Opinion ID: 1748199
Heading Depth: 2
Heading Rank: 1

Heading: Violations of SCR 20:1.8(a), 20:1.8(b), and 20:8.4(c) Regarding the Client Loans

Text: ¶37 Attorney Phillips challenges the referee's findings of fact and conclusions of law with respect to the two loans. As admitted in his answer to the OLR complaint, Attorney Phillips acknowledges that he did not obtain R.M.'s signed consent to the loans, one of the requirements of SCR 20:1.8(a) for any transaction between a lawyer and a client. Nonetheless, he argues that the referee erroneously concluded that Attorney Phillips had violated the other two requirements of SCR 20:1.8(a). ¶38 First, Attorney Phillips asserts that the terms of the loan transactions were fair and reasonable to R.M. Indeed, he argues that there was really only one loan; that the initial $20,000 was always contemplated merely as an advance on a much larger loan that was ultimately completed with the $125,000 check. Although he did not state so explicitly, the referee's report treats the two transfers from R.M. to Attorney Phillips as two separate loans. Attorney Phillips asserts that this court is not bound by this finding because it is simply an inference drawn by the fact finder from documentary evidence. See State ex rel. Sieloff v. Golz, 80 Wis. 2d 225, 241, 258 N.W.2d 700 (1977). Attorney Phillips' argument ignores the fact that the referee reached his factual findings, including the implied finding that there were two separate loans, not only on the basis of the note, but also on the basis of Attorney Phillips' and R.M.'s testimony. R.M.'s testimony spoke of two distinct loans and provided a sufficient ground to support the referee's finding. ¶39 Moreover, the documentary evidence supports a conclusion that the two transfers of money from R.M. to Attorney Phillips should be treated as separate transactions. The February 1998 loan of $20,000 was evidenced only by R.M.'s check. There were no terms at all to that loan. Attorney Phillips did not pay any interest on the loan (or principal either) for more than a year. Attorney Phillips did not provide R.M. with any note, gave no collateral, and specified no date of repayment. ¶40 The second transfer was of a substantially greater amount of money, creating a different level of risk for R.M. As the referee found, R.M. did not immediately write out a check to Attorney Phillips when he requested this second, larger amount. It took a substantial amount of time (indisputably months) before R.M. agreed to turn over the second check. Even if, as Attorney Phillips claims, the parties had an understanding that R.M. would loan a second amount to Attorney Phillips, there was nothing definite in February 1998 that required him to do so. Writing out a second check (this one for $125,000) was a second volitional act by R.M. and should be considered as a separate transaction. ¶41 Moreover, whether the loan was ultimately treated as a single debt because the entire loaned amount ultimately was covered by the March 23, 1999, promissory note, does not make much legal difference as to the conclusion that Attorney Phillips violated SCR 20:1.8(a). SCR 20:1.8(a) states that a lawyer must take specified actions before entering into a business transaction with a client. Attorney Phillips tries to argue that the loan was actually one transaction that occurred in March 1999 when the second loan check was issued. It is undisputed, however, that R.M. initially lent money ($20,000) to Attorney Phillips in 1998. Even if treated as a single loan, that was the date that Attorney Phillips entered into a loan transaction with R.M. At least that date, regardless of the fact that the course of lending concluded more than a year later, would have to be the date for determining Attorney Phillips' compliance with SCR 20:1.8(a). ¶42 The referee correctly found, however, that there were two transactions and that neither transaction was fair and reasonable to R.M. Attorney Phillips challenges this characterization. With respect to the $20,000 loan, Attorney Phillips does not claim that this was fair and reasonable standing alone because he considers it an advance on the later loan. However, this was unquestionably a loan that stood on its own for more than a year. It was undocumented and provided no interest or security for R.M. As the OLR notes, common sense dictates that a loan without terms greatly prejudices the lender as enforceability is greatly hampered, if not diminished or even extinguished. Moreover, although Attorney Phillips argues that such terms are appropriate between friends, Attorney Phillips never offered any evidence that R.M. had expressly agreed that Attorney Phillips could have the $20,000 for over a year, interest-free, without collateral, and without any repayment. The most Attorney Phillips can allege is that R.M. never subsequently objected to his failure to pay any interest or principal for more than a year. ¶43 On its face, borrowing such a substantial amount of money without any provision for payment of interest or for a specified term of the loan is certainly not fair and reasonable to a lender. Attorney Phillips admitted as much during the disciplinary hearing when, in response to a question asking what advice he would give to a potential lender client facing such a loan request, he stated that it would be prudent to document the terms of the loan in writing. If a client, having been fully informed and with the opportunity to consult independent counsel, nonetheless expressly chose in writing to forego interest, one could argue that the client's express statement showed that the client considered the interest-free term to be fair and reasonable to the client. In the absence of any such written expression of R.M.'s intent here, the lack of any terms for the initial loan was not fair and reasonable to R.M. ¶44 Attorney Phillips also argues that the terms of the promissory note show that the loans were fair and reasonable to R.M. Attorney Phillips again claims that this court can substitute its own judgment because the referee's finding was based on documentary evidence. See State ex rel. Sieloff, 80 Wis. 2d at 241. Attorney Phillips argues that, on its face, a five-year note providing for 7 percent interest and requiring only the payment of interest is fair and reasonable. Although one can imagine situations in which a lender might agree to make such an interest-only loan, the lender would compensate for having its money tied up for such a lengthy period of time by charging a higher interest rate and obtaining collateral to protect the principal. Neither was done here. In addition, Attorney Phillips' reliance on just the face of the note is misplaced because the referee also considered and credited R.M.'s testimony that he did not understand at the time of the loan that the note provided for payment of interest only. This factual finding, based on the referee's firsthand view of the testimony, will not be overturned. ¶45 Attorney Phillips also argues that basic contract law requires a party to read a contract and to take reasonable steps to protect one's own interests. See State Farm Fire & Cas. Co. v. Home Ins. Co., 88 Wis. 2d 124, 129, 276 N.W.2d 349 (Ct. App. 1979). Attorney Phillips claims that the transaction cannot be deemed unfair because R.M. chose not to read the note, investigate Attorney Phillips' financial situation and ask for collateral. This is a primary theme of Attorney Phillips' argument that the transaction was fair because it was between long-standing friends. ¶46 Attorney Phillips' reliance on general contract law misses the intent of SCR 20:1.8(a). That rule is designed to make transactions between lawyer and client subject to higher standards than general contract law. It imposes these additional safeguards to protect clients precisely because they often rely on their attorney to look after their interests. Attorney Phillips' argument fails to grasp this difference. ¶47 Attorney Phillips' reliance on his friendship also underlies his argument that he sufficiently disclosed his financial situation to R.M. He asserts that R.M. knew he was in financial straits because it is undisputed that Attorney Phillips said he needed the money to pay back taxes. He claims that R.M. simply chose not to ask for any more financial information. Thus, he argues that whether R.M. was placed behind a long line of prior creditors in terms of priority of repayment is irrelevant. [10] ¶48 The referee found, however, that Attorney Phillips' financial situation was significantly more desperate than Attorney Phillips disclosed. The referee credited R.M.'s testimony that Attorney Phillips told him the second loan would make Attorney Phillips debt-free. This was an issue of fact and the referee's findings are supported by record evidence. ¶49 Attorney Phillips also challenges the referee's finding that he did not advise R.M. to seek independent counsel. Attorney Phillips relies on the April 11, 1998, and March 23, 1999, letters as proof that he did tell R.M. to have another attorney review the loans. He argues that the referee stated his factual finding in terms of the letters not being sent. Attorney Phillips therefore claims that the referee did not find that the letters were after-the-fact fabrications by Attorney Phillips. Because the letters purport to confirm Attorney Phillips' statements to R.M. that he should consult another attorney, Attorney Phillips claims that the referee should have concluded that Attorney Phillips gave R.M. a reasonable opportunity for independent counsel pursuant to SCR 20:1.8(a). He argues that even if the letters were not sent, they prove that Attorney Phillips did make the necessary oral statements to R.M. ¶50 We agree with the OLR's response that this was an area of disputed fact resolved by the referee against Attorney Phillips. The referee's findings are not clearly erroneous. R.M. testified that he knew nothing about the letters until he received them from the OLR during its investigation years later. In addition, Attorney Phillips never produced these letters during R.M.'s malpractice action against Attorney Phillips. Also, Attorney Phillips testified during the malpractice trial that he could not specifically remember telling R.M. to seek independent advice. Finally, even if the referee had found the letters had been sent, the first letter would have been sent 46 days after the original $20,000 loan had been made.