October 30, 2012
A lawyer proposing to represent a client in a dispute concerning a distribution of trust res may not ethically acquire a security interest in funds to be received from the trust to secure payment of attorney's fees when the trust account is the subject matter of the litigation.
References: MRPC 1.8(a), 1.8(j); RI-182; RI-354; Wipfler v Warren, 163 Mich 189; 128 NW 178 (1910); George v Sandor M Gelman, PC, 201 Mich App 474; 506 NW2d 583 (1993); Kysor Industrial Corp v DM Liquidating Co, 11 Mich App 438; 161 NW2d 452 (1968); Doxtader v Sivertsen, 183 Mich App 812; 455 NW2d 437 (1990).
A Michigan lawyer has asked whether he is permitted, under the Rules of Professional Conduct, to secure payment of his fees by entering into a written agreement with his client, obtaining a security interest (and filing of a UCC financing statement) from his client in funds to be distributed to the client as the beneficiary of a trust; the distribution of the trust res1 is at issue; and the lawyer is representing the client in connection with that dispute on an hourly rate basis. The lawyer states that his client will, following completion of the litigation, receive a distribution of funds from the trust res that is more than sufficient to pay the lawyer's fees.
Determining whether a lawyer may ethically acquire a lien on funds to be distributed to a client as beneficiary of a trust when the lawyer is representing the client seeking that distribution, is a two-part inquiry involving both the concept of acquiring a security interest and the notion of having a financial stake in the subject matter of the representation. Rule 1.8 considers conflicts of interest that may be created by prohibited transactions or certain transactions that involve a conflict of interest unless identified conditions are met.
Rule 1.8(j) provides in relevant part:
A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting2 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. [Emphasis added.]
If the transaction were permissible, compliance with Rule 1.8(a) would also be required. Rule 1.8(a) provides:
(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.
The facts submitted do not include a copy of the proposed written agreement. Even if the proposed written agreement had been attached, however, a determination would still need to be made as to whether the client has been given a reasonable opportunity to seek the independent advice of counsel in the transaction, as required by Rule 1.8(a)(2), and whether the client has consented in writing, as required by Rule 1.8(a)(3).
Because the lawyer and client have entered into an hourly rate arrangement, subsection (2) of Rule 1.8(j) is not relevant to the inquiry. What constitutes a "lien granted by law" as provided under MRPC 1.8(j)(1) has been addressed in numerous Michigan Court of Appeals decisions. An attorney lien can be one of two kinds (1) a general, retaining, or possessory lien, or (2) a special, particular, or charging lien. Wipfler v. Warren, 163 Mich 189, 194; 128 NW 178 (1910); Kysor Industrial Corp. v D.M. Liquidating Co., 11 Mich App 438, 444; 161 NW 2d 452 (1968).
A general or retaining lien gives a lawyer the right to retain possession of all documents, money or other property of the client until the fee for services is paid.3 George v Sandor M Gelman, PC 201 Mich App 474; 506 NW2d 583 (1993). A special or charging lien exists at common-law and creates a lien on a judgment, settlement, or other money recovered as a result of the attorney's services. Doxtader v Sivertsen, 183 Mich App 812, 815; 455 NW2d 437 (1990). A charging lien attaches to funds or a money judgment recovered as a result of an attorney's services.
The security interest the lawyer proposes to take is not a "lien granted by law" because the proposed lien arises from the client's agreement rather than by operation of law. Therefore, it is not permitted by MRPC 1.8(j).
In RI-182, the Committee concluded that it would be unethical for a lawyer to acquire construction liens on the subject matter of the litigation, whether or not title to the properties were ultimately obtained, noting that it has "placed a jealously guarded taboo on a lawyer acquiring a proprietary interest in the subject matter of the litigation . . . ." RI-182.4 And the Committee recently determined in RI-354 that a lawyer could not ethically secure payment of his fees and court costs by taking a lien against his client's marital home where the home was the subject matter of the litigation for which he was retained.
Under the rationale articulated in RI-182 and RI-354, because the funds held in trust are the subject matter of the litigation, the lawyer may not ethically seek to obtain any interest, including a lien to secure payment of his fees, in them. Accordingly, it would be unethical for the lawyer to obtain the lien he proposes.5
1 "Res" is the subject matter of a trust, i.e., the property held in trust. Black's Law Dictionary (7th ed), p. 1307.
2 The Committee notes that Rule 1.8(j) proscribes the lawyer's acquisition of a proprietary interest in a client's ongoing cause of action or subject matter. Lawyers seeking such a proprietary interest following completion of representation in order to, for example, collateralize payment of earned fees and expenses incurred would nonetheless have to satisfy the requisites of Rule 1.8(a).
3 The lawyer's right to retain possession pursuant to a general or retaining lien is constrained if the client needs the property in order to pursue legal rights or when refusal to turn over the file would prejudice the client's case. RI-203 (2003). The attorney may, however, charge the client a reasonable fee for the service of searching the files to provide the client access to information and for the reproduction or other methods of access to such information. R-19 (2000).
4 The proscription of Rule 1.8(j) is not of recent vintage. See CI-898, citing MCPR DR 5-101(A), DR 5-103(A), wherein it was determined that a lawyer may not acquire an interest in the client's property which is the subject matter of the litigation the lawyer has been employed to litigate.
5 The Committee notes that, if this inquiry were made under the ABA Model Rule, the result would be different because the Model Rule uses "authorized by law" rather than "granted by law." See ABA Model Rule 1.8(i).