September 3, 2014

Business Transactions with a Client

State Capitol, Sacramento
When a client hires an attorney, a appreciable level of trust and respect is generally established. The client can expect the attorney to act in their best interest at all times. Similarly, the client can expect the attorney to not exploit them in any fashion. In legal terms, the attorney is the client's fiduciary. Unfortunately though, an attorney occasionally abuses the trust and respect a client provides them. The following is allegedly an example of such. 

According to the Sacramento Bee, Attorney Delbert Modlin was arrested on August 26, 2014 in Sacramento for felony financial elder abuse and grand theft charges. Allegedly Mr. Modlin had persuaded an estate planning client to liquidate their investments and then told the client's daughter to invest the $120,000 in a new cat litter box he had invented. The daughter said that Mr. Modlin promised to double the client's money in 4 years. Furthermore, Mr. Modlin did not reveal two prior bankruptcy filings and that he is awaiting trial on felony charges in Placer County.       

Besides the alleged criminal aspect to this circumstance, there are serious ethical issues raised here as well. A California attorney should seldom, if ever, enter into a business transaction with a client. The California Rules of Professional Conduct place explicit restrictions on such situations and require extensive disclosures for the few situations where it is otherwise permissible. Rule 3-300 reads:

A member 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 each of the following requirements has been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and

(B) The client is advised 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; and

(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition. 

Past estate planning clients have asked me to participate in business ventures or real estate deals (I have a real estate LLC). Given the inherent risk of such an endeavor, I naturally decline. The risk is simply not worth the reward and I cannot foresee a situation where it ever will be.