Opinion ID: 1288344
Heading Depth: 1
Heading Rank: 3

Heading: Potential Violations

Text: RPC 1.1 requires a lawyer to provide his or her client with competent representation. Because McMullen's conduct in this instance does not implicate the issue of competency, we agree with the hearing examiner that RPC 1.1 was not violated by McMullen. Rather, McMullen's conduct involves the conflict of interest issues addressed by RPC 1.7(b) and 1.8(a). While these provisions appear to address the same conduct, we will address them as two different violations because the parties do not raise this issue. RPC 1.7(b) generally prevents a lawyer from representing a client if that representation will be materially limited by the lawyer's own interests unless the lawyer reasonably believes the representation will not be affected and the client consents in writing. RPC 1.8 addresses particular instances in which conflicts of interest are inherent. [7] Specifically, RPC 1.8(a) prevents a lawyer from entering into a business transaction with a client 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 which can be reasonably understood by the client; (2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and (3) The client consents thereto. To justify a transaction with a client, the attorney has the burden of showing: (1) there was no undue influence; (2) he or she gave the client exactly the same information or advice as would have been given by a disinterested attorney; and (3) the client would have received no greater benefit had he or she dealt with a stranger. In re McGlothlen, 99 Wn.2d 515, 525, 663 P.2d 1330 (1983). Although McGlothlen was decided under the former Code of Professional Responsibility, this rule applies equally under the RPC. While McMullen complied with some of the general requirements of RPC 1.7(b) and 1.8(a)  he disclosed the terms of the transactions in writing, advised his client to seek independent counsel, and received her written consent  it is clear that McMullen did not comply with RPC 1.7(b)'s requirement that the lawyer reasonably believe that the representation will not be affected. On first glance, the interest rates on the first two loans appear close to market rates. [9] However, those rates were only available for secured loans. Since the loans to McMullen were unsecured, the interest rate here was arguably unreasonable. More importantly, as her investment counselor, McMullen should have sought secured investments. While McMullen argues that the third transaction was intended to be an annuity and the rate given was reasonable for that type of investment, the terms of the promissory note and the disclosure form described the transaction as a restructuring of the loans and make no mention of an annuity or any other type of investment. As another loan, there is no justifiable reason for decreasing the interest rate to 9 percent per year from 12 percent when another year still existed on the original note. While McMullen argues that Brimblecombe wanted bigger payments, she should have gotten the full amount under the original note within a year. In short, we cannot find that McMullen reasonably believed that his representation was unaffected by his own interests. He received both a lower interest rate and an extended payment period on the renegotiated loan. Because his client was an 87-year-old investor, advising her to put her money into an unsecured, 10-year loan (which made no mention of its dischargeability in bankruptcy) with him where she would be unlikely to retrieve it should she need it for her care reeks of self-interest. Nor did McMullen comply with the requirements of RPC 1.7(b) and 1.8(a) that the material facts be fully disclosed. Both the fact that the McMullens were not a good credit risk and the McMullens' financial status were material to the transaction and should have been disclosed. [10] Further, we believe that McMullen should have disclosed whether the notes were dischargeable in bankruptcy. This result is more in keeping with the purposes of the rules. [8] Next, we consider whether the transaction and its terms were fair and reasonable as required by RPC 1.8(a). Given Brimblecombe's financial acumen, age, and the trust relationship McMullen had with her as a client, we agree that it was not. Substantial evidence was presented at the disciplinary hearing regarding Brimblecombe's financial sophistication. The evidence on balance shows that Brimblecombe did indeed lack financial sophistication. She had never had this kind of money to invest and thus was inexperienced at differentiating between a good and a bad investment. Her family and former attorney persuasively pointed out that Brimblecombe was not a good money manager and had trouble paying her debts all her life. She frequently needed financial help from her family. The McMullens argue that Brimblecombe was a bright, strongly opinionated woman who knew what she was doing. Yet even the McMullens' own testimony highlights Brimblecombe's lack of financial experience and history of problems. While it is not clear whether McMullen knew that Brimblecombe's previous lawyer, Harrison, had been assigned the trust funds for the purpose of straightening out creditor problems, he did have notice of her inability to handle her finances in the fall of 1987 when several of her checks from her personal checking account were rejected for insufficient funds. McMullen also knew that Brimblecombe's children were reluctant to agree to release the funds and were persuaded only by his suggestion of a joint account that would enable him to act as a restraint on her foolish spending. However, the evidence does show that Brimblecombe did have some knowledge and understanding as to the nature of her financial arrangements with McMullen. She knew that she needed an investment that generated income but would tie her money up so she could not spend it wantonly. Nor did she offer this money to the McMullens as a gift. The fact that she often had no money does not clearly indicate a lack of financial acumen; she previously had a very limited income. Given the inconclusive nature of the evidence regarding her ability to understand the transactions, this alone is not determinative of whether the transactions were fair and reasonable in this case. However, Brimblecombe's age and the trust relationship she had with McMullen are persuasive on this point. Despite McMullen's assertions to the contrary, it is clear that some trust relationship did exist between him and Brimblecombe. He had to sign every check from their joint account since the release of the trust funds was conditioned on this. McMullen was her investment counselor for the money and, therefore, had some fiduciary duty with regard to the money entrusted to his supervision, as slight as that may have been. Having undertaken this duty, he was required to insure that his client invested in options that met her needs and provided a good rate of return. Instead, he ignored the basic tenets of investment for the elderly. One investment counselor McMullen consulted regarding the trust funds advised him that Brimblecombe should diversify, putting 30 percent in short-term investments and 70 percent in long-term investments, and recommended long-term options that would not lock her in but could be sold if she chose. Another investment counselor testified at the hearing that security is one of the foremost considerations for elderly clients who have limited income. Yet McMullen put Brimblecombe's money in a risky, unsecured loan and locked her money up for the long term. This was neither fair nor reasonable. An attorney-client transaction is prima facie fraudulent. Johnson, 118 Wn.2d at 704. McMullen has failed to show that these transactions were not fraudulent under the three factors outlined in McGlothlen. First, McMullen failed to show that no undue influence occurred. He acted in the role of investment counselor to use his position and their friendship to borrow 64 percent of the money released from the trust within a year of its release. Second, he did not give the same advice an uninterested attorney would have in these circumstances. He knew she was an elderly woman who would need the trust money for her care. He knew of investments with better rates of return that would have met both the security and accessibility concerns of an elderly investor. If he had been uninterested, he would have advised her to seek these other investments. For these same reasons, McMullen fails the third requirement. Had she dealt with a stranger, such as the investment counselor from whom McMullen sought advice, Brimblecombe clearly would have received a higher rate of return, and a secured investment, and been able to access the money if she needed it. In sum, McMullen has not demonstrated compliance with the rules as required under McGlothlen. McMullen took loans from his client under questionable circumstances where he had even more influence than the average lawyer because he acted as investment counselor with regard to the trust funds. The circumstances of this case present a classic illustration of the what these rules were designed to prevent. Lastly, the hearing examiner found that McMullen violated his oath to use means consistent with truth and honor. Because McMullen has failed to show that his transaction with Brimblecombe was other than fraudulent under McGlothlen, we agree his conduct was not consistent with truth and honor and constitutes a violation of his oath. B