PA 305 Law Office Management Unit 3 Seminar Conflicts of Interest

What is a Conflict of Interest? Ethics rules prohibit lawyers from representing a client if the representation involves a conflict of interest. But what is a conflict of interest? ABA Model Rule 1.7 and 1.8 address conflicts of interest.

ABA Rule 1.7 (a) A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. Model Rules of Prof’l Conduct R. 1.7 (2002).

ABA Rule 1.7 (b) Rule 1.7(a) defines conflict of interest, and prohibits representation of a client if a conflict exists. But that doesn’t mean that the existence of a conflict will always prevent a lawyer from representing a client. Rule 1.7(b) establishes some general exceptions to the general rule.

ABA Rule 1.7 (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. Model Rules of Prof’l Conduct R. 1.7 (2002).

ABA Rule 1.7 (b) Why does Rule 1.7(b) create exceptions to the rule prohibiting conflicts of interest?

ABA Rule 1.7 (b) Attorney Crawford has been approached by Ed Mays , who wants to bring suit against his former employer, Alcraft Transmission Specialists, for breach of contract and wrongful termination. Crawford’s law firm represented Alcraft two years ago when it purchased Jiffy Transmission & Quick Repair Shops. Mays had been employed as sales manager by Jiffy for two years, but had resigned to open his own repair shop two months before the merger because he wanted to get back to hands-on repair work and be his own boss. After his shop failed, Mays was hired by Alcraft as a repair technician. He was terminated two months ago as part of a corporate cost cutting effort, and has been unable to find work.

ABA Rule 1.8 Where Rule 1.7 establishes the general rule, it isn’t a lot of help in identifying specific situations that are recognized as conflicts. Rule 1.8 defines some specific prohibited situations, to give some basic guidance.

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: 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; 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 (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. ABA Model Rules of Prof’l Conduct R. 1.8(a) (2002).

A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules. ABA Model Rules of Prof’l Conduct R. 1.8(b) (2002)

A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client. For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the lawyer or the client maintains a close, familial relationship. ABA Model Rules of Prof’l Conduct R. 1.8(c) (2002)

Prior to the conclusion of representation of a client, a lawyer shall not make or negotiate an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation. ABA Model Rules of Prof’l Conduct R. 1.8(d) (2002)

A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: (1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and (2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client. ABA Model Rules of Prof’l Conduct R. 1.8(e) (2002)

A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6. ABA Model Rules of Prof’l Conduct R. 1.8(f) (2002)

A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients, or in a criminal case an aggregated agreement as to guilty or nolo contendere pleas, unless each client gives informed consent, in a writing signed by the client. The lawyer's disclosure shall include the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement. ABA Model Rules of Prof’l Conduct R. 1.8(g) (2002)

A lawyer shall not: (1) make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless the client is independently represented in making the agreement; or (2) settle a claim or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel in connection therewith. ABA Model Rules of Prof’l Conduct R. 1.8(h) (2002)

A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may: (1) acquire a lien authorized by law to secure the lawyer's fee or expenses; and (2) contract with a client for a reasonable contingent fee in a civil case. ABA Model Rules of Prof’l Conduct R. 1.8(i) (2002)

A lawyer shall not have sexual relations with a client unless a consensual sexual relationship existed between them when the client-lawyer relationship commenced. ABA Model Rules of Prof’l Conduct R. 1.8(j) (2002). While lawyers are associated in a firm, a prohibition in the foregoing paragraphs (a) through (i) that applies to any one of them shall apply to all of them. ABA Model Rules of Prof’l Conduct R. 1.8(k) (2002).

EXAMPLE 1 Attorney Smith has been retained by Mr. Evans to draft his will. In the process of interviewing Evans to complete the firm’s will questionnaire, Smith’s paralegal, Julie, learns that the client and his wife operate a small retail clothing shop that has hit rough times. Neither Evans or his wife had any retail experience before inheriting the shop from his aunt a year ago. Evans told Julie that if they can’t find an investor or obtain a bank loan, they will have to close the shop and will lose their entire investment of more than $200,000 and may be forced into bankruptcy. Julie mentions this to Attorney Smith. Smith knows that his wife, who has a degree in retail management, has always wanted to run a dress shop, so he calls Evans and offers to buy a minority interest in the business, if Evans hires his wife as store manager.

EXAMPLE 1 Is this a concurrent conflict? Rule 1.7 defines concurrent conflict to include a situation in which the lawyer has a “personal interest”. Rule 1.8(a) provides “A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest …” The comments to Rule 1.8 provide: “A lawyer's legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client, for example, a loan or sales transaction or a lawyer investment …” “The requirements of paragraph (a) must be met even when the transaction is not closely related to the subject matter of the representation, as when a lawyer drafting a will for a client learns that the client needs money for unrelated expenses …” Model Rules of Prof’l Conduct R 1.8 cmt [1] (2002)

EXAMPLE 1 Is the investment prohibited? Rule 1.8(a) provides clear guidance> If each of the three requirements are met, the conflict has been essentially “resolved” and the transaction is not prohibited: “(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; (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 (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. Model Rules of Prof’l Conduct R 1.8(a) (2002).

EXAMPLE 2 Mr. Wilson is an extremely wealthy local business owner and philanthropist who has been a client of the Smith Law Firm for over 20 years. His net worth has been estimated by Forbes Magazine to be in excess of $870 million. The firm recently represented Wilson in establishing a charitable foundation which Wilson personally funded with $25 million. The week before Christmas, the firm received delivery of a Christmas gift for each of the lawyers and employees of the firm. Each lawyer received a leather Gucci briefcase containing a new iPad and a $100 bill; each non-lawyer employee received a leather Gucci purse or wallet containing a new iPod Touch and a $50 bill. On Dec 24, Wilson personally delivered a case of Dom Perignon and an extravagant catered luncheon buffet.

EXAMPLE 2 Can the firm accept the gifts? Rule 1.8(c) provides: “A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift…” The comments to Rule 1.8 provide: “A lawyer may accept a gift from a client, if the transaction meets general standards of fairness. For example, a simple gift such as a present given at a holiday or as a token of appreciation is permitted. If a client offers the lawyer a more substantial gift, paragraph (c) does not prohibit the lawyer from accepting it, although such a gift may be voidable by the client under the doctrine of undue influence, which treats client gifts as presumptively fraudulent. In any event, due to concerns about overreaching and imposition on clients, a lawyer may not suggest that a substantial gift be made to the lawyer or for the lawyer's benefit, except where the lawyer is related to the client as set forth in paragraph (c).” Model Code of Prof’l Conduct R. 1.8(c) cmt. [6] (2002)

EXAMPLE 3 Same client as Example 2. Wilson’s wife died last year, and Attorney Jones is drafting a new will for him. In the new will, Wilson intends to significantly reduce the amount that he passes to his three children, all of whom are adults with successful careers. Nearly all of his estate is to be liquidated and pass to several charitable organizations, his children will each receive a bequest of $250,000 and a few pieces of personal property with sentimental value. Jones and her paralegal Amy had lunch with him yesterday, and Amy happened to mention that her husband died last year after a lengthy illness, her son was recently diagnosed with a rare cancer, and she may be forced to sell her family home to pay the bills that piled up and continue to do so as a result of her husband’s last illness and her son’s medical condition, neither of which are covered by her medical insurance. Laughing, she said “yeah, all I really need is for my rich uncle Buck to leave me a couple grand so I can stop worrying and get on with life”. Today, Wilson called John Smith, one of the senior partners, and instructed him to draw up an irrevocable charitable remainder trust of which Amy and her son will be the present beneficiaries, specifically for payment of medical expenses. Wilson intends to fund the trust with $1 million cash. Upon the death of the last to die of Jones and her son, any remaining assets of the trust are designated to the local hospital, of which Wilson is a trustee.