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.



Taking an Interest Adverse to the Client, Part Three of Three: Business Dealings with Clients (Rule of Professional Conduct 3-300)
 
“Attorneys wear different hats when they perform legal services on behalf of their clients and when they conduct business with them.  As to the latter, the law presumes the hat they wear is a black one.” (Mayhew v. Benninghoff (1997) 53 Cal.App.4th 1365, 1369.) As you would expect, if the Court of Appeal makes such a statement in the context of a dispute between you and a client, things will not turn out well for you. So it was in Mayhew, supra, a dispute in which the client tendered to the lawyer more than $600,000 for the lawyer to “prudently invest.” The lawyer allegedly converted some $76,000, purportedly to pay for outstanding legal fees owed to the lawyer for handling the client’s divorce. When the lawyer moved to compel arbitration of the client’s action for conversion and other claims, the trial court denied the lawyer’s request and the Court of Appeal affirmed. The lawyer relied upon the broadly worded arbitration language in his retainer letter that called for arbitration of “any controversy arising out of or related to” the rendition of legal services for the client. Client declared that he understood the clause to only relate to legal services rendered in the divorce. The Court found the client’s position to be “eminently reasonable,” and had this to say of the lawyer’s obligation to follow Rule of Professional Conduct 3-300 (“Avoiding Interests Adverse to a Client”):
 
Rule 3-300 of the Rules of Professional Conduct requires attorneys who enter into business transactions with their clients to first advise them in writing to seek "the advice of an independent lawyer of the client's choice." The attorney is further obligated to give " 'his client "all that reasonable advice against himself that he would have given him against a third person." ' " ([Citation].) (Id. at 1370.)
 
Finding no evidence that the lawyer complied with any of these obligations and that he failed to make the arbitration clause sufficiently clear, the petition to compel arbitration was denied. The Court continued:
 
We are baffled by [lawyer’s] argument that his ethical responsibilities are lessened because he was dealing with a client who is "very wealthy, having deposited with the attorney more than $607,000.00 of his own funds," and "who is highly schooled in business affairs and is a fully licensed contractor." Not all fools are poor. We decline to adopt a rule that encourages unscrupulous lawyers to make them so. [¶] We also question [lawyer’s] breezy assurances that [client] is a "sophisticated user of legal services ...." Had he been such, he may not have chosen to consult [lawyer], whose acumen and integrity have not been well demonstrated by the arguments he makes in this appeal. (Id. at 1371.)
 
Ouch. It is bad enough to be in a dispute with your former client, it is far worse to not pick your arguments carefully.
 
One key aspect of 3-300 not addressed in detail in Mayhew, is that when the lawyer has exercised undue influence over the client, which often involves a violation of 3-300, the transaction is not ipso facto void, but is voidable at the will of the client. In BGJ Associates v. Wilson (2003)113 Cal.App.4th 1217, attorney represented client in client’s prescriptive easement claim over a piece of real property. The defendant landowner proposed a settlement whereby plaintiff would purchase the property, in exchange for, inter alia, the dismissal of the lawsuit. Lawyer proposed to client that the two of them, along with one of lawyer’s friends/former clients, jointly purchase the lot. Lawyer continued to represent client in the lawsuit which was, in effect, placed on hold pending negotiations to purchase the land. Lawyer drafted an operating agreement for the LLC that was to purchase the land, with the three men serving as principals. When client read the proposed agreement, he expressed disagreement with the fact that the other two, the lawyer and his friend/former client, could override client’s desires by simple majority vote. Client retained separate counsel who also concluded that the agreement was unfair to the client. Ultimately, no agreement was signed, and client ended up purchasing the property jointly with third parties on better terms to him. Lawyer sued claiming breach of an oral joint venture to purchase the property, among other things, but not for breach of the unsigned joint operating agreement. The trial court found for the defendant client reasoning that lawyer had violated 3-300 and Probate Code section 16004. The Court of Appeal affirmed.
 
The Court explained that although lawyer had advised client in writing via the draft operating agreement that he could have independent counsel of his choosing review the same—which client did—because lawyer is seeking to enforce the separate oral joint venture agreement, lawyer failed to transmit the terms of the transaction in writing, and, correspondingly, client gave no written consent to the same, both of which are required by 3-300. The Court rejected attorney’s argument that because client had actually consulted with other counsel, this relieved him of the obligation to explain the transaction and to have it confirmed in writing. The Court explained that 3-300 expressly contemplates a client seeking independent advice, and then agreeing to the transaction in writing. (Id. at 1226-1227.) Thus, lawyer’s argument was contrary to the express language of the rule. This, of itself, however, does not mean the oral agreement is unenforceable. The rules are a matter of professional discipline and do not by themselves provide a basis of liability. However, taken together with statutes and governing legal principles, they define the scope of the lawyer’s fiduciary duty to the client. In relation thereto, Probate Code section 16004 provides the governing rule for transactions between a trustee and beneficiary in which the trustee gains an advantage over the trustee, and this governs attorney-client business dealings. The lawyer has the burden of showing that the transaction which benefits him/her was not the result of undue influence. The trial court found that the lawyer failed to meet this burden, and this conclusion was aptly supported by the evidence. In addition to the above unfairness, the alleged oral agreement did not even provide that client would receive a perspective easement over the land—the very subject of lawyer’s representation of client—even though client was supposed to dismiss his lawsuit as part of the overall oral agreement. (Id. at 1228-1229.) Thus, client was supposed to have given up something of value (the lawsuit) which would benefit the lawyer without adequate protections for the client in return.
 
All of the above rendered the transaction voidable at client’s election, and client had chosen to void it and thereafter acquire the property jointly with third persons.  The trial court had rejected attorney’s argument that client had ratified the oral joint venture through conduct, and this finding was also well supported by the evidence. (Id. at 1229-1230.) (Still left to be resolved in the case was client’s cross-complaint for damages for lawyer’s breach of fiduciary duty.) 
 
The reported cases aptly exhibit why 3-300 is so very important for the protection of clients. Since abandonment of the categorical prohibition against entering into a business transaction with a client or taking an adverse interest (see Part One of Three of the current series), 3-300 appears particularly well crafted to strike the balance between the freedom for lawyers and clients to enter into transactions, on the one hand,  and protecting the public against lawyers who would exercise undue influence to benefit themselves at their clients’ expense, on the other.  
 
--Luis E. Ventura
 
**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.**