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Lay ownership of firms under ‘discussion’

Senate bill would let non-lawyers own 49% stake in practices

Sylvia Adcock//March 18, 2011

Lay ownership of firms under ‘discussion’

Senate bill would let non-lawyers own 49% stake in practices

Sylvia Adcock//March 18, 2011

By SYLVIA ADCOCK, Staff Writer

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Non-lawyers would be allowed ownership in professional corporation law firms – something State Bar rules expressly forbid – under a bill now under consideration in the N.C. Senate.

State Bar officials said they have not had a chance to analyze the bill or to make a decision on whether to take a position. But Tom Lunsford, the Bar’s executive director, said, “It’s a matter of concern to us, and we’ll be taking a close look at it.”

Rule 5.4 of the Rules of Professional Conduct states in part that “a lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if a non-lawyer owns any interest therein.”

The bill, S. 254, allows non-attorney ownership of firms under certain conditions. A non-attorney could own up to 49 percent of the stock of the professional corporation law firm, while a controlling 51 percent of the ownership must remain with licensed attorneys.

The bill also spells out special language for the stock certificates owned by non-lawyers. Those certificates must state – in at least 12-point type – that the shareholder cannot interfere with the professional judgment of the attorneys, and if there is a conflict of interest or inconsistency, then the lawyer’s duty to the court and clients will prevail over any duty to shareholders.

Tom Metzloff, who teaches ethics at Duke University’s law school, said the bill raises ethical issues. “There has been a historical prohibition of wanting to be sure that the people who were really in charge of a law firm understood the ethical pressures lawyers face. … If everything is just profit-driven, it creates tensions and we think conflicts.”

The model is already used in England and Australia. In the United States, the only jurisdiction allowing it is the District of Columbia, where non-attorneys may own no more than a 25 percent interest in a law firm.

“Certainly we’re now looking at lots of issues of how the business of law is being conducted,” Metzloff said. “The people who are proposing this need to make a case: What problem are we solving and why is this the appropriate way to do it?”

The bill’s sole sponsor is Sen. Fletcher L. Hartsell Jr., R-Cabarrus and Iredell. “Discussion,” Hartsell said in a brief interview last week at the Legislature when asked why he sponsored the bill. “It’s apparent the time has come to look at this issue because of the focus the direction of practicing law is taking.”

Ronald Rotunda, a legal ethics professor at Chapman University’s law school in California, said that as law firms have grown larger, the trend toward non-attorney ownership is almost inevitable.

“I think ultimately this will happen. Whether it’s good or bad, we’ll have to wait and see,” he said.

Rotunda noted that there was a major shift 30 or 40 years ago when brokerage houses became publicly owned. “What we’ve seen is that law firms have gotten huge. Not just defense-oriented firms, but plaintiff’s firms have also gotten very rich and very wealthy,” he said. “And the corporate forum is a very effective way of raising capital for expansion.”

Last week, the N.C. Bar Association was continuing to gather comments from its section chiefs to determine whether to take a position on Hartsell’s bill.

“It’s a question of how the practice of law is evolving,” said Beth Voltz, chairman of the NCBA’s Practice Management Section.

Voltz, of Weatherspoon & Voltz in Raleigh, said the idea of non-attorney stockholders concerns her. “The question for me personally and as the owner of a law firm is how to adequately protect the independence of the attorneys and the conflict and confidentiality issues,” she said.

She also said the issue raised questions about how to run a conflict-of-interest check on a potential client if non-lawyer owners were part of the equation. Furthermore, Voltz said, if some of the non-lawyer owners were working with the firm in another professional capacity, it might be difficult to make sure it was clear that only the attorneys were giving legal advice.

Lunsford said the State Bar’s rule is designed to ensure the professional independence of lawyers. “The primary concern is that lawyers are making professional judgments based on their client’s best interest, not on their own best interest or that of any third party,” he said.

Peter Geraghty, director of the American Bar Association’s EthicSEARCH, echoed Lunsford’s comments that the purposes behind the rules prohibiting the practice are based on a desire to maintain ethical standards.

 “We don’t want to have non-lawyers sharing profits with lawyers because they are not bound by the same ethical standards,” he said. For instance, attorneys are supposed to charge reasonable fees. A non-lawyer not bound by the same ethical code might want to change that, he said.

The ABA’s Committee on Ethics 20/20 has discussed the practice, however. “It’s the direction things are moving in,” said Rotunda, the Chapman professor.

Hartsell practices with Hartsell & Williams, which bills itself as the largest law firm in Cabarrus County. Of his bill, he said, “I’m not saying I like it, but I think it should be discussed.”

The bill is now in the Senate Judiciary I Committee.

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