Opinion ID: 1653251
Heading Depth: 1
Heading Rank: 2

Heading: Alleged Violations of DR 5-101(A) and DR 5-104(A).

Text: The commission found that McCullough had not violated either DR 5-101(A) or DR 5-104(A) in connection with the mortgage and confession of judgment. The commission thought that the documents and the circumstances surrounding their execution did not constitute business transactions. On appeal the committee challenges this finding and argues that the mortgage and confession of judgment do indeed constitute business transactions. DR 5-101(A) provides that [e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests. (Emphasis added.) As the italicized words plainly indicate, this disciplinary rule is limited to those circumstances in which a lawyer has not yet been retained. Here McCullough was already representing Fred when Fred executed the two documents. Simply put, DR 5-101(A) did not apply. In contrast, DR 5-104(A) contemplates an attorney-client relationship exists at the time the transaction takes place: A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure. (Emphasis added.) To establish a violation of this rule it is necessary to show that an attorney-client relationship existed, that during this relationship the attorney and client entered a business transaction in which the lawyer and client had differing interests, that the client expected the lawyer to exercise the lawyer's professional judgment for the protection of the client, and that the client consented to the transaction without full disclosure. Committee on Professional Ethics & Conduct v. Mershon, 316 N.W.2d 895, 898 (Iowa 1982). As we said earlier an attorney-client relationship existed between McCullough and Fred when Fred executed the mortgage and confession of judgment. That brings us to the central issue: whether the mortgage and confession of judgment constituted business transactions. Business transaction suggests to us a commercial activity engaged in for a profit. We think the framers of DR 5-104(A) had in mind a myriad of commercial ventures in which lawyers and clients might engage with a view to making a profit. Such activity was clearly apparent in two of our decisions involving DR 5-104(A). See, e.g., Committee on Professional Ethics & Conduct v. Postma, 430 N.W.2d 387, 388 (Iowa 1988) (attorney entered into joint business venture with two clients in a chemical packaging company; attorney was to perform services for his ownership interest); Mershon, 316 N.W.2d at 897 (attorney became stockholder with client and third party in land development corporation; attorney was to perform services for his ownership interest); see also ABA Comm. on Professional Ethics and Grievances, Formal Op. 320 (1968) (Business transactions are frankly impersonal and commercial in character). Here the apparent purpose of the mortgage and confession of judgment was to give McCullough security for his present and future fees. A consensual security transaction is far different from a commercial venture entered into for a profit. The commission correctly determined that DR 5-104(A) did not cover the mortgage and confession of judgment transactions. What we say, however, should not be interpreted to mean that a lawyer does not have any duty to a client when the lawyer takes security for a fee after accepting employment. We think other ethical rules may govern the lawyer's conduct in these circumstances. EC 5-3 is a prime example. It provides in pertinent part: After accepting employment, a lawyer should not acquire property rights that would adversely affect his professional judgment in the representation of his client. Even if the property interests of a lawyer do not presently interfere with the exercise of his independent judgment, but the likelihood of interference can reasonably be foreseen by him, a lawyer should explain the situation to his client and should ... withdraw unless the client consents to the continuance of the relationship after full disclosure. EC 5-3 does not prohibit a lawyer from accepting security for fees after the lawyer is retained. It is only if the lawyer reasonably foresees that such acceptance of security would probably interfere with the lawyer's independent judgment that the lawyer has any duty under EC 5-3. If such interference is reasonably foreseeable, the lawyer must disclose and explain this conflict to the client. In doing so, the lawyer must fully inform the client of the nature and effect of the security and of the client's own rights and interests in the security. In addition, the lawyer must give the client such advice that the lawyer would have been expected to give had the transaction been between the client and a stranger. If, in the face of this disclosure and explanation, the client still wants the lawyer's representation, the lawyer may take the security and proceed with the representation. If the client balks, the lawyer's duty is clear: withdraw the request for security or withdraw from employment. Here the commission concluded McCullough violated EC 5-3 when he took the mortgage and confession of judgment. The commission reached its conclusion without explanation. Little explanation, however, was necessary. Obviously, McCullough's independent judgment was adversely affected when he took the mortgage. Had he been exercising independent judgment, he would not have taken a mortgage that contained material misstatements of fact. McCullough's professional judgment would remain tainted and compromised until the transaction was undone. The transaction was not undone, and its wrongfulness was compounded when McCullough took the confession of judgment that also contained material misstatements of fact. Since the documents were materially false, the transactions were patently wrong. Compliance with EC 5-3, no matter how scrupulously done, could never make them right.