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