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End-of-life notice: American Legal Ethics Library

As of March 1, 2013, the Legal Information Institute is no longer maintaining the information in the American Legal Ethics Library. It is no longer possible for us to maintain it at a level of completeness and accuracy given its staffing needs. It is very possible that we will revive it at a future time. At this point, it is in need of a complete technological renovation and reworking of the "correspondent firm" model which successfully sustained it for many years.

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California Legal Ethics

1.8   Rule 1.8 Conflict of Interest: Prohibited Transactions

1.8:100   Comparative Analysis of CA Rule

Primary California References: CRPC 3-300, 4-400, 4-210, 3-310, 4-300, 3-320, 3-700
Background References: ABA Model Rule 1.8, Other Jurisdictions
Commentary: ABA/BNA Lawyers' Manual on Professional Conduct 01:121-01:123

1.8:101      Model Rule Comparison

The provisions of MR 1.8 are reflected in a series of provisions in CRPC.

The counterpart of MR 1.8(a), which deals with business transactions with the client, is CRPC 3-300 which generally tracks MR 1.8(a). However, CRPC 3-300(B) goes one step further than MR 1.8(a)(2) in requiring the attorney to advise the client in writing that the client may seek the advice of an independent lawyer of the client’s choice.

California has no counterpart to MR 1.8(b) concerning a lawyer’s use of information to the disadvantage of the client. However, such use might be considered a breach of the lawyer’s fiduciary duty to the client [see 1.1:380 Liability to Client for Breach of Contract, Breach of Fiduciary Duty and other Liabilities, supra]. If the use of the information involves its disclosure to others, there may also be a breach of the attorney-client privilege.

MR 1.8(c) dealing with gifts is similar to CRPC 4-400 except that MR 1.8(c) prohibits a lawyer from preparing an instrument giving the lawyer or related person any substantial gift whereas CRPC 4-400 prohibits the lawyer from inducing a client to make such a gift. The discussion to CRPC 4-400 makes clear that a lawyer may accept a gift from a client subject to general standards of fairness and absence of undue influence.

MR 1.8(d) concerning literary or media rights does not have a specific counterpart in the CRPC.

MR 1.8(e) dealing with financial assistance to the client has its counterpart in CRPC 4-210. Several differences exist. MR 1.8(e) is confined to providing financial assistance to a client in connection with pending contemplated litigation whereas CRPC 4-210 deals with the payment of personal or business expenses of a prospective or an existing client generally. CRPC 4-210(A)(1) permits the payment of expenses from funds collected or to be collected for the client as a result of the representation. CRPC 4-210(A)(2) permits the lawyer, after employment, to lend money to the client upon the client’s promise in writing to repay such loan. The counterpart to MR 1.8(e)(1) in CRPC 4-210(A)(3) goes beyond MR 1.8(e)(1) by requiring that costs and expenses advanced in contingent litigation be limited to specified reasonable expenses. CRPC 4-210(B) makes clear that the exceptions in CRPC 4-210(A) do not override the limitations of CRPC 3-300, CRPC 3-310 and CRPC 4-300.

MR 1.8(f) dealing with compensation from third parties is generally tracked by CRPC 3-310(F) except that the requirement of client consent in CRPC 3-310(F)(3) does not require either the disclosure or consent if such nondisclosure is otherwise authorized by law or the lawyer is rendering legal services on behalf of any public agency which provides legal services to other public agencies or the public.

MR 1.8(g) dealing with aggregate settlements finds its counterpart in CRPC 3-310(D) except that MR 1.8(g) is more specific in including criminal cases and in the detail which needs to be disclosed to the multiple clients.

MR 1.8(h) concerning limiting the lawyer’s liability to a client for malpractice has its counterpart in CRPC 3-400. However, there are differences. MR 1.8(h) would permit a prospective agreement limiting the lawyer’s liability where permitted by law if the client is independently represented in making the agreement, whereas the prohibition in CRPC 3-400(A) has no exceptions. In addition, with respect to an agreement settling a claim for malpractice, CRPC 3-400(B) goes beyond MR 1.8(h) in requiring that the client be given a reasonable opportunity to seek the advice of an independent lawyer (in addition to merely being informed that the client may do so).

MR 1.8(i) dealing with the lawyer’s relationship with the other party’s lawyer finds its counterpart in CRPC 3-320. However, CRPC 3-320 includes, in addition to the relationship of parent, child, sibling or spouse, the relationship of living with the lawyer, being a client of the lawyer or having an intimate personal relationship with the lawyer.

The provisions of MR 1.8(j), which deal with acquiring a proprietary interest in a cause of action, find their conceptual counterparts in CRPC 3-300. In addition, CRPC 3-700(D) prohibits a lawyer from using possession of client documents as a leverage to collect fees.

1.8:102      Model Code Comparison

Because of the variety of provisions in the CRPC which are analogous to MR 1.8, the comparison between the CRPC and the Model Code is best seen through the analysis set forth in the comparison between the CRPC and the Model Rule [see 1.8:101 Model Rule Comparison, infra] and the comparison between the MR and the DR set forth at pages 121 and 122 of the Annotated Model Rules:

With regard to paragraph (a) [of MR 1.8], DR 5-104(A) provided that a lawyer “shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure.” EC 5-3 stated that a lawyer “should not seek to persuade his client to permit him to invest in an undertaking of his client nor make improper use of his professional relationship to influence his client to invest in an enterprise in which the lawyer is interested.”

With regard to paragraph (b) [of MR 1.8], DR 4-101(B)(3) provided that a lawyer should not use “a confidence or secret of his client for the advantage of himself, or of a third person, unless the client consents after full disclosure.”

There was no counterpart to paragraph (c) [of MR 1.8] in the Disciplinary Rules of the Model Code. EC 5-5 stated that a lawyer “should not suggest to his client that a gift be made to himself or for this benefit. If a lawyer accepts a gift from his client, he is peculiarly susceptible to the charge that he unduly influenced or overreached the client. If a client voluntarily offers to make a gift to his lawyer, the lawyer may accept the gift, but before doing so, he should urge that the client secure disinterested advice from an independent, competent person who is cognizant of all the circumstances. Other than in exceptional circumstances, a lawyer should insist that an instrument in which his client desires to name him beneficially be prepared by another lawyer selected by the client.”

Paragraph (d) [of MR 1.8] is substantially similar to DR 5-104(B), but refers to “literary or media” rights, a more generally inclusive term than “publication” rights.

Paragraph (e)(1) [of MR 1.8] is similar to DR 5-103(B), but eliminates the requirement that “the client remains ultimately liable for such expenses.”

Paragraph (e)(2) [of MR 1.8] has no counterpart in the Mode Code.

Paragraph (f) [of MR 1.8] is substantially identical to DR 5-107(A)(1).

Paragraph (g) [of MR 1.8] is substantially identical to DR 5-106.

The first clause of paragraph (h) [of MR 1.8] is similar to DR 6-102(A). There was no counterpart in the Model Code to the second clause of paragraph (h).

Paragraph (i) [of MR 1.8] has no counterpart in the Model Code.

Paragraph (j) [of MR 1.8] is substantially identical to DR 5-103(A).

1.8:200   Lawyer's Personal Interest Affecting Relationship

Primary California References: CRPC 3-120, 3-300, 4-300, 4-210, 3-310, B&PC §§ 6147, 6148
Background References: ABA Model Rule 1.8(a), Other Jurisdictions
Commentary: ABA/BNA § 51:501 et seq., ALI-LGL § 207, Wolfram §§ 7.6, 8.11

A lawyer’s personal interest may affect the attorney-client relationship in a number of ways which would create a conflict of interest. These are generally covered throughout Rule 1.8 Conflict of Interest: Prohibited Transactions. [See also, 1.10:200 Imputed Disqualification Among Current Affiliated Lawyers, infra for a discussion of Stanley v. Richmond (1st Dist. 1995) 35 Cal.App.4th 1070, 41 Cal.Rptr.2d 768].

1.8:210      Sexual Relations with Clients

The ABA Codes contain no provision dealing expressly with lawyer-client sexual relations. CRPC 3-120 prohibits lawyer-client sex when the lawyer demands sex as a condition of employment or incident thereto; when the lawyer uses coercion, intimidation, or undue influence to enter into sexual relations; and when the sexual relationship causes the lawyer to render incompetent legal services. The teeth were withdrawn from the provision when the California Supreme Court adopted it without an additional provision: a presumption that all lawyer-client sexual relations violate the rule, requiring the lawyer to rebut in order to avoid discipline. As adopted, the rule largely duplicates existing rules against conflicts of interest, client coercion, and incompetent representation. Prior to the adoption of CRPC 3-120, an amendment to the B&PC required the State Bar to propose a rule on this topic [B&PC § 6106.8]; in 1992 a second amendment to the B&PC put in statutory form the disciplinary content of CRPC 3-120 [B&PC § 6106.9].

Although not implicating on specific provisions of CRPC, sexual relations with clients can have an adverse impact on an attorney’s defense of other claims. In McDaniel v. Gile (2nd Dist. 1991) 230 Cal.App.3d 363, 281 Cal.Rptr.242, an attorney brought an action against a client seeking to recover legal fees and the client brought a cross-complaint for legal malpractice and sexual harassment. The client claimed that the attorney withheld legal services in an attempt to gain sexual favors. Although the court specifically did not address whether sexual relations between an attorney and a client constitute a per se violation of the fiduciary relationship between attorneys and clients, the court concluded that delaying and refusing legal services where the client did not grant sexual favors fell below the standard of care and skill of members of the legal profession. Accordingly, the client had stated a claim for legal malpractice.

In Barbara A. v. John G. (1st Dist. 1983) 145 Cal.App.3d 369, 193 Cal.Rptr. 422, the client sued the attorney for misrepresentation after the client became pregnant notwithstanding representations by the attorney that he could not impregnate her. The court held that the confidential relationship created by the attorney-client relationship placed the burden on the attorney of proving that consent to intercourse was informed and freely given.

1.8:220      Business Transactions with Clients

CRPC 3-300 applies specifically to business dealings with clients. Similar to MR 1.8(a), it provides: (a) the terms must be fair and reasonable to the client and fully disclosed to the client in writing in a reasonably understandable manner; (b) the client must be advised in writing and given a reasonable opportunity to seek independent counsel; and (c) the client must thereafter give written consent to the terms. In Ainsworth v. State Bar (1988) 46 Cal.3d 1218, 252 Cal.Rptr. 267, 762 P.2d 431, a lawyer represented one member of a partnership in dividing up the partnership assets. The lawyer had his client execute a bill of sale transferring one partnership asset, a boat, to the lawyer. The court disciplined the lawyer, among other things, for his violation of the predecessor of CRPC 3-300: acquiring an adverse interest in his client’s property without advising his client to seek the advice of independent counsel.

In addition, CRPC 4-300 prohibits a lawyer from buying property at a probate, foreclosure, or similar sale in any proceeding in which the lawyer is an attorney for a party. CRPC 3-300 also applies to situations where a lawyer “knowingly acquire[s] an ownership, possessory, or other pecuniary interest adverse to a client.” See, e.g., Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096 (lawyer who secured payment of fees by acquiring a note secured by a deed of trust in the client’s property acquired an interest adverse to the client); and Brockway v. State Bar (1991) 53 Cal.3d 51, 278 Cal.Rptr. 836, 806 P.2d 308 (lawyer who took quitclaim deed to secure fees acquired adverse interest in client’s property).

A California lawyer may loan money to a client in a transactional context if the loan agreement meets the requirements of CRPC 3-300. Loans in connection with pending or impending litigation are further restricted in nearly all states other than California: Under the ABA codes, advances in connection with litigation are permissible only when made for litigation expenses. California, however, permits lawyer-client loans for any purpose. Thus a California lawyer may advance medical or living expenses to a client who has retained the lawyer to prosecute a personal injury claim. See CRPC 4-210(A)(2). The loan agreement, of course, must meet the requirements of CRPC 3-300. CRPC 4-210(A)(3) permits the advancement of costs of promoting the client’s interest, the repayment of which may be contingent on the outcome of the matter.

The following comments are taken from Karpman & Margolis pages 40-43 with certain conforming changes:

CRPC 3-300 was approved to become operative by the Supreme Court on September 14, 1993. Prior cases and ethics opinions address former CRPC 5-101 (1975) (the former rule dealing with adverse interests). These cases should be considered.

There are significant distinctions between current CRPC 3-300 and former CRPC 5-101 (1975):

1.   The new rule is not limited to transactions but includes “acquisitions.”

2.   Further, the new rule is more stringent in terms of the execution of writings; that is, the advice to seek independent counsel must also be in writing. Note, there is no requirement that the client actually contact independent counsel; merely that the client be advised to do so in writing.

The rule is generated from the well-established principle that business transactions between an attorney and client, although not absolutely prohibited, are fraught with ethical peril, and “such transactions are always scrutinized by the courts with zealous care.” Felton v. Le Breton (1891) 92 Cal. 457, 28 P. 490. Due to the fiduciary character of the relationship, all transactions by which the attorney gains an advantage over his or her client are subject to the rebuttable presumption that they were entered into under undue influence and without sufficient consideration. Bradner v. Vasquez (1954) 43 Cal.2d 147, 151, 272 P.2d 11. The attorney bears the burden of showing that the dealings were fair and reasonable. Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 243 Cal.Rptr. 699, 748 P.2d 1161; Clancy v. State Bar (1969) 71 Cal.2d 140, 77 Cal.Rptr. 657, 454 P.2d 329.

The disciplinary standards regarding attorneys obtaining adverse interests have formed the bases, at least in significant part, for litigation against attorneys who have entered into unsuccessful business transactions with their clients. Mirabito v. Liccardo (1st Dist. 1992) 4 Cal.App.4th 41, 5 Cal.Rptr.2d 571.

Cases

CRPC 3-300 was intended to regulate two types of activity: business transactions between attorneys and clients and the acquisition by attorneys of pecuniary interests adverse to clients. Government attorneys who organize themselves into associations pursuant to statute and proceed to bargain collectively with their employer-clients are not per se in violation of any duty of loyalty or any other ethical obligation. Santa Clara County Counsel Attorneys Assn. v. Woodside (1994) 7 Cal.4th 525, 28 Cal.Rptr.2d 617, 869 P.2d 1142.

The purpose of the rule “is to protect clients from their attorneys’ self-interested use of financial information gained from confidences disclosed during the attorney-client relationship.” Arden v. State Bar (1987) 43 Cal.3d 713, 726, 239 Cal.Rptr. 68, 739 P.2d 1236.

As to the meaning of “adverse” interest, see Connor v. State Bar (1990) 50 Cal.3d 1047, 269 Cal.Rptr. 742, 791 P.2d 312 (when it is reasonably foreseeable that acquisition may become detrimental to client, even if attorney’s intention is to aid client); Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096 (acquiring ability to summarily extinguish client’s interest in property renders acquisition adverse); Ames v. State Bar (1973) 8 Cal.3d 910, 106 Cal.Rptr. 489, 506 P.2d 625 (actual injury to client not essential ingredient of adverse interest; attorney must avoid any situation where his acquisition might become detrimental, or where he might have to choose between conflicting loyalties.)

Generally the rule is not applicable to the initial attorney-client retainer agreement. However, if the attorney, in obtaining security for payment of fees, acquires an “ownership, possessory, or other pecuniary interest” adverse to the client, the rule will apply. Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096; Brockway v. State Bar (1991) 53 Cal.3d 51, 278 Cal.Rptr. 836, 806 P.2d 308; Read v. State Bar (1991) 53 Cal.3d 394, 279 Cal.Rptr. 818, 807 P.2d 1047.

Respondent breached his fiduciary duties, where as trustee for his partner’s estate he borrowed the corpus. The advantages of loaning oneself money as opposed to obtaining a loan from another source are obvious. Indeed, one of those advantages, respondent’s unilateral ability to modify the terms of the loans, manifested itself in this case. In the Matter of Hultman (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 297.

Where a client, who had been severely burned by a hair product, was an unsophisticated impecunious vulnerable relative, employed as a part-time cleaning lady, respondent was obligated to go beyond informing her that she had a right to consult with another attorney and was required to advise her to do so. Written consent obtained from one incapable of consenting due to poor health, frequent use of alcohol, lack of sophistication in business matters, limited education is not knowing consent within the meaning of this rule. Exploitation of the client based upon the attorney’s superior knowledge coupled with the breach of fiduciary duties constitutes moral turpitude. In the Matter of Johnson (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 233.

A special power of attorney contained in a retainer agreement does not create an adverse interest in and of itself, absent unconscionable circumstances in its creation, so as to require compliance with this rule. In the Matter of Lazarus (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 387, 397.

Client loan to attorney as “adverse” interest. Sugarman v. State Bar (1990) 51 Cal.3d 609, 274 Cal.Rptr. 246, 798 P.2d 843; Morgan v. State Bar (1990) 51 Cal.3d 598, 274 Cal.Rptr. 8, 797 P.2d 1186; Ritter v. State Bar (1985) 40 Cal.3d 595, 221 Cal.Rptr. 134, 709 P.2d 1303. Failure of an attorney to provide security for a loan obtained from a client is an indication that the transaction is not fair and reasonable. Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 243 Cal.Rptr. 699, 748 P.2d 1161; In the Matter of Hagen (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 153.

An attorney obtained an adverse interest when his criminal client granted him literary rights to the client’s life story, including the circumstances in question in the criminal case. People v. Corona (1st Dist. 1978) 80 Cal.App.3d 684, 145 Cal.Rptr. 894.

Courts take an expansive view as to whether the attorney-client relationship has continued after specific legal services have been completed, for purpose of determining whether an attorney-client relationship existed at the time of the transaction in question, therefore bringing it within the ambit of this rule. Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 243 Cal.Rptr. 699, 748 P.2d 1161; Beery v. State Bar (1987) 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289.

To fall within the operation of the rule, the transaction in question need not be related to the services for which the attorney was hired. Beery v. State Bar (1987) 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289.

Need for clear, unambiguous and full disclosure of terms of transaction to client. Brockway v. State Bar (1991) 53 Cal.3d 51, 278 Cal.Rptr. 836, 806 P.2d 308; Rose v. State Bar (1989) 49 Cal.3d 646, 663, 262 Cal.Rptr. 702, 712, 779 P.2d 761, 771 (attorney did not inform client that he would profit by client’s participation in investment transaction); Beery v. State Bar (1987) 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289 (attorney solicited investment funds from client without disclosing his relationship with the subject of investment); In the Matter of Crane and DePew (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 139.

An attorney’s failure to disclose his adverse interest (“finder’s fee”) constituted breach of duty and malpractice. Stoll v. Superior Court (1st Dist. 1992) 9 Cal.App.4th 1362, 12 Cal.Rptr.2nd 354.

An attorney representing a client in probation administration was disciplined for failing to disclose to the client or the probate court that he owed money to the estate. Mayo v. State Bar (1978) 23 Cal.3d 72, 151 Cal.Rptr. 345, 587 P.2d 1158.

Requirement that attorney advise client to consult independent counsel. Rose v. State Bar (1989) 49 Cal.3d 646, 663, 262 Cal.Rptr. 702, 712, 779 P.2d 761, 771; Ritter v. State Bar (1985) 40 Cal.3d 595, 602-603, 221 Cal.Rptr. 134, 709 P.2d 1303 (attorney must also give client reasonable opportunity to do so).

What constitutes “independent” counsel. Connor v. State Bar (1990) 50 Cal.3d 1047, 269 Cal.Rptr. 742, 791 P.2d 312 (as a general rule, an associate or law partner in the same firm as the attorney in question cannot serve as “independent” counsel).

As to whether attorney has “knowingly” acquired an adverse interest, see In the Matter of Cacioppo (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 128, 147, and In the Matter of Respondent C (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 439, 452.

Attorney’s taking unauthorized loans from trusts while serving as trustee. Schneider v. State Bar (1987) 43 Cal.3d 784, 239 Cal.Rptr. 111, 739 P.2d 1279.

Issues of adverse and conflicting interests in the context of limited partnerships. Kapelus v. State Bar (1987) 44 Cal.3d 179, 242 Cal.Rptr. 196, 745 P.2d 117.

Transactions rife with undisclosed conflicts of interest, taking positions adverse to former clients, and failing to advise clients of right to seek independent counsel, leading to disbarment of attorney. Rosenthal v. State Bar (1982) 43 Cal.3d 612, 238 Cal.Rptr. 377, 738 P.2d 723.

References

CRPC 3-310 (avoiding the representation of adverse interests); 4-200 (fees for legal services).

B&PC §§ 6147 and 6148 (fee agreements).

Witkin, California Procedure (3d Ed.), Vol. 1, “Attorneys,” §§ 417-419.

Maltz, Lawyer-Client Business Transactions: Caveat Counselor, 3 Geo. J. Legal Ethics 291 (1989).

Developments in the law--Conflicts of interest in the legal profession. 94 Harv. L.Rev 1244.

35 ALR3d 647. Disciplinary proceeding based upon attorney’s actual or constructive purchase of client’s assets.

Ethics Opinions

C.O.P.R.A.C. Op. 1994-135 (A structured settlement in which an attorney receives disbursement front loaded requires compliance with this rule absent a prior agreement to this type of disbursement in the fee agreement.)

C.O.P.R.A.C. Op. 1994-137 (Although fee agreements are statutorily exempt from this rule, where a client waives rights to recovery of fees in a civil rights suit compliance should be considered.)

L.A. Op. 477 (Attorney/physician who refers a client to a clinic in which he has all ownership interest raises issues involving a financial transaction with a client, therefore requiring compliance with this rule.)

S.D. Op. 1992-1 (In order for a lawyer to receive fees as a personal representative of the probate estate and as a real estate broker, compliance is required.)

S.D. Op. 1993-1 (Although this area is fraught with peril, a member may advise and instruct on asset protection techniques but must comply and be mindful of this rule. Discusses implications of lost fees due to fraudulent transfers, possible criminal penalties (Pen. Code § 531).)

Additional Cases and Commentary

In Mayhew v. Benninghoff (4th Dist. 1997) 53 Cal.App.4th 1365, 62 Cal.Rptr.2d 27, the retainer agreement between the attorney and the client contained an arbitration clause. The attorney attempted to invoke the arbitration clause with respect to a dispute on a separate business transaction between the attorney and the client. The court refused to honor the arbitration clause because of the attorney’s noncompliance with CRPC 3-300. Quoting from Beery v. State Bar (1987) 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289, the court stated that to comply with CRPC 3-300, the attorney is further obligated to give “his client `all that reasonable advice against himself that he would have given him against the third person.”’ Mayhew v. Benninghoff (4th Dist. 1997) 53 Cal.App.4th 1365, 62 Cal.Rptr. 27.

In Passante v. McWilliam (4th Dist. 1997) 53 Cal.App.4th 1240, 62 Cal.Rptr.2d 298, the board of directors of the defendant corporation had granted its in-house attorney three percent of its stock in gratitude for the in-house attorney having procured a $100,000 loan for the corporation at a critical point in its existence. The corporation subsequently reneged, and the in-house attorney sued. The court held that the three percent of the stock was either gratuitous, in which case it was an unenforceable gift, or that it was bargained for, in which case it was unenforceable under CRPC 3-300 (former CRPC 5-101 (1975)) because the in-house attorney had failed to advise the board of directors to consult with another lawyer or to advise the board of potential complications which might arise from the issuance of the stock.

A loan by the attorney to a client as an advance on an anticipated recovery in a personal injury case required compliance with CRPC 3-300. In the Matter of Acuna (Review Dept. 1996), 3 Cal. State Bar Ct. Rptr. 495. If an attorney accepts a loan from a client without complying with Rule 3-300, the loan may be a non-dischargeable debt in the lawyer's subsequent bankruptcy. In re Tallant (9th Cir. Bankr. 1998) 218 B.R. 58.

An attorney and a client may agree at the outset of their relationship or during the course of the representation, without violating CRPC 3-300, how they will allocate payment of any sanctions which may be imposed jointly upon them under CRPC 3-300. C.O.P.R.A.C. Op. 1997-151.

Violations of CRPC 3-300 (and former CRPC 5-101 (1975)) cover a wide variety of business transactions. Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 243 Cal.Rptr. 699, 748 P.2d 1161 and In the Matter of Hultman (Review Dept. 1995), 3 Cal. State Bar Ct. Rptr. 297 (borrowing money from the client on an unsecured, as opposed to a secured, basis is not fair and reasonable to the client; burden is on lawyer to prove fairness); Arden v. State Bar (1987) 43 Cal.3d 713, 239 Cal.Rptr. 68, 739 P.2d 1236 (former CRPC 5-101 (1975)) (borrowing money from a client without any specific terms); Beery v. State Bar (1987) 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289 (former CRPC 5-101 (1975)) (soliciting investment in a project in which the attorney was a principal); Brockway v. State Bar (1991) 53 Cal.3d 51, 278 Cal.Rptr. 836, 806 P.2d 308 (former CRPC 5-101 (1975)) (taking a quitclaim deed over a client’s property as a retainer for fees).

Former CRPC 5-101 (1975)

With the adoption of former CRPC 5-101 (1975), attorneys were no longer prohibited from acquiring interests adverse to their clients so long as they complied with the requirements of former CRPC 5-101 (1975) (now CRPC 3-300). In a leading case, the California Supreme Court concluded that an attorney who secures payment of fees by taking a note secured by a deed of trust in the client’s property has acquired an adverse interest to the client and so must comply with the requirements of former CRPC 5-101 (1975). Taking an unsecured promissory note would not necessarily have invoked the rule. Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096). For other examples of violations, see Morgan v. State Bar (1990) 51 Cal.3d 598, 274 Cal.Rptr. 8, 797 P.2d 1186) (client permitted attorney to use client’s credit cards); Schneider v. State Bar (1987) 43 Cal.3d 784, 239 Cal.Rptr. 111, 739 P.2d 1279 (attorney obtained unsecured loan from client - attorney cannot rely on broad management powers conferred upon him by a trust agreement); Sugarman v. State Bar (1990) 51 Cal.3d 609, 274 Cal.Rptr. 246, 798 P.2d 843) (client made temporary loan to attorney in lieu of payment of fees); In the Matter of Hagen (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 153 (loan or investment between client and attorney); Rosenthal v. State Bar (1982) 43 Cal.3d 612, 238 Cal.Rptr. 377, 738 P.2d 723 (advising clients to advance funds for hotel in return for the attorney receiving an equitable interest in the hotel).

Even if the transaction is fair vis-ą-vis the client, the failure to advise the client to obtain other counsel and to give the client the opportunity to do so is a violation of former CRPC 5-101 (1975). Ritter v. State Bar (1985) 40 Cal.3d 595, 221 Cal.Rptr. 134, 709 P.2d 1303. It is not sufficient to merely tell the client that the client can consult with another attorney; rather the client must be advised to consult with another attorney. Rose v. State Bar (1989) 49 Cal.3d 646, 663, 262 Cal.Rptr. 702, 712, 779 P.2d 761, 771. An attorney’s law partner cannot serve as the “independent counsel” required by the CRPC. Connor v. State Bar (1990) 50 Cal.3d 1047, 269 Cal.Rptr. 742, 791 P.2d 312.

Taking title to property owned by client in order to assist the client to avoid foreclosure is the acquisition of an adverse interest to the client, and the requirements of former CRPC 5-101 (1975) must be complied with. Connor v. State Bar (1990) 50 Cal.3d 1047, 269 Cal.Rptr. 742, 791 P.2d 312.

An attorney-client relationship is not necessarily required in order to invoke the prohibition against various transactions so long as there is a position of trust and confidence which creates a fiduciary duty. Sodikoff v. State Bar (1975) 14 Cal.3d 422, 121 Cal.Rptr. 467, 535 P.2d 331 (advising beneficiary of an estate which the attorney represented).

An attorney improperly acquires a pecuniary interest in a matter where he obtains authority to pay prior legal fees on other matters out of the proceeds of a current matter. In the Matter of Cacioppo (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 128 (no violation of former CRPC 5-101 (1975) because an attorney did not rely on prior authorization but sought new authorization at the time the settlement proceeds were received in the current matter).

An attorney violated former CRPC 5-101 (1975) by causing a licensing agreement to be entered into by his client-employer and the attorney’s wholly owned company because the attorney knowingly acquired a pecuniary interest adverse to his client without disclosing the ownership interest in the licensee to the client. In the Matter of Crane and Depew (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 139.

When a transaction results from an ongoing process of solicitation, begun during the attorney-client relationship and proceeding to consummation uninterrupted by advice from independent counsel, the transaction is one “entered into” during the attorney-client relationship under former CRPC 5-101 (1975) even if the representation has otherwise ended. Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 243 Cal.Rptr. 699, 748 P.2d 1161, 703-704 (it was highly unfair and unreasonable for an attorney to borrow a client’s funds on an unsecured basis).

Because of the client’s poor health, frequent use of alcohol, lack of sophistication on business matters and limited education (all of which were known to the attorney), the client was incapable of giving informed written consent under former CRPC 5-101 (1975). In the Matter of Johnson (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 233 (an unsecured loan was an indication of unfairness).

It was a violation of former CRPC 5-101 (1975) for an attorney to borrow $100,000 from a client without advising the client that client should seek independent legal counsel, that the interest rate for the loan was usurious and could have legal consequences adverse to the client, or that the client should undertake particular action necessary to perfect the client’s security in interest and property offered by the attorney as collateral for the loan. Giovanazzi v. State Bar (1980) 28 Cal.3d 465, 169 Cal.Rptr. 581, 619 P.2d 1005.

Accepting an assignment of a promissory note from a third party in payment of fees did not violate former CRPC 5-101 (1975) because the note was assigned in payment of fees and not as a security transaction. In the Matter of Respondent C (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 439.

Former CRPC 5-101 (1975).

Even prior to the adoption of the CRPC, court had held that, when an attorney attempts to enforce a contract entered into with his client after the attorney-client relationship has arisen, the presumption arises that the contract was without sufficient consideration. Lady v. Worthingham (2nd Dist. 1943) 57 Cal.App.2d 557, 135 P.2d 205.

Borrowing money from client and others and failing to repay the loan was a violation of B&PC §§ 6103, 6106 and 6128 and former CRPC 9, warranting disbarment. Benson v. State Bar (1975) 13 Cal.3d 581, 119 Cal.Rptr. 297, 531 P.2d 1081 (disbarment).

Where a lawyer purchased property from an aged and unsophisticated client in exchange for a promise of support and then misled the probate court to prevent its scrutiny of the transaction, disbarment was warranted. Eschwig v. State Bar (1969) 1 Cal.3d 8, 81 Cal.Rptr. 352, 459 P.2d 904.

The burden is on the attorney to show that the dealings are fair and reasonable and were fully known and understood by the client. Clancy v. State Bar (1969) 71 Cal.2d 140, 77 Cal.Rptr. 657, 454 P.2d 329.

Where an attorney arranged a foreclosure sale against the client’s husband’s property in order to obtain payment of alimony for the client, the purchase at the foreclosure sale by the attorney’s wife (although unknown to the attorney at the time of sale) was imputed to the attorney because he obtained the subsequent benefits of the purchase. Accordingly, the purchase of the property required compliance with the CRPC. Marlowe v. State Bar (1965) 63 Cal.2d 304, 46 Cal.Rptr. 326, 405 P.2d 150.

Where an attorney represented a client in the administration of a probate without disclosing either to the client or the probate court that the attorney owed money to the estate, there was a breach of former CRPC 9 and ABA Code of Professional Responsibility Canon 9. Mayo v. State Bar (1978) 23 Cal.3d 72, 151 Cal.Rptr. 345, 587 P.2d 1158.

CRPC 4-300

CRPC 4-300 addresses the specific type of transaction in which a lawyer purchases property at a foreclosure or at a sale subject to judicial review where the lawyer or a member of the lawyer’s law firm represents a party for the executor, receiver, trustee, administrator, guardian or conservator.

The following comments are taken from Karpman & Margolis pages 86-87, with certain conforming changes:

CRPC 4-300 represents a blanket prohibition upon the purchase of assets in the circumstances delineated.

Prob. Code § 9881 and Prob. Code § 9882 allow an estate’s personal representative or his attorney to purchase property of the estate under certain conditions. The court can make orders permitting such a purchase if it is to the advantage of the estate. Full disclosure and written consent of each known heir and devisee whose interest would be affected is required.

Cases

An attorney representing the representative of an estate is under an obligation to seek the highest possible price on the sale of an estate asset. As a purchaser, however, he or she would be inclined to seek the lowest possible price. The resulting conflict of interest where the attorney becomes the purchaser is apparent. Because of the conflict of interest inherent in the situation, it was held that former CRPC 8 (now, this rule) was applicable even where an attorney acting in good faith and even where there was competitive bidding. Eschwig v. State Bar (1969) 1 Cal.3d 8, 15, 81 Cal.Rptr. 352, 357, 459 P.2d 904, 909.

A purchase of a client’s property by an attorney’s wife is a violation of this rule where the attorney, upon discovery, fails to actively seek to protect the client’s interests. Marlowe v. State Bar (1965) 63 Cal.2d 304, 46 Cal.Rptr. 326, 405 P.2d 150.

An attorney while representing an estate, took advantage of his fiduciary relationship to purchase property from the estate beneficiary. He deceitfully represented that an alleged “client” of his law firm would purchase the property (substantially below the market value). The “client” was actually his corporate alter ego. Sodikoff v. State Bar (1975) 14 Cal.3d 422, 121 Cal.Rptr. 467, 535 P.2d 331.

1.8:300   Lawyer's Use of Client Information

Primary California References:
Background References: ABA Model Rule 1.8(b), Other Jurisdictions
Commentary: ABA/BNA §§ 55:501-55:2001 , ALI-LGL §§ 113-117A, Wolfram § 6.7

California does not have a counterpart in the CRPC to MR 1.8(b). However, depending upon circumstances, a lawyer’s use of information relating to a representation to the disadvantage of the client might well be considered a breach of the duty of loyalty to the client. In addition, if the information is divulged to other persons, there may be a breach of the attorney-client privilege.

1.8:400   Client Gifts to Lawyer

Primary California References: CRPC 3-300, 4-400, Probate Code 21350-21355, 10804
Background References: ABA Model Rule 1.8(c), Other Jurisdictions
Commentary: ABA/BNA § 51:601, ALI-LGL § 208, Wolfram § 8.12

CRPC 4-400 did not have a counterpart in the pre-1989 CRPC and was developed as a result of consideration of MR 1.8(c).

MR 1.8(c) prohibits a lawyer from drafting an instrument providing a substantial gift to the lawyer or a member of his family (except when the client is related to the donee), but does not deal with appointments as executor or trustee. CRPC 4-400 is less restrictive: It allows a lawyer to create the instrument giving the lawyer a substantial gift, whether or not the lawyer and the donee are related, but forbids the lawyer from inducing the client to make such a gift. In short, the California rule deals only with solicitation of a gift. The discussion that follows CRPC 4-400 states that “[a] member may accept a gift from a member’s client, subject to general standards of fairness and absence of undue influence.”

As stated by the California Supreme Court: “There is no rule that attorneys should never draw wills in which they receive gifts. There is nothing improper in an attorney’s drawing wills for his family or for relatives, provided the gift to him is reasonable under the circumstances.” Magee v. State Bar (1962) 58 Cal.2d 423, 433, 24 Cal.Rptr. 839, 374 P.2d 807 (evidence failed to support findings that client’s inter vivos and testamentary gifts to attorney were caused by impaired mental capacity of client or undue influence of attorney).

The following comments are taken from Karpman & Margolis pages 87-88, with certain conforming changes:

Comment

In an effort to stem abuses in the area of testamentary gifts to attorneys, the Legislature enacted Prob. Code §§ 21350-21355, which prohibits attorneys from drafting wills in which they are named as beneficiaries, with certain exceptions. Exceptions are provided for transfers to persons related to the drafter by blood or marriage, and persons with whom the drafter cohabits, and wills reviewed by independent counsel. The legislation provides for a certification procedure to validate transfers. Attorneys should check the 1993 amendments to Prob. Code § 10804, and become familiar with new Probate Code §§ 21350-21355, which apply to instruments executed on or after September 1, 1993.

Cases

“For the very reason that the boundary between ethical and unethical behavior in such cases is not clearly defined, attorneys should avoid drawing wills containing gifts to themselves under circumstances in which there is a reasonable basis for suspicion that the client was overreached or that the gift would prevent the attorney from acting in the client’s best interests. Such a practice would remove any temptation to deal unfairly and would protect the reputation of the profession. When an attorney does draw a will under circumstances that suggest that he took advantage of a client’s weakness or that he benefitted unduly, he must justify his action as he must when an inference of undue influence arises.” Magee v. State Bar (1962) 58 Cal.2d 423, 24 Cal.Rptr. 839, 374 P.2d 807.

An attorney who by undue influence obtains a gift from a client inter vivos or in a will is guilty of an act involving moral turpitude. (See B&PC § 6106). “The highest good faith an attorney owes his client requires the attorney to rebut the inference of undue influence that arises when he receives a gift from the client under circumstances that reasonably suggest such influence.” Although the circumstances of the instant case gave rise to a presumption of undue influence, petitioner rebutted the presumption and raised reasonable doubts that he committed this offense. (See Brawner v. State Bar (1957) 48 Cal.2d 814, 313 P.2d 1.)

An attorney’s duty of fidelity to his client involves far more than refraining from exercising undue influence. His fiduciary duty is “of the very highest character.” (Marsh v. State Bar (1930) 210 Cal. 303, 307, 291 P. 583). For this reason all business dealings between attorney and client whereby the attorney benefits are closely scrutinized for any unfairness on the attorney’s part. See Lady v. Worthingham (2nd Dist. 1943) 57 Cal.App.2d 557, 135 P.2d 205.

References

B&PC § 6103.6. (new code section which will subject lawyers to discipline, if the violation occurs after January 1, 1994); B&PC § 6106 (moral turpitude).

CRPC 3-310 (conflicts of interest).

Vollmer, Legislated Ethics: What You Don’t Know (About Assembly Bill 21) Will Hurt You, Estate Planning, Trust, and Probate News, Vol. 13, No 3, Fall 1993.

98 ALR2d 1234. The attorney, drawing a deed or will under which he figures as grantee, legatee, or devisee as subject to discipline.

Ethics Opinions

S.D. Op. 1990-3. (Signatory of will is a client, regardless of who initially retains services of attorney).

L.A. Op. 1984-428. (No violation of the rule where an attorney for a charity offers to gratuitously draft wills for those who leave their estate to the designated charity).

1.8:500   Literary or Media Rights Relating to Representation

Primary California References:
Background References: ABA Model Rule 1.8(d), Other Jurisdictions
Commentary: ABA/BNA § 51:701, ALI-LGL § 48, Wolfram § 9.3.3

Agreements between a lawyer and a client in which the lawyer acquires rights to the client’s story present conflict of interest problems: The lawyer may be tempted to abuse client confidences (or obtain an advance waiver of confidentiality); and the arrangement may adversely affect the representation -- a plea of guilty or a boring trial is unlikely to sell a book or article. The lawyer’s financial and personal interests come into conflict with the client’s interest. No ethics rule in California deals with the subject specifically, so it is governed by general conflict-of-interest principles. Maxwell v. Superior Court (1982) 30 Cal.3d 606, 180 Cal.Rptr. 177, 639 P.2d 248, the court held that lawyers who represented an indigent defendant in a capital case and received literary rights as payment for services should not be disqualified where defendant received extensive disclosure of the risks and knowingly and competently waived the potential conflicts. Informed consent probably cures the conflict in other situations, such as that involving a wealthy defendant, but the Maxwell opinion emphasizes an indigent criminal defendant’s right to counsel of his choice.

Where an attorney entered into a literary rights contract for the exclusive literary and dramatic property rights to a criminal defendant’s life story in return for legal services, the attorney created a situation which prevented him from devoting the requisite undivided loyalty and service to his client and which resulted in manifest prejudice to the client. People v. Corona (1st Dist. 1978) 80 Cal.App.3d 684, 145 Cal.Rptr. 894.

1.8:600   Financing Litigation

Primary California References: CRPC 4-210, 3-300, 3-310, 4-300, 4-200, 4-210, B&PC §§ 6146, 6147, 6148
Background References: ABA Model Rule 1.8(e), Other Jurisdictions
Commentary: ABA/BNA § 51:801, ALI-LGL § 48, Wolfram § 9.2.3

Former CRPC 4-210 (1989) is based upon former CRPC 5-104 (1975), with certain modifications. Former CRPC 4-210 (1989) was unamended in the 1992 revisions to the CRPC.

CRPC 4-210(A) generally restricts a lawyer from directly or indirectly paying or agreeing to pay, guarantee, represent, or sanction of representation that the lawyer or the lawyer’s law firm will pay the personal or business expenses of a prospective or existing client. There are three exceptions to this rule:

(1)   With the consent of the client, the lawyer may pay or agree to pay such expenses to third persons from funds collected or to be collected for the client as a result of the representation.

(2)   After employment, the lawyer may lend money to the client upon the client’s promise in writing to repay such loan.

(3)   The lawyer may advance the costs of prosecuting or defending a claim or action or otherwise protecting or promoting the client’s interests, the repayment which may be contingent on the outcome of the matter. Such costs shall be limited to all reasonable expenses of litigation or reasonable expenses in preparation for litigation or in providing any legal services to the client.

CRPC 4-210(B) makes clear that the above exceptions do not override the limitations of CRPC 3-300, 3-310 and 4-300.

The following comments are taken from Karpman & Margolis pages 85-86, with certain conforming changes:

Currently agreements for reimbursement of client expenses may be dependent upon the successful outcome of litigation. Since this could be construed as the creation of an “interest in the outcome” of the litigation in the attorney, the rules governing the creation of adverse interests (CRPC 3-300) or conflicts of interest (CRPC 3-310) must be adhered to.

Lawyers representing medical malpractice victims have their contingency fees and costs tightly regulated by the MICRA statute (B&PC § 6146). To reduce the amount of costs the attorney advances under this rule, the repayment of which is contingent on the successful outcome of the case, the client may retain outside experts willing to provide services on a separate contingency fee basis. The trial court must, however, ensure that the total fees paid to the attorney and to the outside expert not exceed maximum attorney fees and allowable disbursements and costs under MICRA limitations.

Cases

Ojeda v. Sharp Cabrillo Hospital (4th Dist. 1992) 8 Cal.App.4th 1, 10 Cal.Rptr. 2d 230 anticipates the charging of higher fees by a plaintiff’s personal injury attorney, where the recovery of expenses is contingent upon successful outcome of the case. Also, the case addresses the impact of MICRA (Medical Injury Compensation Reform Act—limiting contingent fee in medical malpractice) upon the recovery of expenses incurred due to consultants providing expert assistance (such as close scrutiny of such expenses to prevent subversion of “legislative scheme”).

See also: In the Matter of Crane and DePew (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 139 (although violations were charged by the Office of Trial Counsel (State Bar prosecutors), the State Bar Review Department declined to sustain the allegations).

References

CRPC 3-300 (avoiding interests adverse to the client); CRPC 3-310 (avoiding the representation of adverse interests); CRPC 4-200 (fees for legal services; prohibition on unconscionable fees).

B&PC § 6147 and B&PC § 6148 (legislatively imposed fee agreement requirements).

8 ALR3d 1155. Ethical ramifications of attorney-client agreements where attorney pays or advances expenses on clients’ behalf.

C.O.P.R.A.C. Op. 1976-36 (opines that it is unethical for an attorney to advance expenses (i.e., in instances of indigence on pro bono cases) where there is a substantial likelihood that the client will not be able to repay such costs absent successful resolution of the case).

L.A. Op. 1979-379 (an attorney is not obligated to, but may pay costs and expenses incurred in connection with litigation, even where there is a substantial likelihood that the client will not be able to repay such expenses absent recovery in the suit).

1.8:610      Litigation Expenses

MR 1.8(e) and CRPC 4-210(A)(3) permit a lawyer to advance litigation expenses; the client’s obligation to repay the advanced expenses may be contingent on the outcome of the case. See Ripley v. Pappadopoulos (3rd Dist. 1994) 23 Cal.App.4th 1616, 1625 n.17, 28 Cal.Rptr.2d 878, 884.

1.8:620      Living and Medical Expenses

CRPC 4-210(A)(2) permits a lawyer to lend money to a client for any purpose, provided the client gives the lawyer a written promise to pay back the loan; MR 1.8(e) prohibits an advance of living or medical expenses to a client in a litigation matter (a loan connected with transactional representation is permissible if the terms are fair and reasonable).

1.8:700   Payment of Lawyer's Fee by Third Person

Primary California References: CRPC 4-210, 3-300, 3-310, 4-300, 4-200, 4-210, B&PC §§ 6146, 6147, 6148
Background References: ABA Model Rule 1.8(f), Other Jurisdictions
Commentary: ABA/BNA § 51:901, ALI-LGL §§ 215, 216, Wolfram § 8.8

MR 1.8(f) dealing with compensation from third parties is generally tracked by CRPC 3-310(F) except that (1) the client consent required by CRPC 3-310(F)(3) must be in writing and (2) neither disclosure nor consent is required if such nondisclosure is otherwise authorized by law or the lawyer is rendering legal services on behalf of any public agency which provides legal services to other public agencies or the public. CRPC 3-310(F) was originally adopted in 1989 as former CRPC 3-310(E) (1989), without a prior California counterpart. The 1992 revisions resulted in a relettering as CRPC 3-310(F) and introduced the requirement of obtaining the client’s informed written consent.

1.8:710      Compensation and Direction by Third Person

[See 1.8:700 Payment of Lawyer’s Fee by Third Person, supra].

1.8:720      Insured-Insurer Conflicts [see also 1.7:315]

The official discussion to CRPC 3-310 states that CRPC 3-310(F) “is not intended to abrogate existing relationships between insurers and insureds whereby the insurer has the contractual right to unilaterally select counsel for the insured, where there is no conflict of interest,” citing San Diego Navy Federal Credit Union v. Cumis Insurance Society (4th Dist. 1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494. [See 1.7:410, Insured Insurer Conflicts, supra].

1.8:730      Lawyer with Fiduciary Obligation to Third Persons [see 1.13:520]

[See 1.7:420 Lawyer with Fiduciary Obligation to Third Persons, supra].

1.8:800   Aggregate Settlements

Primary California References: CRPC 3-310
Background References: ABA Model Rule 1.8(g), Other Jurisdictions
Commentary: ABA/BNA § 51:375, ALI-LGL § 209, Wolfram § 8.15

CRPC 3-310(D) was originally adopted in 1989 as former CRPC 3-310(C) (1989), based upon MR 1.8(g) and without a prior California counterpart. In the 1992 revisions to the CRPC, it was relettered as CRPC 3-310(D) with non substantive changes.

CRPC 3-310(D) requires that an attorney who represents two or more clients to obtain the informed written consent of each client before entering into an aggregate settlement of the claims of or against the client.

The following comments are taken from Karpman & Margolis page 54, with certain conforming changes:

In this situation there are multiple claims and the settlements may involve substantially different terms for the various clients. Note that the Official Discussion specifically exempts a class action settlement subject to court approval.

Due to the possibility of a lawyer favoring one client over the other (divided loyalty) the specifics of the settlements (monetary, merits, impact, and the like) of each aspect of the resolution must be disclosed to every individual client. If the clients have claims against each other, it may be necessary for the clients to be advised to seek independent counsel.

1.8:900   Agreements Involving Lawyer's Malpractice Liability

Primary California References: CRPC 3-400
Background References: ABA Model Rule 1.8(h), Other Jurisdictions
Commentary: ABA/BNA § 51:110l, ALI-LGL § 76, Wolfram § 5.6.7

CRPC 3-400 addresses agreements involving a lawyer’s malpractice liability. CRPC 3-400(A), as adopted in 1989, continued the prior prohibition found in former CRPC 6-102 (1975). CRPC 3-400(B) was added in 1989 without a prior California counterpart.

The following comments are taken from Karpman & Margolis pages 60-61, with certain conforming changes:

CRPC 3-400 does not bar a member settling a claim for professional malpractice with the client, as long as the client is advised in writing to seek independent counsel and is given an opportunity to do so.

The rule does not prohibit an attorney from reasonably limiting the scope of his or her representation or employment when initially retained. See Nichols v. Keller (5th Dist. 1993) 15 Cal.App.4th 1672, 19 Cal.Rptr. 2d 601, 608.

Cases

Following the termination of an attorney-client relationship, the former client threatened to sue for malpractice. The attorney offered a cash settlement and mutual releases were signed which prevented client from bringing a malpractice action. The court held that this rule did not apply to the release, which was signed after the termination of the attorney-client relationship. Donnelly v. Ayer (4th Dist. 1986) 183 Cal.App.3d 978, 228 Cal.Rptr. 764.

Threatening a plaintiff with criminal prosecution to obtain an advantage in a civil case, in violation of this rule, is a sufficient legal basis to state a cause of action for intentional infliction of emotional distress and to seek monetary damages. Kinnamon v. Staitman & Snyder (2nd Dist. 1977) 66 Cal.App.3d 893, 136 Cal.Rptr. 321.

It was not improper for an attorney to request a written confirmation of his discharge as counsel. This was not an improper release from liability under this rule. In the Matter of Bach (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 631, 639 n.2.

References

B&PC § 6090.5 (Cause for suspension, disbarment or other discipline, to require, as a condition for settling a claim for professional misconduct, that the plaintiff agree to not file a complaint with the State Bar regarding that misconduct).

C.O.P.R.A.C. Op. 1989-116 (Not a violation of this rule to include a provision for mandatory binding arbitration of potential malpractice claims in the attorney-client retainer agreement. Standard arbitration provisions do not detract from or limit an attorney’s duty to use reasonable care or limit attorney’s liability for breach of the duty. It merely selects the forum in which liability will be determined).

1.8:910      Prospective Limitation of Malpractice Liability

CRPC 3-400(A) prohibits an attorney from contracting with a client to prospectively limit the lawyer’s liability to the client for the lawyer’s professional malpractice.

Where the arbitration clause in a retention agreement did not provide adequate notice to the client that it was intended to cover malpractice claims as well as fee disputes, the clause was construed not to cover malpractice claims. Lawrence v. Walzer & Gabrielson (2nd Dist. 1989) 207 Cal.App.3d 1501, 256 Cal.Rptr. 6.

1.8:920      Settlement of Legal Malpractice Claim

MR 1.8(h) requires a lawyer to advise the client in writing to consult with an independent lawyer before settling a malpractice claim. CRPC 3-400(B) prohibits an attorney from settling a claim or potential claim for the lawyer’s liability to the client for the lawyer’s professional malpractice, unless the client is informed in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice.

However, a settlement agreement, signed by the client after the termination of the attorney-client relationship and while the client had other counsel, was a complete defense to a claim for malpractice. Donnelly v. Ayer (4th Dist. 1986) 183 Cal.App.3d 978, 228 Cal.Rptr. 764.

1.8:1000   Opposing a Lawyer Relative

Primary California References: CRPC 3-320
Background References: ABA Model Rule 1.8(i), Other Jurisdictions
Commentary: ABA/BNA § 51:1301, ALI-LGL § 203, Wolfram § 7.6.6

CRPC 3-320 was adopted in 1989 based upon MR 1.8(i) and without a prior California counterpart. However, California introduced certain changes.

MR 1.8(i) permits related lawyers to represent an adverse interest after full disclosure and consent by the parties. CRPC 3-320 is broader and more lenient: it applies to “an intimate personal relationship” and is not limited to relationships by blood or marriage; and it merely requires that each member inform that lawyer’s client of the relationship in writing. Client consent is not required, but the client remains free to ask the lawyer to withdraw. The 1992 amendments to CRPC 3-320, in conjunction with other amendments to the CRPC, expanded its coverage to out-of-state and foreign-licensed attorneys.

The failure of appointed criminal trial counsel to inform defendant of counsel’s ongoing dating relationship with the prosecutor denied the defendant his right to effective assistance of counsel under the California Constitution. People v. Jackson (3rd Dist. 1985) 167 Cal.App.3d 829, 213 Cal.Rptr. 521 (decided prior to enactment of CRPC 3-320).

1.8:1100   Lawyer's Proprietary Interest in Subject Matter of Representation

Primary California References: CRPC 3-310, 3-300, 3-700, B&PC § 6068, Evid. Code 952
Background References: ABA Model Rule 1.8(j), Other Jurisdictions
Commentary: ABA/BNA § , ALI-LGL §§ 47, 53, 55, Wolfram §§ 8.13, 9.6.3

1.8:1110      Acquiring an Interest in Subject Matter of Representation

MR 1.8(b) and 1.8(a) and (j) prohibit a lawyer from acquiring an interest in the subject matter of litigation except in the form of contingent fee agreements or attorney liens. This type of conflict generally cannot be cured by client consent under MR 1.7(b) because a reasonable lawyer could not conclude that representation would not be substantially affected. Perhaps the same result would be reached under CRPC 3-310, which includes a comment that “[t]here are some matters in which the conflicts are such that written consent may not suffice for non-disciplinary purposes.” [Emphasis added.] Non-disciplinary purposes include disqualification in a proceeding, enforcement of an agreement, malpractice liability, etc. But the general framework in California is that informed consent by the client will cure a conflict of interest. Moreover, there is no prohibition in California parallelling MR 1.8(j) (acquisition of an interest in the subject matter of litigation). Presumably the acquisition of such an interest is proper if the client gives informed consent (CRPC 3-310) and the transaction meets the requirements of CRPC 3-300 (lawyer-client business transactions). Contingent fees are a recognized exception everywhere. See CRPC 4-200(B)(9). In California, contractual liens and other security agreements for fees and costs are subject to CRPC 3-300. Although contingent fee agreements are an exception to the prohibition against acquiring an interest in the subject matter of the representation, these agreements are extensively regulated by B&PC §§ 6146-6149. [See 1.8:1120 Contingent Fees, infra].

Under former CRPC 4 and former CRPC 8, a lawyer’s acquisition of first deed of trust where client held second deed of trust was a transaction adverse to the client even if done initially to assist client (former CRPC 4 did not permit consent by the client). Ames v. State Bar (1973) 8 Cal.3d 910, 106 Cal.Rptr. 489, 506 P.2d 625 (private reproval).

1.8:1120      Contingent Fees [see also 1.5:600]

Contingency fee arrangements have been the subject of much public debate in California. B&PC §§ 6146-6149 contained detailed provisions on contingency fees. Several initiative measures (Proposition 207 and Proposition 211) were presented to the California voters in 1996 and rejected.

B&PC § 6146, added in 1975 as part of the Medical Injury Compensation Reform Act (“MICRA”), limits contingency fees in the representation of any person seeking damages in connection with an action for injury or damage against a health care provider based upon the health care provider’s alleged professional negligence. B&PC § 6147 requires that any contract for a contingency fee be in writing and contain certain specified information and that a copy of the contract be provided to the client, or his guardian or representative, at the time the contract is entered into. B&PC § 6148 contains certain exceptions to the provisions of B&PC § 6147.

B&PC § 6147 is currently scheduled to sunset on January 1, 2000 unless a later enacted statute, enacted before that date, deletes or extends that date. Effective on January 1, 2000, a new version of B&PC § 6147 becomes operative. B&PC § 6147(b) provides that failure to comply with the provisions of B&PC § 6147 renders the agreement voidable at the option of the client, and the attorney shall thereupon be entitled to collect a reasonable fee. Similarly, B&PC § 6148 has one version effective until July 1, 2000 and another version will become operative on that date. B&PC § 6147.5 exempts from §§ 6147 and 6148 contingency fee contracts for the recovery of claims between merchants arising from the sale or lease of goods or services rendered or money loaned for use in the conduct of a business or profession if the merchant contracting for legal services employs ten or more individuals. B&PC § 6147.5(b) then regulates the contingency fees which may be contracted for or collected in the absence of a written contract in such situations. B&PC § 6149 provides that a written fee contract shall be deemed to be a confidential communication subject to the attorney-client privilege in B&PC § 6068(e) and Evid. Code § 952.

In addition to these general provisions, there may be specific other statutory requirements for contingent fees in certain circumstances. See, e.g., Prob. Code § 2644(b) (guardians and conservators); Prob. Code § 10811(c) (personal representative of estate). In addition, many courts have specific rules to implement the statutory provisions.

A contingent fee arrangement between a city and a private lawyer hired by the city to bring abatement actions under the city’s nuisance ordinance required disqualification of the lawyer from representing city in pending abatement action against a bookstore. Although the lawyer was not an employee of the city, the abatement action was sufficiently akin to criminal proceedings to require the same neutrality required of criminal prosecutors. People ex rel. Clancy v. Superior Court (1985) 39 Cal.3d 740, 218 Cal.Rptr. 24, 705 P.2d 347.

1.8:1130      Lawyer Liens

A lawyer’s lien on a judgment for legal fees can be created in California either by express contract or by implication. See generally, Cetenko v. United California Bank (1982) 30 Cal.3d 528, 179 Cal.Rptr. 902, 638 P.2d 1299. However, a lawyer may lose his lien on a judgment if he withdraws from the case without good cause. Hensel v. Cohen (2nd Dist. 1984) 155 Cal.App.3d 563, 202 Cal.Rptr. 85.

1.8:1140      Retention of Files to Collect Fees

CRPC 3-700(D) departs from the law of most states by prohibiting a lawyer from using possession of client documents as a lever to collect fees. CRPC 3-700(D) provides that the lawyer, after termination of the representation, “shall ... promptly release to the client, at the request of the client, all the client’s papers and property [broadly defined] ... whether the client has paid for them or not.” The Rule codifies prior California case law. In Academy of California Optometrists v. Superior Court (3rd Dist. 1975) 51 Cal.App.3d 999, 124 Cal.Rptr. 668, a former client used a writ of mandamus to obtain papers and files from his ex-attorney who did not want to release them until he was paid. The lawyer had a general retaining lien on the files which had been written into the retainer agreement. The court, holding “that where the subject matter of the attorney’s retaining lien is of no economic value to him, but is used only to extort disputed fees from his client, the lien is void,” ordered the lawyer to deliver to his former client all files, documents and papers relating to the representation. See also Weiss v. Marcus (2nd Dist. 1975) 51 Cal.App.3d 590, 599, 124 Cal.Rptr. 297, 304 (“the `work product’ of an attorney belongs to the client, whether or not the attorney has been paid for his services”). Similarly, a lawyer’s promise to refrain from withholding execution of a “Substitution Of Attorney” form and to refrain from withholding the client’s file, given in exchange for a percentage of the fees to be received by a subsequent lawyer for the client, is contrary to public policy, and the contract for the share of fees was not enforceable. Kallen v. Delug (2nd Dist. 1984) 157 Cal.App.3d 940, 203 Cal.Rptr. 879.

Violation of CRPC 3-700(D) because of a failure to release files to the client has resulted in disciplinary action. In the Matter of Meyer (Review Dept. 1997) 1997 WL 412517; In the Matter of Hindin (Review Dept. 1997) 1997 WL 469424 (see Count 52 thereof); In the Matter of Sullivan (Review Dept. 1997) 3 Cal State Bar Ct. Rptr. 608; In the Matter of Kaplan (Review Dept. 1996) 3 Cal. State Bar Ct. Rptr. 547; In the Matter of Rubens (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 468.

The following comments on CRPC 3-700(D) are taken from Karpman and Margolis page 69, with certain conforming changes:

A client’s failure to sign a substitution did not ameliorate the lawyer’s duty to release the file to the client, where Respondent did not take the position that retention of the file was required to protect the client’s legal interests. In Matter of Kopinski (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 716.

A one-year delay in turning over the file and executing a substitution of attorney was patently unreasonable. It was no defense that the attorney believed the client already had copies of everything in the file. Friedman v. State Bar (1990) 50 Cal.3d 235, 266 Cal.Rptr. 632, 786 P.2d 359.

A 6-month delay in turning over a client file to the new attorney after an attorney was discharged was unreasonable and violated this rule. Rose v. State Bar (1989) 49 Cal.3d 646, 663, 262 Cal.Rptr. 702, 712, 779 P.2d 761, 771.

The file and the attorney’s work product belong absolutely to the client, whether the client has paid the attorney’s fee or not. John F. Matull & Associates, Inc. v. Cloutier (2nd Dist. 1987) 194 Cal.App.3d 1049, 240 Cal.Rptr. 211; Weiss v. Marcus (2nd Dist. 1975) 51 Cal.App.3d 590, 124 Cal.Rptr. 297.