14.02. Business Transactions With A Client [Rule 1.8(a)]

In most business transactions, each party is expected to look out for their own interests.  Each party is attempting to obtain the “best” deal.  However, because lawyers are in a unique (fiduciary) relationship with their clients, they must look out for the client’s interests when doing business with the client.  Here is how a Comment to Rule 1.8 puts the concern:  “A lawyer’s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property transaction with a client.”[1] It is important to note that these concerns exist even if the transaction is not related to the representation.

Lakisha Lawyer is hired by Charlie Client to draft a will.  Lawyer and Client meet to discuss how Client wants to dispose of his estate.  After they have finished discussing the will, Client mentions that he is having trouble paying his car note because he was recently laid off from his job.  Lawyer offers to loan Client $1,000 at 2% interest.  Client agrees.  Is this transaction subject to the requirements of Rule 1.8(a)? [ABA Model Rule 1.8, Comment [1]]

Yes.  Even though the loan is unrelated to the representation, it is still subject to the requirements of Rule 1.8(a). 

There are two transactions between a lawyer and client that are not considered “business transactions” under the Rule.  First, the terms and validity of the fee agreement.  A lawyer’s ethical obligation when entering into a fee agreement is addressed in a separate rule – Rule 1.5.  However, if part of the fee agreement is that the lawyer will take an interest in the client’s business as part of the fee, the transaction must meet the obligations of Rule 1.8(2).[2]  Second, when a lawyer purchases from the client “products or services that the client generally markets to others” the Rule 1.8(a) obligations do not have to be satisfied.

Latinus Lawyer has a number of business clients.  One of his long-time clients is Borrower’s Bank – a small community bank.  Lawyer charges Bank a fee of $300 per hour.  Lawyer has a checking account at the bank.  Yesterday Lawyer agreed to represent a start-up company:  Computers-R-Us.  After explaining the business model to Lawyer, the owner of the company said, “I don’t have the money to pay you to represent the company.  However, would you be willing to accept a 50% interest in the company in exchange for representing the company?” Lawyer was very impressed with the business, and thinks it will make a lot of money (and therefore his 50% interest could be very valuable).  Which of these transactions are (and are not) subject to the requirements of Rule 1.8(a)? [ABA Rule 1.8, Comment [1]]

Starting at the beginning.  The fee agreement between Lawyer and Bank where Bank agrees to pay $300 per hour for legal services is not subject to Rule 1.8(a) – instead, it is governed by the rule setting out the requirements for an ethical fee agreement (Rule 1.5 which requires that the fee be “reasonable”).  The checking account that Lawyer has with Bank is not subject to Rule 1.8(a).  Although the checking account is a “business transaction” between Lawyer and his client, this is a service that Bank offers to all of their customers, which reduces the concern that the lawyer could take advantage of the Bank in the course of the transaction.  The fee agreement with Computers-R-Us, however does implicate Rule 1.8.  In this situation, the lawyer is taking an interest in the company instead of a traditional hourly (or contingent) fee arrangement.  The rules consider this a “business transaction” because there is a real concern that the lawyer could attempt to get a good deal for himself in the transaction – taking advantage of the client.  You should also note that this fee agreement is also subject to the reasonableness requirement of Rule 1.5 as well.

Now that you have a sense of what types of transactions Rule 1.8(a) covers, the next question is:  what does the rule require?  There are four requirements:  (1)  the terms of the transaction must be “fair and reasonable” to the client; (2) the terms must be “fully disclosed and transmitted in writing” in a manner that the client can understand; (3) the lawyer must advise the client “in writing” of the desirability of seeking independent legal counsel and given an opportunity to obtain that advise; and (4) the client must give “informed consent” in a “writing signed by the client” that includes the essential terms of the transaction, the lawyer’s role in the transaction and whether the lawyer is representing the client in the transaction.

A Comment to Rule 1.8 provides that “informed consent” means that the lawyer must “discuss both the material risks of the proposed transaction, including any risk presented by the lawyer’s involvement, and the existence of reasonably available alternatives and should explain why the advice of independent legal counsel is desirable.”[3]  As you will see in the Passante case in the Readings, if a lawyer fails to jump through all of the hoops set out in Rule 1.8(a), a court will very likely find the transaction to be invalid.

[1] ABA Rule 1.8, Comment [1].

[2] ABA Model Rule 1.8, Comment [1].

[3] ABA Rule 1.8, Comment [2].