Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.  

Failure to Comply with Rule of Professional Conduct 3-300 Regarding Transactions with Clients—Even Where Transactions are Successful for the Client—Can Result in Denial of Quantum Merit Claim for Unpaid Fees

In Fair v. Bakhtiari, (Cal. App. 1st Dist., May 24, 2011) 2011 Cal. App. LEXIS 634;
             Cal.App.4th        ;          Cal.Rptr.3d        ; 11 Cal. Daily Op. Serv. 6185, an attorney (Fair) went into business with his client (Bakhtiari) in forming Stonesfair Corporation and several related entities.  Because Fair was representing Bakhtiari and the Stonesfair entities when he entered into the various business transactions with them, he was obligated to comply with Rule of Professional Conduct  3-300 which requires full written disclosure of terms that are fair and reasonable to the client, recommendation to seek separate counsel, and consent by the client.  Fair never complied with 3-300.   

After their relationship soured, Fair filed a complaint against Bakhtiari and the Stonesfair entities.  In response, they cross-complained against Fair for several causes of action including legal malpractice.  Fair moved for leave to amend his complaint to add a cause of action for quantum meruit, and this was eventually denied.  After a bench trial, the court found “Fair had violated rule 3–300, raising a presumption of undue influence under [Probate Code] section 16004, subdivision (c)” and that Fair had breached his fiduciary duties to Bakhtiari even though Fair “established that ‘each of the subject business transactions was fair and reasonable,’ and that Stonesfair Financial Corporation's business was ‘tremendously successful....’ ”

On appeal from the trial court’s denial of his request to add the quantum meruit claim, the Court of Appeal distinguished the Supreme Court’s decision in Huskinson & Brown v. Wolf (2004) 32 Cal.4th 453, 458, where the high court found an attorney could sue for quantum meruit despite violation of Rule 2-200 requiring a written fee sharing agreement and client consent.  In affirming the denial of leave to amend, the Court of Appeal concluded, “[u]nlike those rule violations in which counsel has been allowed to recover the reasonable value of services rendered and which involved no serious breach of fiduciary duty, the [trial] court could well determine that Fair’s conduct here was so fundamentally at war with rule 3-300 and section 16004, that it infected the entire  relationship between Fair and his clients, and that Fair’s breach of his fiduciary duties under the statute was therefore sufficiently serious as to warrant the denial of quantum meruit recovery.” (Id. at *22.) 
This decision is an important reminder to attorneys of the absolute necessity of complying with ethical duties.  If the conflict at issue is sufficiently severe, the attorney can be denied all compensation even where the transaction with the client was, by all accounts, very successful for the client. 

--Andrew A. Servais

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis.  Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**