NYSBA 2020-03-10

Can a lawyer take a spot on a counterparty's list of designated counsel for the funders in a financing deal, paid from the deal proceeds, when the counterparty tries to limit the lawyer's role?

Short answer: The opinion concludes a lawyer may serve as designated counsel recommended and paid by the counterparty only if the third party does not interfere with the lawyer's independent professional judgment and the client gives informed consent confirmed in writing; the lawyer may not let the counterparty dictate the limits of the lawyer's judgment.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NYSBA Ethics Opinion 1183: Designated Counsel Selected and Paid by the Counterparty in a Financing Transaction

Short answer: The opinion concludes that a lawyer may serve as designated counsel for funders in a financing transaction when the counterparty recommends the lawyer and the fee is paid from deal proceeds, but only if the lawyer concludes the third party will not interfere with the lawyer's independent professional judgment and the client gives informed consent confirmed in writing; a lawyer may not let the counterparty dictate the limits of the lawyer's judgment on the client's behalf.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's view of New York's Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

Plain-English summary

A lawyer represents underwriters, lenders, and other funders in private equity and corporate financing transactions, with fees paid from the deal proceeds. The counterparties (the "recipients") and their counsel keep lists of designated counsel that funders must use as a condition of doing business; the recipients' law firm selects the funders' counsel, with no funder consent beyond agreeing to the transaction. The lawyer was offered a spot on such a list (potentially a material part of the firm's income) but learned that the recipients send funders a "terms list" with instructions to accept or counter without consulting their designated counsel, leaving designated counsel only to paper the deal. If designated counsel does not follow the recipients' directives, future designations and income disappear.

The opinion analyzes the third-party-payor and independence rules. Rule 5.4(c) bars a lawyer from letting a person who recommends, employs, or pays the lawyer direct the lawyer's professional judgment or compromise confidentiality. Rule 1.8(f) lets a lawyer accept payment from a non-client only with the client's informed consent, no interference with the lawyer's independent judgment, and protection of confidential information. The same duties of competence (1.1), diligence (1.3), communication (1.4), confidentiality (1.6), and loyalty apply regardless of who pays. Drawing on N.Y. State 818 (2007) (designated underwriters' counsel) and the insurance-defense line (N.Y. State 721, 942, 1154), the committee explains that the competing interests and the lawyer's financial stake in future designations create a likely Rule 1.7(a)(2) conflict where a disinterested lawyer would see a significant risk to the lawyer's judgment.

The committee concludes the conflict is consentable: under Rule 1.0(j), informed consent requires disclosing the material risks, including the lawyer's own business and personal interest in the representation and the lawyer's relationship with the recipients and their counsel. A funder's mere willingness to participate in the transaction is not informed consent. The committee stresses it does not discourage the common and efficient use of designated counsel, and that principals may negotiate terms without counsel and then have lawyers paper the deal (subject to Rule 4.2), and a client may consent to a reasonable limited-scope engagement under Rule 1.2(c). What a lawyer may not do is let the counterparty dictate the terms of the lawyer's exercise of independent judgment without the client's informed written consent.

In practice

Under this opinion, a New York lawyer may accept a place on a counterparty's designated-counsel list and be paid from transaction proceeds, but the opinion holds the lawyer must first conclude the arrangement will not interfere with the lawyer's independent professional judgment for the funder client and must obtain that client's informed consent confirmed in writing under Rules 1.7(b) and 1.8(f). Per the opinion, that consent must disclose the lawyer's own financial interest in continued designations and the relationship with the recipients and their counsel; the client's agreement to participate in the deal is not, by itself, sufficient consent, and the lawyer may not allow the counterparty to dictate the limits of the lawyer's judgment.

Common questions

Q: Can a lawyer be paid out of deal proceeds by the counterparty rather than the funder client?

A: Per the opinion, yes, subject to Rule 1.8(f): the client must give informed consent, the third party must not interfere with the lawyer's independent judgment, and confidential information must be protected.

Q: Is being on the counterparty's designated-counsel list a conflict?

A: Per the opinion, it is likely a Rule 1.7(a)(2) conflict, because a disinterested lawyer would see a significant risk that the lawyer's judgment could be affected by the lawyer's interest in keeping a material source of future income (continued designations).

Q: Is the conflict waivable, and what must consent cover?

A: Per the opinion, yes, the conflict is consentable, but informed consent under Rule 1.0(j) must disclose the material risks, including the lawyer's business and personal interest in the representation and the lawyer's relationship with the recipients and their counsel; the funder's willingness to do the deal is not enough.

Q: Can the counterparty limit what the designated lawyer does?

A: Per the opinion, a client may consent to a reasonable limited scope under Rule 1.2(c), but the lawyer may not let the counterparty dictate the limits of the lawyer's exercise of independent professional judgment without the client's informed written consent.

Background and rules framework

The opinion interprets New York Rule 5.4(c) (independence from those who recommend, employ, or pay the lawyer), Rule 1.8(f) (compensation from a third party), and Rule 1.7 (concurrent conflicts, especially the 1.7(a)(2) personal-interest conflict and the 1.7(b) consent conditions), along with the Rule 1.0(j) definition of informed consent and the duties in Rules 1.1, 1.2, 1.3, 1.4, 1.6, and 4.2. These correspond to ABA Model Rules 5.4, 1.8, 1.7, and 1.0.

Citations and references

Rules of Professional Conduct:

New York Rules of Professional Conduct 5.4(c); 1.8(f) (Comments [11], [12]); 1.7(a), 1.7(b) (Comment [13]); 1.0(j); 1.1, 1.2(a), 1.2(c), 1.3, 1.4, 1.6; 4.2
ABA Model Rules 5.4, 1.8, 1.7, 1.0 (analogues)

Other opinions cited:

N.Y. State 818 (2007): designated underwriters' counsel selected and paid by the issuer
N.Y. State 721 (1999); 942 (2012); 1154 (2018): third-party payment in insurance defense and adequacy of consent
N.Y. State 957 (2013); 1000 (2014); 1063 (2015); 1081 (2016); 1086 (2016); 1155 (2018); 1162 (2019): third-party payment and independence

Source

Landing page: https://nysba.org/ethics-opinion-1183/