84-F-80 - Corporation billing clients for in-house counsel services

FORMAL ETHICS OPINION 84-F-80


Inquiry is made concerning the propriety of in-house counsel to an
affiliated group of companies performing legal services for certain
affiliates and allowing the corporation that directly employs him to bill the
affiliates for the legal services performed by him and the expenses related
to the delivery of his legal services.


Corporation A is a corporation which employs in-house counsel. In the course of its
business, Corporation A serves as a co-general partner and is often designated as the
"Managing General Partner" of certain limited partnerships which Corporation A has
formed for the purpose of acquiring property for investment. In addition, all of the
stockholders of Corporation A comprise a general partnership which is often the other cogeneral
partner of these limited partnerships and, on occasion, serves as the sole general
and managing partner for such limited partnerships.
In the course of operations, Subsidiary B, a wholly owned subsidiary of Corporation A,
acquires title to the property, which is subsequently transferred to the limited partnership.
The necessary legal work for this initial acquisition is performed by the in-house counsel
employed by Corporation A and Corporation A proposes that it be reimbursed by its
subsidiary (Subsidiary B) for the actual direct cost of the performance of these legal
services. This cost would be defined as the portion of the salary of the attorney devoted
to the particular project (as calculated from timekeeping records) and would also include
the cost of support personnel for that attorney; e.g., secretarial and paralegal expense
(based on a pro rata portion of their salaries) and direct pro rata portion of overhead for
such things as rent, law library, expense, word processing equipment, etc. insofar as those
items are allocated to the lawyer performing the services set forth above.
When Subsidiary B transfers title to the property from itself to the limited partnership as
described above, the legal services will again be performed by the in-house counsel
employed by Corporation A. The cost of these legal services (again, as defined above) is,
under the proposal, to be billed by Corporation A to its subsidiary (Subsidiary B) as set
forth above. The price at which the limited partnership will acquire the investment
property will equal Subsidiary B's purchase price cost, plus its cost of acquisition and
holding. This latter cost would include, among other things, debt service during the
period the property is held by Subsidiary B and all the legal costs described above.
84-F-80 Page 2
In a typical situation, the property will be transferred by the limited partnership in later
years to an unrelated third party. Again, the necessary legal work for this transaction
would be performed by the in-house counsel. Under the proposal, the cost of these legal
services (as described above) would be paid to Corporation A by the limited partnership.
(1) May Corporation A be reimbursed by Subsidiary B upon the initial
acquisition for (a) that portion of the in-house lawyer's salary attributable to the
time spent by such in-house attorney in connection with the acquisition
transaction; and/or (b) the direct overhead cost attributable to that lawyer's
services as described above?
(2) May Corporation A be reimbursed by Subsidiary B for the legal costs
described above arising out of the transfer from Subsidiary B to the limited
partnership in which Corporation A is the managing general partner?
(3) May Corporation A be reimbursed by Subsidiary B for the legal costs
described above arising out of the transfer from Subsidiary B to the limited
partnership in which the managing general partner is a general partnership
consisting of all of the stockholders of Corporation A?
(4) May Corporation A be reimbursed by the limited partnership for legal
costs described above associated with the transfer of the property by the limited
partnership to a third party when Corporation A is the managing general partner of
the limited partnership?
(5) May Corporation A be reimbursed by the limited partnership for legal
costs described above associated with the transfer of the property by the limited
partnership to a third party when the managing general partner of the limited
partnership is the general partnership consisting of all of the stockholders of
Corporation A?
With regard to issues (3) and (5) above, in which the managing general partner is a
general partnership consisting of all of the stockholders of Corporation A, all of the
stockholders would consent to the reimbursement of Corporation A.
Tennessee Formal Ethics Opinion 83-F-52 states that there is no impropriety in in-house
counsel to an affiliated group of companies consisting of several corporations and
partnerships performing legal services for all of the affiliates and allowing the corporation
that directly employs him to bill the affiliate for the legal services performed, provided inhouse
counsel does not allow his direct employer or others to practice law through his
actions; or to regulate, direct or control his professional judgment; or to intervene in the
attorney-client relationship. The opinion further states:
84-F-80 Page 3
In order for there to be no impropriety, it is absolutely
necessary that in-house counsel exercise independent
professional judgment on behalf of each client-affiliate.
Canon 5. He must have a direct attorney-client relationship
with the client-affiliate in the delivery of his legal services
and must not allow his direct employer, or anyone else, to
regulate, direct or control his professional judgment. He
should devote his complete loyalty to the client-affiliate and
no loyalty to his direct employer. He is in the precarious
position of having a potential, if not actual, conflict of
interest in every instance. He is bound by Disciplinary
Rules 7-101(A) to represent the client-affiliate zealously
and 4-101 to preserve the confidences and secrets. There
should be a full and complete disclosure of the possible
effect of his representation on the exercise of his
independent professional judgment and the client-affiliate
should be given an opportunity to evaluate the need for
representation free of any potential conflict and all doubts
should be resolved against the propriety of representation.
There is no impropriety in the corporation being reimbursed for the actual direct cost for
the performance of the legal services described in all the instances stated herein,
including the cost of support personnel and direct pro rata portion of overhead expenses
allocated to the attorney performing the services, provided there is strict compliance with
the caveats stated herein.
This 17th day of October , 1984.
ETHICS COMMITTEE:
O. B. Hofstetter, Jr.
Jerry Colley
William R. Willis
APPROVED AND ADOPTED BY THE BOARD