Marquette University Law School
eric.goldman@marquette.edu
http://eric_goldman.tripod.com
1. Types of Deals with Clients
- Buying/getting stock or taking options in clients
- If taken as a fee, SCR 20:1.5 also applies
- Loaning money to clients or getting loans from clients
- Co-investing with clients in assets or stock
- Asset purchase/sale from clients
- Providing compensated non-legal services to clients
- Especially when a lawyer owns a business and refers clients to it or invests client money in it
2. Overview
- Transacting with clients creates the opportunity for unfair advantage
- Attorney has position of trust and confidence
- Attorney may be more sophisticated
- Attorney may have inside knowledge
- Risks
- Bar discipline
- Malpractice
- Rescission of transaction
- Termination of representation
3. WI SCR 20:1.8(a)
- “A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
- (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
- (2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
- (3) the client consents in writing thereto.”
- Comment: Restrictions do not apply to “standard commercial transactions … for products or services that the client generally markets to others”
- “In such transactions, the lawyer has no advantage in dealing with the client,” and the restrictions are “unnecessary and impracticable”
- Case law adds that a lawyer’s advice on the transaction must be consistent with disinterested advice
4. Related WI SCRs
- w 20:1.8(b): “A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation”
- w 20:1.8(d): restrictions on procuring media or literary rights relating to representation
5. WI SCR 20:1.7(b)
- “A lawyer shall not represent a client if the representation of that client may be materially limited by … the lawyer’s own interests, unless:
- (1) the lawyer reasonably believes the representation will not be adversely affected; and
- (2) the client consents in writing after consultation.”
- Rule 1.7(b) is imputed to all lawyers in a firm
6. Ethics 2000 Rule 1.8(a)
- “A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
- (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
- (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
- (3) the client gives 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.”
7. Other Rules
- Contract law
- Some jurisdictions treat lawyer/client transactions as presumptively fraudulent or impose heightened risk disclosure obligations on the attorney
- w Lawyer may have burden of proof
- w If anything goes wrong, clients may be able to rescind, giving client economic upside with no economic downside
- Securities law
- Insider trading laws
8. Mershon [316 N.W.2d 895 (1982)]
- Mershon is Miller’s tax lawyer for 19 years
- Mershon, Miller and Schenk form a corporation to develop land
- Miller contributes land
- w Mershon had undocumented understanding that land would be returned to Miller if deal didn’t go through
- Mershon contributes legal services
- w Structured as interest-free promissory note to purchase stock, with note paid back as services are performed
- w Not clear if Mershon properly addressed the issues associated with representing both company and investor
- Schenk contributes engineering services
- Company goes bust without developing the land, and later Miller dies
- Mershon returns stock but Schenk retains 50% interest in company/land
- Mershon’s failings
- Did not advise Miller to get independent counsel
- Did not make adequate disclosures
- Business terms were too favorable to Mershon
- Did not document side deal about returning land
- Miller inadequately protected upon a death of a party
- Consequences
- Public reprimand by state bar
- Loses $6,900 of time and advanced costs
- Malpractice?
9. Solutions?
- The lesson: attorneys enter into business deals with clients at their risk
- All facts will be construed against attorney and in favor of clients
- Possible solutions
- Very conservative practice: no business deals with clients
- Conservative practice: Deal with client only if client gets independent legal advice
- Managed risk practice: Transact carefully
- Disclose all terms in understandable language
- Only agree to fair and reasonable terms
- w Best to get reputable third party to set valuations
- Disclose all possible risks of the deal going sour
- Recommend independent legal counsel
- w And give adequate time to get it
- Provide legal advice as you would a stranger
- w Document all deal terms
- Disclose the lawyer’s role in the deal
- Obtain consent to the terms and the lawyer’s role
- Get everything in writing
- Very risky practice: Let each attorney decide for themselves
- Bad practice: Handle deals with clients more sloppily than market-driven deals