RAPA, Inc., No. MSB-571 (May 8, 1997) Docket No. MSBS-96-7-12-8 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. __________________________________ ) IN THE MATTER OF: ) ) Docket No. MSBS-96-7-12-8 RAPA, Inc. ) _________________________________ ) DIGEST A judge may disqualify counsel for unethical behavior, including a conflict of interest due to the representation of another client. Such decisions are made after an examination of the applicable Rules of Professional Responsibility and federal law. The test for disqualification of counsel requires the objecting person to establish each of the following parts: (1) past attorney-client relationships exist between the person seeking disqualification and the attorney he seeks to disqualify; (2) the subject matter of those relationships was/is substantially related to this litigation; and (3) the attorney acquired confidential information from the person seeking disqualification. Counsel owes his allegiance to the partnership, not the individual partners. This is so because an organization of persons, such as a partnership, is a separate legal entity having distinct rights and duties. Under the law of agency, a lawyer is an agent of the employing entity, not its owners. Counsel's loyalty is to the partnership, whose goals and objectives may, or may not, be consistent with the goals and objectives of all or some of its partners. Thus, a lawyer represents a partnership, not the individual partners, unless the specific circumstances show otherwise. MEMORANDUM OPINION AND ORDER May 8, 1997 ARKOW, Administrative Law Judge: Petitioner RAPA, Inc. (RAPA) requests that I determine whether its General Counsel (counsel) can represent it in this proceeding. Mr. Robert F. Christie, a potential witness, but not a party, objects to RAPA's counsel's participation because he believes the representation presents a conflict of interest.[1] Counsel had prior dealings with Mr. Christie. I Mr. Christie, in an unsworn letter, questions whether counsel should represent any individual, company, or organization in any manner regarding documents, interpretations of such documents, and conversations which involved counsel's representation of the partnership, Reliability and Performance Associates (Reliability), in any fashion adverse to Mr. Christie's interests. The salient assertions in his letter are as follows: (1) Counsel represented Mr. Christie as a partner in Reliability from May 1989 through January 1992. (2) Mr. Christie paid for counsel's representation of Reliability. (3) Mr. Christie was counsel's client through the partnership. (4) Counsel has been and is now using the legal material and the knowledge he gained while he was representing Reliability in matters adverse to Mr. Christie's interest. (5) The confidences counsel gained between 1989 and 1992 should not be used against Mr. Christie. (6) From June 1994 to the present, counsel has been directly and indirectly involved in a number of actions and legal matters involving Dr. Wang Lau and Mr. Christie with respect to their relationship in Reliability and RAPA. (7) Counsel, to Mr. Christie's detriment and without his permission, organized RAPA and deprived Mr. Christie of his financial interest in Reliability. (8) As General Counsel of Theta Technologies, Inc. (Theta), counsel had a financial interest in the merger of Theta and RAPA. (9) Counsel took advantage of his knowledge of Reliability to further his and Dr. Lau's interests at Mr. Christie's expense. (10) Counsel represents Dr. Lau in a proceeding concerning the 8(a) status of RAPA. Counsel, in his Motion, attached his affidavit and the affidavits of Dr. Lau and William E. Mason, Esq. The affidavits and the exhibits to those affidavits state as follows: (1) Counsel is a licensed attorney in the State of Tennessee. (2) In September, 1980, counsel began work at the Tennessee Valley Authority (TVA) as an attorney. He worked with Mr. Mason in TVA's Office of the General Counsel. (3) In 1987, both counsel and Mr. Mason were employed by the law firm of Wagner, Myers & Sanger. (4) In 1988, the Wagner firm represented Mr. Christie and Dr. Lau. The representation concerned an employment dispute both had with the TVA. (5) On May 1, 1988, counsel and Mr. Mason formed the law firm of Mason & Gutekunst (firm). The firm assumed the representation of Mr. Christie and Dr. Lau in their employment dispute from the Wagner firm. (6) On May 2, 1989, representation in that matter concluded. (7) In 1989, the firm prepared a Partnership Agreement for Reliability. In 1991, the firm also prepared an amendment to the agreement and a buy-sell agreement for the partnership. The only partners in Reliability were Mr. Christie and Dr. Lau. (8) Counsel's representation was limited to the drafting of these partnership documents. (9) The firm represented the partnership, not the individual partners. (10) On January 31, 1992, counsel withdrew from the firm and became General Counsel to Theta. (11) Counsel represented Reliability from May 1989 through January 1992. He did not represent Reliability from January 1992 to April 1995, including the period RAPA was being incorporated. (12) Counsel did not participate in any business dealings between the SBA and Reliability. (13) RAPA was incorporated April 5, 1995 and assumed, with SBA approval, Reliability's status as an 8(a) program participant. (14) On October 10, 1995, counsel became General Counsel to RAPA. (15) In February 1996, the SBA initiated a termination action against RAPA. In June 1996 the SBA initiated this suspension proceeding. (16) Except for the TVA dispute, counsel never represented Mr. Christie or Dr. Lau individually. II I have an obligation to resolve questions properly brought before me concerning the propriety of the representation by a party's counsel.[2] Administrative Procedure Act  556(c)(5) (presiding official "regulate[s] the course of the hearing"); 13 C.F.R.  134.219(e) (judge may impose sanctions against an attorney who acts in an unethical manner); Matter of Vari-Form Services, Inc., SBA No. 570, at 7 (1997) (ALJ has an obligation to resolve allegations of counsel misconduct).[3] A judge may disqualify counsel for unethical behavior, including a conflict of interest due to the representation of another client. Cole v. Ruidoso Municipal Schools, 43 F.3d 1373, 1383-85 (10th Cir. 1994) (deciding counsel was not disqualified by prior representation of the opposing party). Such decisions are made after an examination of the applicable Rules of Professional Responsibility and federal law. Id. at 1383. Counsel is a member of the Tennessee Bar, RAPA is a Tennessee corporation, and the underlying events relevant to the disposition of this Motion arose in Tennessee. Therefore, I will decide this matter applying the Tennessee Code of Professional Responsibility, formal ethics opinions interpreting that Code, and any applicable standards under federal law. See Bartech Indus., Inc. v. Int'l Baking Co., Inc., 910 F. Supp. 388, 392 (E.D. Tenn. 1996) (applying Tennessee Code of Professional Responsibility to decide if counsel should be disqualified in proceeding in the Eastern District of Tennessee). The court in Bartech stated: Motions to disqualify counsel in a lawsuit are very sensitive and require the Court to exercise its judgment with an eye toward upholding the highest ethical standards of the profession, protecting the interest of the litigants in being represented by the attorneys of their choosing, protecting the loyalty and confidences a prior client may have placed in a law firm or an attorney, and the overriding societal interests in the integrity of the judicial process. 910 F. Supp. at 392. III Two of counsel's prior representational commitments are relevant in deciding whether counsel should be disqualified. First, counsel's representation of Mr. Christie in his personnel dispute with the TVA from 1988 to 1989. Second, counsel's representation of the Reliability partnership from 1989 to 1992.[4] With regard to both of these commitments, I must decide whether there is any connection between those commitments and this case. The Sixth Circuit Court of Appeals adopted a three-part test for disqualification. The test requires the objecting person to establish each of the following parts: (1) past attorney-client relationships exist between the person seeking disqualification and the attorney he seeks to disqualify; (2) the subject matter of those relationships was/is substantially related to this litigation; and (3) the attorney acquired confidential information from the person seeking disqualification. See Dana Corp. v. Blue Cross and Blue Shield Mutual of Northern Ohio, 900 F.2d 882, 889 (6th Cir. 1990). This test has been applied in the Eastern District of Tennessee. See Bartech Industries, Inc. v. Int'l Baking Co., Inc., 910 F. Supp. 388, 392 (E.D. Tenn. 1996). IV Counsel represented Mr. Christie in a personnel dispute with the TVA from 1988 to 1989.[5] That representation was prior to the formation of the Reliability partnership and the RAPA incorporation. There is no factual connection between that personnel dispute and the matter before me. Accordingly, this distant relationship, arising out of a matter completely unrelated to this case, between counsel and Mr. Christie does not present a conflict of interest requiring the disqualification of counsel. See Bartech at 392. See also Tennessee Board of Professional Responsibility Formal Ethics Opinion 89-F-118 (1989), Tennessee Ethics Handbook at 175. V Counsel's former law firm represented the Reliability partnership beginning in May 1989. Counsel advised the partnership on its formation and drafted the partnership agreement. From March to August 1991, the firm prepared an amendment to the partnership agreement and the partnership buy- sell agreement. Counsel's submission does not reflect any other business with Reliability. On January 31, 1992, counsel withdrew from the law firm and assumed the position of Theta's General Counsel. Since counsel left his firm, he has not had any attorney-client relationship with the Reliability partnership, Mr. Christie, or Dr. Lau. Thus, there was no attorney-client relationship when the dispute between the partners arose, which was after counsel left his law firm. RAPA was incorporated April 5, 1995. It acquired Theta as a wholly owned subsidiary on June 1, 1995. Counsel was retained as Theta's General Counsel after the acquisition. On October 10, 1995, Theta merged into RAPA and counsel became RAPA's General Counsel. Accordingly, there has been no showing that counsel served as an attorney for Reliability from the beginning of the dispute between Mr. Christie and Dr. Lau until well after RAPA was incorporated, as the alleged successor to the Reliability partnership. Based upon these facts, the three-part test enunciated in Dana and Bartech can be applied. (1) Attorney-Client Relationship Mr. Christie equates representation of the Reliability partnership with representation of the individual partners. That view is misplaced. The billing records of the Mason and Gutekunst law firm reflect that the firm represented Reliability, not the individual partners, in the preparation of partnership documents forming Reliability, an amendment to the partnership agreement, and a partnership buy-sell agreement.[6] There has been no showing that counsel represented Mr. Christie's interest alone in the partnership, or that Mr. Christie's interest, at the time, was adverse to that of Reliability or to Dr. Lau. Counsel's representation of Reliability ended when he withdrew from the law firm in 1992. Counsel owed his allegiance to Reliability, not Mr. Christie or Dr. Lau. Tenn. Sup. Ct. R. 8, Code of Professional Responsibility, Ethical Consideration (EC) 5-18 (lawyer employed or retained by a corporation or similar entity owes allegiance to the entity); ABA Comm. on Ethics and Professional Responsibility Formal Op. 361 (1991) (partnership is considered a similar entity under EC 5-18). This is so because an organization of persons, such as a partnership, is a separate legal entity having distinct rights and duties. Under the law of agency, a lawyer is an agent of the employing entity, not its owners. Counsel's loyalty is to the partnership, whose goals and objectives may, or may not, be consistent with the goals and objectives of all, or some of its partners. Thus, a lawyer represents a partnership, not the individual partners, unless the specific circumstances show otherwise. ABA Formal Op. 361 (1991). I am unaware of any circumstance that would require an exception to this rule. Accordingly, the Reliability partnership, not Mr. Christie, was the client of counsel. Counsel does not have a duty of confidentiality regarding partnership matters with the individual partners. Even if counsel was Mr. Christie's attorney, case precedent holds: A lawyer who represents both a partner and a partnership at a time when their interests are not adverse is not in the same situation as a lawyer who is representing two unrelated clients. The attorney who owes ethical obligations to two clients is never in a good position. However, when those clients owe each other a fiduciary duty [as in a partnership] and must disclose all information to each other as part of that duty, and the attorney is performing work for both parties during the same time period on partnership business, then the attorney for the partnership should not have a duty of confidentiality concerning partnership matters with regard to the partner. Carlsen v. Thomas, 159 F.R.D. 661, 670 (E.D. Ky. 1994) (quoting Harris v. Agrivest Ltd. Partnership II, 818 F. Supp. 1035, 1039 (E.D. Mich. 1993)). Accordingly, counsel did not represent Mr. Christie personally, but rather he represented the partnership itself; and any conversations he might have had with Mr. Christie are confidences of the partnership, not Mr. Christie personally.[7] (2) Relationship Between Earlier Matter and Current Litigation Counsel prepared the amendment to the partnership agreement and the buy-sell agreement in connection with Reliability's application for admission into the 8(a) program. These documents were prepared to meet SBA 8(a) application requirements. However, according to the law firm's billing records and the assertions of counsel and Dr. Lau, it does not appear that counsel's representation of Reliability included assistance with the 8(a) application itself. Since counsel left his firm, there is no evidence that counsel had any business dealings with Mr. Christie that could have resulted in confidences being exchanged. It is noteworthy that, at the time counsel left his law firm in January 1992, there were no signs of disagreement between Dr. Lau and Mr. Christie--the interests of the partners and the partnership were harmonious. The dissension between Dr. Lau and Mr. Christie, which culminated in the demise of the partnership, did not begin until after Reliability was accepted into the 8(a) program in May 1992. By that time, counsel no longer represented the Reliability partnership and was not a participant in the events that led to this suspension proceeding. This suspension action deals with the SBA's attempt to prevent RAPA from receiving government contracts and other support under the 8(a) program. SBA alleges Reliability ceased business operations and failed to maintain continued eligibility for program participation. Therefore, suspension is necessary to protect the interests of the Government. The dispute between the SBA and RAPA concerns when the Reliability partnership was dissolved; when it wound up its affairs and its existence ended; and whether RAPA is the direct successor to Reliability.[8] RAPA is not seeking to overturn, nullify, or challenge the terms of the partnership documents. On the contrary, it is relying upon the plain language of these documents, even though the interpretation of those documents could become an issue at the hearing. These points will be addressed at the hearing in this case. Therefore, there is no close subject matter nexus between the earlier representation of the Reliability partnership and the current litigation involving RAPA's suspension from the 8(a) program. (3) Acquisition of Confidential Information From the Party Seeking Disqualification The only time period relevant to this part of the disqualification test is from 1989 to 1992, when counsel's firm represented the Reliability partnership. After counsel left his law firm, there was no attorney-client relationship between counsel and either Mr. Christie or the partnership. Therefore, there were no confidential communications after counsel left his firm. As noted, the work counsel did in drafting partnership documents was for the partnership, not Mr. Christie. Accordingly, any confidences were with the partnership. Because the documents prepared by counsel became part of the record when Reliability applied for admission into the 8(a) program, they cannot be considered privileged. Accordingly, I cannot conclude that counsel received information that can be considered a confidence between Mr. Christie personally and counsel. VI I must decide the propriety of counsel's representation of RAPA here, not whether his representation prior to the commencement of this proceeding presents a conflict of interest. Counsel should not be disqualified from serving as RAPA's counsel because none of the three prongs of the disqualification test has been met. There is no past attorney-client relationship, the subject matter of which is closely related to this case, and in which counsel acquired confidential information from Mr. Christie. Counsel is not disqualified from representing RAPA in this proceeding because of a conflict of interest. Accordingly, the Motion is GRANTED. ______________________________ RICHARD S. ARKOW Administrative Law Judge _________________________ 1 See Letter of 4/1/97 from Mr. Christie to Judge Arkow. Mr. Christie also filed a complaint against RAPA's counsel with the Board of Professional Responsibility of the Supreme Court of Tennessee (Board). The Board has not acted upon the complaint but concluded it does not "have jurisdiction over the administrative proceeding and, therefore, cannot order respondent to withdraw his representationŝonly the presiding judge can do so." Letter of 4/3/97 from the Board to Mr. Christie. 2 As counsel for RAPA raised the question of his representation in this proceeding, I need not decide whether a potential witness and alleged former client has standing to object to the representation, or whether I have a duty, sua sponte, to decide the issue. 3 See also Butz v. Economou, 438 U.S. 478, 513-14 (1978) (the role of persons performing adjudicatory functions within a federal agency is "functionally comparable" to that of a judge). 4 Counsel, in his brief supporting continued participation in this case, states he has no financial interest in this litigation or in his client, but acknowledges his status as a paid employee (General Counsel of Theta and RAPA). This is not the type of financial interest in litigation that presents a conflict of interest. See Tenn. Sup. Ct. R. 8, Code of Professional Responsibility, Canon 5, Ethical Considerations (EC) 5-7, 5-8; and Disciplinary Rule 5-103(A). Thus, I need not address the law regarding counsel disqualification for financial reasons. Brief at 24 (including quotations of the applicable Ethical Considerations and Disciplinary Rules). 5 Mr. Christie does not cite this representation as a conflict of interest. 6 These documents are not now subject to the attorney-client privilege because they were filed with the SBA when Reliability applied for admission into the 8(a) program and are part of the record. 7 There is no evidence before me that there was anything more than representing the best interest of the partnership. 8 This simplification of the issues here is merely for the purposes of this Disqualification Motion and is not intended to reflect what issues must be addressed at the hearing.