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130 N.J.L.J. 656
February 24, 1992
1 N.J.L. 129
February 17, 1992
ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the New Jersey Supreme Court
OPINION 658
Conflict of Interest: Bond Counsel for
Municipality Representing Clients Before
Governing Body and Municipal Boards
We are asked:
"Whether members of a law firm that acts as bond counsel in a
municipal bond offering may appear before the municipality to
represent individual clients. We limit this inquiry to bond
offerings in which the municipality has been represented by its own
attorneys and in which bond counsel has been retained pursuant to
an agreement which clearly sets forth bond counsel's independent,
objective role."
Despite the lengthy and detailed nature of the memorandum
submitted in support of this inquiry, there is little discussion in
that memorandum of the ethical standards which must guide our
consideration of this issue. The starting point in our analysis is
RPC 1.7, which reads as follows:
RPC 1.7 Conflict of Interest: General Rule
(a) A lawyer shall not represent a client if the
representation of that client will be directly adverse to
another client unless:
(1) the lawyer reasonably believes that representation
will not adversely affect the relationship with the other
client; and
(2) each client consents after a full disclosure of the
circumstances and consultation with the client, except
that a public entity cannot consent to any such
representation.
(b) A lawyer shall not represent a client if the
representation of that client may be materially limited by the
lawyer's responsibilities to another client or to a third
person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation
will not be adversely affected; and
(2) the client consents after a full disclosure of the
circumstances and consultation with the client, except that a
public entity cannot consent to any such representation. When
representation of multiple clients in a single matter is
undertaken, the consultation shall include explanation of the
implications of the common representation and the advantages
and risks involved.
(c) This rule shall not alter the effect of case law or
ethics opinions to the effect that:
(1) in certain cases or categories of cases involving
conflicts or apparent conflicts, consent to continued
representation is immaterial, and
(2) in certain cases or situations creating an appearance
of impropriety rather than an actual conflict, multiple
representation is not permissible, that is, in those
situations in which an ordinary and knowledgeable citizen
acquainted with the facts would conclude that the multiple
representation poses substantial risk of disservice to either
the public interest or the interest of one of the clients.
Counsel must avoid not only conflicts of interest, but also
must avoid the "appearance of impropriety rather than an actual
conflict ...." RPC 1.7(c)(2). The New Jersey Supreme Court "has
had a long history of requiring attorneys to avoid even the
appearance of impropriety." Matter of Petition for Review of
Opinion No. 569, 103 N.J. 325, 329 (1986). "In the absence of an
actual conflict of interest, the appearance of impropriety alone
may be a sufficient basis to bar an attorney from representing
conflicting parties." Petition for Review of Opinion 552, 102 N.J.
194, 203 n.2 (1986) (citations omitted). "[I]t is necessary that
the appearance of, as well as actual, wrongdoing be avoided."
Perillo v. Advisory Comm. on Professional Ethics, 83 N.J. 366,373
(1980) (quoting In re Cipriano, 68 N.J. 398 (1975)).
I. Actual Conflict
For the purpose of this analysis we assume that the firm is
currently serving as bond counsel to the municipal corporation, has
served in this capacity recently, or that it has so served from
time to time on an "as needed" basis so as to justify the
conclusion that a continuous relationship may be presumed. See
International Business Machines Corp. v. Levin, 579 F.2d 271 (3rd
Cir. 1978).
Inquirer suggests that this Committee erred in Opinion 571,
116 N.J.L.J. 270 (1985), where we held that a law firm and all of
its members may not properly represent clients before a municipal
body where the firm serves as bond counsel for that municipality.
According to Inquirer, the Committee "... implicitly concluded that
the ultimate client of bond counsel is the issuer-municipality."
We do not hesitate to make that conclusion explicit. N.J.S.A.
40A:2-38.1 provides as follows:
Attorneys; compensation; services on issuance of bonds
No county, municipality or other political subdivision
of the State or any board, commission or agency thereof,
shall compensate an attorney for services rendered in
connection with the issuance of bonds other than at a
reasonable rate agreed on prior to the rendering of the
services.
In Gallano v. Running, 139 N.J. Super. 239 (Law Div. 1976),
certif. denied, 75 N.J. 600 (1978), a number of owners of real
estate brought a suit against a municipal sewerage authority and
its counsel, Running, alleging that the authority improperly paid
an excessive fee to Running in connection with the issuance of
revenue bonds of the authority in contravention of the statute.
While the issue in this decision had to do with the propriety of
the alleged class action on behalf of some 3,000 property owners,
there was no suggestion that either the authority of Running
contended that the authority was not Running's client.
A taxpayer brought suit against the City of Union City in
O'Connor v. City of Union City, 117 N.J. Super. 575 (Law Div.
1971), appeal dismissed, 409 U.S. 1031 (1972), challenging the
validity of a resolution adopted by the governing body wherein they
designated a certain person as "special counsel to the City of
Union City for all matters pertaining to bond sales." It is true
that "[i]n harmony with established practices and the demands of
the financial community, New York bond counsel, Hawkins, Delafield
& Wood, was retained to perform the requisite legal services and
add its imprimatur on the legality of the bonds as protection for
the underwriters and the purchasing public." 117 N.J. Super. at
581. The Committee is well aware of the fact that investors rely
upon the legal opinion furnished to the public agency, but this
does not in any sense dilute the duty of bond counsel to properly
advise its client, the public agency, to which such opinions are
customarily addressed, and upon which its responsible officials
equally rely. Indeed, in the nature of things, there is no class
of investors in being at the time the opinion is rendered and there
will be none unless and until the bonds are offered for sale.
Bond counsel has a duty to those who may ultimately purchase
the bonds in reliance upon the opinion of bond counsel, but this
duty does not spring from an attorney/client relationship; it is
based upon the law of torts, and the concept of third party
beneficiary. Of course, where bond counsel expressly invites
reliance by a third person it may assume a fiduciary obligation and
be held to a stricter standard than mere negligence. In a recent
case, Crossland Sav. FSB v. Rockland Ins., 700 F. Supp. 1274
(S.D.N.Y. 1988), the Court said, at p. 1282:
When a lawyer at the direction of her client prepares an
opinion letter which is addressed to the third party or
which expressly invites the third party's reliance she
engages in a form of limited representation. See G.
Hazard & W. Hodes, The Law of Lawyering 320 (1987).
Although the attorney is paid by and represents her
client, in the opinion letter she expressly states (with
her client's consent) that she is rendering a legal
service to the third party. Commentators have agreed
that the attorney owes a duty to the third party if the
opinion letter is either addressed to the third party or
expressly authorizes his reliance. See Fuld, Lawyers'
Standards and Responsibilities in Rendering Opinions, 33
Bus. Law 1295, 1309 (1978).
Note particularly that such an undertaking must be "(with her
client's consent)." In such a case there would be a permissible
joint representation, but this would not diminish the duty owed to
the primary client, i.e., the municipality.
Nor does it matter that the function of bond counsel is not
adversarial. The professional obligation is simply to furnish a
sound opinion to the client municipality with the risk that extends
to third parties not, strictly speaking, in privity but "... who he
knows or should know rely on him in his professional capacity."
Albright v. Burns, 206 N.J. Super. 625, 632-644 (App. Div. 1986).
A variety of other considerations are also at stake. Does not
the Lawyer-Client Privilege exist as between the municipal official
family and bond counsel? See Evid. R. 26. Do not provisions of
the "Sunshine Law" apply? See N.J.S.A. 10:4-12(b)(7).
For those interested in a scholarly opinion upon the specific
subject see City of Cleveland v. The Cleveland Electric
Illuminating Company, et al., 440 F.Supp. 193 (1977), aff'd, 573
F.2d 1310 (6th Cir.), cert. denied, 435 U.S. 996 (1978), in which
upon its specific facts, it concluded (among other things) that the
public agency had waived or was estopped from complaining over the
alleged "conflict." But compare RPC 1.7(b)(2) forbidding consent
by a public entity. Plainly, the concepts of waiver and estoppel
would be inappropriate if the City was not the client. The decision
is also interesting in its discussion of the problems of
confidentiality. The Court found considerable difficulty because
of the long line of authorities holding that there is a presumption
that confidential information was disclosed to the attorney by the
client and that such presumption cannot be rebutted. This is the
New Jersey view. See Gray v. Commercial Union Inc., 191 N.J. Super.
590, 598 (App. Div. 1983).
For the foregoing reasons, we conclude that the hypothetical
situation submitted involves an actual conflict of interest. In
the interest of complete resolution, however, we now pass to the
question of whether the hypothetical situation gives rise to an
"appearance of impropriety."
II. Appearance of Impropriety
Even if we were convinced that there was no actual conflict of
interest in the situation presented by this inquiry, "we are far
less certain that the average citizen ... would perceive" the
absence of a conflict of interest. Matter of Petition for Review
of Opinion No. 569, supra, 103 N.J. 325, 331. The rule prohibiting
the "appearance of impropriety ... is intended to instill public
confidence in the integrity of the legal profession. Perillo v.
Advisory Comm. on Professional Ethics, supra, 83 N.J. 366, 373.
Accordingly, we assess whether an attorney's conduct presents an
appearance of impropriety from the perspective of the public, and
not from the point of view of attorneys. Id. at 373.
It is therefore the viewpoint of the public from which
this Court has chosen to judge whether particular conduct
would constitute the appearance of impropriety. "We must
view the conduct as an informed and concerned private
citizen and judge whether the reputation of the Bar would
be lowered if the conduct were permitted." In re Opinion
415, supra, 81 N.J. at 325; Perillo v. Advisory Committee
on Professional Ethics, 83 N.J. 366, 373 (1980).
Matter of Petition for Review of Opinion No. 569, supra, 103 N.J.
at 331. The appearance of impropriety, however, "must have some
reasonable basis" and "must be more than a fanciful possibility."
Matter of Tenure Hearing of Onorevole, 103 N.J. 548 (1986) (quoting
Higgins v. Advisory Committee on Professional Ethics, 74 N.J. 123
(1977)). See also Perillo v. Advisory Committee on Professional
Ethics, supra, 83 N.J. at 376.
When we are dealing with the representation of public bodies,
as we do in this inquiry, "the appearance of impropriety assumes an
added dimension." Matter of Petition for Review of Opinion No. 569,
supra, 103 N.J. at 330. "The necessity to dispel all appearances
of any impropriety becomes even more compelling when the attorney
is a government attorney, i.e., an attorney invested with the public
trust." Perillo v. Advisory Committee on Professional Ethics,
supra, 83 N.J. at 373. The conduct of attorneys representing the
public "must be even more circumspect than a private attorney."
Matter of Petition for Review of Opinion No. 569, supra, 103 N.J.
at 330. Finally, a public entity cannot consent to a conflict of
interest in those situations where a private client could give its
consent to such conduct. RPC 1.7.
In some instances ... an attorney may continue dual
representation when the attorney believes that he can
adequately represent the interests of each client and
each client consents to the representation after full
disclosure. The option of representing both clients if
consent is obtained after full disclosure, however, is
not available to an attorney representing public
entities.
In re Professional Ethics Opinion 452, 87 N.J. 45, 49 (1981)
(citations omitted).
In addressing the present inquiry, we look to Opinion 571,
supra, 116 N.J.L.J. 270, where we held that a law firm is precluded
from representing clients before a municipal board or body when the
law firm also acts as bond counsel for that municipality. The
present inquiry professed not to call into question our holding in
Opinion 571 that bond counsel cannot simultaneously represent
clients before the municipality. In fact, the Inquirer admits that
an appearance of impropriety is created by bond counsel's
representation of clients before the municipality unless the
municipality is represented by separate counsel in the issuance and
there is a separate retention agreement. Inquirer attempts to
distinguish the present inquiry from Opinion 571 on the basis that
"Opinion 571 did not address the situation where the municipality
is represented by its own counsel in the bond issuance and where the
bond counsel retention agreement clearly sets forth bond counsel's
independent role."
At bottom, it is contended that bond counsel owes a duty to,
and in fact is a counsel for, the investors. The Inquirer initially
contends that the concept of bond counsel arose in order to protect
the interest of the investors by providing assurance that the bond
issue is a legal obligation of the issuer municipality. It is next
inferred, based on the nature of the function of bond counsel, that
when it comes to the issuance of bond counsel's opinion, the
investor, and not the municipality, is the client of bond counsel.
The inquiry then points to the duty that is owed by bond counsel to
the investors, and concludes that bond counsel represents the
investors. As set forth at length above, we conclude that bond
counsel's duty to the investors is not inconsistent with an
attorney-client relationship between the bond counsel and the
municipality.
Putting to one side the issue of whether there is an actual
conflict, the lengthy and detailed submission in support of this
inquiry actually highlights the existence of an appearance of
impropriety. We judge whether there exists the appearance of
impropriety from the standpoint of "an informed and concerned
private citizen," Matter of Petition for Review of Opinion No. 569,
supra, 103 N.J. at 331, and not from the perspective of attorneys
with a detailed knowledge of the history and duties of bond counsel.
Accordingly, the detailed exposition of the history and duties of
bond counsel does little to address the perception that there is a
conflict of interest in a municipality's bond counsel's
representation of other parties before the same municipality. The
private citizen will know that bond counsel is selected and retained
by the issuer-municipality. The public also is witness to the fact
that bond counsel works closely with the municipality in assuring
that the municipality takes all steps necessary to a legally
enforceable obligation. The public also undoubtedly is aware that
the bond counsel's fee is paid by the issuer. If the bond counsel
comes before the municipality on behalf of another client, the
public "could reasonably believe that an attorney in such a position
would be subject to and hindered by a professional conflict of
interest." Perillo v. Advisory Committee on Professional Ethics,
supra, 83 N.J. at 370. Perillo involved a municipal attorney who
had worked closely with, but did not represent, the municipality's
police officers. The Supreme Court held that it created an
appearance of impropriety for the municipal attorney to engage in
an adversarial proceeding against a police officer. The finding of
an appearance of impropriety in Perillo did not rest upon a finding
that the municipal attorney "represented" the police officer.
Rather, the Court focused on the "closeness, continuity, and
regularity in such a professional relationship between a municipal
attorney and municipal police officers ...." Id. at 375. In the
instant case, the public might reasonably believe that bond counsel
could obtain favorable treatment for other clients appearing before
the municipality in light of bond counsel's close relationship with
the municipality. Alternatively, the public might believe that bond
counsel would be a less zealous advocate before the municipality for
fear of losing the municipality's bond business. "A perception by
the public of undivided allegiance and diminished professional
commitment on the part of the attorney, whether accurate or not,
would be entirely reasonable ...." Id. at 376. As the Inquirer
realizes in his memorandum, "[w]e acknowledge that the public may
not readily perceive bond counsel's function in a bond issuance."
The Committee dealt with an analogous situation in Opinion 466, 106
N.J.L.J. 518 (1980) where we held that lawyers retained as "special
counsel in labor matters" by public agencies may not appear on
behalf of private clients before boards or agencies of the public
corporation which retained the lawyer, relying on Perillo, which was
decided the same year, i.e. 1980.
Accordingly, we reaffirm our holding in Opinion 571, supra, 116
N.J.L.J. 270, that it is improper for bond counsel to "practice ...
before the public entity and its agencies ...." We are not
persuaded that the appearance of impropriety is eliminated by the
representation of the municipality by separate counsel, or by the
existence of a retainer agreement that "clearly set[s] forth Bond
Counsel's role as an independent, unbiased participant in the bond
issuance." We cannot imagine, and the inquiry does not specify,
what separate counsel would do, or what the retainer agreement would
say, that would alleviate the public's perception of divided
allegiance and diminished professional commitment on the part of
bond counsel in representing private parties before the
municipality. Further, we question whether the public would be
aware of the existence of a retainer agreement, or comprehend its
terms. The existence of separate counsel for the municipality does
not negate the fact that bond counsel works hand-in-glove with the
municipality (and, perforce, with counsel for the municipality) on
the issuance. The presence of separate counsel also does not change
the fact that bond counsel is retained and paid by the municipality.
Despite the presence of separate counsel and the existence of a
specific retainer agreement, there is still a reasonable "perception
by the public of divided allegiance and diminished professional
commitment on the part of the attorney ...." Perillo v. Advisory
Committee on Professional Ethics, supra, 83 N.J. at 376.
In sum, we conclude that there is an actual conflict of
interest, and that an appearance of impropriety is created, when
bond counsel represents individual clients before the municipality.
Further, we fail to see how that conclusion is altered by the use
of separate counsel or a specific retainer agreement. The use of
separate counsel and a specific retainer agreement does not change
the fact that the municipality is bond counsel's client, and does
not address the appearance of impropriety from the perception of "a
person generally familiar with the affairs of the municipality ...."
Id. at 370. Accordingly, we reaffirm our opinion that bond counsel
is prohibited from representing private clients before the public
entity and its agencies, even though the municipality is represented
by its own attorneys and bond counsel has been retained pursuant to
an agreement which clearly sets forth bond counsel's role.
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