by Bethany Mito Lee and Nelson Lee
At present, there are no explicit prohibitions – in state or federal legislation or case law or in codified Rules of Professional Conduct (such as those enacted by the American Bar Association) – against attorneys representing multiple parties to an EB-5 transaction. A single immigration firm can – and frequently does – represent the legal interests of EB-5 investors, regional centers and/ or developers under the aegis of shepherding the legal strategy for an entire project. The appeal of this vertical integration of services is clear: if one firm is managing every aspect of the legal process of developing, securing funding for, and completing the project, there are great administrative efficiencies associated with this (not the least of which is that USCIS communicates with one entity at every phase of project management), as well as lucrative dividends for the firm itself (keeping all the work within one firm means no splitting of fees with outside professionals).
While this is all well and good for the immigration firms, it is the opinion of the authors of this article that dual representation is not in the best interests of the clients that the attorneys are serving. There are any number of potential conflicts between the interests of a regional center/project developer and individual EB-5 investors – many (if not most) of which are impossible for the clients to effectively and knowingly waive.
A concurrent conflict of interest exists if:
- the representation of one client will be directly adverse to another client; or
- there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.[1]
When an EB-5 project is in its “infancy,” it is easy for attorneys and their clients to have a rosy view of the conflict issue: when everything is progressing to plan, and there are few investors, the possibility of a conflict of interest is minimal. It may seem attractive at that point in time for one legal team to handle all of the work – it is cleaner and more efficient that way. However, as time wears on, and more interests (e.g., more clients) are added to the proverbial pot, conflict becomes inevitable: unanticipated, adverse circumstances invariably arise during the course of the build-out of a project – circumstances which diligent legal counsel will become aware of in due course, but which the regional center/developer will avoid disclosing to either existing or potential investors, for fear that investors will back out of the investment. While legal counsel has a duty of confidentiality to safeguard the potentially-actionable information that it discovers in the course of its representation of its regional center clients, counsel has an equally weighty fiduciary duty to disclose adverse circumstances that might negatively impact the investment and/or immigration prospects of existing and potential investor-clients. In these circumstances, attorneys are damned if they disclose, and damned if they do not. Moreover, to the extent that legal counsel has its own vested interest in the outcome of the project – and in increasing the fee potential of working with as many parties as possible – there is a significant risk that the representation of either the regional center/developer and/or the investors will be materially limited by the personal concerns of the attorneys themselves. This is why attorneys are usually deterred from “doing business” with their clients under the ABA Model Rules (1.8) and most states’ rules of professional responsibility: attorneys who have their own self-interest foremost in mind will not, presumptively, be acting in the best interests of their clients.
In the end, where the same law firm is representing all of the parties involved in a project, it is really the individual investors who stand to lose the most in this calculus: after all, if the goals of both the regional center/developer and the law firm– i.e., to maximize the number of investors/payers of legal fees – then it does not take much guess work to figure out whose interests will be the least protected under these conditions.
Given the high risk of conflict(s) of interest arising at some point during the pendency of a project, and the potential peril for investors in particular, it is incumbent upon any entity operating in the EB-5 industry to consider carefully (i) the state and local requirements that constrain their relationships with legal counsel; (ii) what those requirements are when it comes to conflicts and waivers of conflicts; and (iii) whether – in view of those requirements – it is worth taking the gamble of attempting to waive conflicts.
I. Rules of Professional Responsibility for Attorneys: What is the “Informed Consent” Requirement?
The rules governing the professional conduct of lawyers in the United States are mandated and enforced by state and local entities. The American Bar Association (ABA) is a national organization that counts thousands of lawyers in the ranks of its membership. The ABA’s Model Rules serve has a pattern of reference for the majority of local rules of professional conduct, and they state in relevant part that a lawyer may represent a client or clients in a situation where the lawyer anticipates that a conflict might arise, if:
- the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
- the representation is not prohibited by law;
- the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
- each affected client gives informed consent, confirmed in writing.[2]
Most jurisdictions in the United States, true to these Model Rules, require that affected clients give “informed consent, confirmed in writing” acknowledging the potential conflict inherent in the proposed representation. See, e.g., the State Bar of California Rules of Professional Conduct 3-310, “Avoiding the Representation of Adverse Interests;” see also New York State Bar Rules of Professional Conduct DR 5-105 [1200.24],
“Conflict of Interest; Simultaneous Representation.” “Informed consent” requires specific and full disclosure, made by the lawyer to the client(s), of the implications of the simultaneous representation of potentially adverse clients, and the advantages and risks involved.3 It is not sufficient, under the rules of most
– if not all – state bar associations for an attorney to insert a pro-forma, boilerplate “conflict waiver” paragraph into a retention agreement with the potentially-affected client(s), which the client(s) then sign off on. The attorney must make a diligent effort to educate the client(s) on the particular conflict risks of the representation, in as much detail as possible, in order to secure an “informed,” written waiver that would arguably pass muster under the applicable rules of professional conduct.
Furthermore, the attorney must make this effort not only with respect to the prospective investor-client, but also with respect to the existing regional center/developer-client. Thus with every new representation, the attorney must make sure that this process of careful education of both the regional center and the investor regarding the potential conflicts is repeated, and that informed consent is provided in writing by both the regional center (vis-à-vis the new investor) and the investor. While this may seem like an administrative burden for all of the parties involved, in order to comply with the requirements of the Model
Rules and most local rules of professional responsibility, a careful attorney must insist that this process be undertaken if he or she wishes to represent both the regional center and the investor(s).
II. What Are the Consequences of Waiver Failure – How Does a Conflict of Interest Play Out “In Real Life”?
The stakes are high if a conflict of interest is cognizable, and the affected parties did not give informed consent to the dual representation of the same attorney despite the (potential) conflict. First and foremost, the conflict could serve as grounds for the investor to back out of the investment, on the basis that the investment agreement was entered into under false pretenses (i.e., that the investor was not fully informed of the potential conflict prior to entering its investment relationship with the regional center/developer, and had the investor known of said conflict, then the investor would not have invested in the project). While this would be unlikely to occur when the underlying project is fairing well, this scenario may be cause for concern if a project is foundering. Furthermore, if other investors follow suit and race for the exit, the project at issue would be jeopardized.
Another potential pitfall of a lack of informed consent: litigation. Again, should a project “go south,” and investor expectations not be met (i.e., the investor is not in a position to receive I-829 approval due to an arguable failing on the part of the project –a change in TEA designation, an inability to demonstrate the requisite number of jobs created, etc.), the lack of knowing consent to a conflict of interest could – in and of itself – form a basis for disqualifying a firm from representing either the regional center/developer or the investor(s). Further, a lack of knowing consent could form the basis for a malpractice and/or professional liability claim against the attorneys involved, as well as fee disgorgement or disallowance, sanctions, and in cases of willful misconduct, discipline by local bar associations (including but not limited to suspension and disbarment).
A recent case that was brought in the U.S. District Court for the Eastern District of Louisiana demonstrates just how thorny the issue of dual representation can become in the litigation context when investors turn against their regional center partners.
In Terence K. Sumpter et al. v. William B. Hungerford Jr. et al., case number 2:12-cv-00717 (E.D.L.A. 2012) (Dkt. No. 149), a group of dissatisfied investors brought a shareholder derivative suit against a New Orleans regional center, alleging bad business practices. Counsel for the plaintiffs in this case was ultimately disqualified, largely due to the fact that an attorney who worked for the firm representing the plaintiffs had represented the regional center during the course of the underlying activities that formed the basis for the cause of action. While counsel for the plaintiffs attempted – unsuccessfully – to argue to that the attorney’s relationship with the regional center was not a “formal” one (it appears that no specific retention agreement was executed for some or many of the attorney’s activities executed on behalf of the regional center), and that therefore no attorney-client relationship existed, the District Court for the Eastern District of Louisiana determined that the subjective belief of the putative client is what governs the determination of whether a relationship does in fact exist (which may, in turn, form the basis for a conflict). In this case, court found that defendants had sufficiently asserted a number of actions on the part of the attorney that could have lead to the reasonable belief that she was acting as the regional center’s attorney (with or without a formal representation agreement in place). These included, but were not limited to, intervening on behalf of both the regional center and the lead plaintiff with the USCIS regarding the status of the lead plaintiff’s I-829 petition.
Moreover, the court found that a “substantial relationship” existed between the subject matter of counsel’s prior representation of the regional center and the underlying cause of action in the plaintiffs’ case – a clear and direct circumstance where the claims of one client are adverse to those of another, and where the likelihood of the confidences shared by one client could be used to leverage the claims of the other. Lastly, the court found that not only the individual attorney at issue in this case, but also her firm and their local counsel, should be disqualified – again, on the assumption that the confidences shared by one client/set of clients were no doubt shared with other members of the firm or firms:
“Considering the irrebuttable presumption that [the attorney] shared [the regional center’s] confidences during her prior representation with her fellow[firm’s] attorneys, and the plain language of Louisiana Rule 1.10, which automatically disqualifies all lawyers in a law firm when one attorney in the firm is disqualified, the Court has no choice but to disqualify the entire… firm.”4
Under these circumstances, no amount of attempting to artificially “wall off” one member or members of a firm from communicating with other members could defeat the presumption that confidences have been (or would be) shared, in violation of the attorney’s fiduciary duties to one or both sets of clients.
III. Should One Legal Team be Representing Multiple Parties with Potential Conflicts in the EB-5 Investment Context?
All of this this begs the question: is it really advisable for one legal team to attempt to represent regional centers/developers and investors? That is, can a single firm do so with the confidence that a knowing waiver has been secured from all of the clients involved?
The conservative answer to these questions, in the opinion of these authors, is “no.” Why? First, validity of a waiver can always be challenged at a later date, most likely on the grounds that it was not “knowing.” Second, these challenges may be difficult to defeat, given that it is presumptively not feasible to secure informed consent from a prospective investor without disclosing confidential information regarding a project. Lastly, and most importantly, the individual interests of the attorney(s) (e.g., in maximizing his or her financial stake in the success of the project, as well as in maximizing the fees associated with working with an ever-larger group of investors) will always lurk as a potential material limitation on the attorney’s ability to provide fair and impartial representation to both the regional center/developer and the individual investor(s).
Bethany Mito Lee is a partner in Lee & Lee, PS. Prior to founding the firm with Nelson K.H. Lee in 2010, she practiced in Washington, D.C. with Crowell & Moring LLP as a counsel in the antitrust group. Ms. Mito Lee has focused on litigation and counseling throughout her legal career, advising clients from a broad range of industries, including but not limited to the health care, technology, government contracts, telecommunications, energy and transportation industries. In addition, she has served as pro bono counsel in asylum and trafficking cases involving complex immigration issues.
Nelson Kuo Hua Lee is an EB-5 immigration attorney and president and founding partner of Lee & Lee, PS, a law firm experienced in assisting clients with the experiential and language challenges that the U.S. legal system may present to non-native individuals. Lee & Lee, PS also works in customs and international law and adjustment of status, as well as government contracts, antitrust cases, employment claims, insurance coverage, real estate and commercial disputes, criminal defense, and personal injury.
1 American Bar Association Model Rules of Professional Conduct, Rule 1.7
(Conflict of Interest: Current Clients) (“Model Rules”).
2 ABA Model Rules 1.7. 3Id.
Nelson Lee
Nelson K. H. Lee is a partner in Lee & Lee, PS. Mr. Lee is a former Senior Deputy Prosecutor with the King County Prosecuting Attorney’s Office. In 2010, Mr. Lee left the Prosecutor’s Office to start his own practice. His goal was to create a firm that would provide legal services to his community in the private sector.
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