Over the years, I've written extensively on the problems that can arise when an entity is formed with the attorney for the group also participating in the venture as a partner, co-shareholder or co-member with ownership interest. A new decision from the Disciplinary Review Board in New Jersey highlights the myriad problems that can occur in such a situation.
The New Jersey Supreme Court just disbarred a Manalapan attorney. He allegedly misappropriated funds relating to one of his client's ventures. The opinion shows that the lawyer, who had represented a client in his business operations, assisted in the formation of a new business venture. The lawyer gained an ownership interest in exchange for providing legal services. After the loss of substantial funds, the lawyer found himself on the other side of ethics charges. As a result, he lost his law license.
Having your lawyer who forms an entity, as a business partner in that very entity, is a recipe for disaster. Generally speaking, lawyers must give special, written warnings to clients before they can enter into business transactions with clients. Without certain protections, the lawyers' actions in the transaction can easily appear to be a conflict of interest.
In the decades that I've been handling partnership, shareholder and LLC disputes, I have seen many occurrences of this. As such, I have another comment when an attorney's unethical conduct taints the formation process. When dealing with a deadlocked LLC or other partnership dispute, this unethical conduct is a strategic consideration.
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