Opinion ID: 2111125
Heading Depth: 2
Heading Rank: 2

Heading: Duty of full disclosure.

Text: 1. Duty of full disclosure where attorney has financial interest in the transaction. As mentioned, because of Wagner's ten percent commission, his interests conflicted with Childers' interests. In these circumstances, Wagner had the heavy burden of showing that Childers consented to Wagner representing him after Wagner made a full disclosure. See DR 5-104(A). Under DR 5-104(A), a lawyer's duty to make full disclosure means more than making the client aware of the nature and the terms of the transaction. It also requires the attorney to give the client the kind of advice the client would have received if the transaction were with a stranger. Committee on Prof'l Ethics & Conduct v. Carty, 515 N.W.2d 32, 35 (Iowa 1994) (citations omitted). According to one writer, [t]he most obvious reason for requiring [a lawyer to disclose to a client their differing interests in a business transaction] is to permit a client to assess whether to do business and to continue to be represented despite the lawyer's conflicting self-interest. A less obvious, but nonetheless important, function of disclosure is that its absence serves as a strongly negative measure of the good faith of the lawyer. A lawyer who keeps his or her differing interests in a transaction secret from a client demonstrates a lack of candor that rightfully casts a pall of suspicion over the entire transaction. Wolfram § 8.11.4, at 484; see also Peaslee v. Pedco, Inc., 388 A.2d 103, 107 (Me.1978) (holding that clients were entitled to know that the lawyer had a personal stake in the transaction in deciding whether to consent to retaining him or his associate as their attorney). A failure to inform the client that the lawyer has a percentage interest in a transaction is a failure to make a full disclosure within the meaning of DR 5-104(A). See, e.g., In re Pike, 408 Mass. 740, 744-46, 563 N.E.2d 219, 222-23 (1990) (failing to disclose lawyer's 12.5% broker's commission in landlord-tenant transaction). Additionally, in these circumstances, [l]awyers have a duty to explain carefully, clearly and cogently why independent legal advice is required. When a lawyer has a personal economic stake in a business deal, [the lawyer] must see to it that [the] client understands that [the lawyer's] objectivity and [the lawyer's] ability to give [the] client [the lawyer's] undivided loyalty may be affected. In re Wolk, 82 N.J. 326, 333, 413 A.2d 317, 321 (1980); see also Sikma, 533 N.W.2d at 537 (holding that lawyer has a duty to disclose his adverse interests and the effect they would have on the exercise of his professional judgment); Committee on Prof'l Ethics & Conduct v. Oehler, 350 N.W.2d 195, 199 (Iowa 1984) (holding that lawyer has a duty to fully disclose the lawyer's own rights and interests in a transaction). Nor will a passing suggestion that the client consult a second attorney discharge the lawyer's duty when [the lawyer] and [the] client have differing interests. In re Smyzer, 108 N.J. 47, 55, 527 A.2d 857, 862 (1987). In like circumstances, we have held that the lawyer must insist that the client secure independent counsel and explain why the client would benefit from independent counsel. See Carty, 515 N.W.2d at 36. There is no record evidence that Wagner ever disclosed to Childers his commission arrangement with Oehl. In fact, Wagner readily concedes he made no such disclosure. As mentioned, Wagner suggested to Childers that it might be in his best interest to have independent counsel, but never explained why. Despite this oral admonition, we think Wagner actually encouraged both parties to proceed without independent counsel. In his letter to Childers and Oehl following Childers' acceptance of the counteroffer, Wagner wrote: In regard to this transaction, it is my opinion that I can continue to provide representation to the Oehl family and to the Childers family as long as you are fully informed of such representation, and as long as there are no controversies. Like the commission, we conclude that Wagner failed to make a full disclosure of his financial interest in the transaction. Thus, any consent on the part of Childers to Wagner's representation was not an informed consent. Without such informed consent, Wagner's representation of Childers was in violation of DR 5-104(A). 2. Duty of full disclosure in dual representation situations. As mentioned, Wagner represented clients with differing interests. Thus, his duty to make full disclosure was again called into play. Absent such disclosures, Wagner could neither undertake representation of Childers, see DR 5-105(B) and (D), nor continue such representation once undertaken, see DR 5-105(C) and (D). In a dual representation situation, it is not enough for a lawyer simply to inform the client that the lawyer is representing both sides. Full disclosure under DR 5-105(D) requires the attorney not only to inform the prospective client of the attorney's relationship with the seller, but also to explain in detail the pitfalls that may arise in the course of the transaction which would make it desirable that the buyer obtain independent counsel. In re Dolan, 76 N.J. 1, 10, 384 A.2d 1076, 1080 (1978); see also In re Boivin, 271 Or. 419, 425, 533 P.2d 171, 174 (1975) (holding it is not sufficient that attorney advise both parties that attorney is representing both of them; rather, attorney must explain to them the nature of the conflict of interest in detail so that they can understand the reasons why it may be desirable for each to have independent counsel, with undivided loyalty to the interests of each). Such a disclosure is crucial in a large commercial transaction as the one here because as one court put it: A client cannot foresee and cannot be expected to foresee the great variety of potential areas of disagreement that may arise in a real estate transaction of this sort. The attorney is or should be familiar with at least the more common of these and they should be stated and laid before the client at some length and with considerable specificity. In re Lanza, 65 N.J. 347, 352, 322 A.2d 445, 448 (1974). A board opinion on multiple representation echoes these holdings: [A full disclosure] requires a detailed explanation to the client of all possible areas where the interest of one client may differ from that of the other. The burden is upon the lawyer to raise all possibilities. A simple recitation of the applicable law is inadequate. An explanation of the applicable law to every possible factual situation is essential. Iowa Supreme Ct. Bd. of Prof'l Ethics & Conduct Formal Opinion, No. 79-19. It is true that Wagner informed Childers and Oehl that he was representing both of them in the transaction and that if any controversies arose he would withdraw. In addition, Wagner told Childers about a possibility of a conflict. Wagner, however, did not advise Childers what possible conflicts might arise and why independent counsel was advisable. These disclosures to Childers were not adequate. See In re Shannon, 179 Ariz. 52, 62, 876 P.2d 548, 558 (1994) (holding that it was insufficient for attorney to merely inform client that there was a potential for conflict and if the conflict arose attorney would withdraw). Wagner did not shed his duty to point out the advantages of obtaining independent counsel even though he shied away from negotiating the purchase price. See Lanza, 65 N.J. at 352, 322 A.2d at 448 (holding that duty to disclose applies even though lawyer's representation of both parties did not include negotiating contract). All of what we have said about Wagner's duty to insist that Childers secure independent counsel applies with equal force here. As we said earlier, whatever admonition Wagner gave about securing independent counsel was inadequate. We adopt the following findings by the commission: [W]e find that Childers was harmed by not having had the opportunity for representation by truly independent counsel who could have been expected to personalize the lawyer-client relationship as the profession is normally practiced. Such representation would have been expected to have, inter alia, obtained greater knowledge of the potential purchaser's finances, discussed not only risk of loss but likelihood thereof for this type of business, and disclosed knowledge as to Oehl's preparation of low risk investment material and lack of any prior offers and minimum interest to that point in time by anyone else as [Wagner] was privileged to know. We conclude Wagner violated DR 5-105(B), (C), and (D). On this point, we note that Wagner now recognizes that he should not have attempted to undertake even a circumscribed and limited representation of both parties in the real estate transaction.