§7.2 RPC 1.8: Current Clients-Specific Conflicts

• Jurisdiction: Washington

II. RPC 1.8: CURRENT CLIENTS—SPECIFIC CONFLICTS

Expanding upon the concepts established in RPC 1.7, Washington's RPC 1.8 addresses several specific forms of conflict of interest involving current clients. Washington has adopted MRPC 1.8 in large part; however, Washington has made substantial changes to sections (e), (g), (h), and (j), and added two additional sections, (l) and (m). In addition, Washington has made revisions to four of the ABA comments to MRPC 1.8 and added nine additional comments specific to Washington. Each of sections (a) through (j), (l), and (m) of RPC 1.8 addresses a unique conflict of interest situation, while section (k) addresses imputation of these various conflicts to other members of a lawyer's firm.

The same overarching duties of confidentiality and loyalty to the client expressed in RPC 1.7 form the bases for the specific prohibitions of RPC 1.8. Along with concern for the possibility of a conflict of interest, RPC 1.8 also demonstrates concern for the high likelihood of the appearance of impropriety each of the actions addressed by the rule carries.³³³ Because RPC 1.8 deals with conflicts of interest involving current clients, the discussions in Section I., above, regarding the determination of the existence of an attorney-client relationship and whether a conflict of interest exists under RPC 1.7 also apply to analysis under RPC 1.8.³³⁴

A. RPC 1.8(a): Business Transactions With Clients

Washington's RPC 1.8(a) is identical to MRPC 1.8(a), including all three subsections and imputation of the rule to the whole firm.³³⁵ "The rule requires that the business transaction and its terms be (1) fair and reasonable, (2) fully disclosed and transmitted in writing to the client, (3) in a way the client can understand, (4) the client must consent, and (5) the client must be given a reasonable opportunity to seek the advice of independent counsel."³³⁶

1. Determining Whether an Attorney-Client Relationship Exists and Identifying Conflicts Under the Rule

The fiduciary relationship between client and attorney inherently requires a level of trust and confidence. When a client and attorney extend their relationship to involve not only representation but also business transactions, the requisite trust of a client for an attorney compounds with the difference in power and the legal skill and training of the attorney, creating "the possibility of overreaching" on the part of the lawyer.³³⁷ Along with concern that business or financial transactions between attorneys and clients may create an opportunity for inappropriate conduct on the part of the attorney, the restrictions found in RPC 1.8(a) are also motivated by the desire to reduce the potential appearance of impropriety arising when a lawyer's financial interests are involved in a transaction with a client.³³⁸ When analyzing a particular attorney-client transaction under RPC 1.8(a), two questions must be answered: (1) whether an attorney-client relationship exists so that the transaction was with a client and (2) if so, whether the transaction violated the rule.³³⁹ For analysis of the process for determining whether an attorney-client relationship exists, see Chapter 4 of this book. If an attorney-client relationship is found, RPC 1.8(a) comes into play.

In Washington, business transactions between an attorney and a current client are viewed as prima facie fraudulent.³⁴⁰ The Washington Supreme Court has held that when business transactions with a client are under scrutiny, the burden is on the attorney to justify the transaction and show "(1) there was no undue influence; (2) he or she gave the client exactly the same information or advice as would have been given by a disinterested attorney; and (3) the client would have received no greater benefit had he or she dealt with a stranger."³⁴¹ Anytime a business transaction is undertaken with a client, even a transaction that meets the requirements of RPC 1.8(a), it is important for the attorney to "[document] the transaction and [preserve the] documentation" so as to be able to meet the burden established by the court and have protection should questions regarding the transaction arise.³⁴² Although McGlothlen was decided prior to Washington's adoption of the Rules of Professional Conduct, the rules discussed in McGlothlen have been found to also apply under the RPC.³⁴³

2. Entering a Business Transaction or Knowingly Obtaining a Pecuniary Interest Adverse to the Client

If the proposed action involves a current client, the next step in analysis under RPC 1.8(a) is to determine whether the action constitutes a business transaction or involves a pecuniary interest adverse to the client. The term "business transaction" is not defined in the RPC, although it is noted not to include "standard commercial transactions" such as for "products or services that the client generally markets to others," like banking, medical, or utility services.³⁴⁴ Generally a lawyer has no advantage in these types of transactions, over the client or any other customer, so the client does not need the protection of this rule.³⁴⁵ Absent bright-line rules of what constitutes a business transaction or pecuniary interest, examples serve as illustrative. Two of the more common situations (discussed below) recognized as potentially questionable business transactions involve attorneys receiving loans from clients and transactions for the securing of payment of legal fees.

Knowingly. RPC 1.8(a) prohibits a lawyer from entering into a business transaction or knowingly acquiring a pecuniary interest adverse to a client. The ABA Standards for Imposing Lawyer Sanctions note three levels of mental culpability—negligently, knowingly, and intentionally.³⁴⁶ "Knowingly" is defined in the RPC as denoting "actual knowledge of the fact in question. A person's knowledge may be inferred from circumstances."³⁴⁷ The Washington Supreme Court has stated that it is possible to find an attorney knowingly violated the RPC even if he did not know that his actions were violating a rule at the time of the conduct.

[The attorney] nevertheless argues that his misconduct is more comparable to cases in which we have found negligent conduct than it is to cases in which we have found knowing conduct. In doing so, he seems to argue that an attorney must know that his conduct violates the RPCs for it to be considered knowing under the Standards. Although this may have been a factor in one case, In re Disciplinary Proceeding Against Carmick, 146 Wash.2d 582, 604, 48 P.3d 311 (2002), the definition of knowledge contains no such requirement and this court has found knowledge where an attorney knew or should have known that a conflict existed. See, [e.g.], In re Disciplinary Proceeding Against Gillingham, 126 Wash.2d 454, 466, 896 P.2d 656 (1995). Moreover, this court has found knowing conduct even where the attorney claimed a matter "‘fell through the cracks.'" Cohen I, 149 Wash.2d at 335, 67 P.3d 1086 (quoting Anschell I, 141 Wash.2d at 610, 9 P.3d 193). ... Therefore, consciousness that particular conduct violates the RPCs is not a prerequisite for a finding of knowledge.³⁴⁸

The court has further explained that knowledge is "the conscious awareness of the nature or attendant circumstances of the conduct but without the conscious objective or purpose to accomplish a particular result."³⁴⁹Negligence, on the other hand, is merely "the failure of a lawyer to heed a substantial risk that circumstances exist or that a result will follow, which failure is a deviation from the standard of care that a reasonable lawyer would exercise in the situation."³⁵⁰

Loans from clients. Even if loans obtained from clients are repaid in full, an attorney can still be found to have knowingly violated RPC 1.8(a) by obtaining the loans in the first place. In In re Holcomb,³⁵¹ an attorney (Holcomb) obtained 24 interest-free loans totaling over $52,000 from a client over the course of approximately two years. Most of the loans were small, and all were paid back. There was no written loan agreement or repayment schedule for any of the loans, and Holcomb failed to advise the client of potential personal conflicts of interest or that he could seek independent legal counsel. Holcomb also failed to disclose information to the client about his own precarious personal financial condition.³⁵² Holcomb argued that he had not violated the RPC because his client was an individual named Schiffner, and the funds he borrowed were from a checking account in the name of Schiffner, his spouse, and a revocable trust of the couple, so he didn't borrow from a "client."

The court found that due to the characteristics of the trust, including the fact that it was revocable and the tax identification numbers were those of the client and his spouse, the trust was "indistinguishable from [the client] individually."³⁵³ The court quoted the hearing officer's finding that to allow the attorney to claim the transaction was not with a client simply because the borrowed funds came from community property would present an immediate defense to any lawyer accused of a business transaction with a client who happened to be married.³⁵⁴ The court found that the terms of these transactions were not fair and reasonable, and were not fully disclosed or in writing, and the client was not given a reasonable opportunity to seek independent legal counsel, thus violating RPC 1.8(a).³⁵⁵ Holcomb also argued that he was merely negligent when he obtained the loans. The court noted that Washington's "definition of ‘knowledge' includes the requirement that the lawyer should have known that a conflict existed," and found that Holcomb knowingly obtained the loans as he "should have known that a conflict existed when he requested the loans from his client without knowing of the trust and he should have inquired into the terms of the trust when he learned of it. Had he done so, he would have known...