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.
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:
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.
O. B. Hofstetter, Jr.
William R. Willis
APPROVED AND ADOPTED BY THE BOARD