The Overreaching Concern

Business Transactions With Clients

The Overreaching Concern

A lawyer who wants to buy a client's delivery van, borrow from a client, or take shares in a client's company is bargaining with the person who trusts her most. Rule 1.8(a) treats that situation as dangerous enough to open with a prohibition: 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 stated conditions are met.¹ Two triggers sit in that sentence. The first is a business transaction between lawyer and client, such as a sale or a loan. The second is the knowing acquisition of an interest adverse to the client, such as a security interest in the client's property. Because the rule is built as a prohibition with conditions, a lawyer who sees such a deal coming must treat it as forbidden until the conditions are satisfied. Later sections sort out what counts as a trigger; this one explains why the conditions exist and how they fit together.

The reason is the lawyer's position. Legal training, together with the trust and confidence between lawyer and client, creates the possibility of overreaching (taking unfair advantage of the other side) whenever the lawyer joins the client in a business, property, or financial deal. Compare how people ordinarily protect themselves in a bargain: they distrust the other party, compare offers, and ask a trusted adviser whether the terms are sound. A client dealing with her own lawyer has already given her trust to the other party, and the adviser she would normally consult is the person across the table. The lawyer also knows more than the client about contracts, valuation, and the legal consequences of the paper, so the client cannot easily tell a generous term from a self-serving one. That trust does not stop at the edge of the file, which is why the rule's requirements apply even when the transaction is not closely related to the subject matter of the representation.²

Committee on Professional Ethics v. Mershon shows how little the rule depends on bad motive. The lawyer in that case entered a transaction with his client, Miller, without recommending that Miller obtain independent advice. Having made that choice, the court said, he was obliged to make full disclosure, and the record did not show that he made it before Miller consented. That established a violation of DR5-104(A), the disciplinary rule then in force, even though the lawyer did not act dishonestly or make a profit, and the court reprimanded him.³ The rule polices the risk of overreaching, not proof that overreaching happened. Honest intentions and a harmless outcome therefore do not excuse a missing safeguard.

Each requirement answers a different part of the danger. Fair and reasonable terms address the substance of a bad deal. Written disclosure addresses the knowledge gap by giving the client terms she can read, reread, and check. The written advice invites the client to bring in the neutral adviser she otherwise lacks, and the reasonable opportunity to act on it makes the invitation real. The signed consent records the client's approval of the essential terms and of the lawyer's role, including whether the lawyer represents the client in the transaction.

Independent representation changes the list. When the client has her own lawyer in the transaction, the advice requirement of (a)(2) is inapplicable, and the written disclosure that (a)(1) demands can come either from the lawyer involved in the transaction or from the client's independent counsel. The client's independent representation also bears on whether the agreement was fair and reasonable to her.⁸ The other conditions still apply.

A signed consent satisfies only the fourth requirement, yet it is the one most readers treat as the whole test.

A client's signature cannot repair a lopsided price. The discussion of fair and reasonable terms below returns to that problem through Goldman v. Kane.

Rule 1.8(a) is a consent-plus rule: the client's consent is required, but it is not enough, because the rule also demands terms that are fair and reasonable to the client.⁹ The extra requirement targets the danger this unit began with. A client who trusts her lawyer may agree to a bad deal, so consent cannot carry the whole load. Other provisions of Rule 1.8 go further and establish non-consentable conflicts, which a later section separates from consent-plus conduct.¹⁰