Ethics Advisory Opinion 03-06FACTUAL SUMMARY
Under the Rules for Lawyer Disciplinary Enforcement (SCACR 413), when a lawyer is subject to discipline which would require him or her to cease the practice of law (i.e., suspension or disbarment), the Supreme Court appoints an attorney as trustee to inventory the files of that lawyer and take all action necessary to protect the interests of the lawyer and the lawyer’s clients. Such a trustee is appointed if there is no partner, personal representative, or other responsible party capable of conducting the lawyer’s affairs.
May the attorney subject to discipline sell his or her practice to another attorney under the provisions of Rule 1.17, Rules of Professional Conduct?
A suspended or disbarred attorney may not sell his or her practice. The tangible assets of the practice, such as buildings, library materials and office materials, are not subject to these Rules, and may be transferred regardless of the status of the disciplined lawyer. Otherwise, under Rule 1.17, a Lawyer may sell his practice so long as all of the conditions under Rule 1.17 are satisfied. Further, such sale must comply with all other applicable ethical standards.
The sale of the law practice is governed by Rule 1.17. Subsection (a) of this rule provides:
(a) A lawyer or a law firm may sell or purchase a law practice, including goodwill, if the following conditions are satisfied:
1. The seller ceases to engage in the private practice of law in the geographical area in which the seller’s practice has been conducted;
2. The practice is sold as an entirety to another lawyer or law firm;
3. Written notice is given to each of the seller’s active clients regarding:
i. the proposed sale;
ii. the terms of any proposed change in the fee arrangement authorized by paragraph (b);
iii. the client’s right to retain other counsel or take possession of the client’s files;
iv. the fact that the clients consent to the sale will be presumed if the client does not take any action or does not otherwise object within forty-five (45) days of the date of the mailing of the notice; and,
4. a notice is published in a newspaper of general circulation in the geographical area in which the practice has been conducted regarding:
i. the proposed sale;
ii. the client’s right to retain other counsel or to take possession of the client’s files;
iii. the fact that active clients will be or have been given written notice regarding the proposed sale and that their consent to the sale will be presumed if they do not take any action or object within forty-five (45) days of the date of the mailing of the written notice;
iv. the fact that the selling lawyer will retain the files of inactive clients unless those clients give permission for the transfer of their files or, if the parties to the sale elect to give written notice to an inactive client in the manner provided by paragraph (a)(3) above, the inactive client’s consent to the sale will be presumed if the client does not take any action or does not otherwise object within forty-five (45) days of the date of the mailing of the notice.
A law practice consists of both tangible and intangible assets. Such tangible assets may include a building, a law library, and office equipment. Individual client files belong to the clients. The primary intangible asset associated with the sale of a law practice is the goodwill associated with the practice. Goodwill has been defined as “the ‘going concern value of a business’ or the ‘tendency of satisfied clients to give the lawyer their future legal business.’ More specifically, goodwill is defined as ‘the expectation of continued public patronage, and a client base that can hopefully be transferred to the purchasing attorney’ or something that is ‘evidenced by general public patronage and is reflected in the increase in profits beyond those that may be expected from the mere use of capital.’” Nina Fields, The Sale of a Law Practice in South Carolina: The Impact of Model Rule 1.17 on Sole Practitioners and Their Clients, 50 S. Car. L. Rev. 1029, 1032 (1999) (citations omitted). Rule 1.17 specifically identifies goodwill as an asset of a law practice that may be sold.
Under the facts presented above, the timing of the sale of the law practice is critical. The timing of the sale will determine whether there exists a law practice to sell. First, if a lawyer has already been disciplined and is subject to suspension or disbarment, and no partner, personal representative, or other responsible party capable of conducting the lawyer’s affairs is known to exist, Rule 31(a) of the Rules of Lawyer Disciplinary Enforcement, Rule 413, SCACR, provides that a trustee shall be appointed to take possession of and inventory client files. The trustee must take possession of client files, notify clients, and publish notice of discontinuance or interruption of the disciplined lawyer’s law practice.
Upon appointment of a trustee under Rule 31, Rules of Lawyer Disciplinary Enforcement, Rule 413, SCACR, the trustee steps in the shoes of the attorney, and it is the trustee, rather than the attorney, charged with the disposition of the law practice. Further support for this view is found in the language of Rule 1.17 which requires satisfaction of the following condition: “(3) Written notice is given to each of the seller’s active clients regarding: (i) the proposed sale....” Rule 1.17(a)(3), SCRPC (emphasis added). Because the disciplined attorney no longer has any active clients, attorney is unable to satisfy this condition. Accordingly, a suspended or disbarred attorney may not sell his or her practice. The tangible assets of the practice, such as buildings, library materials and office materials, are not subject to these Rules, and may be transferred regardless of the status of the disciplined lawyer.
Prior to final sanctions being assessed against a disciplined lawyer, however, that lawyer may properly sell his or her law practice. First, the lawyer must comply with the timing requirements of Rule 1.17. Notice of forty-five (45) days must be given, both written and through publication, to all of attorney’s clients regarding the proposed sale. In order to be timely under Rule 1.17, the lawyer to be disciplined must properly complete sale of the law practice (including satisfaction of the forty-five (45) day notice provision) prior to suspension or disbarment being imposed. Further, it is the opinion of this Committee that the lawyer selling his or her practice may be required to disclose to the purchasing attorney that disciplinary charges are pending. Existence of such proceedings may affect the value of the law practice being sold. The selling lawyer presumably would provide the purchasing lawyer with a waiver allowing disclosure of confidential disciplinary information pursuant to Rule 12(c)(3), Rules of Lawyer Disciplinary Enforcement, Rule 413, SCACR. Failure to disclose such pending charges may be a violation of Rule 8.4, SCRPC.
Lastly, in addition to the conditions set forth in Rule 1.17, SCRPC, the selling lawyer must also comply with other applicable standards. These include the selling lawyer’s obligation to exercise competence in identifying a purchaser qualified to assume the practice and the purchaser’s obligation to undertake the representation competently (Rule 1.1, SCRPC); the obligation to avoid disqualifying conflicts, and to secure client consent after consultation for those conflicts which can be agreed to (Rule 1.7, SCRPC); and the obligation to protect information relating to the representation (Rule 1.6 and 1.9, SCRPC). Accordingly, it is the opinion of the Committee that the attorney with pending disciplinary proceedings may sell his or her law practice as long as all of the conditions and requirements of the Rules of Professional Conduct are satisfied. The Committee cautions that the most prudent course may be for the attorney or the appointed trustee to petition the Supreme Court for an order allowing sale of the attorney’s practice.