Court Opinion

ID: 4963360
Source: CourtListenerOpinion
Date Created: 2021-09-24 15:26:52.620648+00
Date Added: 2024-06-11T08:15:57.350867
License: Public Domain

FARRELL, Associate Judge:
This appeal presents two questions. First, did the probate judge correctly find that appellant Michelle D. Smith had a conflict of interest when she simultaneously served as attorney to the personal representative of a decedent’s estate and contracted with the latter to sell real property of the estate using Smith’s services as sole owner of a real estate brokerage company? Second, having found a conflict of interest, did the judge have “equitable” authority to order the attorney to disgorge the realtor’s commission she — or her company — had earned from the sale and return it to the estate? We answer the first question “yes,” the second “no.” Although the judge had undeniable authority to consider any conflict of interest on Smith’s part (a) in reviewing the personal representative’s conduct in effecting the sale through her, and (b) in assessing the reasonableness of the attorney’s fee request made on Smith’s behalf, no statutory authority enabled the judge to reach past the personal representative, as it were, and order a third-party contractor, including an attorney, to disgorge funds based on a conflict of interest in performing duties owed solely to the personal representative.
I.
Solomon Brown died intestate leaving eleven heirs and one main estate asset, a townhouse on 15th Street, N.W. In 2008, one of his daughters, Auldrey Glover (Glover), was appointed unsupervised personal representative of the estate. Attorney Smith was retained by Glover to represent her in the estate administration. Smith was also a licensed real estate broker and sole owner of Smart Choice Real Estate, PLLC (Smart Choice).
Intending to sell the townhouse, Glover had received an October 2002 appraisal valuing the house at $258,000. In October 2008, Glover and Smith agreed in writing that Smart Choice would list and market the townhouse under an arrangement that would earn Smart Choice a (below-market) 3% commission in return for an exclusive listing, i. e., the property would not be entered in the Multiple Listing Service (MLS). Less than two months later, the townhouse was sold to a couple, the Chens, for $300,000, Smith thereby earning a $9,000 sales commission. As it happened, the Chens again listed the property for sale in March 2004 for $599,000, and sold it a few days later for $730,000.
*252Glover, as personal representative, had not received consent to the sale of the property from the other heirs before the townhouse was sold. In May 2004, she filed a Petition to Court for Approval of the Sale of the Real Property, at the same time filing her First and Final Account of the estate. That same month, she filed the Personal Representative’s Request for Compensation in the amount of $6,250 for herself and $9,692.72 for legal services performed by Smith. Thereafter, all but two heirs consented to the sale of the townhouse and did not object to the account or the request for compensation. In June 2004, however, a son and the estate of a daughter of the decedent filed objections in the Probate Division to the sale of the property, the accounting, and the request for compensation, alleging that the townhouse had been sold without their knowledge by Smith and for a price based on an appraisal more than one year old. The objections asked for a hearing, inter alia, “to find out why [Smith] did not disclose her connection to Smart Choice ... and why [Glover was seeking] to ratify a sales contract for a consideration far below the market and have the heirs ... pay her for this activity.” In reply, Smith made the listing agreement part of the record and asserted both that Smart Choice was “a separate legal entity from Michelle D. Smith’s legal practice” and that her “relationship with Smart Choice was disclosed to the personal representative and was indicated in the listing agreement.”
The probate judge held a status hearing in September 2004 and identified the issues for trial as whether “the personal representative acted [reasonably in selling the townhouse for $300,000] considering the market conditions,” and whether, “as to the sales commission, ... there was a conflict of interest” on Smith’s part by virtue of the sale having been conducted through her real estate company. At a trial in late 2004 and early 2005, lengthy testimony was presented regarding the market value of the townhouse during the relevant time period, the main issue being whether — as the objectors argued — Glover had been negligent or even reckless in letting the property be sold for well below its actual value. But Smith also acknowledged that the judge was being asked to decide “whether there was a conflict of interest^] with counsel for Ms. Glover being the owner of the company that did the real estate transactions.” Although Glover was available to testify, Smith did not call her or anyone else as a witness regarding the circumstances of her listing agreement with Glover.
In February 2006, the judge issued an order finding that Glover had breached her duty as personal representative by not marketing the property in a prudent manner, including her use of a year-old appraisal and forgoing use of the multiple listing service. He ordered Glover to repay $75,000 to the estate, “the difference between the price she obtained for the property and the reasonable market value” shown by the appraisal testimony, “that is[,] $75,000.” Glover took no appeal from that ruling.1
The judge further found that Smith’s “behavior and action” as attorney to the personal representative was marked by a conflict of interest between her roles as attorney and realtor.
Auldrey Glover used a broker ... [who] was her own lawyer.... The conflict of interest arises because if ... Glover had had an independent attorney she would have been told that the concession of commission to 3% [in the listing agreement] was of no benefit to the estate *253unless the property was to be marketed properly.
The judge thus concluded that an “equitable sanction should ... be imposed against Ms. Smith,” and ordered that “the commission of $9,000 to Ms. Smith’s company shall be disgorged from her business” and returned to the estate by way of an offset against — a “reduction in]” — the attorney’s fees that otherwise “would be due to Ms. Smith.” As an additional “sanction,” the judge ruled that “the estate shall not be charged for [Glover’s] fees and [those] of Ms. Smith regarding all time spent in this litigation.”
II.
We first consider whether the probate judge correctly found that Smith had a conflict of interest in simultaneously serving as attorney to the personal representative and contracting with her to sell the estate’s townhouse through Smart Choice.2 The judge was correct in this regard.
As relevant here, Rule 1.8(a) of the District of Columbia Rules of Professional Conduct (2007) prohibits a lawyer from “enter[ing] into a business transaction with 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 gives informed consent in writing thereto.
There is no question that Smith, the sole owner of Smart Choice, entered into a business transaction with Glover by agreeing to market the townhouse through a listing agreement that would earn her a 3% commission upon sale. We need not dwell separately on whether the terms of the agreement — a reduced commission in return for an exclusive listing — were “fair and reasonable to the client,” Rule 1.8(a)(1), because it is clear that Smith did not meet the other conditions of the rule.3 At trial, Smith offered no testimony that she had given Glover, the personal representative, “a reasonable opportunity to seek the advice of independent counsel in the transaction,” nor that Glover had “give[n] informed consent in writing thereto” beyond merely signing the fisting agreement. As the probate judge recognized, listing the house for sale through Smart Choice was at least potentially disadvantageous to the estate, especially since the fisting was an exclusive one that relinquished the potential benefits of an MLS fisting. Yet the record is devoid of evidence that Smith (a) had told Glover that *254she might want to consult independent counsel about whether to enter the listing transaction, or (b) had told her anything about the relative advantages and disadvantages of the listing to the estate, so that she could even gauge the utility of seeking independent counsel. In these circumstances, Glover’s written signature on the listing agreement cannot constitute the “informed consent in writing” required by Rule 1.8(a)(3), for “[t]he client’s signature on documents [evidencing the business transaction] cannot be considered ‘written consent’ under [the rule] where the client has not been informed of the implications ... of the transaction.” In re Taylor, 741 N.E.2d 1239, 1242 n. 4 (Ind.2001).
Smith asserts that the absence of evidence regarding what, if anything, she had told Glover about these matters should not be laid to her account. To the extent this is a claim that she was not on adequate notice of the need to defend her conduct, the record does not support it. The objecting heirs raised the issue in written opposition both to the petition to ratify the sale of the house and to Glover’s claim for attorney’s fees on Smith’s behalf, and at the status hearing the judge made clear that one trial issue would be whether a conflict of interest on Smith’s part tainted the sale by the personal representative. Smith herself acknowledged at the trial that an issue to be decided was whether she had a conflict of interest in “being the owner of the company that did the real estate transactions.” She cannot claim ignorance of her obligations as a lawyer under Rule 1.8(a), nor of the fact that the trial was being held, among other things, to afford her the opportunity to demonstrate that she had no conflict of interest.
Smith relatedly argues that the probate judge heard no “testimony from Ms. Glover or [cjounsel as to what [c]ounsel advised Ms. Glover” (Reply Br. for Smith at 3). As will be apparent, however, the burden was on Smith to demonstrate compliance with the ethical rule, and Smith offered no reason to the judge — lawyer-client confidentiality or any other — why she could not have shown the substance of her advice to Glover about the listing agreement. As it turned out, testimony by Glover was barely relevant to the defense Smith offered to the conflict alleged: in summation she argued that, because in the sale of the property to the Chens she had been broker or listing agent only for the seller, “her ... duty of loyalty [remained always] to” Glover and the estate (“I have the same duty towards her and the estate”), and so “there [was] no conflict of interest.” But this ignored the listing agreement, which left the marketing of the townhouse solely to the efforts of Smith and her company with possible disadvantage to the estate, a matter on which Glover was entitled to a reasonable opportunity to seek independent advice.
Rule 1.8(a) states a prohibition (“[a] lawyer shall not”) with an exception (“unless”), and thus by clear implication imposes on the attorney the burden to show that a business transaction he or she entered into with a client entailed no conflict of interest. Interpreting a similarly worded provision, the Supreme Court of Washington has said:
The burden of proving compliance with [Rule] 1.8 rests with the lawyer; an attorney-client transaction is prima facie fraudulent. A lawyer must prove strict compliance with the safeguards of [Rule] 1.8(a)[, ... and t]he opportunity to seek independent advice must be real and meaningful.
Valley/50th Avenue, L.L.C. v. Stewart, 159 Wash.2d 736, 153 P.3d 186, 190 (2007) (citations and internal quotation marks omitted). The Restatement (Third) of the Law Governing Lawyers, § 126 (2000), set*255ting forth a similar bar to business transactions between a lawyer and client unless conditions corresponding to those in Rule 1.8(a) are satisfied, likewise states, in Comment a, that “[i]n any civil proceeding between a lawyer and a client or their successors, the lawyer has the burden of persuading the tribunal that requirements stated in this Section have been satisfied.” 4 Construing its own parallel ethical rule, the California Supreme Court too has recognized that “[w]hen an attorney-client transaction is involved, the attorney bears the burden of showing that the dealings between the parties were fair and reasonable and were fully known and understood by the client.” Hunniecutt v. State Bar, 44 Cal.3d 862, 243 Cal.Rptr. 699, 748 P.2d 1161, 1167 (1988). Finally, the predecessor to Rule 1.8(a), DR 5-104(A), carried with it this Comment in the American Bar Foundation’s Annotated Code of Professional Responsibility (1979), at 205 (emphasis added):
DR 5-104(A) is essentially a restatement of the common law rule that creates a presumption of invalidity concerning business transactions between attorney and client. This presumption is based upon the attorney’s fiduciary status, which dictates that the attorney maintain the highest degree of fairness and good faith and obligates the attorney to come forward with convincing evidence that full disclosure was made to the client about the nature of the transaction and its effects on the client’s interests.
Our dissenting colleague does not dispute this placement of the burden of proof generally, but thinks that it should not apply here when it is not the client (Glover) who is alleging an ethical violation but a third party, ie., heirs to the estate. Smith goes even further and asserts, without citing authority, that “the only party able to invoke Rule 1.8 against ... Smith is ... Glover because she is the [c]lient” (Reply Br. for App. at 4). Neither point persuades us. The objecting heirs were not just any “third party.” They were persons whose interests Glover was charged with protecting, and when in their view she failed to do so — in part by ignoring a conflict of interest on her attorney’s part adversely affecting the sale of the townhouse — they stepped into her shoes, as it were, and asserted the conflict as reason to invalidate the sale. And, too, they raised the conflict in opposing Smith’s request, sponsored by Glover, to be compensated by the estate for sale-related services they believed were tainted by Smith’s divided interests. We do not see why, in such circumstances, the heirs should have been required to shoulder a burden of proof Glover would have been spared had she herself recognized the conflict and questioned Smith’s actions — all the more so since Smith, not the heirs, was best equipped to show the circumstances surrounding the transaction with Glover.
In sum, then, a business transaction between an attorney and client generally is so fraught with the potential for a conflict of interest5 that, once the transaction has been shown, the burden falls to *256the attorney to justify it in the multi-conditioned way Rule 1.8(a) prescribes. Whether the listing agreement between Smith and the personal representative was presumptively “fraudulent,” Valley/50tk Avenue, swpra, or merely such as to require her to prove compliance with each condition of Rule 1.8(a), the probate judge correctly found that she had not met that burden and that the sale of the townhouse through Smart Choice was tainted by a conflict of interest. Cf also D.C. Bar Op. No. 226 (1992) (lawyer acting as attorney and real estate broker “with respect to a single transaction” should comply “with applicable ... Rules of Professional Conduct [including Rule 1.8(a)] regardless of which ‘hat’ he is wearing in particular aspects of that transaction”).
III.
The probate judge erred, however, in the remedy he exacted from Smith (and/or Smart Choice) for the conflict of interest. As explained, the objecting heirs cited the conflict in their twofold request that the judge (a) invalidate the sale of the townhouse (at a below-market price) as a breach of fiduciary duty by the personal representative, and (b) reduce the attorney’s fees claimed by Smith as counsel to Glover. The judge did not invalidate the sale; rather, as pointed out, he ordered Glover to repay to the estate $75,000, the difference he found between the sale price and a price that would have reflected “reasonable market value.” The correctness of that ruling is not before us. Nor did the judge reject or reduce the attorney’s fees requested on Smith’s behalf, except by the (modest) portion of the fees representing her “time spent in this litigation.” The judge, in other words, did not reach the question of the “reasonableness” of the requested fees under D.C.Code § 20-753 (2001). Instead, the judge dealt with Smith’s conflict of interest by what he termed the “equitable sanction” of making her “disgorge” the $9,000 commission paid to Smart Choice for its services; that money was to be repaid to the estate through an offset to the attorney’s fees otherwise due Smith — thus making assessment of the reasonableness of the fees unnecessary.
We find no statutory authority for the judge to order the remedy he did. Undeniably the judge had authority to decide the heirs’ claims of breach of fiduciary duty by the personal representative, see D.C.Code § 20-743, for having let the estate’s main asset be sold through a listing agreement tainted by a conflict of interest. But Smith, as attorney to the personal representative — ie., “an employee of the personal representative,” Poe v. Noble, 525 A.2d 190, 193 (D.C.1987)—owed no fiduciary duty to the estate, and the fact merely that (in the judge’s words) her conflicting interests “harmed [the estate]” did not permit the judge to order her, or Smart Choice, to disgorge a real estate commission in what amounted to damages payable to the estate. The situation is no different, we think, than if Glover had hired a home improvement contractor to renovate the townhouse and the contractor had breached the agreement or performed negligently; no one would fairly argue that the probate court, exercising its authority over the personal representative, could order the contractor to pay damages or make restitution to the estate for its negligence. Indeed, as a matter of personal jurisdiction, the third-party contractor might not even be before the court. Enforcement of the contract, instead, would rest there — and rests here — with the personal representative, who in turn is accountable to the court for any failure in his stewardship of the estate. But reaching past the personal representative and ordering restitution directly by a contractor, including an attorney, as the judge did *257here, is not within the otherwise broad statutory authority possessed by the probate court.
Our decision in Hopkins v. Akins, 637 A.2d 424 (D.C.1998), supports that conclusion. There the spouse of an intestate decedent sued the lawyer for the personal representative for breach of contract and legal malpractice, alleging that the lawyer had allowed another heir to divert estate assets and thereby breached a duty owed not just to the personal representative but to the estate beneficiaries. The trial judge agreed that the lawyer’s duty of care extended to the heirs, and after a bench trial entered judgment against the lawyer in the amount of the spouse’s lost share of the estate. This court reversed, joining “the broad majority of the courts” that had barred suits by a beneficiary against an attorney of the personal representative for negligence. Id. at 428. The reason was essentially one of privity and the bedrock rule “ ‘that the obligation of the attorney is to his chent, and not to a third party,’ ” id., quoting Needham v. Hamilton, 459 A.2d 1060, 1061 (D.C.1983):
"When an attorney is employed to render services in ... settling the estate, he acts as attorney of the executor, and not the estate, and for his sendees the executor is personally responsible.
Id., quoting Ronald E. Mallen & JeffRey M. Smith, Legal MalpRactice, § 26.4, at 600 (3d ed. 1989) (citation omitted); see also id., quoting Goldberg v. Frye, 217 Cal.App.3d 1258, 266 Cal.Rptr. 483, 489-90 (1990) (“The beneficiaries are entitled to even-handed and fair administration by the fiduciary. They are not owed a duty directly by the fiduciary’s attorney.”).6
In this ease, of course, the objecting heirs did not sue Smith — indeed, they sought no relief against her directly, though challenging the attorney’s fees requested on her behalf by the personal representative. The judge nevertheless awarded what in effect were damages to the estate for breach of a duty that, under Hopkins, Smith did not owe the beneficiaries. If her sale of the townhouse in contravention of Rule 1.8(a) resulted in harm to the estate, the remedy for that was an action by Glover against Smith or her company, or, failing that, an action by the heirs against Glover for maladministration of the estate. But neither “equity” nor any similar authority cited by us — or that we can find — allowed the judge to bypass the personal representative and enforce a duty of unconflicted representation that Smith owed to her and not the beneficiaries.
Accordingly, the case must be remanded to the probate judge with directions to vacate the order of disgorgement. At the same time, Smith’s conflict of interest remains a relevant consideration for the judge in connection with the attorney’s fee request made by the personal representative — a request the judge largely put aside by using the fee-request as a setoff against the commission he had ordered disgorged. To the extent the judge finds that particular services billed by Smith were affected by her conflict of interest, the judge may take that into account in assessing the reasonableness of the fees requested. See D.C.Code § 20-753.

Reversed and remanded, for further proceedings consistent with this opinion.

*258Concurring opinion by Associate Judge REID.
Dissenting opinion by Associate Judge THOMPSON.

. We were informed at oral argument that she is since deceased.

. The heirs challenge Smith’s standing to bring an appeal from sanctions levied chiefly against her client, Glover. But Smith challenges only the order directing her — through Smart Choice — to disgorge the commission from the sale of the townhouse, and it is well settled that "[cjounsel have standing to appeal from orders issued directly against them.” Uselton v. Commercial Lovelace Motor Freight, Inc., 9 F.3d 849, 854 (10th Cir.1993); see also, e.g., Employers Mut. Cas. Co. v. Keene Corp., 629 A.2d 581, 582 (D.C.1993) (proper appeal by attorney from Rule 11 sanctions awarded against both defendant and its attorney).

. Nevertheless, the interrelatedness of at least the first two conditions of Rule 1.8(a) is suggested by the Comment [4] to the Rule, stating that ”[t]he fact that the client was independently represented in the transaction is relevant in determining whether the agreement was fair and reasonable to the client.” (The Comments to the ethical rules "are intended as guides to interpretation,” see paragraph [6] to the prefatory section entitled "Scope.”)

. Even in a disciplinary case, the Restatement observes, “once proof has been introduced that the lawyer entered into a business transaction with a client, the burden of persuasion is on the lawyer to show that the transaction was fair and reasonable and that the client was adequately informed.” Restatement § 126, cmt. a.

. See State Bar v. Dolenz, 3 S.W.3d 260, 265 (Tex.App.1999) (“Business relationships between lawyers and clients are beset with conflicts of interest and will often involve situations in which the lawyer occupies a dangerously superior bargaining position.”).

. The court left open whether intentional wrongdoing by the attorney could rise to liability directly to the estate. See Hopkins, 637 A.2d at 430. In the present case, no claim is made that Smith engaged in intentional wrongdoing of any sort; her conflict of interest at most amounted to per se negligence in performing the duties she owed to the personal representative.