ABA v. CA: Business Transactions

Both the ABA and California rules provide guidance on attorneys entering into business transactions with clients. Such relationships can often be considered a conflict of interest. Attorneys and clients must enter into any such relationships with absolute informed consent and confirm all parties have full understanding and agreement on the terms, expectations, risks of such transactions. If this cannot be obtained, a business translation between an attorney and client should not be entered into.

ABA Rule 1.8

(a) 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:

(1)

Honest and Dependable

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)

We Are Always Improving

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)

We Are Passionate

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.

CA Rule 1.8.1

The CA rule 1,8,1 Business Transactions with a Client and Pecuniary Interests Adverse to a Client on business transactions is not much different from the ABA rule.

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 each of the following requirements has been satisfied:

(a)

the transaction or acquisition and its terms are fair and reasonable to the client and the terms and the lawyer’s role in the transaction or acquisition are fully disclosed and transmitted in writing to the client in a manner that should reasonably have been understood by the client;

(b)

the client either is represented in the transaction or acquisition by an independent lawyer of the client’s choice or the client is advised in writing to 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 provides informed written consent to the terms of the transaction or acquisition, and to the lawyer’s role in it.

An example of where a lawyer violated the business transactions rules can be found in McMahon v. Eke-Nweke, No. 06-CV-5762 (E.D.N.Y.).
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Lease for a building on Staten Island

New York City attorney Vincent I. Eke-Nweke drew up a lease for a building on Staten Island. It had some problems—enough for the document to come under the scrutiny of a U.S. District Court.

Independent counsel

To start with, the transaction involved Eke-Nweke’s own lease of a building owned by one of his clients. But contrary to New York requirements, Eke-Nweke never advised the client to seek independent counsel, nor was the lease written or explained in terms she could reasonably understand.

Breach of fiduciary duty

When client/landlord Judi Anne McMahon filed a lawsuit alleging that Eke-Nweke had breached his fiduciary duty to her, even the judge said he found the terms of the lease hard to follow.

Appropriate disclosure

The attorney should have provided the appropriate disclosure to the client because the lease agreement did not constitute a regular commercial transaction