Freivogel on Conflicts

Investing in Clients/Stock for Fees

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This page has been a receptacle of materials on lawyers engaged in business with clients and others in largely non-legal contexts. We have decided to re-organize it some and to provide the following subtitles along with this Table of Contents:

1. Introduction
2. Application of Model Rule 1.8(a) (in California, Formerly Rule 3-300, Now Rule 1.8.1)
3. Patent Practice (lawyer taking interest in IP)
4. Mid-Stream Fee Changes
5. Tax Opinions
6. Lawyer Liability from Non-Legal Activity
7. Other

1. Introduction       

John S. Dzienkowski & Robert J. Peroni, The Decline in Lawyer Independence: Lawyer Equity Investments in Clients, 81 Tex. L. Rev. 405 (Dec. 2002). Putting aside the authors' somewhat negative view of lawyers investing in clients, this is a very comprehensive (143-page) and useful treatment of the subject. It covers the ways lawyers and law firms invest in clients, the ethics rules and ethics opinions, the interface with securities laws, and the problems for clients and lawyers sometimes introduced by such investments.  Virtually all the material that follows this paragraph on this page is considered and updated in this article.

       Lawyers Doing Business with their Clients: Identifying and Avoiding Legal and Ethical Dangers, A Report of the Task Force on the Independent Lawyer, Section of Litigation Section, American Bar Association (undated, but released in January 2002).  This is a 181 page document exhaustively treating the entire subject of doing business with clients.  The Task Force does not propose the prohibition of the practice, but rather makes suggestions for doing it safely and ethically.  One of the many helpful appendices is one containing ALAS' suggested policies and forms for law firms wanting to regulate this practice.  This wonderful compendium stands in sharp contrast with the Litigation Section's heavy-handed and ill conceived attempt ten years ago to prohibit law-related businesses.  This new report describes that effort, among many other things.

        On July 7, 2000, the ABA Standing Committee on Ethics and Professional Responsibility issued its Formal Opinion 00-418, "Acquiring Ownership in a Client in Connection with Performing Legal Services."  It contains no surprises.  It says that such arrangements are not per se unethical.  It says that lawyers taking client securities must comply with Model Rule 1.8(a).  That means the arrangement must be in writing, the client be afforded a reasonable opportunity to consult with other counsel, the client's consent to the arrangement be in writing, and the terms be "fair and reasonable" to the client.  The opinion discusses the interplay of the "fair and reasonable" requirement of Rule 1.8(a) and the requirement of Rule 1.5(a) that fees be "reasonable."  It also deals with the need to disclose possible conflicts to the client and the role of Model Rule 1.7(b). 

        N.Y. City Bar Op. 2000-3 (2000), which was rendered soon after ABA Op. 00-418, basically tracks the ABA Op. 00-418, described above.  In brief summary, it is slightly more lenient than ABA Op. 00-418.  It says that the lawyer does not have to comply with N.Y. DR 5-104(A) (N.Y.'s version of Model Rule 1.8(a)), unless the client is relying upon the advice of the lawyer with respect to the fee transaction itself.  Thus, the Committee concludes, there may be instances in which a lawyer takes stock in lieu of fees where it would be appropriate to treat the arrangement as any other fee arrangement.  The sophistication of the client and complexity of the transaction will obviously play a role in whether this is the case.  In other respects, N.Y. City Bar Op. 2000-3 (2000) is comparable to ABA Op. 00-418.

        D.C. Bar Op. 300 (July 25, 2000).  It mentions ABA Op. 00-418 and N.Y. City Bar Op. 2000-3, only in a footnote, but states that Op. 300 reaches the same conclusions as those two opinions.  Actually, unlike N.Y. City Bar Op. 2000-3, Op. 300 does not discuss situations in which such an arrangement might not be subject to Rule 1.8(a) or its New York counterpart, DR 5-104.

        Restatement.  See §§ 76 & 126.

        Treatises.  Hazard, Hodes, & Jarvis §§ 11.17 & 12.2-12.5; Rotunda & Dzienkowski § 1.8-2(a)(1).

        Law Reviews.  John S. Dzienkowski & Robert J. Peroni, The Decline in Lawyer Independence: Lawyer Equity Investments in Clients, 81 Tex. L. Rev. 405 (Dec. 2002); Jason M. Klein, No Fool for Client: The Finance and Incentives Behind Stock-Based Compensation for Corporate Lawyers, 1999 Colum. Bus. L. Rev. 329; Gwyneth E. McAlpine, Getting a Piece of the Action: Should Lawyers be Allowed to Invest in their Clients' Stock? 47 U.C.L.A. L. Rev. 548 (1999); Richard M. Maltz, Lawyer-Client Business Transactions: Caveat Counselor, 3 Geo. J. Legal Ethics 291 (1989).

2. Application of Rule 1.8(a) (in California, Rule 1.8.1)       

As far as we know every state has a version of this rule. In California, it is Rule 1.8.1. The rules vary to a limited extent. They all contain a disclosure requirement and a consent requirement. As far as we know they all require that the lawyer give the client an opportunity to seek the advice of another lawyer -- always a good idea, in any event.

        Rule 1.8(a)
.  Failure to comply with Rule 1.8(a) can have harsh consequences. In Passante v. McWilliams, 62 Cal. Rptr. 2d 298 (Cal. App. 1997), failure to comply with California’s version of Rule 1.8(a), in part, cost the lawyer his ability to collect $32 million worth of stock from a client.  In Santiago v. Evans, 2012 U.S. Dist. LEXIS 167983 (M.D. Fla. Nov. 27, 2012), the court found the sale of a vessel void due to the purchaser's (lawyer) failure to comply with the rule.   In Gurvey v. Legend Films, Inc., 2012 U.S. Dist. LEXIS 131547 (S.D. Cal. Sept. 14, 2012) the court did not allow lawyer to take an interest in the client for failure to comply with Rule 1.8(a).  In BGI Associates, LLC v. Wilson, 7 Cal. Rptr. 3d 140 (Cal. App. 2003), a lawyer's evident failure to comply with the California rule caused him to lose breach of contract case.  In Fair v. Bakhtiari, 2011 Cal. App. LEXIS 634 (Cal. App. May 24, 2011) the court held that a lawyer’s failure to advise the client in writing of the right to seek other counsel would be grounds for denial of quantum meruit.  Likewise, in DiLuglio v. Providence Auto Body, Inc., 755 A.2d 757 (R.I. 2000), the court held that a lawyer’s failure to comply with Rule 1.8(a) in contracting with a client could entitle the client to rescind the contract. (The court denied rescission in DiLuglio, because the client waited six years to raise the issue.) Page v. ADS Invs., LLC, 2014 R.I. Super. LEXIS 106 (R.I. Super. Aug. 5, 2014) (following DiLuglio, court "voided" lawyer's ownership interest for violating rule);  LK Operating, LLC v. Collection Grp., LLC, 2014 Wash. LEXIS 573 (Wash. July 31, 2014) (rescission appropriate);  Rhodes v. Buechel, 685 N.Y.S.2d 65 (N.Y. App. 1999) (recission appropriate where disclosure not adequate).  In In re Nelson, 681 N.W.2d 352 (Minn. 2004), the lawyer was disbarred.  In In re Trewin, 684 N.W.2d 121 (Wisc. 2004), a lawyer was suspended for five months for lending money to clients but not complying with Rule 1.8.  Same result in In re Gebo, 796 N.Y.S.2d 918 (N.Y. App. 2005).  Lawyer leased property from client without complying with New York's version of Rule 1.8(a); client stated a cause of action for breach of fiduciary duty, McMahon v. Eke-Nweke, 503 F. Supp. 2d 598 (E.D.N.Y. 2007).  Florida Bar v. Ticktin, 2009 Fla. LEXIS 1254 (Fla. May 21, 2009) (lawyer suspended for not complying with Rule 1.8(a) when becoming officer of, and investor in, client).  In In re Liebowitz, 2010 N.Y. App. Div. LEXIS 6811 (N.Y. App. Div. Sept. 28, 2010), a lawyer was publicly reprimanded for borrowing money from union client without complying with New York’s version of Rule 1.8(a).  In People v. Bates, 2011 Colo. Discipl. LEXIS 55 (Col. Discipl. Justice Sept. 15, 2011) lawyer was disbarred for violating Rule 1.8(a) in a real estate investment context. In In re Spencer, 2014 Ore. LEXIS 483 (Ore. June 26, 2014) lawyer/real estate broker disciplined. Stillwagon v. Innsbrook Golf & Marina, LLC, 2014 U.S. Dist. LEXIS 120938 (E.D.N.C. Aug. 29, 2014); Law Offices of Peter H. Priest, PLLC v. Coch, 2014 NCBC LEXIS 55 (N.C. Super. Ct. Nov. 5, 2014), aff'd, Law Offices of Peter H. Priest, PLLC v. Coch, 780 S.E.2d 163 (N.C. App. 2015) (contract prepared by lawyer unenforceable). Followed Priest, Viper Publ'g, LLC v. Bailey, 2018 WL 3114536 (W.D.N.C. June 25, 2018)

        1.8(a); Remarkably Similar to Passante, but Court Did not Discuss Rule or Passante.   Goldston v. Bandwidth Tech. Corp., 2008 WL 2445496 (N.Y. App. June 19, 2008).

        In Rubin v. Murray, 2011 Mass. App. LEXIS 365 (Mass. App. March 16, 2011), the court approved a 1975 stock-for-fees arrangement and discussed the applicability of DR5-104(A) and Rule 1.8(a).  The lawyer had advised the other parties to talk to other counsel, and the other parties were sophisticated.

        1.8(a); Referring Client to Wife's Real Estate Firm.  N.J. Op. 696 (5/16/05).  The Committee said that where a lawyer for an executor lists estate property with the real estate broker employing his wife, the lawyer must comply with New Jersey’s version of Model Rule 1.8(a).

        1.8(a); Lawyer for Estate and Realtor for Estate Sale Should Have Complied with Rule.  In re Estate of Brown, 930 A.2d 249 (D.C. App. 2007).

        1.8(a); In re Fisher, 2012 U.S. Dist. LEXIS 8293 (S.D.N.Y. Jan. 24, 2012).  In this disciplinary proceeding and in this opinion Judge Rakoff, acting as Chair of the Committee on Grievances of the S.D.N.Y., immediately suspended Lawyer, in part, for borrowing money from a client but failing to comply with Rule 1.8(a) or its predecessor, DR5-104(A).  The term of the suspension will be determined at a later date.

        Smith-Canfield v. Spencer, 2011 Bankr. LEXIS 1822 (D. Ore. May 17, 2011).  Defendant was a lawyer and real estate broker.  While giving Plaintiff bankruptcy advice, Defendant also assisted Plaintiff in buying a home.  There were problems with the property, and Plaintiff sued Defendant for legal malpractice and real estate broker malpractice.  Defendant tried to defend, in part, by claiming he was not acting as a lawyer in the real estate transaction.  The court rejected that claim saying:

Defendant cannot simply remove his attorney hat and put on his broker hat when he and Plaintiff went house-hunting.

Among other things, the court held that Defendant had failed to comply with Rule 1.8(a).

        1.8(a); In Donald J. Weiss & Associates, P.C. v. Tulloch, 2008 Pa. Super. LEXIS 3511 (Pa. App. Oct. 30, 2008), the court said that violation of “Rule 1.8” (presumably 1.8(a)) did not invalidate a note the lawyer had taken from the client to secure fees.  The court did rule against the lawyer as a matter of contract law.

        Contract Violating Rule 1.8(a) not Enforceable. Calvert v. Mayberry, 2019 WL 1510451 (Col. April 8, 2019). Lawyer, pursuant to an oral agreement, lent a feeble client substantial sums of money without complying with Rule 1.8(a). In this case Lawyer sued to collect the loans. The trial court found for the client. The appellate court affirmed. In this opinion the Colorado Supreme Court also affirmed. The court adopted the rule that a lawyer may not enforce a contract that violated Rule 1.8(a), because that rule is an expression of “public policy.” Contrary was Enforceable: M.A. Mills, P.C. v. Kotts, 2022 WL 176125 (Tex. App. Jan. 20, 2022).

        Gorshek v. Trewin, 2010 Wisc. LEXIS 46 (Wis. June 24, 2010).  Lawyer purchased his clients' farm.  The clients sued for breach of fiduciary duty.  The trial court found for the clients and ordered the purchase rescinded.  The appellate court affirmed, and in this opinion the supreme court affirmed.  The trial court had also ordered punitive damages.  The supreme court held (with one dissent) that because there were no compensatory damages, an award of punitive damages would be inappropriate.  The overall outcome of this case was heavily dependent on the factual findings of the trial court.  This opinion contained no mention of Rule 1.8(a).

        Purchasing Client’s Property.  Houston v. Ludwick, 2010 Tex. App. LEXIS 8415 (Tex. App. Oct. 21, 2010).  In this opinion the court upheld a $142,000 breach-of-fiduciary-duty jury verdict against a lawyer who had received four condominium units from the plaintiff/client in payment of fees.  Among other things, the jury held that the client received considerably less than what the units were worth.  The court did not mention Texas' version of Model Rule 1.8(a).

        Construction Services for Fees; 1.8(a) (posted February 20, 2023) In re DuBoff, No. SC S069006 (Ore. Feb. 16, 2023). Lawyer represented Client for "many years." In about 2015, under a letter agreement, Lawyer began accepting Client's construction services in lieu of payment of Lawyer's legal fees. A trial panel of the Oregon Disciplinary Board found that Lawyer violated Oregon Rule 1.8(a) because the letter agreement failed "to disclose in writing the essential terms" of the agreement. In this opinion the Oregon Supreme Court agreed and publicly reprimanded Lawyer. Most of the opinion deals with whether the arrangement was a "business transaction for purposes of RPC 1.8(a)." The court found that it was. The court concludes by describing the ways the letter agreement fails to disclose the "essential terms" of the transaction. If you want to know what terms were missing, in the context of these facts, read the opinion.

       Rule 1.8(a).  Asymmetrx Med., Inc. v. McKeon, 2012 U.S. Dist. LEXIS 38218 (D. Mass. March 2, 2012).  One of the issues in this case is Lawyer's right to an equity interest in Company.  Opponents of Lawyer claim that Lawyer should not have an equity interest in part because Lawyer violated "Rule 1.8" (presumably Rule 1.8(a)).  In this opinion the magistrate judge, relying in part upon the Scope statement in the Massachusetts Rules, held that the violation would not deprive Lawyer of her equity interest.

        Fee Unreasonable; 1.8(a) Discussed.  Holmes v. Loveless, 94 P.3d 338 (Wash. App. 2004).  A law firm represented a real estate joint venture in connection with the development of a shopping center.  The fee agreement provided for a discounted billing rate for 2 1/2 years in exchange for an agreement to pay the law firm 5% of the revenues of the shopping center.  After the shopping center became successful, the joint venture balked at paying the 5%.  In litigation over the fee, this court held that the fee, while possibly reasonable when it was agreed to, had become unreasonable and was no longer enforceable.

         Lawyer Released in Settlement Document and Effect of Rule 1.8(a).  Berner Cheese Corp. v. Krug, 2008 Wisc. LEXIS 347 (Wis. July 15, 2008).

        1.8(a); Lawyer Disbarred.  Florida Bar v. Doherty, 2012 Fla. App. LEXIS 623 (Fla. App. March 29, 2012).

        1.8(a); Violation Triggers Exception in Malpractice Policy.  Minnesota Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, 2012 U.S. App. LEXIS 6504 (4th Cir. March 29, 2012). Same result in Taylor v. The Bar Plan Mut. Ins. Co., 2015 WL 1094848 (Mo. March 10, 2015).

        Violation of 1.8(a) as Grounds for Rescission of Contract.  LK Operating, LLC v. Collection Group, LLC, 2012 Wash. App. LEXIS 1435 (Wash. App. June 19, 2012).

        Sands v. Menard, 2016 WL 6758454 (Wis. Dec. 29, 2017). For several years John Menard (SAVE BIG MONEY AT MENARD'S) lived with Debra Sands. This case is a fight over whether Sands was entitled to certain compensation and an interest in Menard's companies. Sands is a lawyer and did legal work for Menard. One of Menard's defenses was that Sands failed to comply with Rule 1.8(a) (written disclosures, consents, etc.). The Wisconsin Supreme Court, in this opinion, resolved Sands' claims without resort to that rule. However, the court felt that it needed to address whether violation of such a rule would be an absolute defense against a claim against the lawyer. The court said it would not but "may guide courts in determining required standards of care generally."

        Violation of 1.8(a) as Defense to a Civil Case Brought by Lawyer. Law Offices of Peter H. Priest, PLLC v. Coch, No. COA15-254 (N.C. App. Nov. 17, 2015).

        1.8(a) Finding of Preference in Bankruptcy Proceeding. In re Hadley, 2015 WL 7455630 (N.D. Ohio Nov. 23, 2015). Chapter 7 bankruptcy. Debtor had transferred two classic cars to Lawyer three days before filing the bankruptcy. In this proceeding Trustee seeks to avoid the transfers as preferences. In this opinion granting Trustee relief, the court said that Lawyer’s failure to comply with Rule 1.8(a) (no written disclosure, consent, etc.), while not raised by Trustee, was a factor, among several, influencing the his ruling.

        1.8(a; Lawyer as Real Estate Agent. Conn. Informal Op. 15-03 (Feb. 2015) This opinion discusses the extent to which a lawyer may act both as lawyer and as a real estate agent in the same transaction. Sometimes yes and sometimes no. Rule 1.8(a) plays an important role.

        1.8(a); Enforceability of Fee Agreement. Institutional Labor Advisors, LLC v. Allied Resources, Inc., Civil Action No. 4:12-CV-00044-JHM (W.D. Ky. Aug. 25, 2014). Lengthy discussion of Rule 1.8(a) and its application to a fee agreement. Also a discussion of the admissibility of the testimony of ethics experts.

        "Client" within 1.8(a).  Rafel Law Grp. PLLC v. Defoor, 2013 Wash. App. LEXIS 1919 (Wash. App. Aug. 19, 2013).  Law Firm sued for fees.  One of Client's defenses was that a security agreement and promissory note negotiated between Law Firm and Client at the inception of the representation violated Washington Rule 1.8(a) (same as MR 1.8(a)).  The trial court rejected that argument.  In this opinion the appellate court agreed.  The court held, in effect, that at inception of the representation, when fee documents are created, the person agreeing to them is not yet a "client" as that term is used in the rule.

        1.8(a) Applied to Agreement between Law Firm and Non-Client. SAS Inst., Inc. v. Akin Gump Strauss Hauer & Feld, LLP, No. 5:10-CV-101-H (E.D.N.C. Feb. 6, 2015).

        1.8(a); Cancelling Note and Lien. In re Pace, 2015 WL 6728007 (W.D.N.C. Nov. 2, 2015). Lawyer represented Debtor in this Chapter 7 proceeding. Prior to filing the case, and because of Debtor’s financial problems, Lawyer took a note and security interest to secure his fees. Because Lawyer did not comply with the requirements of N.C. Rule 1.8(a), the court, in this opinion, ordered Lawyer to cancel the note, release the lien, and terminate the financing statement.

        Friedman v. Kuczkir, 2017 WL 3411971 (S.D.N.Y. Aug. 9, 2017). Defendant is a successful novelist. Plaintiff is a lawyer who did legal work for Defendant, for which he billed by the hour. Plaintiff also had a literary agency agreement with Defendant. Plaintiff brought this suit to collect a fee earned under that agreement. One defense is that Plaintiff violated then N.Y. D.R. 5-104 (predecessor to N.Y. Rule 1.8(a)). In this opinion the court rejected that defense because the agency agreement was unrelated to the practice of law.

        Lawyer and Broker. Jay Deitz & Assocs. of Nassau County, Ltd. v. Breslow & Walker, LLP, 2017 WL 3273327 (N.Y. App. Div. Aug. 2, 2017). Lawyer acted as broker in the sale of a business and also as lawyer in the sale. The retainer agreement provided that the broker portion of the fee would be contingent upon the deal closing. In this opinion the appellate court affirmed a trial court holding that Lawyer should be denied a fee because acting in both capacities, where the broker fee was contingent, was a violation of N.Y. Rule 1.7(a)(2). [Our note: This write-up is an over-simplification of the holding because of its New York-centric nature. New York lawyers who mix business with the practice of law should read the opinion. Among other things, the ruling is puzzling to us because it makes no mention of N.Y. Rule 1.8(a), which appears to be identical, or nearly so, to M.R. 1.8(a).]

        Ontario's Version of Rule 1.8(a).  Ontario's Rule 2.06(2.1) is similar to MR 1.8(a), including the requirement that the lawyer recommend that the client seek other counsel.  However, in Hillsburg Stables Inc. v. Gardiner Roberts LLP, 2012 ONCA 95 (CanLII) (Ct. App. Ont. Feb. 13, 2012), the court held that the failure to make the recommendation in connection with an interest to secure fees was not fatal to the interest where the client was sophisticated, not disadvantaged, and the interest was fair.

        1.8(a). In Chism v. Tri-State Constr., Inc., 2016 WL 2643355 (Wash. App. May 9, 2016), the court held that Rule 1.8(a) was not implicated when an in-house lawyer negotiates a bonus agreement with his employer.

        But see Day v. Meyer, 2000 U.S. Dist. LEXIS 13470 (S.D.N.Y. 2000) (court refused to grant summary judgment to client even though California lawyer violated California's version of Rule 1.8(a)).

        Discipline.  Gersten v. Statewide Grievance Committee, 1997 Conn. Super LEXIS 1590 (Conn. Super. 1997) (lawyer disciplined for not complying with Rule 1.8(a)); Attorney Grievance Commission of Maryland v. Hines, 783 A.2d 656 (Md. 2001) (lawyer had piece of company; misbehaved).

        Rule 1.8(j): Suing on Note not the Same as Seeking to Foreclose on Mortgage.  Ankerman v. Mancuso, 860 A.2d 244 (Conn. 2004).

       Rule 1.8(j): Mortgage Taken from Client During Litigation not Valid as Against Public Policy.  McLaughlin v. Amirsaleh, 844 N.E.2d 1105 (Mass. App. 2006).

        New Jersey and Taking Mortgage to secure Fee.  Van Horn v. Van Horn, 2010 N.J. Super. LEXIS 141 (N.J. App. July 23, 2010).  In addition to Rule 1.8(a), New Jersey has a court rule (Rule 5:3-5(b)) that prohibits a lawyer from taking -- during the representation -- a mortgage from a client to secure fees.  The plaintiff's lawyer violated that rule, and the trial court disqualified the lawyer.  In this opinion the Appellate Division reversed, noting that the rule does not specify a remedy.  The court said that it would have been more appropriate for the trial court to order the mortgage discharged.  The court also held that there was insufficient material in the record to determine whether the lawyer violated N.J. Rule 1.8(a) or (i).  However, the court said the more appropriate remedy for a violation would be invalidation of the mortgage transaction.

        Contingent Fee Compared. Wiener, Weiss & Madison, P.C., 2018 WL 1404286 (W.D. La. March 20, 2018). This is a suit by Law Firms to collect a contingent fee. The facts are many and complex. We are going to risk missing some important meaning with this very brief summary. Law Firms (two of them) entered into a contingent fee contract with Defendant for bankruptcy representation. The issue is whether the contract violated Rule 1.8(a). The amount of the fee would depend upon a number of business contingencies occurring in, and out of, the bankruptcy. In granting summary judgment for Law Firms, the court held that the fee agreement complied with Rule 1.5 and did not implicate Rule 1.8(a). In short the agreement did not involve things like Law Firms lending money to Defendant or Defendant conveying property interests to Law Firms.

        Creer Legal v. Monroe School Dist., 2018 WL 3830035 (Wash. App. Aug. 13, 2018). Lawyer representing Client filed a Public Records Act ("PRA") complaint against District. This led ultimately to a settlement between Client and District, in which Client gave up her rights under the PRA, in exchange for not having to pay District's costs. Lawyer then filed this PRA complaint involving the same requests as those given up by Client. The trial court granted summary judgment to District. In this opinion the appellate court affirmed. The court held that Lawyer owned no rights under the PRA, because Lawyer had been acting solely as Client's agent. The court said Rules l.8(a) and 1.8(i) support that finding. As to her claim that she obtained ownership of the PRA rights, Lawyer made no showing that she made the disclosures or obtained the consents required by Rule 1.8(a).

        Bartering for Fees. N.H. Op. 2017-18/01. This opinion holds that where the lawyer agrees to accept property instead of money for fees, whether at the outset of the representation, or midstream, the lawyer almost certainly will have to comply with Rule 1.8(a).

        California. Bisno Dev. Enter., LLC, 2018 WL 4292915 (Cal. App. Unpub. Sept. 10, 2018). Lawyer not only practices law but is a real estate investor. This case involves issues between the plaintiff ("Lawyer") and another investor/defendant who is a sometimes client of Lawyer ("Client"). One of the issues that needs resolution is the extent to which Lawyer violated Cal. Rule 3-300, California's equivalent of Model Rule 1.8(a). Early on, Lawyer had provided Client with a writing explaining the problems with lawyers doing business with clients and recommending that Client seek the advice of another lawyer. The trial court granted summary judgment to Client. In this opinion the appellate court reversed. The appellate court found that because Lawyer's earlier writing did not relate specifically to the real estate involved in this case, Lawyer had violated Cal. Rule 3-300. However, the court held that Rule 3-300 had to be read with Cal. Probate Code section 16004, which means that Lawyer could present evidence rebutting Section 16004's presumption that Lawyer had exercised undue influence over Client. [Our note: This summary probably does not do justice to this unpublished opinion. This is our introduction to the notion that California Rule 3-300 had to be read with California Probate Code section 16004.]

        Another California Case. Epis v. Bradley, 2022 WL 3593978 (Cal. App. 1st Dist. Unpub. Aug. 23, 2022).

        California. Unethical Deal Never Consummated. Carter v. Landa, No. D075353 (Cal. App. Unpub. Sept. 21, 2020). Lawyer sued for fees. The trial court found for Lawyer, awarding him half his fees. On appeal, one of Client's arguments is that Lawyer violated California Rule 1.8.1 (California's version of MR 1.8(a)). In this unpublished opinion the appellate court affirmed. Lawyer, without complying with Rule 1.8.1, had agreed to defer half his fees in exchange for a one-half interest in one of Client's water projects. Because that project never succeeded, the court held that Lawyer's violation of the rule should not be the basis for denial of fees. The court said that result was further justified by Lawyer's recovering only half his fees at trial.

        Nebraska Poster Child. State of Nebraska v. Chvala, 304 Neb. 511 (Neb. Nov. 22, 2019). 35-year respected business lawyer disbarred.

        Lawyer Owns Financial Management Company. N.Y. Op. 1231 (Oct. 6, 2021). Estate planning lawyer has an interest in a financial management company. This opinion deals with the circumstances under which the lawyer can recommend that estate planning clients use that company. At bottom, the lawyer has a conflict of interest requiring the clients' informed consent, confirmed in writing. The opinion discusses application of N.Y. Rules 1.7, 1.8(a), & 5.7.

        British Columbia Version of Rule 1.8(a)(1). In re Korn, 2020 LSBC 5 (CanLII) (Law Soc. B.C. Feb. 10, 2020). This is a hearing panel decision of the Discipline Committee of the B.C. Law Society. We normally do not spend time with lawyer discipline because, too frequently, a conflict of interest is just part of more serious case such as lying or stealing. This is a pure conflict case. Lawyer, or members of Lawyer's family, on three occasions, made loans to clients at market interest rates, which were repaid without incident, and without any kind of wrong-doing by Lawyer. The clients expressed gratitude to Lawyer, and no client complained to the B.C. Bar. The conduct in question was discovered during a "routine compliance audit." The hearing panel held that Lawyer was in a conflict of interest, violating several provisions of Part 3.4 of the B.C Code of Professional Conduct (the conflict of interest rules). This included Rules 3.4-28 and 3.4-29, which are the B.C. analog of ABA M.R. 1.8(a)(1). Evidently, Lawyer made no disclosures of her conflicts, obtained no consents, and did not recommend that the clients seek other counsel to evaluate Lawyer's role in the transactions. The panel ordered Lawyer to pay a fine of $7,500, but no costs.

        Alberta/Saskatchewan Versions of Rule 1.8(a). Hudye v. Rosowsky, 2022 ABCA 279 (CanLII) (Ct. App. Alb. Aug. 30, 2022). Lawyer had done legal work for a family group's businesses ("Group"). Lawyer negotiated with Group to become inside general counsel to Group and obtain an equity interest in Group. In this action Group sought recision of the resulting agreements. The trial court found for Lawyer holding that lawyer had no fiduciary obligations in his capacity as a "joint business partner." In this opinion the appellate court reversed, holding that, under applicable law and codes, the agreements should have been fair and reasonable to Group, the Group's consent should have been sought, and the Group should have been given adequate opportunity to seek other counsel's advice as to the agreements. According to the appellate court, Lawyer's conduct fell well short as to the latter two requirements. [Our note: The above is a bare-bones description of what happened. We should advise readers that its purpose is to alert lawyers who wish to mix legal advice to clients with doing business with clients, some of the issues that could arise.]

3. Patent Practice (Lawyer Taking Interest in IP)

Three related New York cases dealt, in part, with the ethics implications of patent lawyers taking an interest in patents they prosecute: Rhodes v. Buechel, 685 N.Y.S.2d 65 (N.Y. App. Div. 1999); Buechel v. Bain, 713 N.Y.S.2d 332 (N.Y. App. Div. 2000); and Buechel v. Bain, 766 N.E.2d 914 (N.Y. 2001). At the time of those cases 37 CFR 10.64(a)(3) was in effect. It provided that lawyers could take an interest in a patent in lieu of a fee. The issue was whether that regulation preempted New York's right to enforce DR5-104(A), which was the predecessor of New York Rule 1.8(a). The cited cases stood, in part, for the proposition that patent lawyers need to comply with New York's rule. Since that time New York has amended its rules, adopting Rule 1.8(a), which is similar to M.R. 1.8(a). More significantly, the USPTO, in 2013, scuttled its old ethics code, including 37 CFR 10.64(a)(3) and adopted a new set of ethics rules, including 37 CFR 11.108(a), which appears to be nearly identical to M.R.1.8(a). One implication of all this is that lawyers wishing to take an interest in patents they are prosecuting will be held to requirements regarding disclosures, consents, and advice to the client to seek other counsel regarding the arrangement.

4. Mid-Stream Fee Changes       

A lawyer may, during a matter, feel the need to alter the fee arrangement with a client: switch to a contingent fee; take security for unpaid fees, etc. Such changes could result from the lawyer's need to protect his fee. Or, the client may request it, if strapped. Courts historically have viewed these changes with suspicion. With the introduction of Model Rule 1.8(a) in 1983, and the gradual implementation of the rule among the states, courts have begun to adopt the protections of that rule in the case of mid-stream fee changes. Note, however, that in almost all cases the rule is not applied to the initial fee agreement.

        ABA Op. 11-458 (Aug. 4, 2011).  This is an excellent discussion of what rules apply to a lawyer changing a fee arrangement after the representation begins.  A change in rates implicates Rule 1.5.  Taking an interest in the client's property, such as taking a mortgage to secure fees, implicates Rule 1.8(a).

        Earlier Cases on Mid-stream Fee Changes.  In Valley/50th Ave., L.L.C. v. Stewart, 153 P.3d 186 (Wash. 2007); In re Haley, 138 P.3d 1044 (Wash. 2006), In re Richmond, 904 A.2d 684 (N.H. 2006), In re Hefron, 771 N.E.2d 1157 (Ind. 2002), Petit-Clair v. Nelson, 782 A.2d 960 (N.J. Super. 2001), In re Curry, III, 2009 La. LEXIS 2183 (La. July 1, 2009), and Cotton v. Kronenberg, 44 P.3d 878 (Wash. App. 2002), the courts held that lawyers who seek to change a fee arrangement after the representation is under way must comply with Model Rule 1.8(a).  In  Naiman v. New York University Hospitals Center, 351 F. Supp. 2d 257 (S.D.N.Y. 2005), the court relied, in part, on New York's version of Model Rule 1.8(a) in invalidating a mid-stream change in a contingent fee agreement.  Other authorities that deal harshly with mid-stream fee changes (but not citing Rule 1.8(a)) are United States Postal Service v. Haselrig Construction Co., 349 F. Supp. 2d 955 (D. Md. 2004); The Florida Bar v. Shankman, 908 So. 2d 379 (Fla. 2005); McConwell v. FMG of Kansas City, Inc., 861 P.2d 830 (Kan. App. 1993); Rose v. Failey, 140 N.E.2d 711 (Ill. 1957); Anderson v. Sconza, 534 N.E.2d 445 (Ill. App. 1989); Miller v. Solomon, 199 N.E.2d 660 (Ill. App. 1964); and Jordan v. Ray Schools-Chicago, Inc., 199 N.E.2d 827 (Ill. App. 1964). See also Chicago Bar Op. 93-1 (1993), which characterizes mid-stream fee changes as "presumptively fraudulent." For a recent contrary view under the Model Code, see Welsh v. Case, 43 P.3d 445 (Ore. App. 2002).

        Contingent Fee Change. Wiener, Weiss & Madison v. Fox, No. 19-30688 (5th Cir. Aug. 21, 2020) Agreement changing fee from hourly to contingent is void if lawyer fails to recommend that client see another lawyer.

        More on Mid-stream Fee Changes; Obtaining Security for Fees.  In Valley/50th Ave. LLC v. Morse and Bratt, P.S.C., 2011 Wash. App. LEXIS 1286 (Wash. App. June 1, 2011), a sequel to In Valley/50th Ave., L.L.C. v. Stewart, 153 P.3d 186 (Wash. 2007), the court held that the law firm in question had, under Wash Rule 1.8(a), given the client a reasonable opportunity to seek other counsel, and had adequately documented the transaction.  ABA Op. 02-427 (2002) discusses this subject in substantial detail.  In Re Snyder, 35 S.W.3d 380 (Mo. 2000), was a disciplinary proceeding involving, in part, a lawyer's taking an interest in a client's real estate in lieu of a cash fee to defend a criminal proceeding.  The court held that the lawyer should have complied with Missouri's version of Model Rule 1.8(a).  That includes advising the client of the terms of the arrangement in writing, giving the client an opportunity to seek the advice of independent counsel, and getting the client's consent in writing.  The lawyer failed to comply with Rule 1.8(a) and was suspended for six months.  In McRentals, Inc. v. Barber, 62 S.W.3d 684 (Mo. App. 2001), a lawyer bought a business from a client, and the court held that he substantially complied with Rule 1.8.  In Welsh v. Case, 43 P.3d 445 (Ore. App. 2002), the court upheld a mid-stream mortgage for fees, even though Oregon DR 5-104(A) was not complied with, because the mortgage was not for the clients' benefit, and the clients were sophisticated.  In Cotton v. Kronenberg, 44 P.3d 878 (Wash. App. April 22, 2002), the lawyer had taken the client's real estate and mobile home.  The court held that the fee was not fair and reasonable and violated Rule 1.8(a).

        Arbitration Clause Inserted by Lawyer in Business Agreement not Enforceable by Lawyer.  Harris v. Albany Lime & Cement Co., 2008 Ga. App. LEXIS 470 (Ga. App. April 24, 2008). 

        Lawyer Taking Real Estate in Lieu of a Fee just Prior to Filing Bankruptcy.  In re Wentzell 656 N.W.2d 402 (Minn. 2003).  Lawyer disciplinary proceeding.  Just prior to his client’s filing for bankruptcy, the lawyer had the client convey property to the lawyer in payment of fees the client owed the lawyer.  The lawyer was disciplined because his disclosures to the bankruptcy court were inadequate and because of misstatements the lawyer made in connection with the conveyance.  [Note: we have been asked by law firms about taking real estate from nearly-insolvent clients in payment of fees.  While it certainly may be possible, it should be done extremely carefully, with due regard for the law of preferences, fraudulent conveyances, and the bankruptcy disclosure rules for conflicts of interest.]

        40% Contingent Fee not Ipso Facto a Violation of Rule 1.8(a).  Premier Networks, Inc. v. Stadheim & Grear, Ltd., 2009 Ill. App. LEXIS 1083 (Ill. App. Nov. 10, 2009).

       Disqualification. Pennsylvania’s version of Model Rule 1.7(b) was cited in Simms v. Exeter Architectural Products, Inc., 868 F. Supp. 668 (M.D. Pa. 1994). A lawyer attempted to represent a corporation in which he was a shareholder. The court found that relationship created an inherent conflict of interest and disqualified the lawyer.  Likewise, in Landzberg v. 10630 Berea Rd., Inc., 2002 Ohio App. LEXIS 1085 (Ohio App. 2002), a lawyer/shareholder of a tavern attempted to represent the tavern in a tort case involving an assault at the tavern.  The lawyer was also the manager of the tavern on the evening of the occurrence.  Because he was almost certainly going to be a witness, the court disqualified his law firm.     

        Class Certification Denied.  In Sipper v. Capital One Bank, 2002 U.S. Dist. LEXIS 3881 (C.D. Cal. 2002), the court held that because the lawyer who sought to be class counsel was in business with the person who sought to be class representative, the class could not be certified.

5. Tax Opinions       

Tax Avoidance; not "Abusive Tax Shelters
."  The following cases dealt with the imposition of negligence penalties by the IRS.  The defense was that the taxpayer relied on the advice of lawyers in not paying the tax or in paying less than the IRS claimed.  In each case the court denied the defense because the lawyer had a business relationship with the taxpayer and, therefore, had a conflict of interest.  Addington v. Comm'r, 205 F.3d 54 (2d Cir. 2000); Pizza Pro Equip. Leasing, Inc., 2016 WL 6804474 (T.C. Nov. 17, 2016); Kenna Trading, LLC v. Comm'r, 2014 U.S. Tax Ct. LEXIS 51 (U.S. Tax Ct. Oct. 16, 2014) (discusses conflict but doesn't explain relevance); Zeluck v. Comm'r, 2012 Tax Ct. Memo LEXIS 97 (U.S. Tax Ct. April 3, 2012); Zatz v. Comm'r, 2011 Tax Ct. Summary LEXIS 87 (U.S. Tax Ct. July 19, 2011); Wiest v. Comm'r,  2002 Tax Ct. Summary LEXIS 32 (U.S. Tax Ct. 2002); Barlow v. Comm'r, T.C. Memo 2000-339, 2000 Tax Ct. Memo LEXIS 402 (U.S. Tax Ct. 2000); In re Canada, 2016 WL 3349165 (N.D. Tex. June 7, 2016) (court found no penalty, but said the taxpayer could nor rely on advice of lawyer).  To the same effect are Goldman v. Comm'r, 39 F.3d 402 (2d Cir. 1994),  Weitzman v. Comm'r, T.C. Memo 2001-215, 2001 Tax Ct. Memo LEXIS 252 (U.S. Tax Ct. 2001), and Robnett v. Comm'r, 2001 Tax Ct. Memo LEXIS 26 (U.S. Tax Ct. 2001), except in those cases, the opinion was that of an accountant who had a business relationship with the taxpayer. In Green Gas Del. Stat. Trust v. Comm’r, 2016 WL 3909765 (T.C. July 14, 2016), Taxpayer was involved in developing and selling gas generated by landfills. The IRS found that Taxpayer owed taxes and also assessed a negligence penalty. Taxpayer claimed it had relied on the advice of Law Firm, but did not proffer a written opinion from Law Firm. Further, given Law Firm’s unique role in the sale of the gas, Law Firm was actually a promoter of the sale. Thus, Law Firm had a conflict, and Taxpayer could not rely on Law Firm’s advice to avoid penalties. 

        "Abusive Tax Shelters;" Penalties Upheld. In the following cases the court upheld penalties because the taxpayer relied upon opinions when the taxpayers should have realized that lawyers or, perhaps others, were complicit in phony tax schemes: Baxter v. Comm'r, 2018 WL 6422483 (4th Cir. Dec. 7, 2018); Curtis Inv. Co., LLC v. Comm'r, 2018 WL 6380325 (11th Cir. Dec. 6, 2018); Gustashaw v. Comm'r, 2012 U.S. App. LEXIS 20379 (11th Cir. Sept. 28, 2012); New Phoenix Sunrise Corp. v. Comm'r, 2010 U.S. App. LEXIS 23909 (6th Cir. Nov. 18, 2010), Stobie Creek Invest. LLC v. United States, 2010 U.S. App. LEXIS 11927 (Fed. Cir. June 11, 2010),
NcNeill v. Comm’r, T.C. Memo. 2017-206 (T.C. Oct. 18, 2017) ("too good to be true"); Curtis Inv. Co., LLC v. Comm'r., T.C. Memo. 2017-150 (U.S.T.C. Aug. 2, 2017); Salem Fin., Inc. v. United States, 2013 U.S. Claims LEXIS 1372 (U.S. Ct. Cl. Sept. 20, 2013) (BB&T bank, "STARS" transaction; penalty, $113 million), conflict finding aff'd at Salem Fin., Inc. v. United States, 2015 WL 2242421 (Fed. Cir. May 14, 2015); NcNeill v. Comm’r, T.C. Memo. 2017-206 (T.C. Oct. 18, 2017); Gerdau Macsteel, Inc. v. Comm'r, 2012 U.S. Tax Ct. LEXIS 30 (U.S. Tax Ct. Aug. 30, 2012); SAS Invest. Partners v. Comm'r, 2012 Tax Ct. Memo LEXIS 160 (U.S. Tax Ct. June 6, 2012); and Kerman v. Comm'r, 2011 Tax Ct. Memo LEXIS 52 (U.S. Tax Ct. March 8, 2011); Murfam Farms, LLC v. United States, 2010 U.S. Claims LEXIS 598 (Ct. Cl. Aug. 16, 2010) (citing Stobie Creek).  Likewise in Canal Corp. v. Comm'r, 2010 U.S. Tax Ct. LEXIS 25 (U.S. Tax Ct. Aug. 5, 2010) (accounting firm rendering legal opinion had “inherent and obvious” conflict).  In Conwill v. Greenberg Traurig, L.L.P., 2010 U.S. Dist. LEXIS 76824 (E.D. La. July 29, 2010), the court held that allegations against a law firm’s fraudulent breach of fiduciary duty triggered Louisiana’s ten-year statute of limitations.  There were allegations of undisclosed compensation passing between the law firm in question and the tax shelter promoter.  In Behnke v. Ahrens, 2012 Wash. App. LEXIS 1555 (Wash. App. July 2, 2012), a lawyer had to forfeit his fees because of his involvement in a "Son of BOSS" shelter.  In Rawls Trading, L.P. v. Comm'r, 2012 Tax Ct. Memo LEXIS 341 (U.S. Tax Ct. Dec. 5, 2012), another "Son of BOSS" case, the court held that the law firm was a "promoter," and could not be relied upon to avoid penalties, but the court held the taxpayer could rely upon an accountant without substantial ties to the seller of the shelter. Kerman v. Comm'r, 2013 U.S. App. LEXIS 7032 (6th Cir. April 8, 2013).  In this opinion the court upheld a 40% penalty, on top of a tax deficiency.  It was unreasonable for the taxpayer to rely upon the opinion of Brown & Wood, a large New York City law firm, in a "CARD" tax shelter transaction.

        "Abusive Tax Shelters;" Taxpayers Catch a Break.
In Klamath Strategic Investment Fund, LLC v. United States, 472 F. Supp. 2d 885 (E.D. Tex. 2007) the court held that to avoid penalties taxpayers could rely on the tax shelter opinion of a law firm that represented not only the taxpayers but also the promoter of the shelters.  A similar result was reached in American Boat Co., LLC v. United States, 2009 U.S. App. LEXIS 21548 (7th Cir. Oct. 1, 2009). Tucker v. Comm'r Int. Rev., T.C. Memo. 2017-183 (T.C. Sept. 18, 2017). Although R.J. Ruble (see above) involved, the court found that, on balance, the taxpayer reasonably relied on several sources and was under no duty to obtain "second opinions," etc.

        Tax Avoidance, But not a Tax Shelter as Such.  United States v. McBride, 2012 U.S. Dist. LEXIS 161206 (C.D. Utah Nov. 8, 2012).  Suit for civil penalties against Taxpayer for failure to report foreign bank accounts.  Promoter was an entity selling services to Taxpayers to help them to avoid federal taxes, in part by utilizing foreign bank accounts.  To avoid a willfulness finding Taxpayer claimed he relied upon opinions of lawyers employed by Promoter.  In making liability findings, in this opinion, the court held that Taxpayer could not avoid a willfulness finding by relying upon lawyers with conflicts of interest.

6. Lawyer Liability from Non-Legal Activity

[Note: For authorities on lawyer civil liability and fee forfeitures resulting from conflicts of interest generally, go to the page at this site: Malpractice Liability/Fee Forfeitures.]

Written court opinions regarding the liability of lawyers investing in clients are rare. The author is aware of a handful of malpractice settlements where the lawyer’s additional role as investor had an undeniable effect on the decision of the lawyer, his law firm, and his law firm’s carrier to settle. While such settlements are few in number, they have been for substantial amounts. An example of how a lawyer’s investment can affect a tribunal’s attitude is SEC v. National Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978). That was an enforcement proceeding brought by the SEC against certain participants in a transaction and several of their lawyers. One of the lawyers stood to profit from the consummation of the transaction in question because he owned stock in his client. The court went out of its way to comment on that, 457 F. Supp., at 711.

        Julia D. Gray, Pillsbury Winthrop Accused of Malpractice in Atlanta Trust Fund Case, Fulton County Daily Report, December 19, 2001.  Following is a summary of the article.  Timothy Cobb is the divorced father of two sons, each of whom is beneficiary of a trust.  Crichlow is a partner at Pillsbury, and until November 2000, was trustee of the trusts.  Pillsbury represented the trusts.  The new trustee is Madelyn Adams, former wife of Cobb and mother of the beneficiaries.  She has sued Cobb, Crichlow and Pillsbury Winthrop.  It seems that the trust had made loans to Cobb's company, edaflow, totaling $2.4 million.  Crichlow is an investor in edaflow.  The trusts made additional loans totaling some $400,000 to other companies in which Cobb and Crichlow had interests.  Much of the money has been lost.  Among other claims, Adams claims Crichlow had violated the prudent investor rule (the trusts had a total value of $6.5 million).  She also claims Crichlow and the firm had a conflict of interest and were guilty of malpractice. 

       Gupta v. Rubin, 2001 U.S. Dist. LEXIS 450 (S.D.N.Y. 2001).  This opinion was in connection with the denial of a FRCP 12(b)(6) motion, so the ultimate significance of the case remains to be seen.  Nevertheless, it is an illustration of possible malpractice liability resulting from a law firm's doing business with a client.  In this case, plaintiff alleges that his law firm did not disclose its business relationship with another party, with whom the plaintiff was doing business.

     Robin McDonald, Scam Outfit's Law Firm Sued for Not Checking Fraud Operator, Fulton County Daily Report, August 4, 2000.  According to this article defrauded investors have sued Philadelphia's Schnader, Harrison, Segal & Lewis for its having represented an investment partnership that was running a Ponzi scheme.  A partner in the law firm had invested $50,000 in the partnership and is believed to have lost $40,000.  The principal allegation against that lawyer and the law firm is that they did not check out the background of one of the investment partners.  He had been fired from two brokerage firms and had been sued several times.  In one case he had a $1.3 million judgment entered against him.

        Insurance Coverage. Minnesota Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, 2010 U.S. Dist. LEXIS 122836 (E.D. Va. Nov. 18, 2010); and Minnesota Mut. Ins. Co. v. King, 2010 U.S. Dist. LEXIS 121446 (D. Col. Nov. 1, 2010).  In both cases the same lawyer malpractice insurance company ("MM") sued its insured lawyers for a declaration that the matters in question were subject to the policy exclusion that related to lawyers doing non-legal business.  In the Virginia case the court entered summary judgment for MM based on the exclusion.  In the Colorado case, in addition to relying on the exclusion, MM also claimed that the lawyer/insured had made misrepresentations about his non-legal business in his insurance application.  In the cited opinion the court only ruled on procedural issues.  However, both cases should serve as a reminder that lawyers doing business with clients need to be mindful of the hazards, including the hazard of losing their insurance coverage.  Similar result in Lancia v. State Nat'l Ins. Co., 2012 Conn. App. LEXIS 178 (Conn. App. April 10, 2012).

        More on Insurance Coverage.  Darwin Nat'l Assurance Co. v. Hellyer, 2011 U.S. Dist. LEXIS 60592 (N.D. Ill. June 7, 2011).  Lawyer participated in a land transaction with Lawyer's clients.  In this opinion the court held that that participation triggered the business enterprise exclusion in Lawyer's malpractice policy.  Abrams, Fensterman, Fensterman, Eisman, Greenberg, Formato & Einiger, LLP v. Underwriters at Lloyd's, 2013 U.S. Dist. LEXIS 1204 (E.D.N.Y. Jan. 2, 2013).  Law Firm got mixed up in the insurance business.  When Law Firm got sued for this activity, its malpractice carrier denied coverage under an exclusion dealing with lawyers doing business.  Law Firm filed this action to enforce coverage.  In this opinion the court granted summary judgment to the carrier holding that the exclusion applied.

        Inducing Clients to Invest.  Minnesota Lawyers Mut. Ins. Co. v. Ahrens, 2010 U.S. Dist. LEXIS 107873 (M.D. Pa. Oct. 8, 2010).  Law Firm allegedly caused Clients to invest several million dollars in an investment scheme.  Clients lost their money and sued Law Firm.  Law Firm's malpractice carrier ("InsCo") filed this action seeking a declaration that an exclusion in its policy, relating to investment activities, precludes coverage for the investment losses.  In this opinion, construing the exclusion, the court granted InsCo a judgment on the pleadings.  [Editorial Comment: we had thought that lawyers stopped inducing their clients to enter into investments years ago, particularly because of jaw-boning by malpractice carriers.  Evidently, some lawyers will never learn.]

        Broker fined for acting as lawyer and real estate broker in same transaction. Curielli v. Dep't of Fin. & Prof'l Regulation, 2018 Ill. App. Unpub. LEXIS 2000 (Ill. App. Nov. 13, 2018).

        Can Jeopardize Malpractice Coverage.  Continental Cas. Co. v. Fenigstein & Kaufman, 2009 U.S. Dist. LEXIS 48696 (C.D. Cal. May 20, 2009).

        More Coverage (No) Cases. Lee & Amtzis, LLP v. Am. Guar. & Liab. Ins. Co., No. 653050/11 13711 (N.Y. App. Div. April 7, 2015); Burk & Reedy, LLP v. Am. Guar. & Liab. Ins. Co., 2015 WL 1286039 (D.D.C. March 23, 2015).

7. Other

        Tex. Op. 626 (April 2013).  Lawyer represented Corp. A and thereby learned information about Corp. A and the relevant industry.  Corp. A was purchased, and Lawyer's representation ended.  Later, Lawyer made a "significant" investment in Corp. B, a competitor of Corp. A.  In this opinion the committee held that the investment violated Texas ethics rules.  [Note: when Texas adopted its version of the ABA Model Rules, it changed things around for no apparent reason.  Thus, this opinion is largely based upon Texas' version of MR 1.6, which resembles MR 1.9(c).  Under any formulation the opinion points to the correct result.  Hats off to the ABA/BNA Lawyers Manual on Professional Conduct, May 22, 2013 edition of Current Reports for flagging this opinion and providing an excellent analysis.]

        Rule 1.8(i). In re Corp. Res. Servs., Inc., 2017 WL 4736686 (S.D.N.Y. Oct. 20, 2017). In this Chapter 11 bankruptcy, the trustee sued Company for fraudulent transfers, among other things. Lawyer and Law Firm appeared for Company. During discovery the trustee learned that Lawyer had an ownership interest in Company. The trustee moved to disqualify Lawyer and Law Firm. In this opinion the court granted the motion. The court found that Lawyer violated New York’s version of Model Rule 1.8(i) and that that  violation was imputed to Law Firm under Rule 1.10. The court also found Rule 3.7, lawyer-as-witness, issues as well.

        Litigation Funding Investment. N.Y. Op. 1145 (March 7, 2018). Lawyer wants to be a significant investor in a litigation funding company. This opinion considers whether Lawyer or his law firm can, at the same time, handle litigation, in which the funding company has a stake. The opinion holds that such an arrangement violates New York's versions of Model Rules 1.8(e) & 1.8(i), and that the violation is not waivable. The opinion also discusses applicability of Rules 1.7 & 1.8(a), and holds that whether there would be a violation of either would depend upon the circumstances.
        Power Play 1 LLC v. Norfolk Tide Baseball Club, LLC, 2017 WL 5312193 (S.D.N.Y. Nov. 13, 2017). Contract dispute. Law Firm represents Defendants. Plaintiffs moved to disqualify Law Firm in part because a member of Law Firm has an ownership interest in one of the defendants. In this opinion the court denied the motion, saying that an ownership interest without more is not disqualifying.

        Lawyer vs. Sports Agent. Sports Mgmt. Network v. Busch, 2019 WL 1057314 (E.D. Mich. March 6, 2019). Busch is a race car driver. At some point Busch hired SMN, a sports agency. Lawyer founded SMN and is its CEO. Lawyer is also a named partner in Law Firm. In 2013 SMN submitted a written agreement modifying Busch's fee obligations. Busch never signed it, but did pay invoices from time-to-time without complaint. Busch terminated his relationship with SMN in 2016. SMN brought this action to collect unpaid fees. Busch counterclaimed against Lawyer and Law Firm. There were several issues in this case, and we will deal with just one of them, the enforceability of the modified fee agreement. In this opinion the court held that the agreement was not enforceable because, in part, Lawyer did not comply with Michigan Rule 1.7. Lawyer had allegiances to Busch, but also to SMN. Lawyer also represented other racing entities at the same time he was negotiating with them on behalf of Busch. The record is bereft of anything resembling disclosures by Lawyer of the significance of these relationships or informed consents given by Busch. Moreover, Lawyer made no attempt to explain to Busch when Lawyer would be acting as a Lawyer versus acting as a sports agent. In fact, in his testimony Lawyer seemed unsure of which was which. In short, this situation is a graphic illustration of how not to combine acting as a lawyer with doing business with a client.       
        Other Cases on Investing in or with Clients: Neill v. All Pride Fitness of Washougal, LLC
, 2009 U.S. Dist. LEXIS 42145 (W.D. Wash. May 4, 2009) (court allowed 17% owner to defend LLC); Avianca, Inc. v. Corriea, 705 F. Supp. 666 (D.D.C.), aff'd, 1995 U.S. App. LEXIS 30863 (D.C. Cir. 1995); Rothman v. Wilson, 121 F.2d 1000 (9th Cir. 1941); Ruth v. Crane, 392 F. Supp. 724 (E.D. Pa. 1975), aff'd, 562 F.2d 90 (3d Cir. 1977); In re Spear, 774 P.2d 1335 (Ariz. 1989); Gold v. Greenwald, 55 Cal. Rptr. 660 (Cal. App. 1966); Melson v. Michlin, 223 A.2d 338 (Del. 1966); Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 864 N.E.2d 927 (Ill. App. 2007) (partners invested in entity that lent money to clients; client was unsuccessful in using this against firm); Comm. on Prof. Ethics and Conduct of Iowa State Bar Ass'n. v. Humphreys, 524 N.W.2d 396 (Iowa 1994); Comm. on Prof. Ethics and Conduct of Iowa State Bar Ass'n. v. Mershon, 316 N.W.2d 895 (Iowa 1982); Mathews v. Spears, 24 So. 2d 195 (La. App. 1945); Goldman v. Kane, 329 N.E.2d 770 (Mass. App.01975);  Rowland v. Monroe, 1996 Minn. App. LEXIS 1195 (Minn. App. 1996);  In re Lowther, 611 S.W.2d 1 (Mo. 1981); In re Discipline of Singer, 865 P.2d 315 (Nev. 1993); In re D'Angelo, 733 P.2d 360 (N.M. 1986); In re Reiss, 502 A.2d 560 (N.J. 1986); Greene v. Greene, 436 N.E.2d 496 (N.Y. 1982); In re Harrington, 718 P.2d 725 (Or. 1986); In re O'Byrne, 694 P.2d 955 (Or. 1985); In re McGlothlen, 663 P.2d 1330 (Wash. 1983); Chancery Estate Holdings Corp. v. Sahara Real Est. Invest. Inc., 2011 BCSC 1067 (CanLII) (S. Ct. B.C. Aug. 5, 2011).

        Other Ethics Opinions:  Col. Op. 109 (2001); D.C. Op. 179 (1987);  Kan. Op. 98-06 (9/15/98);.Miss. Op. 230 (1995); Pa. Op. 89-158 (1989); Utah Op. 98-13 (1998); Va. Op. 1593 (1994).

        Ill. Op. 13-4 (May 2013).  Lawyer owns 8% of Bank and is Chairman of Bank's board.  Lawyer represents Municipality, which does business with Bank.  This opinion explores Lawyer's obligations under Rules 1.8(a) and 1.7(a)(2) (material limitation).  The opinion says that the the relationship is probably "nonconsentable" under Rule 1.7(a)(2).  The opinion is not clear whether Lawyer can avoid a violation by not representing Municipality in dealings with Bank, while representing the Municipality on other matters.

        Non-Law Businesses. N.Y. Op. 1199 (July 15, 2020) & N.Y. Op. 1200 (July 21, 2020). New York adopted a new set of ethics rules in 2009. This included Rule 5.7, which appears to be substantively the same as ABA Model Rule 5.7. These two opinions of the New York State Bar Ethics Committee explore the ways in which the New York rule applies to lawyer activity that is not the practice of law. Opinion 1199 discusses a lawyer's setting up a business to provide pro se litigants with forms and procedures, with or without the lawyer's assistance. Opinion 1200 discusses a lawyer who wishes to practice law and provide wealth management services to clients. The opinion holds that a lawyer may not provide investment services to clients but may provide such services to non-clients. Both opinions discuss the interplay of Rule 5.7 with other rules, particularly conflict rules. Both opinions discuss when certain disclosures must be made to non-clients to ensure that non-clients do not believe they have protections of law clients. The above just scratches the surface of the advice provided by the opinions. Any practicing lawyer in the U.S. who wishes to branch out into non-legal areas would do well to read both opinions, in addition to authorities where the lawyer is admitted.

        Ohio Op. 2020-8 (Aug. 8, 2020). The opinion provides that a lawyer may provide financial planning services to clients provided the fee is on a basis other than a percentage of the client's assets. A lawyer may not sell financial products to clients. Compare this opinion with N.Y. Op. 1200 (July 21, 2020), which holds that a lawyer may not provide financial planning services to law clients.

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