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. 

Attorney Fees - Hourly, Flat and Contingency

When a client hires an attorney, one question that always arises is the fee arrangement. The client is obviously interested in knowing how the attorney will be paid. The three generally understood fee arrangements are (1) hourly rate, (2) flat fee and (3) contingency fee. There can be a combination of the two, e.g. an attorney will charge an hourly rate but agrees to cap their fee at a certain threshold such as $10,000. Still, the fee arrangements mentioned comprise the vast majority of cases. Each of these fee arrangements is typically associated with various estate planning arrangements.

In the case of litigation, e.g. a will or trust contest, an hourly rate can be expected because the attorney will not know the amount of time that has to be invested in the case. The case could take only take a few days or could take months depending on the circumstances. Furthermore, litigants are entitled to appeal which can only lengthen the amount of time the case takes. In these cases, the attorney will ask for an up-front retainer, $2,500 or $5,000 for example. 

A flat fee arrangement can be found in the case of estate planning. Many attorneys have a general sense of how long an estate plan will take to draft, review and execute (trust, will, power of attorney, etc.). For example, if the attorney bills at $250 per hour and has a thorough in-person consultation with the prospective clients, they should be able to reasonably estimate the time it will take to complete the estate plan. So if they estimate that it will take 10 hours to complete the project, they could bill $2,500. From experience, clients invariably insist that they have an "easy estate plan" and hence the fee should not be much. This is simply not true. Even if the client has a nuclear family and wishes for the distribution to go to the surviving spouse and then to the kids, such requires at least a couple hours of work to get the process started. The clients have to provide the attorney with various asset information, the attorney has to incorporate those assets into the estate plan, the clients have to review the estate plan with the attorney to make sure that what is written reflects their true intentions and only after this can the documents be executed. While not hyper technical, it is not something that can be slapped together in an hour as some people erroneously believe.

A contingency fee arrangement can often be found where a client has a disputed or unknown interest in a will, trust or estate but lacks the funds to pay the attorney. For example, the client might have originally been a trust beneficiary but right before the settlor's death, the item specifically devised to the client was sold for some reason. Many clients mistakenly assume that attorneys are generally receptive to contingency fee cases. The problem is that many clients are often overly optimistic in terms of describing their case. The client has, in all probability, never brought a case before so they have no experience to make a judgment. Attorneys, conversely, when deciding on whether to take a contingency fee case look to both the underlying facts and the possibility of recovery. A judgment without a recovery is essentially worthless. So if an abusive trustee is penniless, it is doubtful there is much to recover for the prevailing client.  

Attorney Disqualification

Generally, the attorney that the client wants to retain is the attorney that they are able to retain ultimately. Still, there are occasions when the desired attorney is unable to be retained because of a prior representation. 

For example, the attorney might have represented a past client who is now an adversary of the current client. Since representation of the prior client might yield confidential information that is not discoverable, this could give an unfair advantage to the current client. In particular, the attorney might know the past client's habits, vulnerabilities, personality, etc. This could prove very beneficial to the current client because the attorney would know how the past client could be exploited. Similarly if a professional football team spied on their opponent by taping their practices or their pre-game walk-through, this too would create an unfair competitive advantage because the spying team would know beforehand how that team will run its plays. 

In light of this obvious conflict, the past client is given the ability to disqualify their past attorney even if it deprives the current client of their attorney of choice. This scenario played out in a recent probate case in Los Angeles County Superior Court, Case No GP016054.

Richard E. and Mary Holder, husband and wife, created a revocable trust on February 11, 2009. Richard passed away a few weeks later on February 26, 2009 and Mary passed away on July 19, 2010. The couple had two children, Shyla and Richard L. These two children were named as successor co-trustees of the trust. 

Shyla petitioned in June 2011 to have her brother Richard L. removed as trustee for breach of fiduciary duty. Allegedly, Richard L. had mismanaged trust assets and engaged in self-dealing. The interesting aspect of the case was that Shyla was represented by her husband, attorney David Cordier. Consequently, Richard L. filed a motion to disqualify 
Mr. Cordier from representing his wife. The trial court granted the motion and this decision was upheld on appeal in an unpublished decision by the 2nd district court of appeal. 

The court of appeal's decision can be summarized as follows: "we conclude there was sufficient evidence for the probate court to find that Cordier represented Richard regarding his business and received confidential financial information from him; Cordier represented and advised the settlors in creating the trust; Cordier represented both co-trustees in preparing the sales agreement and urging Richard to just sign the agreement; and Cordier assisted his son Brian and his wife Shyla in a manner adverse to Richard, as the co-beneficiary of the trust. Accordingly, the probate court did not abuse its discretion in granting Richard's motion to disqualify Cordier."

Thus, Mr. Cordier was barred from representing his wife Shyla with the proceeding to attempt to remove her brother as a trustee of the Holder trust. 

Attorney-Client Privilege

A very well-known principle of law is the attorney-client privilege. Whenever an attorney is retained by a client, the communications between the two parties are considered confidential. Thus, these communications are not subject to disclosure to a third-party. While the client is always free to discuss the communications with whomever they want, granted it would be at their own peril. The attorney must "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." Bus & P C §6068(e)(1). The only exception to this rule is that “an attorney may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.” Bus & P C §6068(e)(2).

One rationale for the attorney-client privilege is that it encourages the client to be honest, thorough, and open with their attorney. By shielding communications from basically the world, the client can be free and easy with their communication. The client will not have to worry about their statements coming back to haunt them. Even if the client discloses embarrassing, damaging or bizarre facts, the attorney must still maintain confidentiality subject to Bus & P C §6068(e)(2). This is especially important because an attorney must ascertain all material facts before they can offer advice. If the client is unwilling or afraid to divulge intimate details, the attorney will not be able to render competent legal advice. The following hypothetical illustration highlights the importance of being honest with your attorney and the consequences for secrecy.

Henry was looking to write a trust and was referred to an attorney by his neighbor Joey. Henry met with an attorney and explained that he wanted to leave his entire estate to the local Lion's Club. Years earlier, Henry had fathered an illegitimate child. Henry had purposely lost contact with the child and believed that the child was dead. Since the stigma of illegitimacy was so strong to Henry, he did not disclose this to his attorney, even though the attorney had to maintain confidentiality. Henry irrationally thought that the attorney might disclose the existence of the illegitimate child nevertheless and did not want to risk it. 

When the attorney asked about children, Henry declined to name any. The attorney then wrote the trust and named the Lion's Club as the sole beneficiary of Henry’s trust estate. Unbeknownst to Henry, his son was actually alive at the time of the trust’s execution and his death. Henry’s omission of his will was problematic because of Prob C § 21622. This law states that if the person who signed the trust failed to provide for his child because he thought that the child was dead, such child is entitled to an intestate share of the person’s estate. Since the child was Henry’s sole heir, the child was exclusively entitled to Henry’s trust estate. 

Henry passed away a few years after writing his trust. When the child was made aware of Henry’s death, he applied to be the sole beneficiary of Henry’s estate, and in light of Prob C § 21622, such was distributed to him.

The facts of  Estate of Della Sala (1999) 73 CA4th 463 are somewhat similar to the above hypothetical, although the outcome was different. 

Attorney-Client Fee Agreements

Generally speaking, an attorney is required to execute a written fee agreement with his or her client prior to rendering services. The pertinent statute reads "in any case not coming within Section 6147 in which it is reasonably foreseeable that total expense to a client, including attorney fees, will exceed one thousand dollars ($1,000), the contract for services in the case shall be in writing." Bus & P C § 6148(a). For reference, Section 6147 relates to contingency fee matters which essentially mean that the attorney will not receive a fee unless the client prevails in their matter, e.g. a personal injury lawsuit.

Attorney-client fee agreements are heavily regulated by statute and the California Rules of Professional Conduct (CA attorney ethics rules). All fee agreements must contain, among other items, the following:

1. Any basis of compensation including, but not limited to, hourly rates, statutory fees or flat fees, and other standard rates, fees, and charges applicable to the case.
2. The general nature of the legal services to be provided to the client.
3. The respective responsibilities of the attorney and the client as to the performance of the contract.

A recent California Court of Appeal case seemingly carved out a probate exception to the rule that a written fee agreement is required in most cases. 

Estate of Wong (2012) 207 CA4th 366

In Estate of Wong, Donna Wong hired an attorney to represent her in a trust and probate matter regarding the estate of her late husband, Dennis. The couple had executed a living trust but had not properly funded it. For reasons unknown, the Ms. Wong and her original attorney never executed a written fee agreement. Years later, Ms. Wong fired her original attorney and hired substitute counsel. When substitute counsel completed the probate, original attorney submitted an invoice for the work they previously did for Mr. Wong's estate. The trial court granted original attorney's request for fees and Ms. Wong appealed this decision arguing that a written fee agreement was required.

The appellate court affirmed the trial court's decision, holding that because the estate is paying the attorney fee rather than the client, Bus & P C § 6148 is not applicable and hence no written fee agreement is required. In other words, since the focus of the written fee agreement is to protect the client, no trouble arguably arises for the client because the client is not responsible for payment of attorney fees, the decedent's estate is instead.  

Furthermore, the court noted that in cases where an attorney seeks compensation for extraordinary services on a contingent fee basis, a written fee agreement is required. Prob C § 10811(c). Conversely, compensation for ordinary services does not explicitly reference Bus & P C § 6147 or Bus & P C § 6148, the sections which explain the necessity of a written fee agreement in certain situations. Prob C § 10810. Consequently, if a written fee agreement was required, the California legislature would have referenced Bus & P C § 6147 or Bus & P C § 6148 in Prob C § 10810. Since the statute did not, no written fee agreement is required.

Attorney-Client Privilege in Trust Administration

Few areas of the law are as well-known to the public as the attorney-client privilege. The privilege allows for client communications with their lawyer to be held in strict confidence. Evid C §§952, 954. A lawyer may only disclose this information under very specific circumstances. The following two major cases addressed the applicability of the attorney-client privilege in trust administration cases.

Moeller v. Superior Court (1997) 16 C4th 1124

George Moeller and Grace Todd Moeller, husband and wife, created a trust in which George served as the initial trustee. George later resigned as trustee and Sanwa Bank assumed the office of trustee. The trust owned a parcel of land which was leased to a chrome plating business. 

During its operations, the business  severely contaminated the soil. This contamination appreciably depleted the trust estate whereby Sanwa Bank decided to resign as trustee because of presumably insufficient funds. Prior to its resignation, Sanwa Bank rendered a final accounting and deducted various fees from the trust. George's son Roger, Sanwa Bank's successor, objected to the accounting. 

Roger requested various documents from Sanwa Bank as support for the accounting it had rendered. Sanwa Bank responded that it had given Roger the appropriate documentation and the documents that were not provided was privileged information, i.e. communications from Sanwa Bank and its attorneys. Roger then petitioned to have this information disclosed nonetheless.

Roger's case weaved its way through the California court system before eventually ending up in the California Supreme Court. It held that "a successor trustee, unless the trust instrument otherwise provides, assumes the power to assert the attorney-client privilege as to confidential communications between an attorney and a predecessor trustee on the subject of trust administration, so long as the predecessor was acting in the official capacity of trustee rather than in a personal capacity."

In plain English, the Court held that Roger could request documents detailing the communications Sanwa Bank had with its attorneys because he was the successor trustee. 

Wells Fargo Bank v. Superior Court (2000) 22 C4th 201

William Couch established a trust in October 1991. He served as the sole trustee until his death in March 1992. Upon his death, Wells Fargo and Rosa Couch, William's surviving spouse, became the successor trustees. Years later, certain trust beneficiaries became agitated that the trustees were allegedly not making proper distributions. Consequently, the trust beneficiaries petitioned to have both trustees removed. During litigation, the trust beneficiaries asked for documents detailing the communications from Wells Fargo and its attorneys, O'Melveny & Myers, a prominent international law firm. Wells Fargo naturally balked at this request, citing the attorney-client privilege.

Like Moeller, Wells Fargo Bank meandered through the California court system before eventually landing in the California Supreme Court. However, the Court this time held that the petitioners were not entitled to discover client communications between Wells Fargo and its counsel because there is "no authority in California law for requiring a trustee to produce communications protected by the attorney-client privilege, regardless of their subject matter."

The distinguishing feature between these two cases is the person requesting the discovery of client communications. In Moeller, the successor trustee asked to discover the otherwise privileged communication. Conversely, in Wells Fargo, the beneficiaries requested to discover trustee communications with its lawyer.