Maintaining Professional Corporation; Retaining Interest in Closely Held Corporation

August 27, 1998

CJE Opinion No. 98-14

You have requested the advice of this Committee on two subjects. The first involves the propriety of maintaining in existence the professional corporation through which you practiced law. The second involves the propriety of your retaining a twenty-five percent ownership interest in a closely held corporation which owns a commercial office building.

In addressing the first issue, we state the facts as related in your letter. You practiced law as a professional corporation from 1978 until your appointment as a judge. At some point after 1978, you became associated with another attorney, and the firm practiced under both your names. All bookkeeping was done and all tax returns were filed under the name of the professional corporation. You remain to this day the sole officer, director and stockholder of that professional corporation. You stopped practicing law upon your appointment and transferred active management and ownership of the law practice to your former "partner."

At present, the corporation has the following assets: a sailboat; funds in a checking account; a receivable due from the sale of tangible assets to your former partner which is scheduled to be paid in full as of October, 1998; and a pension plan of which you, your wife and two former employees are beneficiaries. The corporation also has two cars by leases expected to expire in March and June of 1999.

It is your desire to maintain the professional corporation in existence "for a period of some years" to let the car leases run their course, to take advantage of liberal borrowing provisions of the pension plan primarily to pay college expenses, to avoid the prospect that payment of current loans from the pension plan may be accelerated by termination of the plan, and to avoid potential adverse financial consequences that termination of the pension plan may have on your wife and the two former employees. You indicate that the professional corporation will not engage in the practice of law but the shell of the corporation will remain intact but dormant.

You specifically ask our advice as to whether the professional corporation may continue in existence with you as sole officer, director, and stockholder, and, if not, whether the professional corporation may continue in existence with an unrelated attorney as officer and director and you as sole stockholder.

In responding to your request, we are mindful that the mandate of our Committee is to "render advisory opinions with respect to the interpretation of rules of court relating to the ethical and professional conduct of judges." (S.J.C. Rule 3:11(2)). Historically, we have attempted to focus our attention solely on whether the activity in question is proscribed by the Code of Judicial Conduct. With regard to your request, however, we found it necessary, in fulfilling our mandate, to preliminarily examine certain rule and statutory provisions to assess whether the admonition in Canon 2(A) that "[a] judge should respect and comply with the law" may have a bearing on your inquiry.

While we offer no definitive opinion on the applicable substantive law, we think it proper to share with you the results of our preliminary examination.

Supreme Judicial Court Rule 3:06 governs the use of limited liability entities, including professional corporations. Rule 3:06 classifies a shareholder of a professional corporation as an "owner." With certain exceptions not applicable to your circumstances, Rule 3:06 requires that "all owners shall be individuals who . . . are actively engaged in the practice of law. . . ." Rule 3:06 further provides that "[a]ny owner who ceases to be eligible to be an owner . . . shall be required to dispose of his or her shares or other ownership interests as soon as reasonably possible. . . ." If our reading of the rule is correct, you are an owner who ceased to be eligible to be an owner when, upon your appointment to the bench, you became subject to the prohibition on the practice of law contained in Canon 5(F). In such a case, divestment of your ownership interest would be required as soon as reasonably possible after your appointment as a judge.

General Laws c. 156A, referenced in your letter, is known and cited as the professional corporation law. We found no inconsistency between Rule 3:06 and G. L. c. 156A. (1)

Rule 3:06 also appears to prohibit a non-owner from serving as a director of a professional corporation. If this reading is accurate, another attorney could not serve as a director with you as sole stockholder, even if the rule does not require you to dispose of your ownership interest.

Our advice is that you scrutinize Rule 3:06 and G. L. c. 156A, and conduct such further inquiry as you deem necessary, to determine with certainty whether or not maintaining your professional corporation as a viable entity is prohibited by law. Such a determination would resolve any question concerning the possible conflict with Canon 2(A). No other Canon, in our view, is pertinent to your query concerning the professional corporation.

Turning to the question of your retention of a twenty-five percent interest in a closely held corporation, we repeat the facts reported in your letter. You own twenty-five percent of the stock of a closely held business corporation. The corporation owns the commercial office building where you had your former law office. You are not an officer or director in this corporation and you do not participate in the day-to-day management of the corporation.

We see no conflict with the Code of Judicial Conduct in your maintaining your interest in this corporation in the circumstances as you describe them.

However, we draw your attention to CJE Advisory Opinions

91-1 and 93-3, copies of which are enclosed, which we believe would apply to you if any tenants in the building appear before you as litigant or lawyer. Canon 3(C)(1) states, in part, that "A judge should disqualify himself in a proceeding in which his impartiality might reasonably be questioned. . . ." The beneficial financial relationship that exists between you and the tenant, even though it exists indirectly through a corporation, could result in a reasonable questioning of your impartiality should a tenant appear before you.

 

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         1. General Laws c. 156A, § 13 provides, inter alia, that "if the corporation is disqualified from rendering, or will cease rendering (emphasis added), any further professional services pursuant to this chapter, in lieu of or in addition to the redemption or transfer of the shares of such shareholder [then] within twelve months thereafter (1) the corporation shall be liquidated and dissolved; (2) the corporation shall be merged into or consolidated with a corporation qualified to render the same professional service or services; or (3) the corporation shall be merged into, consolidated with or changed into a [business corporation]." Options (2) and (3) do not appear to be viable in the circumstances at issue here. The twelve month time frame referred to in the statute is not inconsistent with the standard contained in Rule 3:06.