Vol. 32, No. 2, 3. Business Transactions with Clients.

• Author: By John M. Burman

Wyoming Bar Journal

2009.

Vol. 32, No. 2, 3.

Business Transactions with Clients

Wyoming Lawyer Issue: April, 2009

ETHICALLY SPEAKING Business Transactions with ClientsBy John M. BurmanMost concurrent conflicts of interest are addressed by Rule 1.7 of the Wyoming Rules of Professional Conduct ("the Rules"). The Rules have long had a special rule (1.8) that regulates or prohibits certain types of concurrent conflicts of interest. Foremost among those conflicts addressed by Rule 1.8 is the conflict created when a lawyer enters into a business transaction with a client, often as part of a fee arrangement (in which the lawyer takes an ownership interest in a client in exchange for legal services). Although such transactions are permissible, they are strongly discouraged and heavily regulated, and aside from problems with trust accounts, more lawyers get into ethical trouble as a result of business transactions with clients than with any other issue. Far too often, the transaction is a loan from a client to the lawyer, which the lawyer does not repay, that lands the lawyer in hot water.(fn1)

Over a decade ago, an article about engaging in business transactions with clients appeared in this column.(fn2) Since then, Rule 1.8(a), which regulates such transactions, has been changed significantly, making an updated article appropriate. It is particularly appropriate as the procedural and substantive requirements of the amended Rule 1.8(a) are more stringent than before, meaning that a lawyer who complies with the former Rule 1.8(a) will have committed misconduct under the new Wyoming Rules.

Business Transactions with Clients are Disfavored

A lawyer has a fiduciary relationship with every client. That relationship requires the lawyer to put each client's interests ahead of the lawyer's. Accordingly, he or she has the same relationship with each client that a trustee has with a beneficiary of the trust.(fn3) In such a relationship, one party, the lawyer or trustee, occupies a position of influence over the other and is supposed to be watching out for the interests of that person. Such a relationship has been referred to by the Wyoming Supreme Court as a "confidential relationship."(fn4) Business dealings between persons in a confidential relationship have the potential to dramatically alter that relationship. Instead of focusing primarily on the interests of the subordinate party, the dominant party has a new and conflicting interest--his or her own business interests. Accordingly, business transactions in such a context are inherently suspect. If the subordinate party subsequently challenges the fairness of a business transaction with the dominant party, the dominant party "has the burden to establish that the transaction was fair and conducted in good faith."(fn5)

The principles applied to confidential relationships by the courts have been incorporated into the Rules, which strongly discourage lawyers from entering into business transactions with clients, and impose important safeguards to protect clients if their lawyers decide to alter the normal fiduciary relationship by entering into business transactions with clients. Unfortunately, lawyers often ignore Rule 1.8(a)'s warnings and decide to enter into business relationships with their clients.

Lawyers' business transactions with clients take many forms. Common transactions include loans to or from clients, a lawyer taking an interest in a business venture as the lawyer's fee, or a lawyer investing in a client's business venture. Whatever the form, lawyer-client business transactions present a host of troublesome issues. A lawyer's failure to properly resolve those issues may lead to a sanction for unethical behavior, civil liability for malpractice, and vicarious liability for the lawyer's firm.

Lawyers have many opportunities (and often receive invitations) to become involved with clients in business transactions, and with good reason. As Professor Wolfram has observed, "many lawyers acquire impressive knowledge and a sense of judgment in business matters through their practice, and many clients come to regard their lawyers as both trusted legal advisers and respected business colleagues."(fn6) Those same virtues create significant concerns.

Clients' trust and respect provide opportunities for lawyers to exercise undue influence and overreach in business transactions with clients. Accordingly, while lawyers doing business with their clients is ethical, it is strongly discouraged by the Rules and the courts which have addressed the issue. It is an area, according to the Missouri Supreme Court, which is "wrought with pitfalls and traps and the Court is without choice other than to hold the attorney to the highest standards."(fn7)

The Threshold Question: Is There a Lawyer-Client Relationship?

A lawyer often learns of a business opportunity from a former or current client, rather than from a person whom the lawyer has never represented. While that makes sense, it also creates problems. When a lawyer learns of a business opportunity from a former or current client, the threshold question for the lawyer is whether there is a current lawyer-client relationship with the other party or parties to the potential business transaction, or whether there is only a former client relationship. If there is no current lawyer-client relationship, the former client provisions of Rule 1.9 apply, and the business relationship is unlikely to be improper, although the lawyer will have to take care that his or her participation in the business deal does not develop into a lawyer-client relationship. If there is an...