dec. 16, 1988).
39
12
a)
Types of Agreements - In a partnership or LLP, the
agreement is known as the “partnership agreement,” 40 in an
LLC, it is known as the “operating agreement” 41 in a
corporation, the agreement may be reflected in the articles of
incorporation, the bylaws, a shareholders agreement or an
employment agreement.
b)
Purposes of the Agreement - the partnership
agreement is the “constitution” of the Firms, it provides the
general agreement of the partners on important matters and
the method of deciding other matters. As such it should be
flexible enough to provide guidance on how to address
unexpected issues.
2.
Contents - The following items should be addressed in the
Agreement of the Members:
a)
The identity of the members and how new members
will be added.
b)
The manner in which day to day decisions will be
made.
c)
The manner in which profits are to be shared and
distributions made.
d)
The duties of the members.
e)
The manner in which major changes will be decided.
(1)
Amendment of the agreement.
(2)
Dissolution.
(3)
Merger.
III.
Trust Account and Banking Relationships - See CRPC Rule 1.15.
IV.
Insurance Issues.
A.
Health Insurance.
B.
Disability Insurance.
C.
Life Insurance.
D.
1.
Personal.
2.
Key Person.
Retirement Accounts.
40
C.R.S. § 7-64-103.
41
C.R.S. § 7-80-108.
13
V.
VI.
Malpractice Insurance.
A.
Claims-made vs. occurrence.
B.
“Tails.”
C.
Activities covered.
D.
Loss Prevention Benefits.
Office Considerations.
A.
VII.
Significant considerations.
1.
Location.
2.
Facilities.
3.
Cost.
4.
Term.
B.
Home Office.
C.
Staffing Issues.
D.
Consultants.
MDP, MJP, Ancillary Business and the Future of the Practice of Law
A.
Multi-Disciplinary Practice (“MDP”)
1.
Defined: An arrangement or organization some but not all of the
owners of which are lawyers, and some but not all of the services of which
constitute legal services.
2.
Current status: Unsettled. While the ABA House of Delegates has
soundly rejected changes in the rules to accommodate MDP while
preserving the core values of the practice of law, many states, including
Colorado, have committees looking at rule changes to permit coownership
by non-lawyers. In addition, many strategic alliances among professionals
exist which operate as de facto MDPs. See Colorado Bar Association
Ethics Committee Formal Opinion 98 (“Dual Practice”) (December 14,
1996) discussing attorneys who are engaged in more than one profession.
B.
Multi-Jurisdictional Practice (“MJP”)
1.
Defined: The practice of law by a lawyer in a jurisdiction in which
the lawyer is not licensed.
2.
Current status: Many states have statutes and court rules
prohibiting the unauthorized practice of law. A recent survey of Colorado
lawyers indicates that many lawyers currently practice across state lines
and would support changes in the rules that permit such practice. The
Colorado Supreme Court is currently considering rule changes that would
14
permit temporary practice and in-house practice in Colorado by lawyers
licensed in other jurisdictions. 42
C.
Ancillary Business
1.
Defined: Services that may not constitute the practice of law,
provided by a law firm or an organization related to a law firm.
2.
Current status: Unsettled, note that Rule 265 provides that a
professional company must be organized “solely for the purpose of
conducting the practice of law.” See also Colorado Bar Association Ethics
Committee Formal Opinion 98 (“Dual Practice”) (December 14, 1996)
discussing attorneys who are engaged in more than one profession.
D.
Other Thoughts on the Future of the Practice of Law
1.
Movement to technology as a manner of delivering information and
legal services.
2.
Greater competition in the delivery of legal information. Greater
movement to the delivery of knowledge rather than information. 43
See Cynthia Covell, Douglas Foote, Robert R. Keatinge, Proposed Amendments to
C.R.C.P. 228 and the Cross Border Practice of Law, Colorado Lawyer, January 2002.
42
43
See Susskind, Transforming the Law, Oxford 2000.
15
Rule 265. Professional Service Companies
I.
A. Attorneys who are licensed to practice law in Colorado may do so in the form of
professional corporations, limited liability companies, limited liability partnerships, registered
limited liability partnerships, or joint stock companies, herein collectively referred to as
“professional companies,” permitted by the laws of Colorado to conduct the practice of law,
provided that such professional companies are established and operated in accordance with the
provisions of this Rule and the Colorado Rules of Professional Conduct. The provisions of this
Rule shall apply to all professional companies having as shareholders, officers, directors,
partners, employees, members, or managers one or more attorneys who engage in the practice of
law in Colorado, whether such professional companies are formed under Colorado law or under
laws of another state or jurisdiction. All professional companies conducting the practice of law
in Colorado shall comply with the following requirements:
1. The name of the professional company shall contain the words “professional
company,” “professional corporation,” “limited liability company,” “limited liability
partnership,” or “registered limited liability partnership” or abbreviations thereof such as “Prof.
Co.,” “Prof. Corp.,” “P.C.,” “L.L.C.,” “L.L.P.,” or “R.L.L.P.” that are authorized by the laws of
the State of Colorado or the laws of the state or jurisdiction of organization. In addition, the
name of the professional company shall always meet the ethical standards established by the
Colorado Rules of Professional Conduct for the names of law firms.
2. The professional company shall be established solely for the purpose of conducting
the practice of law, and the practice of law in Colorado shall be conducted only by persons
qualified and licensed to practice law in the State of Colorado.
3. The professional company may exercise all of the powers and privileges conferred
upon such types of entities by the laws of the State of Colorado or other state or jurisdiction of
organization but only for the purpose of conducting the practice of law pursuant to this rule and
the Colorado Rules of Professional Conduct.
4. The articles of incorporation, partnership agreement, operating agreement, or other
governing document or agreement of the professional company shall provide, and each of the
shareholders, partners, or members shall agree, that each of them who is a shareholder, partner,
or member of the professional company at the time of the commission of any professional act,
error, or omission by any of the shareholders, officers, directors, partners, members, managers, or
employees of the professional company shall be jointly and severally liable to the extent provided
by this Rule for the damages caused by such act, error, or omission; provided, however, that the
governing document or agreement may provide that any such shareholder, partner, or member
who has not directly and actively participated in the act, error, or omission for which liability is
claimed shall not be liable, except as provided in clause (e) of this subparagraph I.A.4, for any of
the damages caused thereby if at the time the act, error, or omission occurs the professional
Copyright Robert R. Keatinge 2016, all rights reserved.
company has professional liability insurance which meets the following minimum standards:
(a)The insurance shall insure the professional company against liability imposed upon
it arising out of the practice of law by attorneys employed by the professional company in their
capacities as attorneys.
(b)Such insurance shall insure the professional company against liability imposed upon
it by law for damages arising out of the professional acts, errors, and omissions of all
nonprofessional employees.
(c)The policy may contain reasonable provisions with respect to policy periods,
territory, claims, conditions, and other matters.
(d)The insurance shall be in an amount for each claim of at least $100,000 multiplied
by the number of attorneys employed by the professional company, and, if the policy provides for
an aggregate top limit of liability per year for all claims, the limit shall not be less than $300,000
multiplied by the number of attorneys employed by the professional company; provided,
however, that no professional company shall be required to carry total limits of insurance in
excess of $500,000 for each claim or be required to carry an aggregate top limit of liability for all
claims per year of more than $2,000,000.
(e)The policy may provide for a deductible or self-insured retained amount and may
provide for the payment of defense or other costs out of the stated limits of the policy. In either
or both such events, the liability assumed by the shareholders, partners, or members of the
professional company shall include the amount of such deductible or retained self-insurance and
shall include the amount, if any, by which the payment of defense costs may reduce the insurance
remaining available for the payment of claims below the minimum limit of insurance required by
this Rule if the ultimate liability for the claim exceeds the amount of insurance remaining to pay
for it.
(f)A professional act, error, or omission is considered to be covered by professional
liability insurance for the purpose of this subparagraph I.A.4 if the policy includes such act, error,
or omission as a covered activity, regardless of whether claims previously made against the
policy have exhausted the aggregate top limit for the applicable time period or whether the
individual claimed amount or ultimate liability exceeds either the per claim or aggregate top
limit.
5. The liability assumed by the shareholders, partners, or members of the professional
company pursuant to subparagraph I.A.4 is limited to liability for professional acts, errors, or
omissions which constitute the practice of law and shall not extend to actions or undertakings
that do not constitute the practice of law. The liability assumed by the shareholders, partners, or
members of the professional company pursuant to subparagraph I.A.4 may be pursued only by a
citation brought under C.R.C.P. 106(a)(5) after entry of a judgment against the professional
company. Liability, if any, for any and all actions or undertakings, other than professional acts,
2
errors, or omissions, shall be as generally provided by law and shall not be changed, affected,
limited, or extended by this Rule.
B. Each attorney practicing law in Colorado as a shareholder, director, officer,
member, manager, partner, or employee of a professional company, whether formed under the
laws of the State of Colorado or under the laws of any other state or jurisdiction, shall comply
with the following standards of professional conduct:
1. No such attorney shall act or fail to act in a way which would violate any of the
Colorado Rules of Professional Conduct adopted by this Court. The professional company shall
also comply at all times with all standards of professional conduct established by this Court and
with the provisions of this Rule. Any violation of or failure to comply with any of the provisions
of this Rule by the professional company may be grounds for this Court to terminate or suspend
the right of any attorney who is a shareholder, director, officer, member, manager, or partner of
such professional company to practice law in Colorado in the form of a professional company.
2. Nothing in this Rule shall be deemed to diminish or change the obligation of each
attorney employed by the professional company to conduct that attorney’s practice in accordance
with the Colorado Rules of Professional Conduct promulgated by this Court. Any attorney who
by act or omission causes the professional company to act or fail to act in a way which violates
such standards of professional conduct or any provision of this Rule shall be deemed personally
responsible for such act or omission and shall be subject to discipline therefor.
II. Any professional company established for the purpose of conducting the practice of law must
comply with all of the following additional requirements:
A. Except as provided in paragraph II.B and II.C, all officers, directors, shareholders,
partners, members, or managers of the professional company shall be individuals who are duly
licensed by either the Supreme Court of the State of Colorado or some other state or jurisdiction
to practice law either in the State of Colorado or in such other state or jurisdiction and who at all
times own shares or other equity interests in the professional company in their own right. In
addition, all other employees or representatives of the professional company who practice law
shall be duly licensed by either the Supreme Court of the State of Colorado or some other state or
jurisdiction to practice law in the State of Colorado or in such other state or jurisdiction.
B. A professional company may have one or more shareholders, partners, or members
which are professional companies so long as each such shareholder, partner, or member is
established and operated in accordance with the provisions of this Rule and the Colorado Rules
of Professional Conduct.
C. A professional company may have directors, officers, or managers who do not have
the qualifications described in paragraph II.A, but no director, officer, manager, or employee of a
professional company who is not licensed to practice law either in the State of Colorado or
elsewhere shall exercise any authority whatsoever over any of the professional company’s
3
activities relating to the practice of law.
D. Provisions shall be made requiring any shareholder, partner, or other member who
withdraws from or otherwise ceases to be eligible to be a shareholder, partner, or member of the
professional company to dispose of all shares or other equity interests therein as soon as
practicable either to the professional company or to any person having the qualifications
described in paragraph II.A. Provisions may be made for the redemption or disposition of shares
or other equity interests over a reasonable period of time so long as the withdrawing shareholder,
partner, or member does not exercise any management or professional function during such
period of time.
E. A professional company may adopt retirement, pension, profit -sharing (whether cash
or deferred), health and accident insurance, or welfare plans for all or some of its
employees, including lay employees, provided that such plans do not require or result in
the sharing of specific or identifiable fees with lay employees and provided that any
payments made to lay employees or into any such plan on behalf of lay employees are
based upon their compensation or length of service or both rather than upon the amount
of fees or income received.
4
89
OFFICE SHARING - CONFLICTS, CONFIDENTIALITY, LETTERHEADS AND
NAMES
Adopted September 21, 1991.
Amended April 18, 1992.
Introduction and Scope
The Colorado Bar Association Ethics Committee (“Committee”) has received
inquiries concerning ethical issues presented in office sharing situations of lawyers.
Sharing office space is a common, time-honored method of association among practicing
lawyers. It provides reduced operating costs, collegiality among lawyers and a
convenient source of lawyers to fill in for one another when one is sick or on vacation.
At the same time, office sharing arrangements allow lawyers to retain the financial
independence and control over the practices valued by sole practitioners not sharing
offices. While deriving benefits from office sharing arrangements, lawyers should be
aware of the potential ethical problems such arrangements may present.
Syllabus
This opinion addresses the following ethical concerns in office sharing
arrangements: conflicts of interest and duty of loyalty to clients; preservation of client
confidences; and use of letterheads and names. Factual patterns illus trating common
problems are included to demonstrate the application of general ethical principles to
specific areas of concern.
Attorneys sharing offices may represent clients with conflicting interests only if
such representation does not violate the applicable disciplinary rules within Canon 5.
For example, the financial, business or operating relationship among the lawyers must
not create differing interests of the lawyer which could cause a violation of DR 5 101(A). See also, Rule 1.7. In some situations, office sharing lawyers who represent
clients with actual or potential conflicting interests to each other may be prohibited from
representing those clients. See, DR 5-105(D); Proposed Model Rule 1.10. Where such
representation causes a conflict described by DR 5-105, the office sharing lawyers may
nevertheless represent clients with conflicting interests if it is obvious to each lawyer
that he or she can adequately represent the interest of the client, and if each client
consents to the representation after full disclosure of the possible effects such
representation may have on the exercise of the lawyer’s independent professional
judgment. DR 5-105(C).
In addition to potential conflict problems, office sharing attorneys must take
precautions to avoid disclosure of client confidences in all matters. The Code, Canon 4;
Proposed Model Rule 1.6. Office sharing lawyers should be particularly attentive when
lawyers or their employees have access to each other’s file storage and/or have shared
reception areas, staff, computer and telephone equipment. Important factors to consider
in protecting confidentiality are sharing of staff and equipment and the overlap in the
areas of practice between the lawyers. The more shared equipment and staff or the larger
the overlap in areas of practice, the greater potential for inadvertent disclosure of client
confidences and secrets and that such disclosure will be harmful to the client.
Copyright Robert R. Keatinge 2016, all rights reserved.
Finally, office sharing lawyers must scrupulously avoid any representation to the
public that there is a professional corporation, partnership, associate or other law firm or
employment relationship among them when no such relationship exists. DR 2 -102(C);
Proposed Model Rule 7.5; CBA Formal Opinions 8, 9 and 50. Otherwise, an office
sharing attorney misleads the public that the other lawyer in the office bears some
additional responsibility for the office sharing attorney’s legal services and standards.
Opinion
A. Conflicts of Interest
The Code requires that lawyers have undivided loyalty to t heir clients and that the
lawyers be free from influences which may affect such loyalty. DR 5 -101(A) and (B);
DR 5-105; Allen v. District Court, 519 P.2d 351 (Colo. 1974); EC 5-1 and EC 5-19.
Accordingly, office sharing attorneys should avoid representing clients with actual or
potential conflicting interests to each other since this practice is rife with ethical
problems.1 “Except with the consent of his [or her] client after full disclosure, a lawyer
shall not accept employment if the exercise of . . . professional judgment on behalf of
[the] client will be or reasonably may be affected by his [or her] own financial, business,
property or personal interests.” DR 5-101(A). DR 5-105 requires a lawyer to decline
proffered employment if it would likely involve him or her in representing differing
interests, unless this actual or potential conflict is waived by the client after full
disclosure. Finally, Canon 9, which requires a lawyer to avoid “even the appearance of
professional impropriety,” further militates in favor of lawyers in an office sharing
situation avoiding conflicts of interest. While the representation of adverse parties in an
office sharing situation may not be a per se violation of Canon 9, lawyers should
recognize that representation in such circumstances is fraught with ethical pitfalls. See,
e.g., CBA Formal Opinion 75, adopted June 20, 1987 (spousal conflicts).
1. Financial Arrangements and the Exercise of Independent Judgment
When lawyers share office space, they usually have financial rel ationships with
each other. Examples of such financial relationships include:
A young lawyer beginning a practice may commit to work a certain number of
hours each month for an established attorney who provides free office space and
services in exchange;
Office sharing lawyers may be jointly liable on a lease and may share other
overhead costs as well; and
One attorney may own or rent offices which he or she rents to a second
attorney.
Shared financial arrangements between and among office sharing lawye rs can be
very advantageous to all of the lawyers involved. However, these financial arrangements
can create a potential leverage to be used by one lawyer against the other, especially in
situations where the attorneys represent clients with actual or pote ntial conflicting
interests. These financial arrangements may require that either or both lawyers decline
representing the clients or alternatively, in some such situations, representation may be
permitted only after full disclosure to each client, followed by client consent. DR 5105(A). Even with disclosure and consent, should the lawyers proceed to represent
clients with conflicting interests, they must be certain that the common financial
2
arrangements will not interfere with their exercise of independen t professional
judgment, and will not adversely affect their duty of loyalty. DR 5 -105(C). If each
lawyer properly determines that his or her independent professional judgment reasonably
will not be affected by the financial arrangement, and the other issu es regarding
conflicts and confidentiality have been satisfactorily addressed, the lawyers may
represent the clients.
2. Imputed Disqualification
Although office sharing lawyers generally are not considered “a firm,” analysis
under DR 5-105(D) and Proposed Model Rule 1.10 is helpful in determining whether a
lawyer should disqualify himself or herself by declining the representation of a potential
client. The vicarious disqualification provisions of DR 5-105(D) apply to a partner or
associate or “any other lawyer affiliated with” the lawyer who is required to decline
employment. For purposes of imputed disqualification, this latter phrase reasonably may
be interpreted to apply to office sharing attorneys in some circumstances. Similarly, the
Comments to Proposed Model Rule 1.10 make clear under the Rules that office sharing
attorneys under certain circumstances may be considered to be part of “a firm”:
Whether two or more lawyers constitute a firm within this definition can
depend on the specific facts. For example, two practitioners who share office space
and occasionally consult or assist each other ordinarily would not be regarded as
constituting a firm. However, if they present themselves to the public in a way
suggesting that they are a firm or conduct themselves as a firm, they should be
regarded as a firm for the purposes of the rules. The terms of any formal agreement
between associated lawyers are relevant in determining whether they are a firm, as is
the fact that they have mutual access to information concerning the clients they
serve. Furthermore, it is relevant in doubtful cases to consider the underlying
purpose of the rule that is involved. A group of lawyers could be regarded as a firm
for purposes of the rule that the same lawyer should not represent opposing parties in
litigation, while it may not be so regarded for purposes of the rule that information
acquired by one lawyer is attributed to the other.
Ethics opinions issued by other states have relied upon rules of imputed
disqualification to disqualify one office sharing lawyer from representing a particular
client when the adverse party is represented by another lawyer in the same suite of
offices. See, Wisconsin Bar Opinion E-86-2 (3-86); Alabama Bar Opinion 83-178
(12/21/83) (lawyer may not represent a wife in action related to divorce in which lawyer
sharing office represented husband); Illinois Bar Opinion 783 (6/28/82) (criminal
defense attorneys are precluded from representing defendants being prosecuted by space
sharing municipal prosecutor). See generally, Sharing Office Space, ABA/BNA Lawyers
Manual on Professional Conduct 91:604-605.
In order to avoid ethically impermissible conflicts of interest, lawyers in office
sharing situations may wish to take several precautionary steps. F irst, they should
ascertain, to the extent possible, the nature of the practices of other office sharing
attorneys in the same suite to determine whether any actual or potential conflicts are
likely to arise. In some office sharing situations, the attorneys represent clients in
completely different areas of practice and there is little if any chance of a conflict
3
arising. If the office sharing lawyer determines areas of conflict may exist,2 the lawyer
can either decline employment in all cases of possible conflict or take certain
precautions to ensure that his or her office sharing arrangement will not be considered
an “affiliation” or “firm” for purposes of imputed disqualification. The more lawyers in
an office sharing arrangement present themselves to the public in a way suggesting they
are a firm, the more likely the vicarious disqualification rules will apply.
To reduce the likelihood of being viewed as a firm, the office sharing attorney
should take various measures to ensure that his or her practice i s completely separate
and distinct from that of other office sharing attorneys and that there are no unnecessary
financial entanglements. A lawyer must restrict access to client files and information
from other office sharing lawyers. If, however, the lawyer wants another lawyer in the
suite to provide coverage, then the clients should consent to such arrangement and
restricted access may not be necessary. See, EC 4-2. Additionally, the lawyers should
further protect the client by restricting computer, telephone, fax machine and copier
access. When there is a reasonable possibility of a conflict of interest arising, the lawyer
may also wish to discuss the office sharing situation with the client and inform the client
in writing of specific procedures he or she has taken to ensure there will be no actual
conflict of interest.
Notwithstanding these precautions, the lawyer should be aware that there is a
substantial risk of disqualification if in fact he or she is “too closely involved with” the
other office sharing attorneys or their clients. See, Dean v. American Security Insurance
Co., 429 F.Supp. 3 (N.D. Ga. 1976), aff’d mem., 559 F.2d 1214 (5th Cir.), reversed on
other grounds, 559 F.2d 1036 (5th Cir. 1977). See also, McMahon v. Seitzinger Bros.
Leasing, Inc., 506 F.Supp. 618, 619 (E.D. Pa. 1981) (attorney disqualified from
representing plaintiff where attorney shares office space with a law firm which
represented defendant in a substantially related matter); CBA Informal Opinion I,
October 10, 1972 (inappropriate for attorney to appear before the Board of County
Commissioners if he shares office space with County Attorney).
B. Presentation of Confidences and Secrets of a Client
An office sharing attorney, like all lawyers, must take precautions to prevent
disclosure of client confidences and secrets on all matters. Canon 4 of the Code. Office
sharing arrangements often include situations where attorneys share or have access to
one another’s file cabinets, reception area, conference room, law library, staff,
computers, telephones, and/or fax machines. In each of these situations, there is an
opportunity for inadvertent disclosure of client confidences or secrets. To minimize such
inadvertent disclosure, each office sharing attorney must assume responsibility for the
conduct of his or her staff and ensure that the staff not disclose or use any client
confidences or secrets. See, DR 4-101(D). ln addition, “absent consent of the client, the
lawyer should not seek counsel from another lawyer if there is a reasonab le possibility
that the identity of the client or his [or her] confidences or secrets would be revealed to
such lawyer.” CBA Formal Opinion No. 75, citing EC 4-2. Moreover, the office sharing
lawyer should avoid “indiscreet conversations” concerning his or her clients. EC 4-2.
To ensure confidentiality, the office sharing lawyer may need to take certain
measures in addition to restricting access to files, such as restricting access between the
4
telephone systems of the separate practices; arranging the rece ption area such that one
lawyer’s secretary is not able to overhear confidences from another lawyer’s clients; not
leaving confidential materials in the copier area or library for inspection by other
lawyers; using security devices to restrict access to computers; avoiding sharing of staff
to the extent possible, particularly secretaries and paralegals; and informing clients of
the space sharing arrangement and of measures undertaken to avoid any compromise of
confidentiality. See, Indiana Opinion 8 of 1985 (undated).
The need to ensure confidentiality exists in all cases, but is especially great when
office sharing lawyers represent clients with potential or actual conflicting interests, as
discussed above.
C. Names and Letterheads
DR 2-102(C) provides that “a lawyer shall not hold himself [or herself] out as
having a partnership with one or more other lawyers unless they are in fact partners.”
Similarly, Proposed Model Rule 7.5(f) states that “lawyers may state or imply that they
practice in a partnership or other organization only when that is the fact.” The comment
to Colorado’s Proposed Model Rule 7.5 states:
With regard to paragraph (f), lawyers sharing office facilities, but who are not
in fact partners, may not denominate themselves, as for example , “Smith & Jones,”
for that title suggests partnership in the practice of law.
This Committee has held that “it is improper to use the term ‘associates’ to
describe lawyers, not employees, who share office space and some costs but do not share
in responsibility and liability for each other’s acts.” CBA Formal Opinion No. 50
(adopted November 29, 1972). See also, CBA Formal Opinions 8 and 9 (both adopted
June 26, 1959).
Lawyers sharing offices are also prohibited from using a common trade name
under the provisions of DR 2-102(B). Similarly, Colorado’s Proposed Model Rule 7.5(b)
prohibits lawyers from practicing under a trade name. (Note, however, that the ABA
Model Rule 7.5(a) allows lawyers to use a trade name, and in this respect Colorado’s
Proposed Model Rules differ).
Furthermore, any misleading name is prohibited by DR 2-101(B). See, Proposed
Model Rule 7.5(b). In some cases, ethics committees have approved a list of attorneys
on a sign outside a suite of offices, when the sign states “law offices,” fo llowed by the
statement “not a partnership, professional corporation, or professional association.” See,
Dallas Bar Opinion 1983-3 (1/28/83); Indiana Bar Opinion 8, 1980. The Committee
believes that such a designation may be helpful in appropriate circumst ances to ensure
that members of the public do not believe that office sharing attorneys in fact are
practicing in a partnership or professional corporation. However, the Committee also
believes that lawyers may list their names on a sign outside an office suite under the
term “law offices,” as long as there is otherwise no indication that the lawyers in that
suite are practicing in a partnership or professional corporation.
In addition, DR 2-102(A) and (B) and Proposed Model Rule 7.5(a) extend the
prohibition against false and misleading names to letterheads, professional cards, and
directory lists. See generally, CBA Formal Opinion 84 (adopted February 26, 1990). As
with firm names, office sharing lawyers must take care to ensure that their letterheads,
5
business cards and directory listings do not falsely or misleadingly suggest to the public
that a partnership exists. Thus, office sharing lawyers should not use joint letterheads
that state, for example, Alice B. Smith, Attorney at Law and Harry R. Jones, A ttorney at
Law, because the use of such letterheads could easily be interpreted as suggesting the
existence of a partnership. The same result should obtain for joint business cards or
directory listings. ABA/BNA Lawyers Manual on Professional Conduct, 91: 601-603.
D. Fact Patterns
To facilitate the analysis of the application of these rules to office sharing
situations, four scenarios are considered:
Scenario One
The first scenario involves office sharing attorneys who have the same area of
practice, namely domestic relations. One attorney is representing the husband, while the
other seeks to represent the wife in a divorce. In this scenario, there is a heightened
likelihood of conflict of interest arising. The lawyers must disclose the office sharing
arrangement to the clients, and allow the clients the opportunity to decide whether to
waive an actual or potential conflict. See, Formal Opinion 75. In order for the client to
intelligently waive any actual or potential conflict, the client must be informed of all
relevant information regarding the conflict and the safeguards for preservation of
confidences and secrets.3 If adequate safeguards are in place, as discussed below, the
second office sharing lawyer may be able to exercise independent professional judgment
on behalf of the wife. On the other hand, if adequate safeguards are not in place, the
office sharing lawyers may be considered “affiliated” or “a firm” for imputed
disqualification purposes. In that event, the second office sharing lawyer may be
required to refrain from representing the wife, or, indeed, both lawyers might be
required to withdraw from representing their clients. If the office sharing lawyers have
taken steps to restrict access to each other’s client files, telephone calls, and fax
transmissions and the lawyers do not share the same staff, there is a reduced likelihood
of access to confidential information.
In sum, where office sharing lawyers are practicing in the same or similar areas,
the need for avoiding conflict of interest and for maintaining client confidentiality is
greatest.
Scenario Two
In this scenario the office sharing lawyers have completely different types of
practices, such as criminal defense, workers’ compensation, and bankruptcy. There is
little if any, likelihood of the office sharing lawyers representing clients with actual or
potential conflicts. However, if one of the office sharing lawyers were to discover after
the commencement of representation that another attorney in the same suite was
representing a client with actual or potential conflicting interests, then this attorney is
required to disclose this fact immediately to his or her client. The client then would
need to consent to the disclosed actual or potential conflict, or the lawyer would be
forced to withdraw. In this situation, it is still important that the lawyers establish
procedures to avoid disclosure of client confidences; however, the risk that an
inadvertent disclosure of client confidences would be harmful is not as great. See, CBA
Formal Opinion 75.
6
Scenario Three
In this scenario the office sharing lawyers practice in the same or similar areas.
Because each is a sole practitioner, they agree to fill in for one another when the other is
sick, on vacation, or out of town. The need for conflict checks in this situation is
heightened because the agreement among the office sharing lawyers to fill in for one
another strongly suggests that at least for some purposes these lawyers are operating as
“a firm,” and thus are subject to the rules of imputed disqualification in both the Code
and the Rules. A conflict check system is advisable to ensure that other lawyers in the
suite are not representing clients with actual or potential conflicts.
Moreover, the office sharing attorneys must include a provision in retainer
agreements that other office sharing attorneys may substitute for the retained attorney
when necessary, and, therefore, client confidences may be revealed. By virtue of such a
provision, the client thereby consents to representation by his or her retained lawyer and
by the other office sharing lawyers. The effect of such a provision in the retainer
agreement would be to extend the notion of “a firm” and to authorize the office sharing
lawyer to disclose the client’s identity and otherwise share information concerning the
client’s legal matter with other office sharing attorneys. The requirement for avoiding
inadvertent disclosure of confidential client matters through access to case files, fax
transmissions and other means would be eliminated, because the client in effect would
have consented to representation by more than one office sharing attorney.
Scenario Four
The office sharing lawyer leases space from another office sharing lawyer. The
two lawyers represent clients with an actual or potential conflict with the other. In this
scenario, as discussed above, if a conflict arises, the office sharing lawyer may be
required either to decline employment or to provide full disclosure to the client,
accompanied by the client’s consent, because either lawyer’s independent professional
judgment could be compromised by the existence of the landlord tenant relationship.
Thus, if the lawyer landlord were to threaten the lawyer tenant, directly or indirectly,
with unfavorable treatment under the lease relationship in the event of an unsuccessful
outcome for the landlord’s client, the lawyer tenant might not be able to exercise his or
her professional judgment properly on behalf of the client. Similarly, an attorney
landlord might not be able to properly exercise professional judgment on the client’s
behalf if the lawyer tenant threatened to move out in the event his or her client didn’t
fare well. Such conduct by the landlord or the tenant attorney also would violate DR l 102(A)(5). In these situations, it is proper for each lawyer to disclose the lease
relationship and its implications for the representation to the client so that the client
may intelligently decide whether to continue representation and waive any possible
Canon 5 violation.
Conclusion
Office sharing is a common way for lawyers to share facilities, to reduce
operating overhead and to create collegiality among lawyers. However, lawyers should
be aware of the ethical issues inherent in office sharing situations, particularly conflicts
of interest, protection of client confidences and secrets, and proper letterheads and
names in order not to mislead clients and others. Because of the variety of office sharing
7
relationships, the different client interests at stake in each instance, and th e interplay of
the several ethical duties, determining the proper course of conduct for the lawyers to
follow will depend upon a thorough analysis of the facts in each situation.
1. The Committee recognizes there may be almost an infinite variety of offi ce sharing
arrangements. In some situations, such as a large suite of nearly independent lawyers, the office sharing
attorneys may be able to avoid potential conflicts and exercise independent professional judgment on
behalf of their clients. In more typical, smaller office sharing situations, with shared use of facilities, it
may be much more difficult to avoid an actual or potential conflict of interest.
2. It may be difficult for a lawyer to determine in all instances whether an actual conflict or
potential conflict exists because even the identity of a client may be confidential. See, e.g., EC 4-2. An
office sharing lawyer may wish to seek a waiver of confidential identity from his or her clients so that a
conflict check can be made. Given the circumsta nces of office sharing lawyers, the Committee believes
that the practice of doing conflict checks in and of itself should not be construed as making them more
like a firm for purposes of imputed disqualification.
3. In order to ascertain whether an actual or potential conflict exists, because the lawyers have
the same type of practices, the office sharing attorneys may wish to consider establishing a regular
conflict check procedure. If this were done, however, office sharing lawyers should obtain a waiver from
their clients of the client’s identity so that such a conflict check could be made. See, EC 4-2.
8
RULE 1.15. SAFEKEEPING PROPERTY;
INTEREST-BEARING ACCOUNTS TO BE ESTABLISHED FOR THE BENEFIT
OF THE CLIENT OR THIRD PERSONS OR THE COLORADO TRUST
ACCOUNT FOUNDATION; NOTICE OF OVERDRAFTS; RECORD-KEEPING
(a) In connection with a representation, an attorney shall hold property of
clients or third persons that is in an attorney's possession separate from the
attorney's own property. Funds shall be kept in a separate account maintained
in the state where the attorney's office is situated, or elsewhere with the consent
of the client or third person. Other property shall be identified as such and
appropriately safeguarded. Complete records of such account funds and other
property shall be kept by the attorney and shall be preserved for a period of
seven years after termination of the representation.
(b) Upon receiving funds or other property in which a client or third person has
an interest, a lawyer shall, promptly or otherwise as permitted by law or by
agreement with the client, deliver to the client or third person any funds or
other property that the client or third person is entitled to receive and, upon
request by the client or third person, render a full accounting regarding such
property.
(c) When in the course of representation a lawyer is in possession of property in
which both the lawyer and another person claim interests, the property shall be
kept separate by the lawyer until there is an accounting a nd severance of their
interests. If a dispute arises concerning their respective interests, the portion in
dispute shall be kept separate by the lawyer until the dispute is resolved.
(d) "Accounts" as used in paragraph (a) above shall mean one or more
identifiable interest-bearing, insured depository accounts; provided, that with
the consent of the client or third person whose funds are in the account, an
account maintained under subparagraph (e)(1) below (interest is paid to the
client or third person) need not be an insured depository account, but all
accounts maintained under subparagraph (e)(2) below (interest is paid to the
Colorado Lawyer Trust Account Foundation) shall be insured depository
accounts. For the purpose of this rule, "insured depository accounts" shall
mean government insured accounts at a regulated financial institution, on which
withdrawals or transfers can be made on demand, subject only to any notice
period which the institution is required to reserve by law or regulation.
(e)
(1) Except as may be prescribed by subparagraph (2) below, interest
earned on accounts in which the funds are deposited (less any deduction
for service charges or fees of the depository institution) shall belong to
the clients or third persons whose funds have been so deposited; and the
lawyer or law firm shall have no right or claim to such interest.
(2) If not held in accounts with the interest paid to clients or third
persons as provided in (e)(1), a lawyer or law firm shall establish a pooled
interest-bearing insured depository account for funds of clients or third
Copyright Robert R. Keatinge 2016, all rights reserved.
persons which are nominal in amount or are expected to be held for a
short period of time in compliance with the following provisions:
(a) No interest from such an account shall be made available to a
lawyer or law firm.
(b) The account shall include funds of clients or third persons
which are nominal in amount or are expected to be held for a short
period of time.
(c) Lawyers or law firms depositing funds in an interest-bearing
insured depository account under this subparagraph (e)(2) shall
direct the depository institution:
(i) To remit interest, net any service charges or fees, as
computed in accordance with institution's standard
accounting practice, at least quarterly, to the Colorado
Lawyer Trust Account Foundation; and
(ii) To transmit with each remittance to the Colorado
Lawyer Trust Account Foundation a statement showing the
name of the lawyer or law firm on whose account the
remittance is sent and the rate of interest applied.
The provisions of this subparagraph (e)(2) shall not apply in those
instances where it is not feasible to establish a trust account for the
benefit of the Colorado Lawyer Trust Account Foundation for reasons
beyond the control of the lawyer or law firm, such as the
unavailability of a financial institution in the community which offers
such an account.
(3) Information necessary to determine compliance or justifiable reason for
non-compliance with subparagraph (e)(2) shall be included in the annual
attorney registration statement. The Colorado Lawyer Trust Account
Foundation shall assist the court in determining whether lawyers or law
firms have complied in establishing the trust account required under
subparagraph (e)(2). If it appears that a lawyer or law firm ha s not complied
where it is feasible to do so, the matter may be referred to the disciplinary
counsel for investigation and proceedings in accordance with C.R.C.P. 241.
(f) Required Bank Accounts. Every attorney in private practice in this state shall
maintain in a financial institution doing business in Colorado, in the attorney's own
name, or in the name of a partnership of attorneys, or in the name of the
professional corporation or limited liability corporation of which the attorney is a
member, or in the name of the attorney or entity by whom employed:
(1) A trust account or accounts, separate from any business and personal
accounts and from any fiduciary accounts that the attorney may maintain as
executor, guardian, trustee, or receiver, or in any oth er fiduciary capacity,
into which trust account or accounts funds entrusted to the attorney's care
and any advance payment of fees that has not been earned shall be deposited
(except that such a trust account shall not be required if the attorney does
not ever receive such funds); and,
2
(2) A business account into which all funds received for professional services
shall be deposited.
(3) One or more of the trust accounts may be the account or accounts
described in Rule 1.15(e)(2), known as COLTAF (Colorado Lawyer Trust
Account Foundation) accounts.
(4) Other than fiduciary accounts maintained by an attorney as executor,
guardian, trustee, or receiver, or in any other similar fiduciary capacity, all
trust accounts, whether general or specific, as well as all deposits slips and
checks drawn thereon, shall be prominently designated as a "trust account."
Nothing herein shall prohibit any additional descriptive designation for a
specific trust account. All business accounts, as well as all deposit slips and
all checks drawn thereon, shall be prominently designated as a "professional
account," or an "office account." The COLTAF account or accounts shall
each be designated "COLTAF Trust Account."
(5) The name of institutions in which such accounts are maintained and
identification numbers of each account shall be recorded on a statement filed
with the annual attorney registration payment, pursuant to Rule 227(2).
Such information shall be available for use in accordance with paragraph (g)
of this Rule. For all COLTAF accounts, the account numbers, the name the
account is under, and the depository institution shall be indicated on the
same statement.
(6) A trust account shall be maintained only in financial institutions doing
business in Colorado approved by the Regulation Counsel with policy
guidelines by the Board of Trustees of the Colorado Attorneys' Fund for
Client Protection, which shall annually publish a list of such approved
institutions. A financial institution shall be approved if it shall file with the
Regulation Counsel an agreement, in a form provided, to report to the
Regulation Counsel in the event any properly payable trust account
instrument is presented against insufficient funds, irrespective of whether
the instrument is honored; any such agreement shall apply to all branches of
the financial institution and shall not be canceled except on thirty days
notice in writing to the Regulation Counsel. The agreement shall further
provide that all reports made by the financial institution shall be in the
following format: (1) in the case of a dishonored instrument, the report shall
be identical to the overdraft notice customarily forwarded to the depositor;
(2) in the case of instruments that are presented against insufficient funds
but which instruments are honored, the report shall identify the financial
institution, the attorney or law firm, the account number, the date of
presentation for payment, and the date paid, as well as the amount of the
overdraft created thereby. Such reports shall be made simultaneou sly with,
and within the time provided by law for, notice of dishonor, if any; if an
instrument presented against insufficient funds is honored, then the report
shall be made within five banking days of the date of presentation for
payment against insufficient funds. In addition, each financial institution
approved by the Regulation Counsel must cooperate with the COLTAF
3
program and must offer a COLTAF account to any attorney who wishes to
open one. In addition to the reports specified above, approved finan cial
institutions shall agree to cooperate fully with the Regulation Counsel and to
produce any trust account or business account records on receipt of a
subpoena therefor in connection with any proceeding pursuant to C.R.C.P.
241. Nothing herein shall preclude a financial institution from charging an
attorney or law firm for the reasonable cost of producing the reports and
records required by this Rule, but such charges shall not be a transaction
cost to be charged against funds payable to the COLTAF progr am. Every
attorney or law firm maintaining a trust account in this state shall, as a
condition thereof, be conclusively deemed to have consented to the reporting
and production requirements by financial institutions mandated by this Rule
and shall indemnify and hold harmless the financial institution for its
compliance with such reporting and production requirement. A financial
institution shall be immune from suit arising out of its actions or omissions
in reporting overdrafts or insufficient funds or producing documents under
this rule. The agreement entered into by a financial institution with the
regulation counsel shall not be deemed to create a duty to exercise a standard
of care and shall not constitute a contract for the benefit of any third parties
that may sustain a loss as a result of lawyers overdrawing attorney trust
accounts.
(g) Required Accounting Records. Attorneys, partnerships of attorneys,
professional corporation and limited liability corporations in private practice in
this state shall maintain in a current status and retain for a period of seven years
after the event which they record:
(1) Appropriate receipt and disbursement records of all deposits in and
withdrawals from accounts specified in subsection (a) of this rule and any
other bank account which concerns their practice of law, specifically
identifying the date, source and description of each item deposited as well as
the date, payee, and purpose of each disbursement. All trust account receipts
shall be deposited intact and the duplicate deposit slip should be sufficiently
detailed to identify each item. All trust account withdrawals shall be made
only by authorized bank or wire transfer or by check payable to a named
payee and not to cash. Only an attorney admitted to practice l aw in this state
or a person supervised by such shall be an authorized signatory on a trust
account; and,
(2) An appropriate record-keeping system identifying each separate trust
client, for all trust accounts, showing the source of all funds deposited in
such accounts, the names of all persons for whom the funds are or were held,
the amount of such funds, the description and amounts of charges or
withdrawals from such accounts, and the names of all persons to whom such
funds were disbursed. A regular trial balance of the individual client ledgers
shall be maintained and reconciled at least quarterly with the applicable
bank statements.
(3) Copies of all retainer and compensation agreements with clients; and,
4
(4) Copies of all statements to clients showing the disbursement of funds to
them or on their behalf; and,
(5) Copies of all bills issued to clients and,
(6) Copies of all records showing payments to any persons, not in their
regular employ, for services rendered or performed; and,
(7) All bank statements and prenumbered canceled checks; and,
(8) Copies of those portions of each client's case file reasonably necessary for
a complete understanding of the financial transactions pertaining thereto.
(h) Type and Availability of Accounting Records. The financial books and other
records required by subsections (f) and (g) of this rule shall be maintained in
accordance with generally accepted accounting principles, such as the accrual
method, the cash basis method and the income tax method. Bookkeeping re cords
may be maintained by computer provided they otherwise comply with this Rule and
provided further that printed copies can be made on demand in accordance with
this subsection or subsection (g). They shall be located at the principal Colorado
office of each attorney, partnership, professional corporation, or limited liability
corporation.
(i) Dissolutions. Upon the dissolution of any partnership of attorneys or of any
professional corporation or limited liability corporation, the former partners or
shareholders shall make appropriate arrangements for the maintenance by one of
them or by a successor form of the records specified in paragraph (g) of this Rule.
(j) Availability of Records. Any of the records required to be kept by this Rule shall
be produced in response to a subpoena duces tecum issued in connection with
proceedings pursuant to C.R.C.P. 241. When so produced, all such records shall
remain confidential except for the purposes of the particular proceeding and their
contents shall not be disclosed by anyone in such a way as to violate the attorneyclient privilege.
COMMENT
A lawyer should hold property of others with the care required of a professional
fiduciary. Securities should be kept in a safe deposit box except when some other form
of safekeeping is warranted by special circumstances. All property which is the property
of clients or third persons should be kept separate from the lawyer's business and
personal property and, if monies, in one or more trust accounts.
Trust accounts of funds of clients or third persons held in connection with a
representation must be interest-bearing for the benefit of the client or third person or for
the benefit of the Colorado Lawyer Trust Account Foundation where the funds are
nominal in amount or expected to be held for a short period of time. A lawyer should
exercise good faith judgment in determining initially whether funds are of such nominal
amount or are expected to be held by the lawyer for such a short period of time that the
funds should not be placed in an interest-bearing account for the benefit of the client or
third person. The lawyer should also consider such other factors as (i) the cost of
establishing and maintaining the account, service charges, accounting fees, and tax
report procedures; (ii) the nature of the transaction(s) involved; and (iii) the likelihood
of delay in the relevant proceedings. A lawyer should review at reasonable intervals
5
whether changed circumstances require further action respecting the deposit of such
funds.
Separate trust accounts may be warranted when administering estate monies or
acting in similar fiduciary capacities.
Lawyers often receive funds from third parties from which the lawyer's fee will
be paid. If there is risk that the client may divert funds wi thout paying the fee, the
lawyer is not required to remit the portion from which the fee is to be paid. However, a
lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The
disputed portion of the funds should be kept in trust and the lawyer should suggest
means for prompt resolution of the dispute, such as arbitration. The undisputed portion
of the funds shall be promptly distributed.
Third parties, such as a client's creditors, may have just claims against funds or
other property in a lawyer's custody. A lawyer may have a duty under applicable law to
protect such third-party claims against wrongful interference by the client, and
accordingly may refuse to surrender the property to the client. However, a lawyer should
not unilaterally assume to arbitrate a dispute between the client and the third party.
The obligations of a lawyer under this rule are independent of those arising from
activity other than rendering legal services. For example, a lawyer who serves as an
escrow agent is governed by the applicable law relating to fiduciaries even though the
lawyer does not render legal services in the transaction. See Rule 1.16(d) for standards
applicable to retention of client papers.
A "client's security fund" provides a means through the collective efforts of the
bar to reimburse persons who have lost money or property as a result of dishonest
conduct of a lawyer. Where such a fund has been established, a lawyer should
participate.
Committee Comment
This Rule is similar in substance to the code. See, DR 9-102. The Rule extends
the concept to monies held for the benefit of third parties, which probably is implied
under the Code.
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98
DUAL PRACTICE
Adopted December 14, 1996.
Introduction and Scope
The Ethics Committee of the Colorado Bar Association has received a number of
inquiries from lawyers concerning the ethical propriety of lawyers practicing law and
being actively involved in one or more separate professions or businesses. It is not
possible to write an ethics opinion covering every conceivable separate business in
which lawyers may become involved in addition to their law practice. Therefore, this
opinion will provide general principles intended to assist lawyers in determining
whether and how they may conduct these separate businesses without violating the
Colorado Rules of Professional Conduct ("Rules"). Then, by way of example, this
opinion will discuss specific ethical considerations applicable to lawyers acting as
agents of title insurance companies.
Lawyers engaged in a second occupation are well advised to consult any statutes, rules
or standards applicable to the second occupations, which of course are not discussed in
this opinion. Also, this opinion will not attempt to discuss the similar but not
coextensive ethical issues arising from the acquisition and possession of passive
ownership interests in separate businesses by lawyers and law firms. (1)
Syllabus
There is no per se prohibition in the Rules against lawyers engaging in a second
occupation or business, provided that the second occupation does not constitute a
vehicle for improper solicitation, otherwise known as a "feeder operation," in violation
of Rules 7.2(c) and 7.3(a). The ethical danger of dual occupations increases if the
separate business involves any of the following elements: (a) the second occupation is
conducted from the law office premises, (b) the second occupation is related to the
practice of law, and (c) the lawyer provides both legal and nonlegal services in the same
transaction.
As to the last criterion, the CBA Ethics Committee strongly discourages lawyers from
ever acting as lawyer and in another professional or business capacity in the same
transaction. Some dual occupation transactions are so fraught with ethical risk that the
CBA Ethics Committee discourages them even with the informed consent of the client,
such as transactions in which a lawyer acts both as lawyer and real estate broker.
Lawyers must be extremely careful in other dual occupation transactions to observe the
Rules relating to conflicts of interest, business transactions with a client, and
permissible fee arrangements, as is illustrated below in the context of a lawyer who
represents one of the parties and acts as the agent of a title insurance company in the
same real estate transaction.
Analysis
Several formal CBA Ethics Committee opinions have addressed ethical issues applicable
to lawyers who wish to practice law and conduct separate busi nesses or occupations.
7
[See CBA Ethics Committee Opinion No. 7 (April 11, 1959) (lawyer/collection agent),
No. 36 (June 19, 1965) (lawyer/title insurance agent), No. 39 (July 15, 1967)
(lawyer/real estate broker), and No. 41 (February 3, 1968) (lawyer/acco untant); see also
Informal Opinion H (collection of real estate commission from transaction originating as
legal matter).] These opinions disapprove of dual practice based primarily, if not
exclusively, on Canon 27 of the Canons of Professional Ethics deal ing with lawyer
advertising and solicitation. The Canons have been inapplicable in this state since 1970,
when they were replaced by the Colorado Code of Professional Responsibility, which
was replaced by the Colorado Rules of Professional Conduct on Janua ry 1, 1993.
Furthermore, the ethics of lawyer advertising changed dramatically with the decision of
the U.S. Supreme Court in Bates v. State Bar of Arizona, 433 U.S. 350 (1977).
Therefore, the Ethics Committee hereby withdraws these prior opinions, refers the bar to
CBA Ethics Committee Opinion 83 (Revised July 24, 1993) [ See 19 Colo. Law. 25 (Jan.
1990)] for a general discussion of ethics in lawyer advertising, and starts anew to guide
lawyers through the many ethical hurdles involved in dual occupations.
There is nothing in the Rules that per se prohibits lawyers from simultaneously engaging
in other businesses or occupations. It is when the distinction between the two
occupations blurs that there is ethical danger in dual practice. The common thread in t he
legal authority on this subject is a concern that lawyers avoid creating - to borrow a
phrase from intellectual property law - a likelihood of confusion in the mind of the
client about whether services are being performed within the lawyer's role as a l awyer or
within the lawyer's role in the second occupation. (2) Generally speaking, it is easier to
avoid that confusion when the separate business is (a) conducted away from the law
office premises, (b) unrelated to the practice of law, and (c) not involved in the same
transaction in which the lawyer is acting as a lawyer.
I. General Ethical Principles Applicable to Dual Practice
A. Same Office.
The operation of a second business from the law office is not, by itself, prohibited.
There are several ethical risks, however, that increase when lawyers conduct second
occupations from the law office. To be sure, these risks may apply even if the second
occupation is not conducted from the law office.
First, the second occupation may not be used as a vehicle for improper solicitation of
legal work, otherwise known as a "feeder" operation, in violation of Rules 7.2(c) and
7.3(a). (3) Rule 7.2(c) prohibits a lawyer from "giving anything of value to a person for
recommending the lawyer's services," except for the reasonable cost of advertisements
and other communications authorized under Rule 7.2 and the "usual charges of a not for-profit lawyer referral service or other legal service organization." Rule 7.3(a)
prohibits in-person or telephone solicitation of professional employment when a
"significant motive for the lawyer's doing so is the lawyer's pecuniary gain."
There are two exceptions to Rule 7.3(a). One is when the lawyer has a family
relationship with the prospective client and the other is when the lawyer has a "prior
professional relationship" with the prospective client. "Prior professional relationship"
has been construed as limited to a prior lawyer-client relationship. (4) Thus, only if the
lawyer has performed legal or law-related services in the past for the prospective client
is the lawyer allowed to engage in in-person or telephone solicitation of a non-family
8
member under Rule 7.3(a). But see note 16, infra [lawyers may not solicit law-related
business in violation of Rule 7.3(a)]. In addition, although solicitation of non -legal
employment may not constitute a "feeder" operation covered by Rules 7.2(c) and 7.3,
lawyers must make full disclosure of their interest in the non -law business when
soliciting non-legal employment from a law client. (5)
Second, lawyers with second occupations may advertise both professions, provided such
advertising is not false or misleading. (6) Thus, a lawyer may, consistent with the Rules,
reflect the lawyer's affiliation with the second occupation on the lawyer's letterhead and
use such letterhead in a mailed solicitation so long as it complies fully with Rules 7.1,
7.3 and 7.5. Nonlawyers employed in the second occupation may also be listed on law
firm letterhead provided their nonlawyer status is clearly indicated. (7) See generally
CBA Ethics Committee Opinion No. 83 (Revised July 24, 1993)[19 Colo. Law. 25 (Jan.
1990)].
Third, Rule 5.4(b) prohibits the formation of a partnership with a nonlawyer that
includes the practice of law. (8) If it is the nonlawyer-employees of the second occupation
who are providing such legal services, the lawyer may also violate Rule 5.5(b), which
prohibits assisting a nonlawyer in the unauthorized practice of law. Also, Rule 5.4(a)
generally prohibits, with some exceptions, the sharing of legal fees with a non lawyer.
Whether or not a lawyer has formed a partnership with a nonlawyer in violation of Rule
5.4(b) generally should be determined under principles of law pertaining to the
formation of partnerships. (9) Sharing office space with a nonlawyer does not
automatically result in a violation of Rule 5.4(b). Lawyers must take care, however, to
keep the law practice and the non-law business separate, including maintaining the
confidentiality of law client files pursuant to Rule 1.6 and ensuring, pursuant to Rules
5.1 and 5.3, that their lawyer and nonlawyer employees of the law practice do the
same. (10)
B. Relationship to the Practice of Law.
"There is little ethical difficulty with the operation of an unrelated occupation from the
same location as a lawyer's law office" so long as the lawyer complies with restrictions
on advertising and solicitation applicable when the lawyer promotes both occupations
simultaneously. (11) Examples of unrelated second occupations are operating a retail
store, shopping center or manufacturing enterprise. (12) Furthermore, although lawyers
are bound by the Rules whether or not they are acting in a professional capacity,
"[m]any, if not most, disciplinary rules by their nature relate only to conduct of a lawyer
acting in his professional capacity." (13) Therefore, lawyers engaged in a second
occupation unrelated to the lawyer's law practice are nevertheless required to follow the
Rules, except those Rules applicable only to lawyers acting as lawyers.
For example, lawyers who practice architecture are not required to follow Rule 7.2
concerning attorney advertising when soliciting business exclusively as architects
without mention of their legal services or degrees. (14) That is not to say that attorneys
who commit dishonest acts as architects might not violate, for example, Rule 8.4(c)
prohibiting "conduct involving dishonesty, fraud, deceit, or misrepresentation." Conduct
of lawyers in a second occupation unrelated to the practice of law may violate general
Rules such as Rule 8.4(c), which are applicable to all lawyers at all times, but not
9
ethical rules specific to professional conduct, such as Rule 1.7 relating to conflicts of
interest in "client" representation, as applied clearly to non -professional conduct.
The ethical danger increases if the second occupation is law -related. The concern behind
the relationship of the second occupation to the practice of law is that
[i]t may be impossible to know whether the lawyer's work for another person is
performed as part of the practice of law or as part of his other occupation or profession.
...
In carrying on law-related occupations and professions the lawyer almost inevitably will
engage to some extent in the practice of law, even though the activities are such that a
layman can engage in them without being engaged in the unauthorized practice of law.
...
If the second occupation is so law-related that the work of the lawyer in such occupation
will involve, inseparably, the practice of law, the lawyer is considered to be engaged in
the practice of law while conducting that occupation. Accordingly, he is held to the
standards of the bar while conducting that second occupation from his law offices. (15)
In other words, lawyers who engage in such a law-related occupation are required to
conform to the Rules in so doing, including Rule 1.5 regarding the reasonableness of
fees charged in the second occupation; Rules 7.1 through 7.5 regarding advertising and
solicitation as they relate to the second occupation; (16) Rules 5.3, 5.4(c) and 5.5(b),
which respectively require supervision of nonlawyer assistants, independence of the
lawyer's professional judgment, and no assistance in the unauthorized practice of law; (17)
and Rule 1.6 regarding the confidentiality of client information acquired in engaging in
the second occupation. (18) To be sure, the Rules apply in such circumstances even where
statutes, rules or standards applicable to the second occupations are in conflict with, or
less stringent than, requirements under the Rules.
Rule 1.6 is important for two additional reasons. First, customers , nonlawyers and even
lawyers associated with the second occupation may assume erroneously that the
attorney-client privilege attaches to their communications with one another or
inadvertently waive the privilege if it does apply in the first instance. (19) Second,
lawyers with second occupations that are related to the practice of law must be careful
not to use information against a client or former client that is learned in performing the
services related to the second occupation. See Rules 1.8(b) and Rule 1.9(c). While these
Rules prohibit the use of information "relating to the representation," as a practical
matter it may be difficult or impossible to distinguish between information learned in
the lawyer's capacity as an attorney and in operating a law-related business from the
same office. This information is not limited to client confidences or secrets but applies
to "all information relating to the representation, whatever its sour ce." Comment,
Confidentiality, Rule 1.6.
Examples of occupations related to the practice of law are those of "accountant,
collection agency, claims adjuster, labor relations consultant, business consultant,
insurance agent, marriage counselor, real estate broker, income tax service, loan or
mortgage broker or any other business where the lawyer participant's activity would be
likely to involve frequent solution of problems that are essentially legal in nature. . .
." (20) The examples given in the Comment to ABA Model Rule of Professional
Responsibility 5.7 for "law-related services" subjecting the lawyer to compliance with
10
all of the Rules are "title insurance, financial planning, accou nting, trust services, real
estate counseling, legislative lobbying, economic analysis social work, psychological
counseling, tax return preparation, and patent, medical or environmental counseling." (21)
A great number of non-Colorado ethics opinions dealing with the ethics of dual practice
concern lawyers as real estate brokers and as agents of title insurance companies, which
without doubt are occupations related to the practice of law. (22)
C. Same Transaction.
Lawyers who engage in their second occupation in the same transaction in which they
represent a client as a lawyer run the greatest ethical risk of all, p articularly if the
second occupation is law-related and conducted from the law office. Of particular
concern here - but by no means the only ethical concerns - are Rules 1.7 and 1.8, which
deal, respectively, with conflicts of interest and entering into bu siness transactions with
a client.
With respect to Rule 1.7, lawyers must first determine whether they have "another
client" in the second occupation within the meaning of Rule 1.7. For example, is the real
estate brokerage agency of which the lawyer is an agent a "client" of the lawyer? This is
a legal determination that requires the lawyer to assess whether the services provided by
the lawyer in the second occupation for the benefit of a third party constitute the
practice of law. See Denver Bar Association v. Public Utilities Commission, 154 Colo.
273, 391 P.2d 467, 471-72 (1964). If the conclusion is that there is "another client," the
lawyer must determine whether the original representation will be "directly adverse" to
the other client, under Rule 1.7(a), or whether that representation "may be materially
limited" by the lawyer's responsibilities to the other client, under Rule 1.7(b). The
remainder of Rule 1.7 does not come into play if these questions are answered in the
negative. If either question is answered in the positive, however, the lawyer must follow
the applicable remaining requirements of either subsection (a) or (b) of Rule 1.7, both of
which require an objective assessment of whether the original representation will be
adversely affected by the representation of the other client and informed client consent.
See also Rule 1.7(c) (client consent cannot be validly obtained where disinterested
lawyer would conclude that client should not agree to representation under the
circumstances).
If the lawyer determines that "another client" is not involved, the lawyer must then
determine whether under Rule 1.7(b) the representation of the client may be materially
limited by the lawyer's responsibilities to a "third person" or by the "lawyer's own
interests." Again, the remainder of Rule 1.7(b) does not come into play if this question
is answered in the negative. If this question is answered in the positive, however, the
lawyer must comply with the remainder of the requirements under Rule 1.7(b). See, e.g.,
People v. Silver, 924 P.2d 159 (Colo. 1996) (lawyer suspended for one year and one day
for, among other things, failing to advise borrower-clients about conflicts of interest
arising from lawyer's multiple roles as attorney for borrowers and lender an d principal
of lender).
For example, the prevailing view among non-Colorado ethics opinions is that even with
the informed consent of the client, lawyers may not act as both lawyer and real estate
broker in the same transaction due to an inherent and irreconcilable conflict between a
broker's personal interest in receiving a commission upon sale and a lawyer's interest in
11
protecting a client even if it means advising against the consummation of the sale. (23) On
the other hand, a substantial majority of non-CBA ethics opinions holds that a lawyer
may, with appropriate precautions, act as a title insurance agent and represent one of the
parties in the same real estate transaction. (24) See discussion, infra.
With respect to Rule 1.8, lawyers engaging in a second occupation in the same
transaction in which they act as counsel to one of the parties must determine whether
they are about to "enter into a business transaction with a client or knowingly acquire an
ownership, possessory, security or other pecuniary interest adverse to a client. . . ." Rule
1.8(a). If so, the "transaction and terms on which the lawyer acquires the interest" must
be "fair and reasonable to the client" and "fully disclosed and transmitted in writing to
the client in a manner which can be reasonably understood by the client"; the client must
be "informed that use of independent counsel may be advis able" and "given a reasonable
opportunity to seek the advice of such independent counsel in the transaction"; and the
client must "consent in writing thereto." Unlike the disclosure and client consent
required under Rule 1.7, that required under Rule 1.8(a) must be in writing. See, e.g.,
People v. Silver, supra [lawyer suspended for one year and one day for conflicts of
interest and entering into loan transactions with client, as principal of lender, in
violation of Rule 1.8(a)]. Rule 1.8(a) does not apply to "standard commercial
transactions between the lawyer and the client for products or services that the client
generally markets to others, for example, banking or brokerage services, medical
services, products manufactured or distributed by the client, a nd utilities' services."
Comment, Transactions Between Client and Lawyer, Rule 1.8.
The CBA Ethics Committee strongly discourages lawyers from ever wearing two hats in
the same transaction, for example serving both as lawyer and real estate broker. (25) It is
beyond the scope of this opinion to analyze whether and how lawyers might engage in
the infinite variety of second occupations both related and unrelated to the practice of
law. By way of analogy, however, the Committee offers the following ethical guidance
concerning lawyers who act as agents of title insurance companies in the same
transaction.
II. Lawyers as Title Insurance Agents
Before title insurance became prevalent in the 1960s, lawyers in this state typically
provided an opinion of counsel in real estate transactions regarding the nature and
quality of title to the real property in question. That practice eventually gave way to title
insurance. With the support of the organized bar, however, some Colorado lawyers
remained involved in title issues by acting as agents of title insurance companies as an
ancillary part of their law practice.
In acting as a title insurance agent, lawyer/title agents often prepare title commitme nts
and policies based on title documents and abstracts provided by the title insurance
company. They also may prepare some of the legal documents signed at the closing,
including deeds, deeds of trust and promissory notes, in their agent capacity.
Lawyer/title agents are entitled to compensation from the title insurance company on a
commission basis if and when the transaction is consummated.
For many years, it also has been commonplace for lawyers to act both as title insurance
agent and counsel to one of the parties in the same transaction, most often the seller but
sometimes the buyer, lender or borrower. (26) There is inherent ethical tension in this dual
12
role, particularly in the form of conflicts of interest. Conflicts of interest exist on a
continuum of severity, however; some are waivable and some are not. In addition, not
every possible conflict of interest precludes a representation under Rule 1.7(b). Rule
1.7, Comment, Loyalty to a Client. With the proper precautions, the dual role of a
lawyer/title agent may be to the advantage of the client, the title insurance company and
the lawyer. The following is a navigational guide through some of the more problematic
issues under the Rules for lawyers who represent a party to a real estate transaction and
simultaneously act as agent for a title insurance company.
A. Conflicts of Interests.
There is a basic divergence of interests among the buyer, seller and lender in a real
estate transaction, on one hand, and the interests of the title insurance company, on the
other. As a practical matter, conflicts of interest under Rule 1.7 generally exist when an
attorney simultaneously represents one of the parties to the transaction and acts as the
agent of the title company. A continuing tension exists between the title insurance
company's desire to limit exposure and the client's desire to maximize coverage.
A variety of potential conflicts of interest, however, are inherent in the lawyer/tit le
agent's dual role. These potential conflicts arise under Rule 1.7(b) because the lawyer/
title agent's duty of loyalty to the client may be materially limited by the lawyer/title
agent's (a) fiduciary responsibilities as the agent of the title company ( a "third person"),
and (b) pecuniary interests in receiving a commission and further business from the title
company (the "lawyer's own interests"). (27) For example, it is generally in the interest of
the title company to limit the coverage available under the title insurance policy. Yet it
is generally in the buyer's and lender's interests to obtain the maximum amount of
insurance coverage at the lowest reasonable cost. The seller may share that interest in
order to satisfy the buyer and consummate the transaction, and avoid recourse to the
seller's title warranties.
One specific concern of the Committee is that a lawyer/title agent might fail to seek the
removal of, or endorsement over, certain title exceptions listed by the title company as
zealously as a lawyer acting only as counsel. It is also not difficult to imagine the
competing pressures on the lawyer/title agent over problems with the legal documents
prepared by him or her, whether as title agent or attorney, and over claims that may later
arise (or are claimed to arise) under the title insurance policy. Even recommending that
a client purchase title insurance might be said to create a conflict of interest for the
lawyer/title agent, who stands to gain financially if the client follows that
recommendation, although it might be legal malpractice not to make that
recommendation.
The lawyer/title agent must therefore carefully follow the steps prescribed by Rule
1.7(b) and (c) before agreeing to represent or continuing to represent a client who is a
party to a transaction in which the lawyer is also the title agent. These steps begin with
full disclosure of the lawyer's status as agent; the nature of the lawyer's services as agent
and the amount of compensation the lawyer expects to receive; the pros and cons of
obtaining title insurance and of obtaining it through the lawyer, including its availability
and cost elsewhere; the ways in which the client and the title company may becom e
adversaries in the matter; and the client's opportunity to seek other counsel whether or
not there arises an actual conflict of interest. There may be other disclosures required
13
under state and federal laws and regulations, including but not limited to t he Real Estate
Settlement Procedures Act of 1974, 12 U.S.C. 2601, et seq. ("RESPA") and regulations
promulgated thereunder, and C.R.S. 10-11-108(2)(a) (requiring attorney's disclosure to
client that "attorney may be compensated for the issuance of such tit le insurance
commitment").
The client and the title insurance company must then consent to the lawyer/title agent's
dual role. Lawyer/title agents must also be satisfied that (a) their representation of the
client will not be affected by their status as title agent, and (b) a disinterested lawyer
would not conclude that the client should not agree to the representation under the
circumstances. Rule 1.7(b)(1) and (c). (28) If the lawyer/ title agent's dual role cannot pass
this test, the lawyer must withdraw from the legal representation, withdraw as agent, or the safest course - do both. See Rule 1.16; see also CBA Ethics Committee Opinion No.
68 (April 20, 1985) [see 14 Colo. Law. 1017 (April 1985)] (attorney's role in resolving
conflicts of interest). The lawyer/title agent would need to repeat this conflict analysis if
there later arises an actual conflict. In that case, the lawyer/title agent likewise must
withdraw from one or both roles in the matter unless the conflict can be resolved, for
example by an agreement between the client and the title company over the matter which
the lawyer/title agent believes is objectively fair to the client, or by the client obtaining
title insurance elsewhere.
B. Business Transactions.
Although a client's purchase of title insurance may, under contract and agency law,
constitute an agreement between the client and the title insurance company, the
Committee believes that Rule 1.8(a) is applicable because of the lawyer/title agent's
pecuniary interests in the transaction. (29) Rule 1.8(a) requires the terms of the
transaction to be objectively fair and reasonable to the client and fully disclosed in
writing, the client must be informed that independent counsel is advisable and given a
reasonable opportunity to seek such independent advice; and client consent must be in
writing. Lawyer/title agents may be able to provide the disclos ure and consent
information required under both Rule 1.7 and Rule 1.8 in standard written disclosure
and consent forms.
C. Fees.
A lawyer/title agent who charges the client for legal services for which the lawyer/title
agent is also compensated in the title insurance commission may be in violation of Rule
1.5(a), which prohibits the charging of unreasonable fees. To the same effect is C.R.S.
10-11-108(2)(a), which states that "[c]ompensation of the attorney for services actually
rendered shall not include the payment of an hourly fee paid by the client combined with
a payment from the title insurance company for the same service. . . ." The Committee
cautions against construing this legislative enactment as comprehensive of a lawyer/title
agent's rights and obligations with respect to charging fees in such transactions, because
it is the Colorado Supreme Court that has exclusive authority to regulate the practice of
law. Unauthorized Practice of Law Committee v. Employers Unity, Inc. , 716 P.2d 460,
463 (Colo. 1986).
Rule 1.5(a) is applicable regardless of who pays the lawyer/title agent's legal fee, such
as when a borrower does so in a loan transaction. The lawyer/agent's independent
judgment on behalf of the client must not be impaired by what may be consi dered the
14
receipt of compensation for legal services by one other than the client (the title
company). See Rules 1.8(f) (lawyer may receive payment from one other than client only
if there is client consent after consultation and no interference with lawye r's
professional judgment) and 5.4(c) (lawyer shall not permit person who recommends,
employs or pays lawyer to direct or regulate lawyer's professional judgment). (30) Of
course, these fee issues are in addition to any fee-splitting and other fee restrictions
stated in the Rules and elsewhere. See, e.g., Rule 1.5(e) (prohibiting referral fees); Rule
5.4(a) (prohibiting the sharing of legal fees with a nonlawyer); Rule 7.2(c) (prohibitin g
the giving of "anything of value to a person for recommending the lawyer's services");
see also C.R.Civ.P. Chapter 23.3 (Rules Governing Contingent Fees).
Conclusion
Lawyers often engage in second occupations in addition to the practice of law. There i s
nothing in the Rules that prohibits it. There are, however, several ethical concerns that
arise if there exists any combination of the following factors: (1) the second occupation
is conducted from the law office; (2) the second occupation is related to the lawyer's
legal practice; and (3) the lawyer engages in the second occupation in the same
transaction in which the lawyer provides legal services for a client. Lawyers should
avoid these dual occupation transactions entirely and some, including real est ate
transactions in which the lawyer is acting as a broker as well, are unethical in the view
of the CBA Ethics Committee even with the informed consent of the client. Other dual
occupation transactions, such as real estate transactions in which the lawyer represents a
party and acts as agent of a title insurance company, are not per se prohibited but
involve several significant ethical considerations, including those relating to conflicts of
interest, business transactions with a client and fees.
1. For a comprehensive discussion of these and other dual practice issues, see Block, Irwin and
Meierhofer, Jr., "Model Rule of Professional Conduct 5.7: Its Origin and Interpretation," 5
Georgetown Journal of Legal Ethics 739 (1991).
2. E.g., id. at 743 (every ABA study of dual practice cited confusion by clients and nonclient
customers as a significant ethical concern); ABA Formal Opinion No. 328 (June 1972) (relatedness of
nonlaw occupation may make it impossible to know whether lawyer is acting as lawyer or as member of
nonlaw profession); New York State Bar Ass'n Committee on Professional Ethics Opinion No. 206
(November 22, 1971) (relatedness of occupations may lead clients to believe the law and nonlaw
practices are related); Wisconsin State Bar Committee on Professional Ethics Memorandum Opinion No.
4/77A (June 1984) (permitting dual practice from same building so long as clear to public that law
office and separate business are separate and independent); Comment, Model Rule of Professional
Conduct 5.7 (principal problem of law-related services performed by lawyer is possibility that person
for whom non-law-related services are performed may not understand that such services do not carry
protections of attorney-client relationship).
3. ABA Formal Opinion No. 328 (June 1972); Block, supra , note 1 at 761.
4. Utah State Bar Ethics Advisory Opinion Committee Opinion No. 146A (April 28, 1995); Michigan
Standing Comm. on Professional and Judicial Ethics Opinion No. RI -135.
5. E.g. , L.A. County Bar Assoc. Professional Responsibility and Ethics Committee Formal Opinion No.
477 (June 20, 1994) (attorney/physician's referral of law clients to medical facility in which he holds
ownership interest and practices medicine on limited basis requires compliance with Califo rnia
counterpart of Rule 1.8 regarding entering into business transaction with client, even though the
attorney/physician does not personally treat such clients).
15
6. Ibanez v. Florida Dep't of Business & Prof. Regulation , ___ U.S. ___, 114 S.Ct. 2084, 129
L.Ed.2d 118 (1994).
7. Florida State Bar Professional Ethics Committee Opinion 94 -6 (April 30, 1995).
8. E.g. , Arizona Opinion No. 93-01 (Feb. 18, 1993) (attorney associated with nonlawyers in business
providing "complete eviction service" violates Rule 5.4(b) if association constitutes partnership whose
activities include practice of law); New York State Bar Ethics Opinion No. 633 (May 3, 1992) (even
where services could be performed by nonlawyer, arrangement whereby lawyer and nonlawyer jointly
provide services including debt consolidation and financial planning constitutes improper partnership
with nonlawyer if it "enables the nonlawyer to hold himself or herself out as offering legal services");
Pennsylvania Informal Ethics Opinion No. 92 -45 (1992) (lawyer's association with nonlawyer to provide
"financial advisory and brokerage services" permissible so long as none of lawyer's activities constitutes
practice of law); Wisconsin Ethics Opinion No. E -84-21 (lawyer's association with accountant, securitie s
broker and life insurance agents to provide "interdisciplinary approach to financial planning" improper
if any of lawyer's activities as partner consist of practice of law).
9. But see Arizona Opinion No. 93-01 (Feb. 18, 1993) (term "partnership" constr ued broadly); South
Carolina Advisory Opinion No. 93-05 (May 1993) ("Rule 5.4(b) applies not only to partnerships, but
also to other organizations that lawyers are involved in managing.").
10. See also Rule 265(I)(A)(2), C.R.Civ.P. (professional service c orporations "shall be established
solely for the purpose of conducting the practice of law"); Network Affiliates, Inc. v. Robert E.
Schack , 682 P.2d 1244, 1246 (Colo. App. 1984) (interpreting same).
11. Cf. ABA Formal Opinions 328 (June 1972) and 336 (June 1974).
12. ABA Formal Opinion No. 328 (June 1972); New York State Bar Ass'n Committee on Professional
Ethics Opinion No. 206 (November 22, 1971).
13. ABA Formal Opinion No. 336 (June 1974). This Opinion cites DR 7 -106 regulating the trial conduct
of a lawyer as an example of a disciplinary rule that by its nature relates only to the conduct of a lawyer
acting in a professional capacity. The analogue to DR 7 -106 is scattered throughout Rules 3.3, 3.4, 3.5
and 3.9. Other Rules that seem to apply only to l awyers acting in their professional capacity are those
relating to conflicts of interests, Rules 1.7 and 1.9.
14. But see ABA Formal Opinion No. 328 (June 1972) (concluding that a lawyer engaged in lawrelated occupations is "held to the standards of the bar while conducting that second occupation from
his law offices").
15. ABA Formal Opinion No. 328 (June 1972). See also Comment, ABA Model Rule of Professional
Conduct 5.7 (lawyer is subject to Rules of Professional Conduct when providing "law -related services").
To date, only one state, Pennsylvania, has adopted a version of Model Rule of Professional Conduct 5.7
in its current form.
16. See ABA Formal Opinion No. 328 (attorney engaging in law-related second occupation must
comply with ethical rules governing "[p]ublicity given to the second occupation and methods of seeking
business"). But see Oregon State Bar Ass'n Informal Opinion No. 90 -40 (lawyer solicitation rules do
not apply to lawyers soliciting business as mortgage brokers). For example, lawyer s may not solicit lawrelated services in violation of Rule 7.3(a) and may not operate law -related second occupations using a
trade name under Rule 7.5(b). Cf. Florida State Bar Professional Ethics Committee Opinion 94 -6 (April
30, 1995) (notwithstanding Florida rule permitting law firms to use non-misleading trade names,
mediation department of law firm may not operate under trade names because rule requires use of trade
name in all aspects of firm's practice).
17. Block, supra , note 1 at 762-67.
18. ABA Formal Opinion No. 328 (June 1972). Accord Arizona State Bar Ethics Opinion No. 88-5
(Oct. 27, 1988); Florida State Bar Professional Ethics Committee Opinion 94 -6 (April 30, 1995); New
Hampshire Bar Ass'n Ethics Committee Formal Opinion No. 1987 -88/2 (Dec. 15, 1987) (also identifying
Rules 4.2 and 4.3). Contra [Ohio] Board of Commissioners on Grievances and Discipline Informal
Opinion No. 90-09 (June 15, 1990) (files of lawyer/realtor not subject to lawyer confidentiality rules if
no attorney-client relationship is formed).
16
19. Block, supra , note 1 at 760-61.
20. New York State Bar Ass'n Committee on Professional Ethics Opinion No. 206 (Nov. 22, 1971).
21. Comment, ABA Model Rule of Professional Responsibility 5.7(b).
22. A survey of lawyers' nonlegal business activities revealed that lawyers frequently act as agents for
title insurance companies; trustees in probate matters; personal representatives for decedents, minors or
incompetents; trustees or conservators in bankruptcy or other insolvency proceed ings; marriage
counselors or mediators; and private investigators in criminal matters. Block, supra , note 1 at 745-46.
23. In re Roth , 577 A.2d 490 (N.J. 1990); Nassau County Opinion No. 84 -3 (March 14, 1984); New
Hampshire Bar Ass'n Ethics Committee Formal Opinion No. 1987-88/2 (Dec. 15, 1987); New York State
Bar Ass'n Opinion No. 208 (Nov. 22, 1971); New York County Lawyers Ass'n Committee on
Professional Ethics Question No. 685 (July 10, 1991); Suffolk County Bar Ass'n Professional Ethics
Committee Opinion No. 93-3; West Virginia State Bar Legal Ethics Opinion Nos. 76 -1 (Summer 1976)
and 89-01. The New Hampshire opinion also concludes that when a nonlawyer co -broker is involved in
such a real estate transaction, the lawyer/broker sharing in the sale comm ission would be sharing a legal
fee with a nonlawyer in violation of Rule 5.4(a). New Hampshire Bar Ass'n Ethics Committee Formal
Opinion No. 1987-88/2 (Dec. 15, 1987); see also Nassau County Opinion No. 89-33 (Oct. 25, 1989)
(attorney may not act as associate of mortgage broker and represent client in same transaction). But see
Oregon State Bar Ass'n Informal Opinion No. 90 -40 (with informed consent of client, attorney may
represent seller in land sales contract and subsequently broker to third party selle r's interest in contract
or in related mortgages or trust deeds, notwithstanding variety of potential conflicts of interest);
Wisconsin State Bar Committee on Professional Ethics Opinion E -86-3 (nothing in ethics rules
precludes lawyer from representing client in same matter as lawyer and realtor, and with informed
consent of client lawyer may receive both legal and brokerage fees in same transaction provided total
compensation is reasonable).
24. ABA Informal Ethics Opinion 331 (Dec. 15, 1972); Illinois S tate Bar Ass'n Advisory Opinion on
Professional Conduct Revised Opinion No. 93 -1 (Jan. 21, 1994); Kansas Bar Ass'n Ethics Opinion No.
92-04 (July 30, 1992); New York State Bar Ass'n Committee on Professional Ethics Opinion No. 576
(June 5, 1988); North Dakota State Bar Ass'n Ethics Committee Opinion No. 93 -08 (June 4, 1993); Ohio
State Bar Ass'n Committee on Legal Ethics and Professional Conduct Formal Opinion No. 37 (July 3,
1989); Pennsylvania Bar Ass'n Committee on Legal Ethics and Professional Responsib ility Informal
Ethics Opinions 93-69 (April 13, 1993) and 93-149 (Jan. 5, 1994); South Carolina Bar Advisory
Opinion No. 92-03 (May 1992); Vermont Opinion No. 87-3. But see New Jersey Advisory Committee
on Professional Ethics Opinion 682 (Feb. 5, 1996) ("a ttorneys who are holders of substantive beneficial
interests in a title insurance company, such as commissions, rebates or profit sharing, may not purchase
title insurance from that company on behalf of their real estate purchasing clients," citing conflic ts of
interest); Oklahoma Bar Ass'n Legal Ethics Opinion No. 281 (Sept. 21, 1974) (attorney may not act as
agent for title insurance company in placement of insurance covering title to property purchased by
attorney's client, citing conflicts of interest). The disparate treatment of real estate brokerage and title
insurance in dual practice (even by the same ethics committee, e.g. , New York State Bar Association)
appears to reflect the historical ties between title insurance and law and, perhaps, the smalle r
commissions that tend to be earned for title insurance work. If anything, title insurance is even more law
related than real estate brokerage, which is reflected in the fact that some legal malpractice insurance
policies specifically include services as a title insurance agent within the scope of coverage.
25. The disclosure obligations of real estate brokers under Colorado law, C.R.S. 12 -61-801, et seq. ,
also may conflict with lawyers' duties under Rule 1.6 to preserve client confidences, especially the
obligations of transaction-brokers under C.R.S. 12-61-807(2)(b)(VI) and (VII).
26. This appears to be a common practice nationwide. See Block, supra , note 1 at 745; New York State
Bar Ass'n Committee on Professional Ethics Opinion No. 576 (June 5, 1986).
27. The services provided by a lawyer/title agent for the title insurance company are so law -related that
they effectively constitute the practice of law, subjecting the lawyer to compliance with the Rules and
creating a fiduciary obligation in the lawye r/title agent owed to the title insurance company. ABA
Formal Opinion 328 (June 1972). Whether the title insurance company is, therefore, "another client" of
the lawyer, within the meaning of Rules 1.7(a) and (b), involves a legal determination that is bey ond the
17
scope of this Opinion. If the lawyer/title agent determines that the title insurance company is "another
client," he or she must comply with the provisions of Rule 1.7 dealing with multiple clients. For
purposes of this Opinion, it will be assumed that the title insurance company is not considered a "client"
of the lawyer/title agent. But see Kansas Bar Ass'n Ethics Opinion No. 92-04 (July 30, 1992) (lawyer
performs legal services for both title company and client, implicating duty of loyalty); Verm ont Bar
Ass'n Opinion No. 87-3 (because attorney "represents" both title insurance company and prospective
purchaser of title insurance, rules relating to representation of multiple clients apply).
28. The comment to Rule 1.7 sheds further light on this t est, stating that the "critical questions are the
likelihood that a conflict will eventuate and, if it does, whether it will materially interfere with the
lawyer's independent professional judgment in considering alternatives or foreclose courses of action
that reasonably should be pursued on behalf of the client." Comment, Rule 1.7.
29. Accord Restatement (Third) of the Law, The Law Governing Lawyers, 207 comment c (Proposed
Final Draft No. 1, March 29, 1996) (Section 207 governing business transactions b etween lawyer and
client is applicable to services ancillary to the practice of law, e.g., sale of title insurance); Illinois
State Bar Ass'n Opinion No. 93-1 (Jan. 21, 1994); North Dakota State Bar Ass'n Opinion No. 93 -08
(June 4, 1993); South Carolina Bar Advisory Opinion No. 92-03 (May 1992).
30. See also New York State Bar Ass'n Committee on Professional Ethics Opinion No. 626 (March 19,
1992) (counsel for lender in real estate transaction must disclose to borrower, who pays lawyer's legal
fee, that lawyer will receive additional payment from title insurance company.
18
PARTNERSHIP AGREEMENT
FOR
WINKEN, BLINKEN & NOD, LLP 1
A COLORADO LIMITED LIABILITY PARTNERSHIP
DATED ____________, 2001
Caution, this Partnership Agreement is intended as an expl oration of
some of the effects of registering a partnership as a
registered limited liability partnership under the Colorado Uniform
Partnership Act (1997) (“CUPA”).
Rule 265 requires that the name of the professional company contain the words
“professional company,” “professional corporation,” “limited liability company,”
“limited liability partnership,” or “registered limited liability partnership” or
abbreviations thereof such as “Prof. Co.,” “Prof. Corp.,” “P.C. ,” “L.L.C.,” “L.L.P.,” or
“R.L.L.P.” that are authorized by the laws of the State of Colorado or the laws of the
state or jurisdiction of organization. In addition, the name of the professional company
shall always meet the ethical standards established by the Colorado Rules of
Professional Conduct (“CRCP”) for the names of law firms. CRCP Rule 7.5(b) and (d)
dealing with the permissable names for a law firm provide:
1
(b) A lawyer in private practice shall not practice under a
trade name, a name that is misleading as to the identity of the
lawyer or lawyers practicing under such a name, or firm
name containing names other than those of one or more of
the lawyers in the firm; provided, the name of a professional
corporation or professional association may contain "P.C.,"
"L.L.C.," "L.L.P.," "P.A." or similar symbols indicating the
nature of the organization, and a legal clinic which meets all
of the criteria of a legal clinic as defined by these rules may
use "legal clinic" in its name.
(d) A firm may use, or continue to include in its name, the
name or names of one or more deceased or retired members
of the firm or of a predecessor firm in a continuing line of
succession.
19
AGREEMENT OF PARTNERSHIP
OF
WINKEN, BLINKEN & NOD, LLP,
a Colorado limited liability partnership 2
This AGREEMENT (the “Partnership Agreement”) of Limited Liability
Partnership of Winken, Blinken & Nod, LLP (the “Partnership”), is entered into and
shall be effective as of the Effective Date (as hereafter defined) by and among Thomas
Winken (“Winken”), Richard Blinken (“Blinken”) and Harold Nod (“Nod”) (collectively
with any other person who becomes a party to this agreement, the “Partners”) pursuant
to the provisions of the Act.
RECITALS
A.
Effective as of the Effective Date, Winken, Blinken, and Nod have agreed
to create and become the partners (the “Partners”) of a partnership to be known as
Winken, Blinken & Nod, LLP (the “Partnership”) in the State; and
B.
Winken, Blinken, and Nod have determined to register the Partnership as a
limited liability partnership effective as of the Effective Date.
Now, therefore, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, and in consideration of the mutual covenants herein
contained, the Partners hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Partnership Agreement, the following definitions 3 shall
apply:
Section 1.1. “Act” shall mean the Colorado Uniform Partnership Act (1997).
This agreement is based on an agreement created by a committee of the American Bar
Association Business Law Section Partnership Committee to address issues which arise
under a partnership statute which conforms to the Revised Uniform Partnership Act
(1997) (“RUPA”).
2
None of the defined terms other than “Business,” “Partner,” “Partnership ,” and
“Partnership Agreement,” set forth in §§ 1.1 through 1.25 duplicate the defined terms
set forth in CUPA § 7-64-101.
3
20
Section 1.2. “All of the Partners” shall mean all of the Partners at the time that
the action is to be taken.
Section 1.3. “Available Cash” shall mean the amount of cash of the Partnership
that is in excess of the amount determined by the Managing Partner to be n ecessary for
current expenses of the Partnership and a reserve for capital expenditures and other
needs of the Partnership.
Section 1.4. “Bankruptcy Code” means the federal Bankruptcy Code and the
bankruptcy and insolvency statutes of any state.
Section 1.5 “Breaching Partner” shall have the meaning set forth in Article 17.
Section 1.5. “Business” shall have the meaning set forth in Article 6.
Section 1.6. “Code shall mean the Internal Revenue Code of 1986, as the same
may be amended from time to time.
Section 1.7. “Consent” when applied to an action of the Partners shall mean
consent expressed at a meeting of the Partners, in writing without a meeting, or by some
Partners at a meeting and by some Partners in writing.
Section 1.8. “Capital Account” shall mean each Partner’s capital account as
maintained pursuant to Article 13.
Section 1.9. “Dissociated Partner” shall mean (i) the Partner whose Withdrawal,
Expulsion or other event (other than death or permanent disability resulting in the
appointment of a legal representative) causes his or her Dissociation or (ii) the legal
representative of a Partner whose death or permanent disability has resulted in the
Partner’s Dissociation.
Section 1.10. “Dissociation” (“Dissociate”) 4 shall mean the Withdrawal,
Expulsion, permanent disability, or death of Partner or any other event that causes a
person to cease to be a Partner.
Section 1.11. “Dissociation Amount” shall mean, in the case of any Dissociated
Partner, the amount in such Partner’s Capital Account determined through the
Dissociation Date. 5
The term used in CUPA is “Dissociation” [CUPA § 7-64-601], which includes all
events causing a partner to cease to be a partner, as opposed to withdrawal, which, in
this Partnership Agreement, is the voluntary dissociation of a partner.
4
Note that this amount will be dramatically different if capital accounts are “booked up”
(i.e., revalued at fair market value) on the dissociation of the Partner. If the capital
accounts are revalued, the value of all uncollected accounts receivable as of the date of
5
21
Section 1.12. “Dissociation Date” shall mean, in the case of any Dissociated
Partner, the date of the event resulting in the Partner’s Dissociation.
Section 1.13 “Effective Date” shall mean the earlier of January 1, 2000 or the
date upon which the registration statement is filed with the Secretary of State.
Section 1.14. “Expulsion” (“Expel” or “Expelled”) shall mean a Partner’s
Dissociation as provided in Sections 15.3 and 21.1.
Section 1.15. “Expelled Partner” shall mean the Partner who has been Expelled.
Section 1.16. “Indemnified Partner” shall mean each Partner and Dissociated
Partner entitled to indemnification by the Partnership pursuant to Article 20.
Section 1.17. “Majority of the Partners” shall mean more than one half of the
Partners (determined Per Capita) at the time that the action is to be taken.
Section 1.18. “Managing Partner” means Winken and any successor managing
partner appointed by the Partners pursuant to Section 8.2 and 8.3 hereof.
Section 1.19. “Other Partners” has the meaning set forth in Section 12.3.
Section 1.20. “Partner” shall mean each individual executing this agreement as a
Partner or subsequently admitted as a Partner. A Partner may transfer its Partnership
Interest to a corporation, partnership, limited liability company or other business entity
so long as: (i) such entity is wholly owned by such Partner, (ii) such individual agrees
that any transfer of any interest in the entity shall be treated as a transfer of entity’s
interest in the Partnership, and (iii) such Partner personally guarantees the obligation of
the entity as a Partner, to the extent such obligation is guaranteed by the individual
partners.
Section 1.21. “Partnership” shall mean Winken, Blinken & Nod, LLP.
Section 1.22. “Partnership Agreement shall mean this partnership agreement of
Winken, Blinken & Nod, LLP.
Section 1.23. “Per Capita” shall mean, with respect to any action or obligation, a
percentage, determined by dividing one by the number of Partners at the time the action
is be taken or the obligation is to be performed.
dissociation will be included in the capital account. In this agreement, capital accounts
are not booked up on dissociation.
22
Section 1.24. “Registration Period” shall mean the period during which the
Partnership is a limited liability partnership within the meaning of the Act. 6
Section 1.25. “Retirement Age” shall have the meaning set forth in Sectio n 16.1.
Section 1.26. “Rules” shall mean Colorado Rule of Civil Procedure Rule 265,
the Colorado Rules of Professional Conduct and any other rule adopted by any body
charged with the regulation of the practice of law in any jurisdiction in which the
Partnership conducts its Business as such rules may be changed from time to time.
Section 1.27. “Secretary of State” shall mean the secretary of state of Colorado.
Section 1.28. “Two-Thirds of the Partners” shall mean 66 % of all the Partners
(determined Per Capita) except that in the case of Expulsion of a Partner, the Partner
whose Expulsion is under consideration shall not be counted in determining the number
of all the Partners.
Section 1.29. “Withdrawal (“Withdraw”) shall mean a Partner’s Dissociation as a
result of the Partner’s act as provided in Section 15.2.
Section 1.30. “Withdrawn Partner” shall mean the Partner whose Withdrawal
causes his or her Dissociation.
ARTICLE 2
NAME AND PLACE OF BUSINESS
Section 2.1 Name. The activities and business of the Partnership shall be
conducted under the name of Winken, Blinken & Nod, LLP, in the City and County of
Denver, State of Colorado and under such variations of this name as may be comply
with the Rules and may be necessary to comply with the laws of other states within
which the Partnership may do business. 7
Section 2.2 Place of Business. The principal place of business and chief
executive office of the Partnership shall be in the City and County of Denver, Stat e of
Colorado, but additional places of business may be located elsewhere. 8
Because the vicarious liability of the partners is different with respect to obligations
incurred while the partnership is a limited liability partnership, the contribution and
indemnification rules will also be different. CUPA § 7-64-306(3) and (4).
6
CUPA does not impose requirements upon the names of non-LLP partnerships, although
Rule 265 and Rule 7.5 CRPC do. CUPA § 7-64-1003(1)(a) details the suffixes which
are required for an LLP.
7
8
CUPA § 7-64-106 provides:
23
Section 2.3
Address. The mailing address of the Partnership shall be as follows:
ARTICLE 3
FORMATION, EFFECTIVENESS AND TERM
Section 3.1 Formation of Partnership. The Partners do hereby form a general
partnership 9 to be registered as a limited liability partnership 10 immediately upon the
formation of the Partnership, all pursuant to the Act. 11
Section 3.2 Effectiveness. The Partners agree all provisions of the Partnership
Agreement are considered effective on the Effective Date. 12
(1) Except as otherwise provided in subsection (3) of this
section, the law of the jurisdiction under which the in which
a partnership is formed governs governs relations among the
partners and between the partners and the partnership;
(2) A partnership is presumed to have been formed in the
jurisdiction in which it has its chief executive office.
(3) The law of this state governs relations among the partners
and between the partners and the partnership and the liability
of partners for an obligation in a partnership that has filed a
registration statement as a limited liability partnership in this
state.
It is important to keep in mind that if the partnership will transact business in any
foreign jurisdiction, especially foreign jurisdictions which provide only a partial liability
shield, or in jurisdictions which limit the permissible activities of an LLP, special
consideration must be given to conflicts of law issues (e.g. Restatement of Conflicts
§§ 307, 298) to ascertain whether the full liability shield will be respected. In cases of
significant ambiguity, the LLP may not be the most appropriate form of business.
9
No state filing is necessary to form a general partnership.
Registration as an LLP requires the filing of a registration statement. CUPA § 7-641002.
10
Under CUPA § 7-64-103(j), the provision that the partnership will be governed by the
laws of the jurisdiction in which the statement of registration is filed (CUPA § 7 -64106(3)) may not be waived or altered in the partnership agreement.
11
24
Section 3.3 Term. The term of the Partnership shall commence upon the
Effective Date and shall continue in existence until terminated pursuant to this
Partnership Agreement or by law. 13
ARTICLE 4
AGREEMENT TO BE BOUND
The Partners agree that except as provided in the Partnership Agreement, 14 the
Act and the laws of Colorado shall govern the internal affairs of the Partnership
including the relationship of the Partners among themselves and the relationship
between the Partners and the Partnership. 15 Notwithstanding the foregoing, no provision
of this agreement that violates the Rules shall be enforceable.
ARTICLE 5
REGISTRATION AS A LIMITED LIABILITY PARTNERSHIP
Section 5.1. Agreement to Registration. The Partners agree that the Partnership
shall register as a limited liability partnership under the Act, and authorize the
Managing Partner to execute a registration statement and such other document or
documents as may be required in order to register the Partnership in any jurisdiction
which the Managing Partners deem appropriate. 16
Ordinarily, registering an existing partnership as a limited liability partnership will
require an amendment of the partnership agreement to (1) change the name of the
partnership, and (2) modify any indemnification rights, contribution obligations, and
statements of liability that might be included in the agreement so as to avoid inadvertent
waiver of the limited liability provided by the registration.
12
Certain partnerships are organized for a specific term or for a particular undertaking.
CUPA § 7-64-406 addresses the continuation of such partnerships beyond that term or
specific undertaking.
13
CUPA § 7-64-103(1) gives the partners broad freedom to order their affairs by
agreement:
To the extent the partnership agreement does not otherwise
provide, this article governs relations among the partners and
between the partners and the partnership.
14
CUPA § 7-64-103 provides that the partners may establish their relationship with each
other and with the partnership by agreement, subject to a few limitations set forth in
CUPA § 7-64-103(2), may not be altered.
15
CUPA § 7-64-1002(1) requires that the registation of a partnership be approved by the
partners necessary to amend the partnership agreement, or if no such consent is set forth
in the partnership agreement, by the consent of all general partners, wh ich, in the
16
25
Section 5.2. Authorization to Execute Statements. The Partners and each of them
hereby agree that the Partnership shall be a registered limited liability partners hip and
authorize any one or more of the Managing Partners or any other Partner or Partners
designated by the Managing Partners to execute any registration statement, report or
other statement required under the Act or authorized by the partners, and pay
appropriate fees therefore necessary or convenient to the Partnership’s status as a
limited liability partnership if and when so directed by the Managing Partner. 17
ARTICLE 6
BUSINESS AND PURPOSE OF THE PARTNERSHIP
The Partnership is organized solely for the purpose of conducting the practice of
law (the “Business”), as permitted by the laws of the State and permitted by the Rules,
the Partnership shall not engage in any other activity or business. The Partnership shall
have the powers to do such things as are incidental, proper or necessary to the operation
of the Business, and to the carrying out of the objects, purposes, powers and privileges
herein granted with respect to the Business, as well as to exercise all those powers
expressly conferred on partnerships organized under the Act, together with all other
rights bestowed upon partnerships generally under the laws of the State, all with respect
to the Business.
absence of a contrary provision, means unanimous consent. CUPA § 7 -64-1002(1) sets
froth the matters required to be included in a registration statement:
(a) The domestic entity name of the limited liability partnership or limited
liability limited partnership;
(b) The address of its chief executive office;
(c) If its chief executive office is not located in this state, the address of a
registered office and the name and street address of a registered agent for service
of process in this state; and
(d) A declaration that it is a limited liability partnership or a limited liability
limited partnership, as the case may be.
details the requirements of the Statement of Qualifications.
CUPA § 7-64-105 details execution requirements applicable to the filing of
“statements” (defined at CUPA § 7-64-101(29)) by general partnerships/LLPs. Any
statement filed by the partnership must be signed by at least two partners (CUPA § 7 64-105(3)).
17
26
ARTICLE 7
OTHER BUSINESS OF THE PARTNERSHIP
The Business of the Partnership shall include holding interests in other
partnerships, limited liability companies, corporations and other business entities
engaging in business activities, but only if unanimously approved by the Partners and
permitted by the Rules.
ARTICLE 8
MANAGEMENT OF THE PARTNERSHIP
Section 8.1. Management of the Partnership. The management of the day to day
business of the Partnership shall be vested in the Managing Partner. Except to the
extent that this Partnership Agreement requires that an action is to be taken with the
Consent of the Partners, the Managing Partners shall have the authority to make all
decisions and take all actions necessary to conduct the business of the Partnership. 18
Section 8.2. Managing Partner. The Managing Partner shall be a Partner who
shall be elected at each annual meeting of the Partners. 19
Section 8.3. Removal of Managing Partner. By the Consent of a Majority of
Partners, the Partners may, with or without cause, remove a Managing Partner at any
time and name and appoint a successor Managing Partner. 20
ARTICLE 9
MATTERS REQUIRING CONSENT OF PARTNERS
Under CUPA § 7-64-401(6), each Partner has equal rights in the management and
conduct of the Partnership business. This provision centralizes day-to-day management
authority in the Managing Partner.
18
The mechanism for electing a managing partner, including the number of votes
required, provisions with respect to whether individual partners vote on a per capital,
per capita or other basis, the term of office and similar matters are open to such
modifications as should be desired by the Partners. The Managing Partner could be a
single individual, a committee which is elected in toto on an annual or other periodic
basis, or, as here, a committee with a staggered membership. In the first year, it may be
necessary to elect a committee with individual members having staggered term
expirations.
19
As with the procedures for the election of a Managing Partner, the mechanisms to be
used with respect to the removal of a Managing Partner are open to such provisions as
are agreed to by the Partners. For example, cause or notice followed by opportunity for
cure may in some instances be appropriate.
20
27
Section 9.1. Items requiring Consent of All of the Partners. The following
actions may not be taken without the Consent of All of the Partners:
i.
Amendment of the Partnership Agreement; 21
ii.
Increase in the principal amount of any indebtedness guaranteed by
the Partners; 22
iii.
Mergers with or into other partnerships, corporations, limited
liability companies and other business entities; 23 and
iv.
Dissolution of the Partnership. 24
Section 9.2. Items Requiring Consent of Two-Thirds of the Partners. 25 The
following actions may not be taken without the Consent of Two -Thirds of the Partners:
CUPA § 7-64-401(b)(10) provides that an amendment to the Partnership Agreement
will require the consent of all Partners. While it is possible to depart from this rule, as
the Partnership Agreement constitutes the essential bargain between the parties,
departing from a rule of unanimous approval will seldom be appropriate.
21
In certain circumstances, it may be appropriate to set a level above which indebtedness
requires partners’ approval, and approval of increases above that level m ay be made by a
majority or super-majority, rather than all, partners. The provision of personal liability
upon this indebtedness will impact upon this issue. See section 12.3 hereof.
22
CUPA, unlike the UPL, provides for conversions and mergers of partner ships; the UPL
was silent with respect to the conversion of merger of partnerships. Consequently,
under the UPA, in order to transfer the business of a partnership to another partnership
or to another business entity, the transaction had to be structured as an asset transfer.
Under CUPA § 7-64-905(3)(a), the merger of a partnership must be approved by all
partners or such differing percentage as is specified in the partnership agreement for
approving a merger.
23
Under CUPA § 7-64-801(b)(ii), a partnership for a definite term or particular
undertaking may be dissolved upon the express approval of all partners.
24
Note that unless another allocation is provided for in the Partnership Agreement,
partners vote on a per capita (one partner/one vote) basis. CUPA § 7-64-401(b)(10);
sections 1.22, 1.26 hereof. The use of two-thirds as a voting threshold for acts which do
not require unanimity, but which should not be left to a simply majority, is not mandated
by CUPA, and any threshold which is negotiated is acceptable. Additional items
requiring this higher threshold are a matter of negotiations in the course of preparation
of the Partnership Agreement.
25
28
i.
Admission of a new Partner; 26
ii.
Waiver of a Partner’s 27 obligation to make a capital contribution;
iii.
Admission of a transferee as a Partner 28; and
iv.
Expulsion of a Partner. 29
Section 9.3. Items Requiring Consent of a Majority of the Partners. 30 The
following actions may not be taken without the Consent of a Majority of the Partner s:
i.
Except as provided above, creation or expansion of Partnership debt
in excess of $___________;
ii.
Purchase or sale of real estate;
iii.
Entering into or modifying the lease of the Partnership’s space; and
iv.
Establishment of new offices of the Partnership.
Under CUPA § 7-64-401(b)(9), a person may become a Partner only with the consent
of all other Partners. Providing that new Partners be admitted upon the approval of two thirds of the Partners is a departure from this provision.
26
CUPA does not contain a provision expressly addressing either the documentation of
an obligation to make a capital contribution or the waiver of such an obligation. The
drafter has the option of providing that the waiver of a contribution obligation shall be
by a majority, a super-majority, or another threshold of the partners.
27
28
See section 15.3 and the comments thereon.
This provision relates to CUPA § 7-64-601(c), which addresses expulsion pursuant to
the partnership agreement. A threshold higher or lower than two -thirds may be utilized.
Under CUPA § 7-64-801, the expulsion of a partner does not lead to the dissolution of
the partnership.
29
None of these items is mandated by CUPA, and are the subject of negotiation. The
term “Majority of the Partners” is defined at section 1.17.
30
29
ARTICLE 10
MEETINGS AND VOTING 31
Section 10.1. Regular Meetings. Regular meetings of the Partners shall be held no
less frequently than quarterly at such time and place determined by the Managing
Partners. The first regular meeting of the Partners each calendar year shall be the annual
meeting of the Partners.
Section 10.2. Special Meetings. Special meetings shall be called by the Managing
Partners at the request of any __ (_) or more of the Partners.
Section 10.3. Notice of Meetings. Partners shall be given notice of the meeting,
and, to the extent known, the matters to be discussed at the meeting in writing, by
electronic mail, or verbally, but, except in the case of the annual meeting of the
Partners, no defect in notice shall cause the action taken at such a meeting to be
invalid. 32
Section 10.4. Election of Managing Partner. In accordance with Section 8.2
hereof, one-third of the Managing Partners shall be elected at the annual meeting of the
Partners, with each Partner having one (1) vote for each Managing Partner to be
elected. 33 Partners shall be entitled to vote cumulatively for the Managing Partners. 34
CUPA, unlike the Colorado Business Corporation Act (see CRS § 7-107-101 et seq.),
does not contain detailed procedures for calling meetings of the members, rights to call
special meetings and similar matters. The level of detail at which these matters should
be addressed in the partnership agreement will vary with the partnership, its size and the
business activity undertaken.
31
Consider the formality of meetings. Note that partners can consent in writing
regardless of whether a meeting is held (i.e., if there are not enough partners to approve
a matter at a meeting, additional consents may be obtained in writin g after the meeting).
Because all consents are determined by reference to all the Partners (rather than a
quorum) there is no reason to require a quorum to conduct business.
32
Note that partners vote per capita, not per capital. Other methods for allocatin g voting
rights are permissible.
33
Cumulative voting is not required by or even addressed by RUPA, and there is no
mandate that it be used. If cumulative voting is used in the election of the Managing
Partners, consider whether it should be referenced as well with respect to the removal of
the Managing Partners.
34
30
ARTICLE 11
AUTHORITY OF PARTNERS
No Partner shall have any authority to hold himself or herself out as a general
agent of the Partnership or another Partner in any business or activity other than the
Business described in Articles 6 and 7. 35
CUPA § 7-64-301(a) recites the rule that each Partner is an agent of the Partnership for
the purpose of its business, and that each Partner has apparent authority to bind the
Partnership with respect to third parties who do not know or have not received
notification that the partner lacks authority. CUPA § 7-64-301(b) goes on to specify
that the act of a Partner not apparently for carrying on the ordinary business of the
Partnership is binding upon the Partnership only to the extent that the act is authorized
by the other Partners.
35
CUPA § 7-64-303 permits a partnership to file a “statement of partnership
authority”, as detailed in Comment 1 thereto, to create:
. . . an optional statement of partnership authority specifying
the names of the partners authorized to execute instruments
transferring real property held in the name of the partnership.
It may also grant supplementary authority to partners, or
limit their authority, to enter into other transactions on
behalf of the partnership.
The execution, filing, and
recording of statements is governed by Section 105.
CUPA § 7-64-303 provides:
(a)
A partnership may file a statement of partnership
authority, which:
(1)
must include:
(i)
the name of the partnership;
(ii)
the street address of its chief
executive office and one of office
in this State, if there is one;
(iii)
the names and mailing addresses
of all of the partners or of an
agent appointed and maintained
by the partnership for the purpose
of subsection (b); and
(iv)
the names
authorized
31
of
to
the partners
execute
an
instrument
transferring
real
property held in the name of the
partnership; and
(2)
may state the authority, or limitations on
the authority, of some or all of the
partners to enter into other transactions
on behalf of the partnership and any
other matter.
(b)
If a statement of partnership authority names an agent,
the agent shall maintain a list of the names and
mailing addresses of all of the partners and make it
available to any person on request for good cause
shown.
(c)
If a filed statement of partnership authority is
executed pursuant to Section 105(c) and states the
name of the partnership but does not contain all of the
other information required by subsection (a), the
statement nevertheless operates with respect to a
person not a partner as provided in subsections (d)
and (e).
(d)
Except as otherwise provided in subsection (g), a filed
statement of partnership authority supplements the
authority of a partner to enter into transactions on
behalf of the partnership as follows:
(1)
Except for transfers of real property, a grant of
authority contained in a filed statement of
partnership authority is conclusive in favor of a
person who gives value without knowledge to
the contrary, so long as and to the extent that a
limitation on that authority is not then
contained in another file statement. A filed
cancellation of a limitation on authority revives
the previous grant of authority.
(2)
A grant of authority to transfer real property
held in the name of the partnership contained in
a certified copy of a filed statement of
partnership authority recorded in the office for
recording transfers of that real property is
conclusive in favor of a person who gives value
32
ARTICLE 12
PARTNERS’ CONTRIBUTION TO THE PARTNERSHIP GUARANTEE OF
PARTNERSHIP OBLIGATIONS & LIABILITY FOR PARTNERSHIP OBLIGATIONS
Section 12.1. Partners’ Obligation to Contribute in General. Except as expressly
set forth in this Article 12, no Partner or Dissociated Partner shall have any obligation to
contribute to the Partnership. The obligations to contribute as set forth in this Article 12
are solely for the benefit of the Partners and Dissociated Partners and no creditor or the
Partnership or any other person shall have any right to rely upon or enforce any
contribution obligation contained herein. The Partners reserve the right to amend or
waive any contribution obligation of any Partner with or without consideration at any
time. 36
without knowledge to the contrary, so long as
and to the extent that a certified copy of a filed
statement containing a limitation on that
authority is not then of record in the office for
recording transfers of that real property. The
recording in the office for recording transfers
of that real property of a certified copy of a
filed cancellation of a limitation on authority
revives the previous grant of authority.
(e)
A person not a partner is deemed to know of a
limitation on the authority of a partner to transfer real
property held in the name of the partnership if a
certified copy of the filed statement containing the
limitation on authority is of record in the office for
recording transfers of that real property.
(f)
Except as otherwise provided in subsections (d) and
(e) and Sections 704 and 805, a person not a partner is
not deemed to know of a limitation on the authority of
a partner merely because the limitation is contained in
a filed statement.
(g)
Unless earlier canceled, a filed statement of
partnership authority is canceled by operation of law
five years after the date on which the statement, or the
most recent amendment, was filed with the [Secretary
of State].
As set forth herein, a vote of only a majority of the partners is required to set aside or
compromise a partner’s contribution obligation. Consideration should be given to
36
33
Section 12.2. Initial Contributions . Each Partner shall contribute an equal
amount of cash equal to $_________ which represents each Partner’s share of the
necessary start up capital for the Partnership by the Partners. 37
Section 12.3. Guarantees and Contributions. At the request of the Managing
Partner, each Partner agrees to execute his or her personal guarantee of any indebtedness
of the Partnership not to exceed $_______. 38 The Managing Partner shall attempt to
structure the guarantee in such a manner as to require each Partner to only have to
guarantee that Partner’s Per Capita share of the indebtedness. In the event any Partner is
required to make any payment with respect to such indebtedness, the Partnership shall
indemnify that Partner for all amounts paid or incurred with respect to such
indebtedness. In the event any Partner (the “Paying Partner”) is obligated to make a
payment in excess of the Paying Partner’s Per Capita share of the indebtedness, each
other Partner (an “Other Partner”) shall be obligated to indemnify the Paying Partner in
an amount equal to the Other Partner’s Per Capita share of the excess of the amount paid
by the Paying Partner over the Paying Partner’s Per Capita share of the indebtedness.
This obligation to contribute shall continue notwithstanding the registration of the
Partnership as a limited liability partnership and notwithstanding Section 12.6 hereof. 39
whether a higher threshold is appropriate. If a higher threshold is adopted, consider
whether compromise of a contribution obligation should be included in either of
sections 9.1 or 9.2, as appropriate.
Note that Schedule 1 provides for a listing of the capital contribution obligations. Of
course, there is no requirement that each partner contribute an equal amount to the
partnership. In such a circumstance, this provision could provide for a schedule listing
the partners and their respective initial capital contributions, as well as such additional
amounts that will be contributed and the events which will give rise to t he obligation to
make the necessary payment.
37
Under CUPA § 7-64-306(3), obligations incurred by the partnership while it is a LLP
are solely obligations of the partnership, and are not obligations of the individual
partners. As such, any personal guarantee of partnership indebtedness is a contractual
waiver of that defense.
38
Contribution among the Partners should be addressed because partners in a limited
liability partnership do not have a default obligation to contribute to the partnership
losses as do partners in an ordinary partnership. In addition, drafters should be cautious
if there are obligations to contribute to the partnership in existence before the
registration as a limited liability partnership. The agreement should clearly state whether
the contribution obligation is to survive registration as an LLP. RUPA (although not
CUPA) actually negates pre-existing contribution obligations unless they are agreed to
again at the time of registration.
39
34
Section 12.4. Contribution to Indemnification with Respect to Obligations
Incurred by the Partnership at a Time Other than During the Registration Period . Each
Partner agrees to contribute an amount equal to that Partner’s Per Capita portion of the
excess of (i) the amount that the Partnership is obligated to pay in Indemnification under
Article 20 to an Indemnified Partner on account of a liability or obligation of the
Partnership that was incurred at a time other than during the Registration Period over
(ii) the amount paid or reimbursed to the Indemnified Partner by the Partnership and
under policies of insurance carried by the Partnership.
Section 12.5. Obligation of Partner or Dissociated Partner to Indemnify
Partnership. Any Partner or Dissociated Partner who’s actions have contributed to the
creation of a liability or obligation of the Partnership with respect to which such Partner
or Dissociated Partner would not be entitled to indemnification under Article 20 , 40 the
Partner or Dissociated Partner shall contribute an amount sufficient to indemnify the
Partnership against all costs, obligations, and liabilities of the Partnership arising from
such actions (including the obligation to indemnify any other Indemnifi ed Partner)
except to the extent such obligation or liability is paid or reimbursed under a policy of
insurance carried by the Partnership. 41
Section 12.6 Liability for Partnership Obligations. Except as specifically
provided herein and to the minimum extent necessary for the Partnership to be in
compliance with the Rules, 42 no Partner shall be personally liable or accountable,
Indemnification among the Partners should be addressed because partners in a limited
liability partnership do not have a default obligation to contribute to the partnership
losses as do partners in an ordinary partnership. In addition, drafters should be cautious
if there are obligations to contribute to the partnership in existence before the
registration as a limited liability partnership. The agreement should clearly state whether
the contribution obligation is to survive. RUPA actually negates pre -existing
contribution obligations unless they are agreed to again at the time of registration.
40
Note that if the partnership chooses to self-insure, the wrongful partner will have to
pay the entire amount of the obligation (i.e., the contributing partner’s obligation is not
reduced by the amount reserved by the Partnership or funded through a letter of credit).
41
See Rule 265 I.A.4 (providing that the partnership agreement shall provide, and each
of the partners shall agree, that each of them who is a partner at the time of the
commission of any professional act, error, or omission by any of the partners or
employees of the partnership shall be jointly and severally liable to the extent provided
by the Rule 265 for the damages caused by such act, error, or omission; provided,
however, that the partnership agreement may provide that any such partner who has not
directly and actively participated in the act, error, or omission for which liability is
claimed shall not be liable if at the time the act, error, or omission occurs the
partnership has professional liability insurance which meets the certain minimum
standards set forth in the Rule.)
42
35
directly or indirectly (including by way of indemnification, contribution, assessment or
otherwise), for debts, obligations and liabilities of, or chargeable to, the Partnership, or
another Partner or Partners, whether arising in tort, contract or otherwise, solely by
reason of being a Partner or acting (or omitting to act) in such capacity, which such
debts, obligations and liabilities occur, are incurred or are assumed while the
Partnership is a limited liability partnership. 43
43
RUPA § 306(c) provides:
(a)
Except as otherwise provided in subsections (b) and
(c), all partners are liable jointly and severally for all
obligations of the partnership unless otherwise agreed by the
claimant or provided by law.
(b)
A person admitted as a partner into an existing
partnership is not personally liable for any partnership
obligation incurred before the person’s admission as a
partner.
(c)
An obligation of a partnership incurred while the
partnership is a limited liability partnership, whether arising
in contract, tort, or otherwise, is solely the obligation of the
partnership. A partner is not personally liable, directly or
indirectly, by way of contribution or otherwise, for such a
partnership obligation solely by reason of being or so acting
as a partner.
This subsection applies notwithstanding
anything inconsistent in the partnership agreement that
existed immediately before the vote required to become a
limited liability partnership under Section 1001(b).
The comments to RUPA § 306 provide:
1.
Section 306(a) changes the UPA rule by imposing
joint and several liability on the partners for all partnership
obligations where the partnership is not a limited liability
partnership. Under UPA Section 15, partners’ liability for
torts is joint and several, while their liability for contracts is
joint but not several. About ten States that have adopted the
UPA already provide for joint and several liability. The
UPA reference to “debts and obligations” is redundant, and
no change is intended by RUPA’s reference solely to
“obligations.”
Joint and several liability under RUPA differs, however,
from the classic model, which permits a judgment creditor to
proceed immediately against any of the joint and several
36
judgment debtors. Generally, Section 307(d) requires the
judgment creditor to exhaust the partnership’s assets before
enforcing a judgment against the separate assets of a partner.
2.
RUPA continues the UPA scheme of liability with
respect to an incoming partner, but states the rule more
clearly and simply. Under Section 306(a), an incoming
partner becomes jointly and severally liable, as a partner, for
all partnership obligations, except as otherwise provided in
subsection (b).
That subsection eliminates an income
partner’s personal liability for partnership obligations
incurred before his admission as a partner. In effect, a new
partner has no personal liability to existing creditors of the
partnership, and only his investment in the firm is at risk for
the satisfaction of existing partnership debts.
That is
presently the rule under UPA Sections 17 and 41(7), and no
substantive change is intended. As under the UPA, a new
partner’s personal assets are at risk with respect to
partnership liabilities incurred after his admission as a
partner.
3.
Subsection (c) alters classic joint and several liability
of general partners for obligations of a partnership that is a
limited liability partnership.
Like shareholders of a
corporation and members of a limited liability company,
partners of a limited liability partnership are not personally
liable for partnership obligations incurred while the
partnership liability shield is in place solely because they are
partners.
As with shareholders of a corporation and
members of a limited liability company, partners remain
personally liable for their personal misconduct.
In cases of partner misconduct, Section 401(c) sets forth a
partnership’s obligation to indemnify the culpable partner
where the partner’s liability was incurred in the ordinary
course of the partnership’s business. When indemnification
occurs, the assets of both the partnership and the culpable
partner are available to a creditor. However, Sections
306(c), 401(b), and 807(b) make clear that a partner who is
not otherwise liable under Section 306(c) is not obligated to
contribute assets to the partnership in excess of agreed
contributions to share the loss with the culpable partner.
(See Comments to Sections 401(b) and 807(b) regarding a
slight variation in the context of priority of payment of
partnership obligations.) Accordingly, Section 306(c) makes
37
clear that an innocent partner is not personally liable for
specified partnership obligations, directly or indirectly, by
way of contribution or otherwise.
Although the liability shield protections of Section 306(c)
may be modified in part or in full in a partnership agreement
(and by way of private contractual guarantees), the
modifications must constitute an intentional waiver of the
liability protections.
See Sections 103(b), 104(a), and
902(b).
Since the mere act of filing a statement of
qualification reflects the assumption that the partners intend
to modify the otherwise applicable partner liability rules, the
final sentence of subsection (c) makes clear that the filing
negates inconsistent aspects of the partnership agreement
that existed immediately before the vote to approve
becoming a limited liability partnership. The negation only
applies to a partner’s personal liability for future partnership
obligations.
The filing however has no effect as to
previously created partner obligations to the partnership in
the form of specific capital contribution requirements.
Inter se contribution agreements may erode part or all of the
effects of the liability shield. For example, Section 807(f)
provides that an assignee for the benefit of creditors of a
partnership or a partner may enforce a partner’s obligation to
contribute to the partnership. The ultimate effect of such
contribution obligations may make each partner jointly and
severally liable for all partnership obligations - even those
incurred while the partnership is a limited liability
partnership. Although the final sentence of subsection (c)
negates such provisions existing before a statement of
qualification is filed, it will have no effect on any
amendments to the partnership agreement after the statement
is filed.
The connection between partner status and personal liability
for partnership obligations is severed only with respect to
obligations incurred while the partnership is a limited
liability partnership. Partnership obligations incurred before
a partnership becomes a limited liability partnership or
incurred after limited liability partnership status is revoked
or canceled are treated as obligations of an ordinary
partnership. See Sections 1001 (filing), 1003 (revocation),
and 1006 (cancellation).
Obligations incurred by a
partnership during the period when its statement of
38
ARTICLE 13
CAPITAL ACCOUNTS
qualification is administratively revoked will be considered
as incurred by a limited liability partnership provided the
partnership’s status as such is reinstated within two years
under Section 1003(e). See Section 1003(f).
When an obligation is incurred is determined by other law.
See Section 104(a). Under that law, and for the limited
purpose of determining when partnership contract
obligations are incurred, the reasonable expectations of
creditors and the partners are paramount.
Therefore,
partnership obligations under or relating to a note, contract,
or other agreement generally are incurred when the note,
contract, or other agreement is made. Also, an amendment,
modification, extension, or renewal of a note, contract, or
other agreement should not affect or otherwise reset the time
at which a partnership obligation under or relating to that
note, contract, or other agreement is incurred, even as to a
claim that relates to the subject matter of the amendment,
modification, extension, or renewal. A note, contract, or
other agreement may expressly modify these rules and fix the
time a partnership obligation is incurred thereunder.
For the limited purpose of determining when partnership tort
obligations are incurred, a distinction is intended between
injury and the conduct causing that injury. The purpose of
the distinction is to prevent unjust results. Partnership
obligations under or relating to a tort generally are incurred
when the tort conduct occurs rather than at the time of the
actual injury or harm. This interpretation prevents a culpable
partnership from engaging in wrongful conduct and then
filing a statement of qualification to sever the vicarious
responsibility of its partners for future injury or harm caused
by conduct that occurred prior to the filing.
Note that liabilities incurred before the partnership became an LLP or after
revocation of that status are treated as obligations of an ordinary partnership. See
RUPA §§ 1001, 1003 and 1006. If an LLP registration is administrative ly resolved, but
reinstated within two years (RUPA § 1003(e)), liabilities incurred during the period of
revocation are treated as obligations of an LLP.
39
Section 13.1. Account. An individual Capital Account shall be established and
maintained for each Partner. Each Partner’s Capital Account (a) shall be increased by (i)
the amount of money and fair market value of property contributed to the Partnership
and (ii) the Partner’s allocable share of income and gain allocated pursuant to this
Partnership Agreement, and (b) shall be decreased by (i) the amount of money and fair
market value of property distributed to that Partner and (ii) that Partner’s allocable share
of deductions and loss allocated pursuant to this Partnership Agreement. 1 No Partner
shall have a deficit Capital Account at the end of any Partnership year. 2
1
Under RUPA § 401(a):
Each partner is deemed to have an account that is:
(1) credited with an amount equal to the money plus
the value of any other property, net of the amount of any
liabilities, the partner contributes to the partnership and the
partner’s share of the partnership profits; and
(2) charged with an amount equal to the money plus
the value of any other property, net of the amount of any
liabilities, distributed by the partnership to the partner and
the partner’s share of the partnership losses.
2
Consider the need for a qualified income offset provision.
40
Section 13.2. Adjustments to Account. The Capital Accounts of the Partners shall
be increased or decreased to reflect a revaluation of the assets of the Partnership
adjusted to reflect the fair market value of the assets upon the admission of a Partner or
the liquidation of the Partnership. The Capital Accounts shall not be so adjusted on the
Dissociation of a Partner. For purposes of making adjustments pursuant to this Section
13.2, the gross fair market values of Partnership assets shall be determined as follows:
(i) accounts receivable shall be valued at - percent (- %) of face amount and (ii) all other
assets shall be valued at their respective fair market values prior to the event causing
such adjustment.
ARTICLE 14
SHARING OF DISTRIBUTIONS AND ALLOCATIONS OF PROFITS AND LOSSES
Section 14.1. Distribution of Available Cash. The Available Cash of the
Partnership shall be distributed not less frequently than monthly in the proportions
determined by the Managing Partners. 3 All Distributions which, when made, exceed the
recipient Partner’s basis in his or her interest in the Partnership shall be considered
advances or drawings against the Partner’s share of taxable income or gain. To the
extent it is determined at the end of the Partnership year that the recipient Partner has
not been allocated taxable income or gain that equals or exceeds the total of such
advances or drawings for such Partnership year, such Partner shall be obligated to
recontribute any such advances or drawings to the Partnership. Notwithstanding the
foregoing sentence, a Partner will not be required to recontribute such advances or
drawings to the extent that, on the last day of the Partnership year, such Partner’s basis
in his or her interest in the Partnership has increased from the time of such advance or
drawing.
Section 14.2. Allocations of Losses. Losses, deductions, and credits of the
Partnership shall be allocated to the Partners in proportion to their Capital Accounts.
Section 14.3. Allocations of Profits. Profits, gains, and income of the Partnership
shall be allocated to the Partners:
i.
First, to the Partners who have been allocated losses and deductions
of the Partnership until they have been allocated profits, gain and
income equal to the losses and deductions so allocated;
ii.
Second, to the Partners in the same proportions as Available Cash is
distributed during the same Partnership year.
Such mandatory distributions are not mandated by RUPA, and should be the subject of
negotiation. Note that, as drafted, the distribution is not necessarily pro rata or in
proportion to capital accounts.
3
41
ARTICLE 15
DISSOCIATION OF PARTNERS
Section 15.1. Effect of Dissociation. The Dissociation 4 of a Partner shall neither
result in the dissolution of the Partnership nor require the winding up of the Partnership
business, 5 and the rights of the Dissociated Partner and remaining Partners shall be
determined under this Partnership Agreement.
4
“Dissociation” is defined at section 1.10.
As noted in RUPA § 102(a), a partnership is an entity distinct from its partners. This
treatment of the partnership as an entity, rather than an aggregate of its partners, has
implications for many aspects of RUPA, including those dealing with the dissociation of
a partner. The official comment to § 102 states:
5
RUPA embraces the entity theory of the partnership. In light
of the UPA's ambivalence on the nature of partnerships, the
explicit statement provided by subsection (a) is deemed
appropriate as an expression of the increased emphasis on
the entity theory as the dominant model. But see Section 306
(partners' liability joint and several unless the partnership
has filed a statement of qualification to become a limited
liability partnership).
Giving clear expression to the entity nature of a partnership
is intended to allay previous concerns stemming from the
aggregate theory, such as the necessity of a deed to convey
title from the “old” partnership to the “new” partnership
every time there is a change of cast among the partners.
Under RUPA, there is no “new” partnership just because of
membership changes. That will avoid the result in cases such
as Fairway Development Co. v. Title Insurance Co., 621 F.
Supp. 120 (N.D. Ohio 1985), which held that the “new”
partnership resulting from a partner's death did not have
standing to enforce a title insurance policy issued to the
“old” partnership.
Subsection (b) makes clear that the explicit entity theory
provided by subsection (a) applies to a partnership both
before and after it files a statement of qualification to
become a limited liability partnership. Thus, just as there is
no “new” partnership resulting from membership changes,
the filing of a statement of qualification does not create a
“new” partnership. The filing partnership continues to be the
same partnership entity that existed before the filing.
42
Section 15.2. Withdrawal of a Partner. A partner may withdraw from the
Partnership at any time upon notice in writing, addressed to the Managing Partners. 6
Unless otherwise mutually agreed 7 between the Partnership (acting as determined by the
Managing Partners) and the withdrawing Partner, the withdrawing Partner shall cease to
be a Partner 8 and shall be dissociated from the Partnership ninety days after the notice. 9
Section 15.3. Expulsion of a Partner. Any Partner may be Expelled upon the
Consent of Two-Thirds of the Partners. 10 Such Expulsion shall be effective regardless of
whether the Expelled Partner is given notice of the consideration of the Partner’s
Expulsion or whether the Expulsion is for cause. 11 Upon Expulsion, the Partner shall be
dissociated from the Partnership.
Similarly, the amendment or cancellation of a statement of
qualification under Section 105(d) or the revocation of a
statement of qualification under Section 1003(c) does not
terminate the partnership and create a “new” partnership. See
Section 1003(d). Accordingly, a partnership remains the
same entity regardless of a filing, cancellation, or revocation
of a statement of qualification.
A partner may unilaterally dissociate from the partnership under CUPA § 7-64601(1)(a). The Partnership Agreement may not vary the power to dissociate except to
require that the notice of intent to dissociate be in writing. CUPA § 7 -64-103(2)(f).
6
In this case, because dissociated partners are receiving back only their capital accounts,
it is probably appropriate to avoid taxing them on the amount of the distribution. If
amounts in excess of capital accounts were to be distributed, it might make sense to
allocate some payments as taxable to the dissociating partner and deductible to the
partnership under Code § 736(a) and to agree that the Partner will not take an
inconsistent position with respect to the payments.
7
Under CUPA §7-64-704(1), either a dissociating partner or the partnership may file a
Statement of Dissociation. The filing requirements and procedures are set forth at
CUPA § 7-64-105.
8
A person who is not a party is deemed to be on notice of the Statement of Dissociation
ninety days after filing. CUPA § 7-64-704(3).
9
Under RUPA § 601(3), a partner may be expelled upon the terms set forth in the
partnership agreement. Under RUPA § 601(4), regardless of other provisions of the
partnership agreement, a partner may be expelled by a unanimous vote of the other
partners upon certain events. The departure from the rules of unanimity is permitted by
RUPA § 103(a).
10
Alternatively, the agreement could provide for notice of a basis for expulsion and a
cure period, expulsion only for cause, or other formulas negotiated by the Partners.
11
43
Section 15.4. Death, Disbarment or Permanent Disability of a Partner or
Assignment of a Partner’s Interest. A Partner shall cease to be a Partner and shall be
dissociated from the Partnership on the Partner’s death, disbarment, permanent
disability, 12 or upon any purported assignment of the Partner’s interest in the Partnership
whether voluntary, involuntary or by operation of law. 13
ARTICLE 16
RIGHTS OF DISSOCIATED PARTNERS
Section 16.1. Payments to Deceased Partners, Partners Who Become Permanently
Disabled and Partners Who Dissociate After Retirement Age. Any Dissociated Partner
whose Dissociation is the result of the Dissociated Partner’s death or permanent
disability or who otherwise Dissociates for any reason after reachi ng Retirement Age,
shall be entitled to receive an amount equal to the Dissociation Amount 14 to be paid
without interest in four equal installments, the first to be paid on or before 30 days after
the end of the Partnership Year in which the Dissociation occurs, the remaining
payments to be made on or before the first, second and third anniversaries of the
Dissociation Date for the Dissociated Partner. 15
Section 16.2. Payments to Other Dissociated Partners. Any Dissociated Partner
not described in subsection 16.1, shall be entitled to receive an amount equal to seventy
percent (70%) of the Dissociation Amount to be paid without interest in ten equal
annual installments commencing on the first anniversary of the Dissociation Date for the
Dissociated Partner. 16
Under CUPA § 7-64-601(g), the death (§ 7-64-601(g)(I)), appointment of a guardian or
conservator (§ 7-64-601(g)(II)) or judicial determination that “the partner has otherwise
become incapable of performing the partner’s duties under the partnership agreement” (§
7-64601(7)(III)) dissociates a partner.
12
This provision is a small departure from RUPA. Under CUPA § 7 -64-503(1)(b), the
transfer of a partner’s interest in the partnership “does not by itself cause the partner’s
dissociation or a dissolution and winding up of the partnerhip business.” Under RUPA
§ 7-64-601(1)(d)(II), upon the unanimous vote of the partners, a partner who has
transferred “all or substantially all of that partner’s interest in the partnership” is
expelled. This provision in effect waives the vote requirement of RUPA § 7-64601(d)(II) and directs the expulsion upon the transfer.
13
14
Defined at section 1.11.
15
Consider issues such as security, priority, a form of promissory note and interest.
The provision that the amount of the payment will be 70% of the Dissociation Amount,
that it will be paid out over ten years, etc., are all matters of agreement among the
partners, and are not mandated by RUPA. A higher or lower percentage of the
Dissociation Amount, payment over a shorter or longer term, and other t erms, are
16
44
Section 16.3. Payments Reduced for Amounts Owing from Dissociated Partners .
The payments due to Dissociated Partners under this Article 16 may be reduced for
amounts owing by the Dissociating Partner to Partnership, including any damages owing
as a result of any breach of this Partnership Agreement. 17
Section 16.4. Tax Treatment of Payments to Dissociated Partners. Payments to
Dissociated Partners under this Section 16 shall be treated as paid for the Dissociated
Partner’s interest in Partnership property other than property described in Section
736(b)(2) of the Code.
Section 16.5. Interest in Partnership Assets. No Dissociated Partner shall have
any interest in any accounts receivable, rights of the Partnership to receive or collect
cash, or other assets of the Partnership.
Section 16.6. Rights and Duties of Dissociated Partner Under the Partnership
Agreement . Except with respect to provisions concerning contribution and
indemnification and rights to payments under this Article 16, a Dissociated Partner shall
cease to have rights and duties under this Partnership Agreement as of the Dissociation
Date. 18
matters for negotiation. Matters such as security, priority, a form of promissory note,
etc. should be considered.
CUPA § 7-64-602(2) sets forth the events of wrongful dissociation, while CUPA § 7 64-602(3) provides in part “A partner who wrongfully dissociates is liable to the
partnership and to the other partners for damages caused by the dissociation.” RUPA §
7-64-602(2) provides:
17
A partner's dissociation is wrongful only if:
(a) It is in breach of an express provision of the partnership agreement; or
(b) In the case of a partnership for a definite term or particular
undertaking, before the expiration of the term or the completion of the
undertaking:
(I) The partner withdraws by express will, unless the withdrawal
follows within ninety days after another partner's dissociation by
death or otherwise under section 7-64-601 (1) (f) to (1) (j) or
wrongful dissociation under this subsection (2);
(II) The partner is expelled by judicial determination under section
7-64-601 (1) (e);
(III) The partner is dissociated under section 7-64-601 (1) (f); or
(IV) In the case of a partner who is not an individual, trust other
than a business trust, or estate, the partner is expelled or otherwise
dissociated because it willfully dissolved or terminated.
18
Under CUPA § 7-64-603(2)(a), a partner’s right to participate in the management and
conduct of the partnership’s business terminates upon the partner’s dissociation. CUPA
45
§ 7-64-603(2)(b) and (2)(c) detail the impact of dissociation upon a partner’s duties of
loyalty and care, providing:
(2)
(b)
(3)
Upon a partner's dissociation:
***
the partner's duty of loyalty under
terminates; and
Section
7-64-404(1)(c)
the partner's duty of loyalty under Section 7-64404(1)(a), (1)(b) and (2) and duty of care under
Section 404(c) continue only with regard to matters
arising and events occurring before the partner's
dissociation, unless the partner participates in winding
up the partnership's business pursuant to Section 7-64803.
As noted in the commentary to RUPA § 603(c):
Subsection (b)(2) and (3) clarify a partner's fiduciary duties
upon dissociation. No change from current law is intended.
With respect to the duty of loyalty, the Section 404(b)(3)
duty not to compete terminates upon dissociation, and the
dissociated partner is free immediately to engage in a
competitive business, without any further consent. With
respect to the partner's remaining loyalty duties under
Section 404(b) and duty of care under Section 404(c), a
withdrawing partner has a continuing duty after dissociation,
but it is limited to matters that arose or events that occurred
before the partner dissociated. For example, a partner who
leaves a brokerage firm may immediately compete with the
firm for new clients, but must exercise care in completing
on-going client transactions and must account to the firm for
any fees received from the old clients on account of those
transactions. As the last clause makes clear, there is no
contraction of a dissociated partner's duties under subsection
(b)(3) if the partner thereafter participates in the dissolution
and winding up the partnership's business.
Drafters may want to consider additional, more detailed provisions to address post dissociation obligations.
46
ARTICLE 17
CONSEQUENCES OF VIOLATION OF COVENANTS
In the event a Partner (a “Breaching Partner”) breaches any provision of this
Partnership Agreement, then, in addition to all other rights and remedies available to the
Partnership, the Breaching Partner shall be liable in damages, without requirement o f a
prior accounting, to the Partnership for all costs and liabilities that the Partnership or
any Partner may incur as a result of such breach, including reasonable attorneys fees
incurred in connection with the breach and in connection with recovery of d amages from
the Breaching Partner. 19 The Partnership may apply any distributions otherwise payable
to the Breaching Partner to satisfy any claims it may have against the Breaching Partner.
ARTICLE 18
DUTIES OF PARTNERS TO THE PARTNERSHIP 20
CUPA § 7-64-602(2) details what circumstances give rise to a wrongful dissociation, a
subset of the circumstances which could give rise to a claim for damages under this
Article 17.
19
This Agreement does not repeat in full the duties of care and loyalty imposed upon
partners as set forth in CUPA § 7-64-404. These duties are subject to only minimal
modification. (CUPA § 7-64-103(2)(c) - (e); duty of loyalty and obligation of good faith
may not be eliminated, and duty of care may not be unreasonably reduced). CUPA § 7 64-404 provides:
(1) The duties a partner owes to the partnership and
the other partners, in addition to those established elsewhere
in this article, include the duties to:
20
(a) Account to the partnership and hold as
trustee for it any property, profit, or benefit derived by the
partner in the conduct and winding up of the partnership
business or derived from a use by the partner of partnership
property, including the appropriation of a partnership
opportunity;
(b) Refrain from dealing with the partnership
in the conduct or winding up of the partnership business as
or on behalf of a party having an interest adverse to the
partnership; and
(c) Refrain from competing with the
partnership in the conduct of the partnership business before
the dissolution of the partnership.
47
Each Partner agrees that he or she will devote substantially full time to the
Partnership Business until he or she Dissociates. 21 In addition, each Partner agrees that,
prior to Dissociation he or she shall not compete with the Partnership and that he or she
shall offer all matters that might constitute opportunities for the Partnership to the
Partnership. 22 After Dissociation, each Dissociating Partner shall agree to maintain all
business information with respect to the Partnership in confidence, and agrees not to use
(d) Comply with the provisions of the
partnership agreement.
(2) A partner’s duty of care to the partnership and the
other partners in the conduct and winding up of the
partnership business is limited to refraining from engaging in
grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law.
(3) A partner shall discharge the duties to the
partnership and the other partners under this [Act] or under
the partnership agreement and exercise any rights
consistently with the obligation of good faith and fair
dealing.
(4) A partner does not violate a duty or obligation
under this [Act] or under the partnership agreement merely
because the partner’s conduct furthers the partner’s own
interest.
A provision such as this requiring the devotion of full time services to the partnership
may or may not be appropriate depending upon the circumstances. For example, in a
professional practice, such a provision would likely be appropriate for most partners.
However, a special provision may need to be made for those in an “of counsel” or
similar capacity. In other factual situations, such as holding rental real estate, such a
provision will likely not be appropriate.
21
RUPA § 404(b)(1) requires that a partner, as part of the duty of loyalty, “a ccount to the
partnership and hold as trustee for it any property, profit, or benefit derived by the
partner . . . derived from a use by the partner of a partnership property, including the
appropriation of a partnership opportunity.” Application of the business opportunity
doctrine to partnerships, as it does with all forms of business, will require a facts and
circumstances review of that business to determine its scope, and from there to
determine whether an opportunity falls within that scope. While references to the
“business of the partnership” in the partnership agreement (e.g. Article 6 hereof) will be
the starting point for this analysis, they will not be determinative if a course of conduct
evidences a wider business activity.
22
48
or disclose any business information, trade secrets, processes or confidences of the
Partnership. 23
ARTICLE 19
TITLE TO PROPERTY
All real and personal property shall be owned by the Partnership as an entity. 24
No Partner shall have any ownership interest in the Partnership property in his or her
own individual name or right. 25 Each Partner’s interest in the Partnership shall be
personal property for all purposes. 26
ARTICLE 20
INDEMNIFICATION
The Partnership shall indemnify each Partner and Dissociated P artner (an
“Indemnified Partner”) with respect to any Partnership debt, obligation or liability of, or
chargeable to, the Partnership or such Indemnified Partner, whether arising in tort,
contract or otherwise, which such debts, obligations and liabilities occur, are incurred or
are assumed in the course of the Partnership’s business and in accordance with the
provisions of this Partnership Agreement while the Partnership is a limited liability
partnership. Notwithstanding the foregoing sentence, no Partner or Dissociated Partner
shall be entitled to indemnification hereunder for any Partnership obligation resulting
from the Indemnified Partner’s grossly negligent or reckless conduct, intentional
misconduct, or knowing violation of the law, except to the ext ent such obligation or
liability is paid or reimbursed under a policy of insurance carried by the Partnership. 27
A confidentiality provision such as this is not mandated by RUPA. Upon dissociation,
a partner’s duty of loyalty is governed by CUPA § 7-64-602(2).
23
This article repeats the rule of CUPA § 7-64-203. CUPA § 7-64-204 addresses when
property becomes partnership property.
24
25
CUPA § 7-64-501 provides:
A partner is not a co-owner of partnership property and has
no interest in partnership property which can be transferred,
either voluntarily or involuntarily.
As noted in RUPA § 502, a partner’s share of the profit and losses i s personal property.
It follows that the balance of the partnership interest (defined at RUPA § 101(9)) is
personal property as well.
26
An alternative, adopted by the UPA, would be to provide for indemnification unless the
obligation resulted from the Indemnified Partner’s grossly negligent or reckless conduct,
intentional misconduct, or knowing violation of law.
27
49
ARTICLE 21
RESTRICTIONS; NEW PARTNERS
Section 21.1 No Assignment. No Partner shall directly or indirectly sell, transfer,
assign, or encumber such Partner’s interest in the Partnership, nor shall such Partner
permit such interest in the Partnership to be directly or indirectly sold or transferred. 28
An attempted sale or other assignment of a Partner’s interest in the Partnership shall not
render the purchaser or assignee a Partner. Moreover, any sale or assignment of all of a
Partner’s interest in the Partnership shall result in such Partner’s immediate Expulsion
as a Partner without further action by the Partners. 29
Under CUPA § 7-64-502, a partner’s share of profits and losses and the right to receive
distributions are transferable. The right to participat e in management, as well as other
rights arising from the partner’s interest in the partnership (defined at CUPA § 7 -64101(i)), and not transferable. Because only lawyers may be partners, this agreement
prohibits transfers of any kind.
28
Note that this provision is applicable only if the Partner transfers all, but not less than
all, of the Partner’s interest; the drafter should consider and address the transfer of less
than all of a partner’s interest. The expulsion of the Partner who has made an
impermissible transfer of all interest in the Partnership serves to prevent the risk of
multiple constituency issues, namely a “partner” with no economic rights, and a
transference with no management rights. The expulsion of the former partner eliminates
his/her voice in management and one of the potential constituencies.
29
50
Section 21.2 New Partners. No person shall become a Partner of the Partnership
except with the Consent of Two-Thirds of the Partners. 30
ARTICLE 22
DISSOLUTION
Section 22.1. Events of Dissolution. 31
The Partnership shall be dissolved and
its affairs wound up upon the occurrence of any of the following events: 32
(a)
The written consent of the Partners; 33
See section 9.2(i) hereof, but not always. The admission of a new partner and the
admission of a transferee give rise to similar considerations as they relate to the
question of “who are your partners” - in either situation, current partners must determine
whether the new partner is compatible with the partnership. The nature of the
partnership (e.g., professional practice versus holding large real estate portfolio) will
impact upon the degree of concern with this issue.
30
There is, however, a significant distinction between the admission of a transferee
member and the admission of a new partner, and that is the economics of the
transaction. The admission of a transferee does not alter the relat ive economic rights of
the partners (i.e., no partner’s percentage share is reduced). The admission of a new
partner has an economic impact in that the percentage interest of each pre -existing
partner is reduced.
Under CUPA § 7-64-802(1), a partnership continues after dissolution through a
winding up phase to termination. CUPA § 7-64-802(2) allows a partnership, by a vote
of all partners who have not wrongfully dissociated, to waive the dissolution. If that
waiver takes place, winding up ceases, and “the partnership resumes carrying on its
business as if dissolution had never occurred”. CUPA § 7-64-802(2)(a).
31
Note that CUPA § 7-64-802(2)(b) uses the term “resumes”. The resumption of
normal business activities does not “look back” to the date of dissolution in the same
way as RMBCA § 14.02(e), which provides:
When the revocation of dissolution is effective, it relates
back to and takes effect as of the effective date of the
dissolution and the corporation resumes carrying on its
business as if dissolution had never occurred.
CUPA § 7-64-801 defines the events triggering the dissolution of a
partnership.
32
33
See section 9.1(iv) hereof.
51
(b)
(c)
(d)
The sale, transfer or assignment of substantially all of the assets of
the Partnership;
(i) The adjudication of the Partnership as insolvent within the
meaning of insolvency in either bankruptcy or equity proceedings;
(ii) the filing of an involuntary petition in bankruptcy against the
Partnership (which is not dismissed within 90 days); (iii) the filing
against the Partnership of a petition for reorganization under the
Federal Bankruptcy Code or any state statute (which is not
dismissed within 90 days); (iv) a general assignment by the
Partnership for the benefit of creditors; (v) the voluntary claim (by
the Partnership) that it is insolvent under any provisions of the
Bankruptcy Code (or any state insolvency statutes); or (vi) the
appointment for the Partnership of a temporary or permanent
receiver, trustee, custodian, or sequestration and such receiver,
trustee, custodian, or sequestration is not dismissed within 90 days ;
or
As otherwise required by law. 34
For example, the partnership may be judicially dissolved in accordance with CUPA §§
7-64-801(e) (in the case of an application by a partner) or (f) (in the case of an
applicatio by an assignee).
34
52
Section 22.2 Conclusion of Partnership Affairs. 35 In the event of the dissolution
of the Partnership for any reason, the Managing Partners 36 shall proceed promptly to
wind up the affairs 37 of and liquidate the assets of the Partnership 38 and to file a
Statement of Dissolution. 39 Except as otherwise provided in this Agreement, the
35
As noted in Comment 2 to RUPA § 801 (which is the basis for CUPA § 7-64-801):
Under RUPA, “dissolution” is merely the commencement of
the winding up process. The partnership continues for the
limited purpose of winding up the business. In effect, that
means the scope of the partnership business contracts to
completing work in process and taking such other actions as
may be necessary to wind up the business. Winding up the
partnership business entails selling its assets, paying its
debts, and distributing the net balance, if any, to the partners
in cash according to their interests. The partnership entity
continues, and the partners are associated in the winding up
of the business until winding up is completed. When the
winding up is completed, the partnership entity terminates.
Under CUPA § 7-64-803(1), any partner who has not wrongfully dissociated may
participate in the winding up - this provision restricts that participation to the Managing
Partners.
36
37
Under CUPA § 7-64-803(3):
A person winding up a partnership's business may preserve
the partnership business or property as a going concern for a
reasonable time, prosecute and defend actions and
proceedings, whether civil, criminal, or administrative, settle
disputes, settle and close the partnership's business, dispose
of and transfer the partnership's property, discharge or
provide for the partnership obligations, distribute the assets
of the partnership pursuant to section 7-64-807, and perform
other necessary acts.
CUPA § 7-64-807 addresses the contribution obligations of partners upon
dissolution.
Under CUPA § 7-64-802, existence of the partnership continues after its dissolution,
but only for the purpose of winding up its business, after which the partnership is
terminated.
38
A Statement of Dissolution, authorized by CUPA § 805, has no UPA counterpart. The
Statement of Dissolution serves to modify or cancel provisions of any Statement of
Partnership Authority filed pursuant to RUPA § 303. RUPA § 803(b). Such
39
53
Partners shall continue to share distributions and tax allocations during the period of
liquidation in the same manner as before the dissolution.
Section 22.3 Liquidating Distributions. After paying or providing for the
payment of all debts or liabilities and obligations of the Partnership and all expenses of
liquidation, the proceeds of the liquidation and any other assets of the Partnersh ip shall
be distributed to or for the benefit of the Partners in accordance with the Partners’
positive capital accounts. 40
cancellation is binding upon third parties ninety days after filing. CUPA § 7 -64-805(3).
CUPA § 7-64-805 provides:
(1) After dissolution, a partner who has not wrongfully
dissociated may deliver to the secretary of state for filing a
statement of dissolution stating the name of the partnership,
or the domestic entity name if the partnership has filed a
statement of partnership authority pursuant to section 7-64303 or is a limited liability partnership, and that the
partnership has dissolved and is winding up its business.
(2) A statement of dissolution cancels a filed statement of
partnership authority for purposes of section 7-64-303 (4)
and is a limitation on authority for purposes of section 7 -64303 (5).
(3) For purposes of sections 7-64-301 and 7-64-804, a person
not a partner has notice of the dissolution and the limitation
on the partners' authority as a result of the statement of
dissolution ninety days after it is filed.
(4) Notwithstanding dissolution or the filing or recording of
a statement of dissolution, a partnership may deliver to the
secretary of state for filing and, if appropriate, record a
statement of partnership authority which will operate with
respect to a person not a partner as provided in section 7-64303 (4) and (5) in any transaction, whether or not the
transaction is appropriate for winding up the partnership
business.
Under CUPA § 7-64-401(1), as a default rule, the partnership is required to maintain
an “account” for each partner and is required to liquidate in accordance with those
accounts. RUPA § 807(2). This regime is similar to that of Code § 704(b) and the
Treasury Regulations promulgated thereunder which provide that the allocation of
income tax items will be respected if the income and loss of the partnership are credited
or charged to the partners’ capital accountas and distributions are made in accordance
with positive capital accounts. The complex capital account maintenance rules are not
40
54
Section 22.4 Termination. Upon completion of the winding up of the affairs of
the Partnership and the distribution of all Partnership assets, the Partnership shall
terminate, 41 and the Managing Partners shall thereupon be authorized to execute and file
[a] such additional [Statement ] Statements of Dissolution and any and all other
documents required to effectuate the dissolution and termination of the Partnership.
ARTICLE 23
GENERAL PROVISIONS
Section 23.1 Amendment. This Partnership Agreement may not be amended,
modified, altered, or changed in any respect whatsoever, except by a further Partnership
Agreement in writing, duly executed by all of the Partners. 42
Section 23.2. Binding on Heirs, Successors, and Assigns. Except as provided
herein to the contrary, this Partnership Agreement shall be binding upon and inure to the
benefit of the parties signatory hereto (as well as to al l future parties who are admitted
as Partners in this Partnership), their respective spouses, heirs, executors, legal
representatives and permitted successors and assigns.
Section 23.3. Books and Records. The Partnership’s books and records, together
with all of the documents and papers pertaining to the business of the Partnership, shall
be kept at the principal place of business of the Partnership, 43 and at all reasonable times
shall be open to the inspection of, and may be copied and excerpts taken ther efrom by,
any Partner or his or her duly authorized representative for any proper purpose. 44 The
normally as important in a personal services partnership where there are not generally
not significant losses or capital expenditures.
41
See CUPA § 7-64-802(1).
42
See also section 9.1(i).
Under RUPA § 403(a), the partnership must keep its books and records at the chief
executive office. Note that RUPA § 403 describes only where the records will be
retained and a right of access to the retained records - it does not mandate that records
be retained. See RUPA § 403, comment 1. An accounting, and not a claim against the
other partners, is the appropriate remedy for a failure to retain necessary records.
43
Comment 2 to RUPA § 403 provides that inspection is not conditional on a proper
purpose (contrast RMBCA § 16.02(c)(1)); the addition of a “proper purpose”
requirement should be carefully considered. Still, under RUPA § 103(b)(2), reasonable
restrictions are permissible. Even absent a “proper purpose” requirement, abuse of this
right could violate obligations of good faith and fair dealing. (RUPA §§ 404 and 405).
The partnership agreement may not unreasonably restrict the right of inspection. RUPA
44
55
books and records of the Partnership shall be kept on a calendar -year basis 45 in
accordance with the cash method of accounting required for federal income tax
purposes, consistently applied, 46 and shall reflect all Partnership transactions and be
appropriate and adequate for the Partnership Business. 47
Section 23.4 Construction. This Partnership Agreement shall be construed in its
entirety according to its plain meaning. The parties hereby agree that this Partnership
Agreement shall be construed as an agreement negotiated at arms length between
equally sophisticated business-persons, each represented and advised by separate
counsel of such party’s choosing, and this Partnership Agreement shall not therefore be
construed against the party who provided or drafted all or any portion of this Partnership
Agreement.
Section 23.5 Counterparts. Any number of counterparts of this Partnership
Agreement may be executed, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
Section 23.6. Entire Agreement. This Partnership Agreement constitutes the
entire agreement between the Partners and supersedes all prior agreements,
representations, warranties, statements, promises and understandings (whether oral or
written) with respect to the subject matter hereof.
Section 23.7. Further Actions. Each party hereto agrees to do all acts and things
and to make, execute and deliver such written instruments as shall from time to time be
reasonably required to carry out the terms and provisions of this Partnership Agreement.
Section 23.8. Notices. All notices under this Partnership Agreement shall be in
writing and shall be served upon the other parties at the addresses set forth in the books
and records of the Partnership.
Section 23.9. Severability. If any provision of this Partnership Agreement shall be
found by a court of competent jurisdiction to be illegal, in conflict with any law of the
§ 103(b)(2). Former partners have a continuing right of inspection for records from the
time they were partners. RUPA § 403(b).
Partnerships with entity partners not using a calendar year will use a fiscal year that
conforms to Code § 706(b).
45
Partnerships engaged in certain businesses will be required to maintain tax records on
the accrued basis. See Code § 448.
46
Partnerships maintaining different books for tax and financial purpose need to define
which books shall control in the event Partnership interest needs to be valued, or upon
the death of a partner.
47
56
State or otherwise unenforceable, the validity and enforceability of the remaining
provisions shall not be affected, and the rights and obligations of the parties shall be
construed and enforced as if this Agreement did not contain the particular provision
found to be illegal, invalid or otherwise unenforceable.
Section 23.10
Situs. It is the intention of the Partners that the laws of the
State should govern the validity of this Partnership Agreement, the construction of its
terms, the interpretation of the rights and duties of the Partners and other matters. 48
Section 23.11.
Waiver. No consent or waiver, express or implied by a
Partner or the Partnership, to the breach or default by any Partner in the per formance of
his or her obligations under this Agreement shall be deemed or construed to be a consent
or waiver to any other breach or default.
IN WITNESS WHEREOF, the partners have executed this Partnership Agreement as of
______________________, _______, _____________.
[Names, typewritten, and signatures of all partners]
SCHEDULE 1
Schedule of Capital Contributions (Name of partner, amount of
contribution, and date of contribution).
2910578_1.DOC
Under CUPA § 7-64-103(j), the provision that the partnership will be governed by the
laws of the jurisdiction in which the statement of registration is filed (CUPA § 7-64106(3)) may not be waived or altered in the partnership agreement.
48
57