Opinion ID: 1464420
Heading Depth: 2
Heading Rank: 1

Heading: Conflict of Interest/Prohibited Business Transaction with a Client in Violation of RPC 1.8(a)

Text: The Special Master and the DRB concluded that respondent's loan transaction with his client constituted a conflict of interest and a prohibited business transaction in violation of RPC 1.8(a). We agree. RPC 1.8(a) prohibits an attorney from entering into a business transaction with a client unless, among other things, the transaction and the terms are fair and reasonable to the client. Indeed, [a] lawyer is required to maintain the highest professional and ethical standards in his [or her] dealings with his [or her] clients. In re Smyzer, 108 N.J. 47, 57, 527 A. 2d 857 (1987) (citing In re Gavel, 22 N.J. 248, 262, 125 A. 2d 696 (1956)). Furthermore, all transactions of an attorney with his [or her] client are subject to close scrutiny and the burden of establishing fairness and equity of the transaction rests upon the attorney....If the burden is not satisfied, equity has regarded such transactions tainted so as to constitute a constructive fraud.... [ In re Gallop, 85 N.J. 317, 322, 426 A. 2d 509 (1981) (citations omitted).] In In re Wolk, 82 N.J. 326, 327, 413 A. 2d 317 (1980), the Court disbarred an attorney who misled a client by counseling her to invest in a building in which the attorney had an interest. In so holding, the Court admonished that it will no more tolerate the hoodwinking of helpless clients out of funds in a business venture that is essentially for the benefit of the lawyer than it will outright misappropriation of trust funds. Id. at 335, 413 A. 2d 317 (citing In re Wilson, 81 N.J. 451, 409 A. 2d 1153 (1979)). Similarly, in Smyzer, supra, 108 N.J. at 49, 527 A. 2d 857, the Court disbarred an attorney who entered into fraudulent and deceptive business transactions with clients, failed to protect their investments, failed to fully explain investments to the clients, and failed to disclose his interests in the companies. The Court found that the attorney had deceived his clients in order to protect his investment in a company whose financial condition was rapidly deteriorating. Id. at 57, 527 A. 2d 857. The Court also was troubled by the lack of independent consultation concerning those investments. In that respect, the Court cautioned that a passing suggestion that the client consult a second attorney [will not] discharge the lawyer's duty when he [or she] and his [or her] client have differing interests. Id. at 55, 527 A. 2d 857. Thus, a lawyer must take every possible precaution in ensuring that his [or her] client is fully aware of the risks inherent in the proposed transaction and of the need for independent and objective advice. Ibid. In the present case, respondent participated in a business transaction with his client without the appropriate safeguards and without disclosing a conflict of interest. Respondent drafted the loan agreement and all of its terms, made misrepresentations in respect of the alleged collateral to induce his client to participate in the transaction, and did not perform title or lien searches or prepare security agreements in respect of the property. Although the agreement stated that respondent owned two properties and that respondent's law firm was worth in excess of $2,500,000, respondent did not give his client a security interest in those assets and did not provide his client with documentation of those assets. Indeed, respondent did not own the six acres of land identified as unencumbered in the loan agreement he prepared. As stated by the Special Master, there was no discussion of payment of more than the compromise amount to the worker's [sic] compensation carrier... no discussion of what would happen if [respondent] went bankrupt. Simply put, there was no discussion of the financial issues that affected Hagerman because the lawyer in the transaction was acting in dual capacities as both lawyer and business partner. Respondent's subsequent failure to repay Hagerman and CNA, even after CNA filed suit seeking payment of its lien, highlights the worthlessness of the loan agreement. In sum, respondent took advantage of an unsophisticated client whose trust he gained through the attorney-client relationship.