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Doing Business With Your Client

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Entering into business transactions with a client may place the attorney and client in adversarial positions. The ethical rules are designed to ensure that the representation will not be compromised by a profit motive. 

EXAMPLE: Take the example of a lawyer whose client, the promoter (soon to be CEO) of a new corporation, proposes that legal fees be awarded in the form of stock in the new company. What’s the problem? For one, the lawyer’s judgment may be clouded by his ownership of the corporation. Once he assumes ownership of the stock, he’s no longer just the representative, but also the client, in a way. This is not necessarily fatal to the relationship. However, what if, as stockholder, the lawyer’s interests diverge from those of the directors and officers? Say the stockholders demand dividend payouts, and the directors and officers refuse. Perhaps the lawyer’s representation of the firm will suffer due to his dissatisfaction with the leadership. These are problems that the ethical rules address. 

Model Rule 1.8 holds that a lawyer must not enter into a business transaction with a client, unless:

  • the terms are reasonable and fair
  • the terms are fully disclosed in writing
  • the client is given a chance to seek the advice of independent counsel
  • the client consents in writing 

If the lawyer and client enter into a business transaction, the rules thus trigger certain “plugs” for holes that necessarily develop in the attorney-client relationship. Perhaps the most important “plug” is that the client must be given the chance to seek the advice of independent counsel before carrying out a transaction with a current attorney. A lawyer is obligated to tell his client/new business partner that their interests might diverge and that it would be wise for the client to seek alternative legal advice.