A law firm was not required to comply with the rule on lawyer-client business transactions when it obtained a promissory note for unpaid fees from a former client in the course of reestablishing an attorney-client relationship with her, the Washington Court of Appeals, First Division, decided Aug. 19 (Rafel Law Group PLLC v. Defoor, Wash. Ct. App. 1st Div., No. 68339-0-I, 8/19/13).
At the point the ex-client acknowledged her obligation for unpaid fees and signed the promissory note she was a prospective client rather than a current client, and thus Washington Rule of Professional Conduct 1.8(a) did not apply, Judge Stephen J. Dwyer explained for the court.
Anthony Rafel and his law firm, now known as Rafel Law Group (RLG), entered into a contingent fee agreement with Stacey Defoor to substitute as her counsel in a contested family law matter involving equitable distribution of substantial assets.
During the litigation RLG filed several attorneys' lien claims. Disputes arose between Rafel and Defoor, partly over fees, and the firm sought and received permission from the court to withdraw.
Defoor subsequently asked Rafel to start representing her again. He said RLG would do so if she (1) acknowledged she owed $775,000 in past fees and costs for RLG's services performed prior to the firm's withdrawal, (2) agreed to pay attorneys' fees going forward on an hourly basis and (3) executed a promissory note to secure those obligations.
Against the advice of other attorneys she consulted, Defoor agreed to these terms, which were memorialized in a settlement and re-engagement agreement and a promissory note. The note granted RLG a lien against Defoor's recovery and any of her other assets for past-due fees and costs, future fees and costs and interest.
Rafel stepped back in as Defoor's counsel and represented her at trial. Although the trial court's award mostly favored Defoor, she was unhappy about certain aspects of the representation and did not pay RLG. After the promissory note came due, the firm sued her on the agreement and note. Defoor claimed the contracts were unenforceable because RLG had not complied with Rule 1.8(a)(1)'s disclosure requirements.
The trial court granted summary judgment in favor of RLG. The court of appeals affirmed, holding that the rule on lawyer-client business transactions did not apply.
Rule 1.8(a) prohibits a lawyer from entering into a business transaction with a client or acquiring an interest adverse to a client unless the lawyer satisfies certain requirements designed to protect the client.
The court ruled that with one exception not applicable in this case, lawyers' business transactions with prospective clients or in anticipation of establishing an attorney-client relationship do not fall within the scope of Rule 1.8(a).
In reaching this conclusion, the court cited the plain language of Rule 1.8(a), which refers to “a client” without mentioning prospective clients or transactions made in anticipation of representation. The court also pointed to the structure of the conflicts rules, in which Rules 1.7 and 1.8 deal with current clients, whereas Rule 1.9 sets out duties to former clients and Rule 1.18 addresses prospective clients.
In addition, Dwyer noted that the purpose of Rule 1.8(a)--to prevent lawyers from exploiting the trust and confidence that clients place in their attorney--does not apply when no lawyer-client relationship is underway. A prospective client who is dissatisfied with the terms of the proposed engagement can simply walk away, he observed.
Here, the court noted, Defoor's attorney-client relationship with RLG had not yet recommenced at the time the parties entered into the agreement and promissory note. Accordingly, the agreement and note were not subject to Rule 1.8(a) and are enforceable, it concluded.
The court also ruled that the lien securing an interest in Defoor's assets did not fall within an exception set out in the official comment to Rule 1.8(a).
The comment states that the rule “does not apply to ordinary fee arrangements between client and lawyer, which are governed by Rule 1.5, although its requirements must be met when the lawyer accepts an interest in the client's business or other nonmonetary property as payment of all or part of a fee.”
That provision is inapplicable for two reasons, Dwyer said. First, the note Defoor signed was nothing more than an accord in settlement of her obligation for RLG's past services. Consequently, and because no attorney-client relationship existed when the agreement and note were negotiated, Rule 1.8(a) did not apply to the grant of a lien securing payment of fees for services in the earlier representation.
Second, the court continued, the lien provision simply did not constitute “payment” for RLG's services. The exception in the comment pertains to a lawyer's acquisition of an interest in a client's property as payment for fees, not to a security interest designed to protect a lawyer against nonpayment, Dwyer said.
The court emphasized that the value of the compensation RLG earned was measured by its rates and hours worked, and that the amount was neither increased nor decreased by the value of the property to which a lien attached. “The grant of an interest to secure payment is not the same as payment,” Dwyer wrote.
In a concurring opinion, Judge Ann Schindler said that because the limited case law interpreting Rule 1.8(a) only addresses its application to current clients, she agreed with the court that Rule 1.8(a) did not apply here.
However, Schindler urged the Washington Supreme Court to address whether the rule should apply to a security interest acquired during the negotiation of an initial fee agreement.
According to Washington Informal Ethics Op. 2209 (2012), she said, it is best practice for lawyers to comply with Rule 1.8(a) when acquiring a lien or other security interest during the initial negotiation of a fee agreement.
Schindler also cited ABA Formal Ethics Op. 02-427 (2002), which states that a lawyer must comply with Model Rule 1.8(a) when acquiring a contractual security interest in a client's property to secure payment of fees earned “or to be earned.”
Kelly P. Corr and Paul R. Raskin of Corr Cronin Michelson Baumgardner & Preece LLP, Seattle, and Michael R. Caryl, Seattle, represented Rafel Law Group.
Roger Leishman and Zak Tomlinson of Davis Wright Tremaine LLP, Seattle, represented Defoor.
Copyright 2013, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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