Opinion ID: 1562683
Heading Depth: 1
Heading Rank: 16

Heading: Business Transaction/Conflict of Interest Issues

Text: The allegations with regard to this category revolve around respondents' 1996 fee agreement. The ODC submits that respondents entered into a business transaction with their client which was not fair and reasonable to the client and without giving their client a reasonable opportunity to seek the advice of independent counsel in the transaction, in violation of Rule 1.8. The ODC further asserts by entering into this agreement, respondents placed their own interests ahead of those of their client, thereby violating Rule 1.7(b). A review of the 1996 fee agreement reveals that it is a highly unusual arrangement. Pursuant to that agreement, the firm guaranteed a $950,000 loan to Gulf States from a bank in order to complete the North Pointe subdivision so that lots could be sold. The agreement further provides the firm two separate options whereby it may recover legal fees in the Gulf States litigation. One option amounted to a standard contingency fee under which the firm was entitled to recover one-third of the amount of any award in favor of Gulf States in the litigation then pending on appeal. However, another option permitted the firm to recover a percentage of the net profit of the sale of lots in the North Pointe subdivision, either by individual or bulk sales. Payment of the fee under this option was not conditioned to any degree on the success or failure of the Gulf States litigation. Moreover, under the agreement, the firm could elect the option under which it chose to recover after the Gulf States litigation had concluded. Much discussion in the parties' briefs and the brief of the amici centers on whether Louisiana law recognizes a so-called hybrid or mixed fee agreement which allows a lawyer to seek recovery from sources other than a traditional contingency fee. However, we need not resolve that question in order to decide the case at bar. Rather, we find that to the extent respondents attempted to enter into a business arrangement with their client, they did not follow the appropriate ethical strictures. [17] At the time of the 1996 agreement, Rule 1.8 of the Rules of Professional Conduct provided, in pertinent part: (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) 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 in writing thereto.    (j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may: (1) Acquire a lien granted by law to secure the lawyer's fee or expenses; and (2) Contract with a client for a reasonable contingent fee in a civil case. Respondents argue that the terms of the 1996 fee agreement were fair and reasonable to Mr. Palowsky and the Gulf States entities because the firm received no additional consideration for guaranteeing the $950,000 loan to Gulf States and it would receive no more under the 1996 fee agreement than it would have received under the 1992 fee agreement. We disagree. As the hearing committee explained, under the 1992 fee agreement, the firm's recovery of a contingent fee was limited to a recovery of a one-third contingent fee plus expenses. By contrast, the 1996 fee agreement provided a means for the firm to collect a fee even if no recovery was made in the Gulf States litigation. Thus, it is clear the firm used the guaranty of the $950,000 loan as leverage to insert terms into the fee agreement which it perceived to be more favorable. Moreover, even assuming for sake of argument that the 1996 fee agreement was fair and reasonable, the undisputed evidence establishes that respondents did not give their client an opportunity to seek the advice of independent counsel regarding the transaction. Although respondents suggest that Mr. Palowsky is a sophisticated businessman and experienced developer, the unusual nature of the 1996 fee agreement should have prompted respondents to urge him to have independent counsel review the arrangement. [18] Under these circumstances, we find respondents violated Rule 1.8. For similar reasons, we find respondents' actions violated the conflict of interest provisions of Rule 1.7(b). At the time of the 1996 fee agreement, that rule provided, in pertinent part: A lawyer shall not represent a client if the representation of that client may be materially limited ... by the lawyer's own interests, unless: (1) The lawyer reasonably believes the representation will not be adversely affected; and (2) The client consents after consultation. . . . As discussed above, the 1996 fee agreement had the effect of placing respondents in a better position than they had been in under the 1992 fee agreement. Additionally, the firm's decision to guarantee the $950,000 loan made to Gulf States impacted the representation by causing the firm to consider its own interests as well as those of its client. Under these circumstances, we conclude respondents' representation of their client was materially limited by their own interests, thereby violating Rule 1.7(b).