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Jan. 28 --A lawyer violated the ethics rule on professional independence by setting up a law practice with nonlawyer clients who provided funds for the new firm, handled its business operations and expected to share in the profits, the Georgia Supreme Court decided Jan. 27 (In re Nesbitt, 2014 BL 19963, Ga., No. S14Y0126, 1/27/14).
The court also faulted the lawyer for improperly borrowing money from the clients, mistreating them financially and acting deceitfully along the way. Disbarment is the appropriate penalty, the court concluded in a per curiam opinion.
The Georgia Supreme Court's decision to disbar the lawyer in In re Nesbitt highlights the potential peril of partnering with nonlawyers in law practice in violation of Rule 5.4, which address a lawyer's professional independence.
Model Rule 5.4 prohibits lawyers from having nonlawyer partners or practicing in firms that have nonlawyer owners, directors or officers. It also forbids fee-sharing with nonlawyers except in a few specified circumstances.
Some version of the model rule has been adopted in nearly all states. So far the District of Columbia is the only U.S. jurisdiction that allows law firms to have nonlawyer partners or shareholders, and change on this issue in most U.S. states seems unlikely anytime soon. When the ABA Commission on Ethics 20/20 asked for feedback on the idea of amending Rule 5.4 to allow nonlawyers working in law firms to have a limited ownership interest in the firm, negative reactions outnumbered positive comments by a wide margin, and the commission ultimately decided not to recommend any form of nonlawyer ownership. See .
Except in the District of Columbia, a nonlawyer obviously must not be designated as a member or shareholder in a law firm, as that will certainly make the lawyer a “partner” as defined in Model Rule 1.0(g). Furthermore, as Nesbitt's case illustrates, nonlawyers may also be regarded as partners in a firm if they expect to receive a share of the profits in return for funding the firm.
Nonlawyers do not become partners, however, merely by making loans to a law practice. See Gillers, What We Talked About When We Talked About Ethics: A Critical View of the Model Rules, 46 Ohio St. L.J. 243, 268 n. 261 (1985).
In addition, when a law firm brings in a nonlawyer in a business management role--as many large firms reportedly have done in recent years--the firm must be careful to comply with Rule 5.4.
Firms should make sure that a nonlawyer's role in managing the firm does not impinge on the lawyer's professional independence or judgment. If a nonlawyer in effect runs the business operations, the arrangement might be viewed as an illicit partnership. See, e.g., In re Jones, 2 Cal. State Bar Ct. Rptr. 411 (Cal. State Bar Ct. Review Dep't 1993) (two-year suspension recommended where nonlawyer insurance adjuster ran branch office of law firm with almost no supervision and named himself president and chief executive officer).
Arguably, giving a nonlawyer a title that includes the word “officer” doesn't offend the spirit of Rule 5.4 so long as the lawyers in the firm don't abdicate any professional independence to the nonlawyer. However, the plain language of Rule 5.4(d) seems to make it risky to designate a nonlawyer as an officer. See, e.g., Fla. Bar v. Shapiro, 413 So. 2d 1184 (Fla. 1982) (lawyer suspended for numerous acts of misconduct, including electing nonlawyer as secretary of incorporated legal clinic). Whatever a nonlawyer's title, the firm should document that the nonlawyer will not share in profits (except as part of the firm's general profit-sharing plan) and that lawyers in the firm will have the last word on business decisions, especially those affecting clients or legal services.
A special master found that lawyer William C. Nesbitt agreed with a married couple who were friends and clients--but not lawyers--to form the Nesbitt Law Firm LLC.
The clients contributed funds to launch and run the firm. One of them served as the firm's chief financial officer, and both were involved in the firm's day-to-day business operations. No document memorialized the parties' agreement about the partnership, the special master found.
Although the clients expected to share in the profits of the firm, and put $12,000 to $15,000 into the firm, they did not receive any profits or repayment. The firm ultimately went out of business.
The special master found, and the supreme court agreed, that Nesbitt's conduct in setting up a law partnership with his clients violated Rule 5.4 of the Georgia Rules of Professional Conduct, which addresses a lawyer's professional independence.
In particular, the court embraced the special master's finding that Nesbitt violated Rule 5.4(b), which forbids a lawyer to form a partnership with a nonlawyer if any of the partnership's activities consist of the practice of law.
The court also agreed with the special master that Nesbitt violated Rule 5.4(d), which prohibits a lawyer from practicing in a for-profit professional corporation or association if a nonlawyer holds any interest in the firm or serves as a corporate officer of it.
In addition, the court said, Nesbitt persuaded the same couple to lend him approximately $15,000 so that the lawyer could pay back taxes on a parcel of Florida property that he told them he owned. Nesbitt signed a promissory note and promised to grant the clients an interest in the property as collateral for the loan, but he only executed a mortgage after receiving an ultimatum from the clients.
Nesbitt didn't tell the clients that the property was actually owned by his domestic partner, Sherry Cornwell. When the clients found out and expressed concern through e-mail and certified letters, Nesbitt did not respond. He eventually filed for bankruptcy.
In the disciplinary proceeding, more details emerged about the ownership of the Florida property and a loan that Nesbitt and Cornwell obtained on the property. The special master found that the property was transferred to Cornwell from Nesbitt's mother in a sham transaction designed to avoid taxes or probate. Moreover, in their dealings with the lender, Nesbitt and Cornwell misrepresented themselves as married and failed to disclose the tax liens on the property, the court said.
Funds from the loan were available when Nesbitt was borrowing money from his clients to set up the law practice and pay off the tax liens, the special master found.
The court agreed with the special master that Nesbitt's dealings with his clients and the Florida property violated Rule 1.8(a), which sets out requirements for lawyer-client business transactions, and Rule 8.4(a)(4), which forbids conduct involving dishonesty, fraud, deceit or misrepresentation.
The special master found only one mitigating factor (no prior discipline) but numerous aggravating factors: a pattern of deceit, multiple offenses, false statements in the disciplinary hearing, refusal to acknowledge wrongful conduct, vulnerable victims, substantial experience in law practice and indifference to making restitution.
The court noted that in Georgia the maximum sanction for violating Rule 1.8 is a public reprimand, while disbarment is the maximum sanction for violating Rules 5.4(b), 5.4(d) and 8.4(a)(4). The court agreed with the special master that disbarment is the appropriate sanction here.
The Georgia State Bar was represented by Assistant General Counsel Rebecca A. Hall and General Counsel Paula J. Frederick, Atlanta. William C. Nesbitt, Stockbridge, Ga, represented himself.
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