Lawyers Doing Business With Their Clients- What Could Go Wrong?

AgreementMuch like any other business person, attorneys are frequently presented with opportunities to invest or do business with family, friends, colleagues, and clients. Whether the business venture is to invest in real estate, an innovative product, or a breeding stallion, the lawyer must walk a difficult line between business partner and legal counselor. There are very specific ethical issues which may arise when a lawyer is also acting as a business partner.

For example, Larry the lawyer and his wealthy friend, Rich, decide to purchase a racehorse for the purposes of training, racing, and either selling or breeding once the horse retires. The horse has an unsuccessful and short career. The horse was finishing last in every race and they suspect, but never confirm, the horse had bowed a tendon. Since the horse was never very fast, Larry and Rich decide to sell the horse. A potential buyer asks whether there is anything wrong with the horse. Rich asks Larry whether he has to disclose the horse’s possible injury.

This situation puts the lawyer in a very difficult position. As an investor, Larry does not want to ruin the potential sale. However, as a lawyer, if he provides advice to Rich and Rich relies on the legal advice, Larry could be exposing himself to malpractice.

The Florida Bar has rules which regulate attorneys. The rule regulating this particular situation is Rule 4-1.8(a), which states:

(a) Business Transactions With or Acquiring Interest Adverse to Client. 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, except a lien granted by law to secure a lawyer’s fee or expenses, unless:

(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 to the client 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.

If an attorney wants to protect him/herself from possible malpractice suits or bar disciplinary action, written disclosures are the first step. Any time there is a possible conflict between the attorney’s interest or between clients’ interests, the conflict must be disclosed to the client and the client needs to sign a written acknowledgement of the disclosure and waiver of the conflict. The next step is to provide written advice to seek counsel and give an opportunity for the partner to consult with one.

Not all conflicts can be disclosed or waived, however. As always, any time you have legal questions, please seek the advice of a qualified attorney.

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