Opinion ID: 1562683
Heading Depth: 1
Heading Rank: 21

Heading: Business Transaction and Conflict of Interest Issues

Text: After reviewing the allegations involving business transaction and conflict of interest issues, the majority finds the respondents violated Rule 1.8(a) [1] and Rule 1.7(b). I will analyze each of these alleged rule violations in turn. The majority first claims that the respondents have violated Rule 1.8(a). At the time of the alleged misconduct, Rule 1.8(a) of the Rules of Professional Conduct provided that an attorney may enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client if: (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.[emphasis added]. The majority concludes that the respondents have violated the above provision because: (1) the business transaction at issue, the 1996 fee agreement, was not fair and reasonable, and (2) the respondents failed to ensure Mr. Palowsky had a reasonable opportunity to seek the advice of independent counsel. Both of these findings are in error. To support its finding that the business transaction in question was not a fair and reasonable one, the majority relies solely on the observation that 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. The majority states, 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. At p. 1154. It seems that the majority has concluded that the respondents should have either allowed Mr. Palowsky and or his partners to go bankrupt or should have elected to bear the risk of default on a loan of nearly one-million dollars for no additional remuneration. The notion that the firm should have allowed Mr. Palowsky to go bankrupt seems callous, and the implicit argument that the firm should have accepted the risk of default at no additional costs disregards one of the most ancient and well established maxims of human commerce, that the chance of profit must go with the risk of disaster. See Justinian's Institutes § 3.23, at 115 (Peter Birks & Grant McLeod eds., Cornell University Press 1987). It was not unreasonable or unfair for respondents to seek additional security in return for accepting a greater risk. The majority's conclusion that respondents did not given Mr. Palowsky a reasonable opportunity to seek the advice of independent counsel in violation of Rule 1.8(a)(2) is also in error. To support this conclusion the majority relies solely on an extraordinary interpretation of the version of Rule 1.8(a)(2) which was in effect during the relevant time period. The majority finds that Rule 1.8(a)(2), as it existed at the time of the alleged misconduct, [2] imposed an affirmative duty upon the respondents to urge Mr. Palowsky to have independent counsel review the 1996 fee agreement. This interpretation finds no support in a plain reading of the pertinent text. During the time period at issue, Rule 1.8(a)(2), on its face, simply established a temporal requirement. Under the rule, a client could not be forced to render an immediate, rash decision regarding a transaction with their lawyer. A client had to be given a reasonable opportunity or time period [3] to consider the implications of any such arrangement and to seek independent counsel. Rule 1.8(a)(2). The 1996 fee agreement was constructed over the course of several months, and Mr. Palowsky was presented with several drafts before signing a final version. There is simply no evidence that Mr. Palowsky was not given a reasonable opportunity to seek the advice of independent counsel. The majority also concludes that the respondents have violated Rule 1.7(b). At the time of the alleged misconduct, that rule, in pertinent part, stated: 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.... The majority concludes that the respondents' law firm's representation of the client was materially limited by their own interests after the respondents' firm adopted the 1996 fee agreement, thereby violating the above provision. However, this finding seems to stand in stark contradiction to the plain terms of the 1996 fee agreement. By its very design, the fee agreement indicates uncertainty as to which method of remuneration, a percentage of the final judgment in the Gulf States litigation or a percentage of the net profits from the sales of the subdivision lots, would yield the greater monetary award for the firm. Thus, it is illogical to claim that by entering into the 1996 fee agreement the respondents' firm was inspired to limit their representation or provide a lower quality of representation. Such a reaction would have reduced the firm's prospects of obtaining the maximum monetary award possible. Rather, under the 1996 fee agreement, the firm was inspired to work diligently to maximize the client's fortunes as this would, in turn, result in the maximization of the firm's fortunes.