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| BAD BUSINESS: by Ross Simmons There are no transactions courts will scrutinize more carefully than business dealings between an attorney and the client. Although neither the common law nor rules of ethics prohibit such transactions outright, the client safeguards are so exacting that the safest rule of thumb is simply don't do it. But if you do, lawyer beware! Transactions Affected California Rules of Professional Conduct, Rule 3-300 uses a broad brush in defining what is an attorney/client transaction. Most obvious are instances where the lawyer knowingly acquires "an ownership, possessory, security, or other pecuniary interest adverse to a client." Such transactions include obtaining security for the payment of fees; providing loans to or getting loans from a client; even accepting a gift for exceptional work. But adversity is not necessarily the touchstone. Any business transaction with a client, even one which is beneficial to the client, is covered by 3-300. This includes obtaining license rights from a client, acquiring a client's property, and inducing investments by a client that are beneficial to the lawyer. There need not be any relationship between the legal advice sought and the separate transaction between lawyer and client for Rule 3-300 to apply. Guidelines While one could take issue with the breadth of Rule 3-300, it should be admired for the guidance provided to the practitioner contemplating a business deal with a client. The rule essentially provides a road map to compliance. 1. The transaction and its terms must be fair and reasonable to the client. Forget any notions of caveat emptor. The price to be paid for doing business with clients is that there be no upper hand by the lawyer. 2. The transaction and its terms must be transmitted in writing to the client in such a way as to have been reasonably understood by the client. Legalese simply will not do. Even if the terms of a transaction are described in precise legal terms, it will be for naught if those terms are obscure to the lay partner in the deal. 3. The client must be advised in writing to seek independent legal advice from a different lawyer of the client's choosing. Rule 3-300 is not unique in requiring the client to be informed of his or her opportunity to resort to outside counsel. Most frequently omitted by practitioners, however, is the requirement that the admonition be made in writing. 4. The client must be given a reasonable opportunity to seek independent legal advice. There are few circumstances where an immediate transaction can be justified. Even where the client is adamant in declining to seek outside counsel, a reasonable opportunity must be afforded the client to reconsider. 5. After all other requirements have been satisfied, the client must consent in writing to the terms of the transaction. Once all other ethical obstacles to the attorney/client transaction have been surmounted, this requirement would seem a mere formality. Wrong. Literal compliance requires the gesture, and prudence suggests that written consent be signed by the client in a separate document apart from the transactional documents themselves. Impact of noncompliance A parade of horribles often follows noncompliance, including the obvious exposure to professional discipline. To the extent the transaction is connected with legal services provided by the lawyer, violation of Rule 3-300 may also be evidence that the attorney's services fell below the standard of care in the context of a malpractice action. What makes Rule 3-300 even more daunting, is the fact that noncompliance will simply render the transaction unenforceable for the participating lawyer. For example, while the court in Passante v. McWilliam (1997) 62Cal.Rptr.2d 298 stated that the client has a "moral obligation" to fulfill its part of the bargain, the court concluded that as a matter of law, counsel's noncompliance with Rule 3-300 rendered the business agreement between them unenforceable. No matter how benevolent and noble the lawyer's intent; no matter how much benefit the client stands to realize, doing business with a client without conforming to Rule 3-300 is simply bad business. Copyright 1998 San Diego County Bar Association. All rights reserved.
Originally published in San Diego Lawyer Magazine, March/April 1998. Reprinted
by permission. |