August 2018

Bartering for Business

By Elizabeth Blust

Attorney at Law

In the opening scene of the movie “To Kill a Mockingbird” — and in a later scene in the book by Harper Lee — client Walter Cunningham brings a bag of hickory nuts to lawyer Atticus Finch as payment for the latter’s help with the former’s entailment. Now that I am a lawyer myself, I understand not only what entailment is (and why, as young Scout Finch commiserates with Mr. Cunningham later, “entailments are bad” and take “a long time sometimes”, Ch. 15), but also the value of accepting barter as a means of payment for legal services.

My first barter experience was with my first client. My long-time hairdresser and her husband had a property issue, so I helped them understand and protect their rights. They paid a cash deposit and we agreed that part of their remaining payment would be a few haircuts from her and some tomatoes and other produce from their garden. An unexpected frost killed off the tomatoes, but I ended up getting two haircuts, some other vegetables, and a check for $75.

My second barter experience was not planned. A trust administration for a surviving spouse took much more of my time than either of us had anticipated, and the deceased spouse had died with a lot more debt than the surviving spouse knew about. I reminded my client that she had once mentioned that she did not know what to do with all her furniture, since she would be moving to a smaller place. We agreed, in a written amendment to the representation agreement, to exchange furniture for a portion of my bill. A few of the pieces found immediate new life — I used her old dining table as my office desk for the next five years — but I will admit that a few were “mercy barters” that still bide their time in my garage. Likewise, I doubt Atticus Finch needed all those hickory nuts.

The California Rules of Professional Conduct do not specifically address barter, so attorneys must align their barter income with all of the rules regarding fees. As with cash compensation, the fee cannot be unconscionable and should be proportional to the value of the services performed. CRPC 4200. A written agreement clearly stating the barter terms, even for representation expected to incur expenses less than $1,000.00, should help avoid questions of improper gifting (See CRPC 4-400 and Bus. & Prof. Code §6148).

All attorneys should avoid obtaining an interest in property that is adverse to the client’s interest unless the transaction is fair, the client understands that the interest is adverse, the agreement is in writing, and the client is advised in writing that he may have the agreement reviewed by an independent attorney. CRPC 3-300. In fact, this potential exists any time an attorney reserves the right to place a lien on the client’s property. Perhaps the most unusual form of bartering is obtaining title to property by foreclosing on a lien. Christin Winkler-Muñoz of San Diego Tax Group, LLC, says that appellate attorneys often include a lien against a car or house as a key part of the fee agreement. If the attorney ends up taking title to the property, that is a non-cash exchange for legal services — barter.

One potential obstacle to bartering in certain circumstances is new Rule of Professional Conduct 1.15 (effective November 1, 2018), requiring advance fees to be held in trust, in most circumstances. What if the attorney needs plumbing services now and agrees to perform legal services for the plumber at a later date? Can a bartered service be held in a client trust account? Perhaps the written fee agreement could state that the barter income is an advanced flat fee for services, and that if the legal services are not completed by a certain date, the attorney will “refund” the unearned fee by paying cash for the plumbing? This is how an ethics committee of the Connecticut Bar Association recommended dealing with advance barter in light of that state’s rules (CBA Informal Opinion 15-04, July 15, 2015). With no such guidance for California, the attorney should perform the legal services first, with the barter income in goods or services being received once the legal fee is earned. The fee agreement should clearly state whether the attorney must accept the proffered goods or services (what if my client had tried to give me those frozen tomatoes?) and what alternatives the client has for payment if he cannot uphold his end of the barter bargain by a certain time.

I do know of one attorney who was stiffed on a barter, when the client was not happy with the legal representation and refused to perform the agreed upon cosmetology services. We take the same risk with our cash clients, deciding how much work to do before securing our payment in advance. For my estate planning clients, it is easy for me to start work with a cash deposit and accept barter as part of the final payment. The utility of bartering will vary with the circumstances.

One friend of mine was shocked, even dismayed, that I would barter. I could not understand his indignation until I realized that he could not distinguish non-cash transactions from fraud. He could only see barter as an attempt to hide one’s income. As with cash payments, I issue a receipt for the goods or services received and make sure the value is entered in my billing system. Barter income should be accounted for like cash; it is not a discount system or a way to avoid reporting income.

The IRS understands that barter is alive and well and has forms for reporting barter income, whether through exchanges (see sidebar) or one-on-one. Ask your tax professional for details.

I continue to barter as the opportunities arise. Sometimes, as with the fictional Walter Cunningham and my very real client with the furniture, it is because the client truly cannot pay cash for my services. Other times, it is because I recognize that a client has goods or services that she might be interested in exchanging. So far, no one has offered me hickory nuts.

This article was originally published in the May/June 2018 issue of San Diego Lawyer.