Every private practice lawyer wants to get paid. Sometimes that’s a challenge.
Marketing and business development can help. And upping your business intake game, including better vetting of new clients, new matters and engagement terms, can help.
But other tools and techniques aimed at ensuring payment from clients can also help—taking a security interest in client property at the outset, or even during a representation, can protect your ability to get paid, just like any other creditor. And adjusting engagement terms midstream in a representation might also allow you to accommodate changes in the economics of the litigation or deal you’re handling. They may also allow you to respond to changes in a client’s financial circumstances.
For a lawyer who is vigilant about the economics of his or her practice—and all of us should be—taking a security interest in a client’s real (or other) property may allow a lawyer to comfortably forgo a large initial retainer intended to be deposited in trust and drawn down for payment of hourly fees. Further on in a representation, taking that security interest might allow a law firm already owed a great deal, and that now needs to gear up for a trial six months out, to accept a mortgage and stay in the case rather than quit the client for nonpayment.
These approaches are not risk-free. Any lawyer considering them needs to very carefully evaluate the business terms from the lawyer’s own perspective. Is there enough equity in that vacation home to cover the expected fees? Will market conditions likely allow the property to be sold quickly enough to amount to real security for the lawyer?
Equally important, the lawyer must think about legal ethics implications. For example, a lawyer can’t acquire an interest in property that is the subject matter of the litigation he or she is handling. And I have seen some proposed transactions that might themselves create fresh conflicts of interest, so that a deal would be imprudent.
Most critically, the lawyer must comply with his or her jurisdiction’s version of ABA Model Rule of Professional Conduct 1.8(a), the core Rule on lawyer business transactions with clients. Failure to do so can lead to dire consequences for a lawyer. A lawyer can be sued by the client; a deal made in violation of the Rule can, in many states, be voided completely; and discipline is a real risk.
What Does Model Rule 1.8(a) Cover?
This is the very same Rule that governs any business transaction between a lawyer and a client—the real estate lawyer who invests with a client in the deal he or she’s handling for the client, or the lawyer who takes stock in the client in lieu of a fee paid wholly in cash. The Rule governs client-lawyer business deals even where the lawyer is not representing the client in that business deal.
The Rule does not cover most ordinary attorney-fee transactions—other ethics rules broadly govern those. But Rule 1.8(a) has been found to cover initial engagement agreements that include unusual elements that look like business transactions—for example, where a client is satisfying a fee obligation by transferring stock or other property, or where a lawyer’s fee is secured by the client giving a mortgage on the client’s home.
Just as important, a number of jurisdictions have found that midstream changes in fee agreements are also covered by Rule 1.8(a) where the change makes the fee deal materially more adverse to the client. ABA Formal Opinion 11-458 explains when and under what circumstances material midstream fee changes may be covered by Rule 1.8(a). They often are. For our purposes, the key point is: Rule 1.8(a)’s application must be seriously evaluated.
What Are the Rule's Requirements?
What exactly does Rule 1.8(a) require? Several things, most of which are derived directly from the common law of fiduciary duty. The example I always give points to the very strict requirements of fairness and disclosure on the executor of Grandma’s estate who wants to personally buy Grandma’s vintage Buick. After all, lawyers are fiduciaries for their clients.
In 1928 Chief Justice Benjamin Cardozo wrote in Meinhard v. Salmon of the “undivided loyalty” owed by a fiduciary, calling it “the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
Other courts have called the duty of a fiduciary “the highest duty known to the law,” requiring “absolute and perfect candor.” Rule 1.8(a) is entirely consistent with that high-flown rhetoric.
For lawyers seeking to do business with their clients, the Rule requires that:
- The transaction and its terms be “fair and reasonable to the client.”
- The transaction and terms be “fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client.”
- The lawyer “advise [the client] in writing of the desirability of seeking ... independent legal counsel on the transaction” and be “given a reasonable opportunity” to get that advice.
- The client give “informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.”
In many situations compliance can be straightforward, but here are some pointers for lawyers trying this at home.
If in doubt, err in favor of complying with the Rule’s requirements. If you’re not certain whether Rule 1.8(a) applies—for example, where a fee is being changed during a representation, but it might or might not be a change adverse to the client—you may be well advised to try to comply with its substance, regardless.
Get the best proof available that the deal is truly “fair and reasonable” to the client. The executor who lusts after Grandma’s Buick is best served, as the estate would be, by the executor paying a well-accepted “blue book” value. Any lawyer trying to comply with (and later prove compliance with) the Rule might think about an independent appraisal of the value of property being pledged.
Think seriously about insisting that the client get independent legal advice. Many clients may already have, or may know, another lawyer. Consider insisting that the client get that other lawyer to advise them on the transaction. In some sensitive situations, I know of lawyers entering into transactions covered by Rule 1.8(a) who have actually personally paid the fees of that independent lawyer to advise the client on the deal. That can be money well spent.
Document informed consent in very plain English. After all, the disclosure and consent may later be evaluated by a truly independent judge or disciplinary counsel, after the client has complained that he or she didn’t understand the deal or its terms. Be clear so the client does actually understand up front, and also so that it will be clear to others after the fact that the client did understand at the time.
The moral? Good fiscal hygiene in a law practice—getting paid in a timely fashion—requires vigilance; it may require ingenuity; and it requires that a lawyer thoughtfully and scrupulously comply with the applicable ethics rules. LP
For more on this topic, see:
ABA Formal Opinion 11-458, Changing Fee Arrangements During Representation
(Aug. 4, 2011).
New York State Bar Association Committee on Professional Ethics Opinion 1156 (Nov. 1, 2018) (ethical propriety of taking a mortgage against a client’s property to secure a fee in a postdivorce proceeding).