When two LLC members both demand the company book after the lawyer who formed the LLC declined to represent either in their dispute, what must the lawyer do with it?

Plain-English summary

After meeting with two individuals, a lawyer formed a limited liability company at their request. The lawyer had no personal doubt that both were members. The two are now in a dispute, and the lawyer has told both he cannot represent either. The operating agreement was never signed, but the company book could be relevant to resolving the dispute, and the lawyer holds it. Both members now want the company book. The lawyer asked what his obligations are with regard to it.

The committee concluded that, absent a written engagement letter designating one member as the company's authorized representative, the lawyer must keep the company book until the dispute is resolved. Rule 1.15(e) provides that when a lawyer possesses property in which two or more persons claim interests, the property must be kept separate until the dispute is resolved, and the company book is "property" under the rule. The committee explained this does not conflict with Rule 1.16(d) (which requires protecting a client's interests on withdrawal, including surrendering papers the client is entitled to), because the client here is the LLC, not either individual, and the lawyer properly declined to represent either to avoid a conflict. Under Rule 1.13(a), a lawyer retained by an organization represents the organization acting through its duly authorized constituents; if the lawyer had a written engagement agreement identifying one individual as the sole contact, it might be appropriate to release the book to that person, but the lawyer must act in the best interest of the organization as a separate entity, and the safer course is to retain the book until the dispute is resolved or the book is subpoenaed.

As a practical accommodation, unless applicable law prohibits access by either party, the committee noted the lawyer could make a complete copy of the company book for each individual if doing so would not be an unreasonable financial burden, while retaining the original until the dispute is resolved. The lawyer could also move the court in his county for permission to deposit the book for safekeeping under Rule 67, SCRCP, in conjunction with an interpleader action pleading that he is a disinterested stakeholder and asking the court to relieve him of responsibility and have the parties litigate the issue.

In practice

Under this opinion, on the facts presented, a lawyer who formed an LLC for two now-feuding members and properly declined to represent either must, under Rule 1.15(e), retain the company book until the dispute is resolved, because it is property claimed by two or more persons. The committee noted that Rule 1.16(d) does not require surrender, since the client is the LLC, not either individual, and that under Rule 1.13(a) the lawyer represents the organization through its authorized constituents. It identified practical options: giving each member a copy (if not an unreasonable burden) while keeping the original, or interpleading the book and depositing it with the court under Rule 67, SCRCP.

Common questions

Q: When two LLC members both demand the company book, who gets it?

A: The committee concluded that, absent a written engagement letter designating one member as the company's authorized representative, the lawyer must keep the company book until the dispute is resolved, under Rule 1.15(e).

Q: Doesn't the duty to return client papers (Rule 1.16(d)) require handing it over?

A: No. The committee explained the client is the LLC, not either individual, so Rule 1.16(d) does not compel surrendering the book to a member; the lawyer properly declined to represent either to avoid a conflict.

Q: Can the lawyer give each member a copy?

A: The committee noted that, unless applicable law prohibits access, the lawyer could make a complete copy for each member if not an unreasonable financial burden, while retaining the original until the dispute is resolved.

Q: How can the lawyer get out of the middle of the dispute?

A: The committee noted the lawyer could move the court to deposit the book for safekeeping under Rule 67, SCRCP, in an interpleader action pleading he is a disinterested stakeholder and asking the court to let the parties litigate the issue.

Background and rules framework

The opinion applies South Carolina Rule 1.15(e) (keeping disputed property separate until resolution), Rule 1.16(d) (protecting client interests on termination, including returning papers), and Rule 1.13(a) (a lawyer for an organization represents it acting through its authorized constituents). These correspond to Model Rules 1.15, 1.16, and 1.13. The analysis turns on the LLC, not either member, being the client, and on the company book being disputed property.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15(e) (keeping disputed property separate until the dispute is resolved)
• MR 1.16 / SC Rule 1.16(d) (protecting client interests on termination; returning papers)
• MR 1.13 / SC Rule 1.13(a) (organization as client; acting through authorized constituents)

Other authorities:

• Rule 67, SCRCP (deposit of property with the court for safekeeping)

See also

• SC Bar Ethics Op. 06-04: Holding disputed settlement funds against a former lawyer's lien
• SC Bar Ethics Op. 05-11: Handling the file of an incapacitated client
• SC Bar Ethics Op. 05-13: Suing a former firm and the duty to a former client

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-06-08/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 06-08

RULES 1.13(a), 1.15(e) and 1.16(d)

Facts:
After a meeting with two individuals, Lawyer formed a limited liability company at their request. Lawyer has no personal doubt that the two individuals are both members of the LLC. The two individuals are now in a dispute. Lawyer has informed both individuals that he cannot represent either of them in the dispute. Though the operating agreement was never signed, the company book could be relevant in resolving the dispute. Lawyer is in possession of the company book. Both individuals now want the company book.

Question:
With regards to the company book, what are Lawyer’s obligations under the Rules of Professional Conduct?

Summary of Opinion:
Absent a designation of one individual as the authorized representative of the company in a written engagement letter with Lawyer, Lawyer must keep the company book until the dispute is resolved.

Opinion:
Rule 1.15(e) provides that, “when in the course of representation a lawyer is in possession of property in which two or more persons claim interests, the property shall be kept separate by the lawyer until the dispute is resolved.” The company book comes under the definition of “property” as used in this rule.

This does not conflict with Rule 1.16(d) which requires a lawyer to take steps to the extent reasonably practical to protect client’s interests such as surrendering papers to which the client is entitled. It is important to note that the “client” in this case is the LLC. Lawyer has properly declined to represent either individual in compliance with the Rules to avoid a conflict of interest.

Rule 1.13(a) provides that a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. If Lawyer had a written engagement agreement with the organization which specifically identified one individual as the sole contact person, it may be appropriate to release the company book to that individual. Still, the Rules require that Lawyer act in the best interests of the organization as a separate and distinct entity, and the safer course of action would be to retain the company book until the dispute is resolved or the company book is subpoenaed during a civil action.

Unless applicable law prohibits access by either party, as a practical matter, Lawyer could make a complete copy of the company book for each of the individuals which, if it would not result in an unreasonable financial burden on Lawyer, would be a reasonable accommodation. However, the original company book should be retained by Lawyer until the dispute is resolved.

Lawyer may also choose to move the court for the county in which he is located for permission to deposit the book with the court for safekeeping pursuant to Rule 67, SCRCP. This motion may be made in conjunction with a simple interpleader action in which Lawyer pleads that he is a disinterested stakeholder, sets forth the dispute, and asks the court to relieve him of responsibility and order the parties to litigate the issue between themselves.