November 19, 1993
A lawyer may not acquire construction liens on the subject matter of the litigation, whether or not title to the property is ultimately obtained.
References: MRPC 1.8(a) and (j); RI-40.
A lawyer is retained by a subcontractor to file construction liens on two semi-complete houses and respective lots. The owner of the properties was the general contractor, who at the time the liens were filed, was in the final stages of building the houses for sale. Foreclosure lawsuits were filed naming all lien claimants who had an interest in the two properti es. There are eight lien claimants on one property and nine lien claimants on the other. The validity of the liens on the two properties will not be contested, therefore, the only task remaining is to enter an order which allows the lien claimants to foreclose on their lien interests in the properties, appoint a receiver, and then allow the receiver to sell the house. At the final hearing the court has the discretion to award a reasonable lawyer's fee to each lien claimant for expense incurred while foreclosing on its construction lien. The sale proceeds will be distributed pro rata for the face value of the lien to the lien claimants, and if high enough, may include respective lawyer fees.
The Committee is asked (1) whether after complying with the provisions of MRPC 1.8(a), having all of the other liens, except for the client's, assigned to the lawyer at a purchase discount from the face value of the lien with hopes of being high bidder at the foreclosure sale, and obtaining title to the properties is ethical; and (2) whether, assuming a lawyer was high bidder at the sale for the properties held by the receiver appointed by the court the payment of monies by the lawyer to the receiver which would be distributed to the client, and may include a portion of the lawyer's fees would be violative of MRPC 1.8(e).
Business transactions between lawyers and clients are greatly disfavored. MRPC 1.8(a) prohibits lawyers from entering into a business transaction with a client except under limited circumstances. MRPC 1.8(a) states:
"(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to 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 that 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."
Assuming arguendo that the provisions of MRPC 1.8(a) are satisfied, this should not be the end of the analysis for a lawyer wondering if a business transaction with a client is ethical. MRPC 1.8(a) must be read in conjunction with the rest of the rule, and in particular MRPC 1.8(j), which states:
"(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:
"(1) acquire a lien granted by law to secure the lawyer's fee or expenses; and
"(2) contract with a client for a reasonable contingent fee in a civil case, as permitted by Rule 1.5 and MCR 8.121."
Without question, the inquirer seeks to acquire a proprietary interest in the subject matter of the litigation whether solely through the purchase of discounted construction liens or through the former and the ultimate purchase of the properties. In addition, the lawyer is not seeking to acquire a lien granted by law to secure the lawyer's fee or expenses or a contingency fee agreement.
In RI-40 the Committee was asked, inter alia, when a lawyer may obtain a mortgage on a client's property to secure payment of a lawyer's fee. The Committee stated:
"A lawyer may obtain a mortgage on a client's property provided the lawyer complies with MRPC 1.8(a) and the property which the mortgage secures is not the subject matter of litigation the lawyer is conducting for the client, MRPC 1.8(j)."
Clearly, the Committee has placed a jealously guarded taboo on a lawyer acquiring a proprietary interest in the subject matter of the litigation. Therefore, even though the provisions of MRPC 1.8(a) are satisfied, it is unethical for a lawyer to acquire construction liens on the subject matter of the litigation, whether or not title to the property is ultimately obtained.
In answering the inquirer's first question, the second is rendered moot; therefore, no answer is necessary.