Committee Reports

Formal Opinion 1988-7

June 14, 1988

ACTION: Formal Opinion


The inquirer represents the principal of a public company under investigation by the Securities and Exchange Commission. He anticipates that the SEC will require his client to testify and that his client may be the subject of a criminal contempt proceeding for violating a prior injunction prohibiting him from participating in the securities business. The client’s only asset is his home and he has promised to pay the inquirer’s $30,000 retainer when the home is sold. The inquirer asks whether he may secure this promise with a mortgage and promissory note. We answer the inquiry in the affirmative, subject to the limitations set forth below.

The Code of Professional Responsibility addresses attorneys’ liens in DR 5-103(A)(1): “A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client, except that he may . . . [a]cquire a lien granted by law to secure his fee or expenses.” This means that the prohibition against acquiring a proprietary interest in the action or subject of the action does not, of itself, bar a lawyer from asserting a lien granted by law. See, e.g., N.Y. Judiciary Law § 475 (charging lien); N.Y. State 591 (1988) (retaining lien); N.Y. County 609 (1972) (retaining lien). The rule does not approve of any lien established by contract between an attorney and client, regarding property of whatever nature, irrespective of the application of other disciplinary rules. Here, the mortgage is created by contract, rather than by operation of law, and applies to the client’s home, which is wholly unrelated to the subject matter of the litigation. Thus, DR 5-103(A)(1) does not provide an answer to the inquirer’s question.

Yet the existence of a mortgage between a lawyer and client does raise concerns under Canon 5 of the Code, which requires a lawyer to “exercise independent professional judgment on behalf of a client.” Under DR 5-104(A), a lawyer may 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.”

The mortgagee plainly has interests different from those of the mortgagor. Furthermore, it would be unrealistic to conclude that a client would not expect his or her lawyer to exercise professional judgment for the client in drafting the mortgage agreement. Therefore the question is whether a mortgage securing an attorney’s fee is a “business transaction” within the meaning of DR 5-104(A).

A mortgage of this type does not contemplate a continuing business relationship between the attorney and client; if the fee is paid, the mortgage is extinguished. Thus the mortgage is closely related to the mere establishment of the lawyer’s fee, which is not normally regarded as a “business transaction” under DR 5-104(A). Cf. C. Wolfram, Modern Legal Ethics 481-82 (1986) (scrutiny applicable to business dealings “extends to fee contracts themselves if they have been entered into or modified after the representation begins”). In N.Y. State 550 (1983), it was concluded that “a lawyer may with ethical propriety receive security for payment of a fee, including a mortgage on real estate.” While the opinion imposed a number of conditions on such a transaction, the State Bar Committee did not find DR 5-104(A) applicable to the creation of the mortgage. Instead, it decided that DR 5-104(A) would be triggered upon the attorney’s participation in the voluntary sale of the mortgaged property by the client. See also ABA Inf. 593 (1962); N.Y. State 253 (1972).

In our view, however, a mortgage on a client’s home as security for the payment of a legal fee should be treated as a business transaction under DR 5-104(A). That provision was intended to protect the client against the attorney’s position of influence and the possibility that that position could be used to gain an advantage over the client in business dealings. See ABA/BNA Lawyers’ Manual on Professional Conduct 51:502. In addition, the rule protects the client where the attorney possesses superior knowledge and skill regarding certain business matters. See C. Wolfram, Modern Legal Ethics 482 (1986). These concerns are no less important where an attorney takes out a mortgage on a client’s house to secure a legal fee. A mortgage and related agreements may well contain highly technical language raising important legal obligations readily ascertained by the lawyer but imperceptible to the untrained eye. People whose situation requires the assistance of counsel may be particularly vulnerable. Thus, the mortgage transaction presents the attorney with a marked opportunity for overreaching, whether intentional or unintentional. Accordingly, it is entirely appropriate to apply the protections afforded the client in DR 5-104(A) to a mortgage transaction designed to secure attorneys’ fees.

Our conclusion that the rationale of DR 5-104(A) requires its application to an attorney who takes out a mortgage on a client’s property is reinforced by Rule 1.8(a) of the ABA Model Rules of Professional Conduct, which addresses the same concerns as those underlying DR 5-104(A) and which specifically applies to attorneys’ security interests in clients’ property. Model Rule 1.8(a) prohibits a lawyer from acquiring a security interest adverse to the 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 consents in writing thereto.

See also Hawk v. State Bar of California, 45 Cal. 3d 589 (1988); Note, An Attorney’s Acceptance of Assignment of Property as Security for Fee, 4 J. Leg. Prof. 263, 263 (1979) (“The lawyer who accepts an assignment of property as security has engaged in a business dealing with his client”); C. Wolfram, Modern Legal Ethics 562 (1986). *

* Even if a mortgage to secure attorney’s fees is analyzed as a fee contract rather than a business transaction obligations similar to those recognized here would arise. See Shaw v. Manufacturers Hanover Trust Co., 68 N.Y.2d 172 (1986).

The remaining question, then, is how an attorney wishing to obtain a mortgage to secure fees can comply with DR 5-104(A). The rule expressly requires the attorney to obtain the client’s consent after full disclosure. See, e.g., Matter of Fraser, 128 A.D.2d 190 (4th Dep’t 1987) (attorney violated DR 5-104(A) by entering into three loan transactions without disclosing his limited ability to repay the loans). To avoid misunderstandings or later disputes, the better practice is to make such disclosure in writing. Further, in some circumstances, informed consent may call for advice to the client, from an independent attorney. See N.Y. City 1988-5 at 5 n.4. Thus, especially where the client is not sophisticated or the mortgage is complex, an attorney should give the client the opportunity to obtain independent advice.

We also believe that a requirement of substantive fairness is imposed under the Code when an attorney takes a mortgage in a client’s property. The assumption of DR 5-104(A) is that the lawyer will exercise professional judgment “for the protection of the client.” A contractual lien unfair to the client cannot be the product of such professional judgment.

In N.Y. City 525 (1940), an attorney desired to purchase income producing property from a client. This Committee concluded that the purchase would not necessarily be unethical, but warned that such a transaction could “put the burden upon the purchasing attorneys to show affirmatively that no deception was practiced; that there was no overreaching, no undue influence used, that there was independent advice and that all was fair, open, voluntary, with full disclosure and well understood.” Courts have also recognized that fairness is necessary with respect to a contract between a lawyer and a client, and that doubts will be resolved against the attorney. See, e.g., Greene v. Greene, 56 N.Y.2d 86 (1982); Howard v. Murray, 43 N.Y.2d 417 (1977); Greenberg v. Bar Steel Construction Corp., 22 N.Y.2d 210, 213 (1968); N.Y. City 1986-6.

In conclusion, an attorney’s mortgage in a client’s property to secure legal fees does not violate the Code. Cf. N.Y. City 547 (1940) (attorneys for a mortgagee took assignment of one third interest in mortgage payments toward mortgagee’s legal fees). However, the attorney must obtain the client’s consent after full disclosure, preferably in writing and after giving the client an opportunity to obtain independent legal advice. Finally, the transaction must be fair to the client.