Conflicts Between a Lawyer’s Personal Interests and a Client’s Interests

This is the fifth of a series of articles, based on a chapter from the 2015 edition of Lawyers’ Professional Responsibility in Colorado by attorney Michael T. Mihm, discussing the current law of conflicts of interest as it applies to Colorado lawyers. It draws upon the Colorado Rules of Professional Conduct; the former Colorado Rules of Professional Conduct, effective through December 31, 2007 (former Colorado Rules or former Colo. RPC); Colorado appellate decisions; ethics opinions; the ABA Model Rules of Professional Conduct; the Restatement (Third) of the Law Governing Lawyers (Restatement); and other resources.

Conflicts With The Lawyer’s Interests — Generally

A lawyer must consider whether a client’s interests conflict with the lawyer’s personal or business interests. Again, the issues directly relate to the lawyer’s duty of loyalty to the client. When a lawyer’s own interests are implicated in the representation, the lawyer must take particular care not to use his or her knowledge of confidential client information to the client’s disadvantage. This type of conflict of interest implicates the lawyer’s duty of loyalty, the lawyer’s duty to maintain the client’s confidences and secrets, and the lawyer’s obligation to exercise professional independence.

If a lawyer’s personal or financial interests will materially limit the lawyer’s ability to represent the client, then Colo. RPC 1.7 prohibits the lawyer from undertaking or continuing the representation:

RULE 1.7. CONFLICTS OF INTEREST: CURRENT CLIENTS

1. Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
   1.  the representation of one client will be directly adverse to another client; or
   2.  there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

Colo. RPC 1.7(a) (emphasis added); see also ABA Model Rule 1.7(a). Rule 1.7 emphasizes that the analysis of any conflict of interest, including a conflict between a lawyer’s interest and the client’s interest, must be considered at the time the lawyer undertakes the representation, and must be analyzed in light of the potential risk to the client. If there is a “significant risk” that the lawyer’s interest in the matter will cause the lawyer to materially limit the representation of the client, then there is a conflict and the lawyer may not undertake the representation absent informed consent from the client.

The Restatement (Third) of the Law Governing Lawyers even more specifically articulates this principle:

§ 125. A Lawyer’s Personal Interest Affecting the Representation of a Client

Unless the affected client consents to the representation under the limitations and conditions provided in § 122 [pertaining to client consent to a conflict of interest], a lawyer may not represent a client if there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s financial or other interests.

Restatement § 125 (emphasis supplied).

There are numerous circumstances in which the lawyer and client may have conflicting interests. The conflict may be as innocuous as the lawyer owning stock in a large corporation that a client intends to sue or as suspect as the lawyer having an undisclosed interest in a business in which the client intends to invest. See, e.g., People v. Schmad, 793 P.2d 1162 (Colo. 1990) (lawyer failed to advise his client of possible conflict between her interests and his interests in how personal injury settlement was to be paid). The lawyer’s conflicting personal interest may be altruistic, such as involvement with a charity, or familial, or may arise from a lawyer’s strongly held religious or political beliefs. See, e.g., Restatement § 125, cmt. c.

Colo. RPC 1.7 must be read in conjunction with Colo. RPC 1.8(b), which discusses the lawyer’s use of information about a client “related to” the representation:

RULE 1.8. CONFLICT OF INTEREST: CURRENT CLIENTS: SPECIFIC RULES

(b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.

Note that Colo. RPC 1.8(b) does not limit its application to only client-lawyer privileged information or client secrets or confidences. Rather, Colo. RPC 1.8(b) is broadly written to encompass all information that the lawyer learns about the client relating to his or her representation of the client. See Colo. RPC 1.6, cmt. [3] (“The confidentiality rule, for example, applies not only to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source. A lawyer may not disclose such information except as authorized or required by the Rules of Professional Conduct or other law.”); see also former Colo. RPC 1.6, cmt. 6, “Confidentiality” (“The attorney-client privilege is more limited than the ethical obligation of a lawyer to guard confidential information of the client. This ethical precept, unlike the evidentiary privilege, exists without regard to the nature or source of information or the fact that others share the knowledge.”). Thus, a lawyer is prohibited from using information to the lawyer’s advantage and to the disadvantage of the client even if the information is public and is widely disseminated. An example provided in the Comment [5] to Rule 1.8 illustrates the point: “For example, if a lawyer learns that a client intends to purchase and develop several parcels of land, the lawyer may not use that information to purchase one of the parcels in competition with the client or to recommend that another make such a purchase.”

Colo. RPC 1.7(b) permits the lawyer to undertake the representation notwithstanding the conflict with the lawyer’s personal interest when (1) the lawyer reasonably believes that he or she can adequately represent the client, (2) the representation is not prohibited by law, and (3) the client consents after full disclosure.

Transactions With Clients — Generally

Neither the former code nor the current rules absolutely prohibit a lawyer from engaging in business dealings with a client. Indeed, it is often impractical for a lawyer not to transact business with a client. Colo. RPC 1.8, cmt. [1]. In Lindsay v. Marcus, 325 P.2d 267 (Colo. 1958), the Colorado Supreme Court held that “[b]usiness dealings between attorneys and their clients are generally subject to searching scrutiny, but when fair, are upheld as other contracts.” Id. at 272.

In Lindsay, three investors, Lindsay, Holland, and Marcus, entered into a commercial real estate investment as joint venturers to purchase ranch land for subdivision and development. Lindsay found and organized the real estate investment. Lindsay and Holland were neighbors and friends. Moreover, Holland occasionally acted as Lindsay’s attorney on various personal matters. Much of Holland’s legal services to Lindsay over the years had been informal and without charge. Lindsay agreed that while Holland was not to invest cash, part of Holland’s role was to find another investor for the transaction. Holland persuaded Marcus to invest in the venture. Lindsay and Marcus each agreed to invest $66,000, while Holland was not to invest any cash, but agreed to provide Lindsay and Marcus with his promissory note for $44,000 and to provide legal services to the partnership. The partners were each to have a one-third interest in the land, with Lindsay to take title to the property in his name and hold it in trust for Holland and Marcus.

Holland, the lawyer, drafted documents for the transaction, in that case, the joint venture agreement. Holland met with Lindsay and Marcus, they each had the opportunity to read the contract, and Holland then read the document aloud and the parties made changes to the document before signing. There were some difficulties negotiating subsurface mineral rights with the seller, but ultimately Lindsay closed the transaction in his own name, but then attempted to exclude Holland and Marcus from the transaction. Holland and Marcus sued for specific performance. Lindsay claimed that Holland was “his friend and attorney” and had urged him to sign the agreement, which he did “‘in reliance upon the assurances of plaintiff Holland and under a mistake as to the contents of said instrument.’” Lindsay alleged he only “‘glanced at the instrument’” and that “‘he did not read it through nor study the terms thereof.’ Lindsay, 325 P.2d at 269.
The supreme court would have none of it. The court observed:

It stretches the credulity of this court to the point of breaking to assert that after a prearranged conference, the reading of the joint venture agreement by each of the parties, the later reading of it out loud by Holland, and the making of agreed alterations to it, that anyone of three participants should assert that he did not understand it. There is no express evidence here that Lindsay had employed Holland as his attorney to represent him in this transaction or that he ever paid or agreed to pay him anything for his work in connection therewith. Defendant had the burden of showing that the relationship of attorney and client existed, this he failed to do. Moore v. Hoar (1938), 27 Cal.App.2d 269, 81 P. (2d) 226, 236. In the absence of fraud no person is excused from reading an agreement, nor can he say that he failed to understand it by showing that the other party was a lawyer who in the past had performed services as such for him. We cite with approval from Masters v. Elder (1950), 407 Ill. 512, 95 N.E.2d 360[, 364] where the court said:

‘The relation of attorney and client is a confidential one which creates a fiduciary relation between the parties with respect to the matter in which the attorney is acting for the client. However, the relation of attorney and client does not forbid the parties from dealing with each other, * * *. (Here) The relation of attorney and client had not been of a continuous nature previously, but consisted of occasional and isolated transaction(s) of the type narrated above, and not of a continuing character, such as an annual or other retainer. * * *’

To the same effect are many other authorities relating to fiduciaries, including: Isaacs v. Okin, 331 Ill.App. 268, 73 N.E.2d 11; Sanford v. Flint, 108 Minn. 399, 122 N.W. 315; Harrison v. Murphey, 39 Okl. 548, 135 Pac. 1137.

Id. at 272. The court went on to explain that “business dealings between attorneys and their clients are generally subject to searching scrutiny, but when fair, are upheld as other contracts.” Id.

The court has also held that contracts between lawyers and clients are not void but are voidable. O’Byrne v. Scofield, 212 P.2d 867, 870 (Colo. 1949).

Thus, while business dealings with clients are not per se improper, they are subject to extraordinary scrutiny and second-guessing, and a lawyer engages in business transactions with a client at his or her peril. Business investments with a client are an invitation for a malpractice lawsuit for reasons often unrelated to a lawyer’s actual conduct. If the investment fails, the lawyer is often the only party with assets (i.e., a professional liability insurance policy) and the lawyer is a tempting target regardless of whether at fault or not.

Business Transactions With Clients

Colo. RPC 1.8(a) provides specific guidance for lawyers who enter business transactions with clients. The key principles are that the lawyer must fully disclose the transaction to the client and that the transaction be fair and reasonable to the client:

1. 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 in a manner that can be reasonably understood by the client;
   2. the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
   3. the client gives informed consent, in a writing signed by the client, to the essential teams of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

Colo. RPC 1.8(a); see also ABA Model Rule 1.8(a).

Section 126 of the Restatement (Third) of the Law Governing Lawyers closely follows the principles of Colo. RPC 1.8:

§ 126. Business Transactions Between a Lawyer and a Client

A lawyer may not participate in a business or financial transaction with a client, except a standard commercial transaction in which the lawyer does not render legal service, unless:

1. the client has adequate information about the terms of the transaction and the risks presented by the lawyer’s involvement in it;
2. the terms and circumstances of the transaction are fair and reasonable to the client; and
3. the client consents to the lawyer’s role in the transaction under the limitations and conditions provided in § 122 after being encouraged, and given a reasonable opportunity, to seek independent legal advice concerning the transaction.

Business transactions between lawyers and clients are the subject of considerable civil litigation and numerous disciplinary actions. In most of the published decisions, the lawyer has in some way violated at least one of the principles of Colo. RPC 1.8 and Restatement § 126. For example, in People v. Nutt, 696 P.2d 242 (Colo. 1984), the Colorado Supreme Court suspended a lawyer after the lawyer assisted the clients to obtain financing for a construction project. The lawyer and his mother-in-law provided the funds for the loan without disclosing the source of the funds or disclosing that the lawyer received a $5,000 loan origination fee. The loan was secured by real property. The clients would not have been likely to obtain financing through conventional sources. The Colorado Supreme Court held that, as a lender and a holder of a long-term mortgage on the client’s property, the lawyer’s interests were necessarily adverse to his clients’ interests. The lawyer argued that since the clients could not have obtained financing elsewhere, they were not harmed by his undisclosed conflict and, in fact, received a benefit from the loan. The supreme court agreed that the terms of the loan were fair and that the clients had suffered no harm, but the court was unimpressed by the “no harm, no foul” argument. The court held that “assuming the client is not prejudiced by the lawyer’s violation of the Code, that fact is only one of mitigation.” Id. at 246 (quoting People v. Gibbons, 685 P.2d 168, 174 (Colo. 1984)).

In People v. Wright, 698 P.2d 1317 (Colo. 1985), the Colorado Supreme Court suspended a lawyer for, in part, investing a client’s trust funds in a mining venture that the lawyer represented and in which the lawyer was also heavily invested. The lawyer failed to disclose his personal investment in the venture to the clients. The mining venture failed, and the client’s trust funds were lost. The court found that the lawyer had “allowed his personal interests to affect the exercise of his professional judgment on behalf of his client in violation of DR 5-101(A).” Id. at 1320. Because of the conflict of interest and other ethical lapses, the lawyer received a two-year suspension. Id.; People v. Mason, 938 P.2d 133 (Colo. 1997) (lawyer suspended after he took an interest in a client’s mountain cabin that was the subject of litigation); People v. Bennett, 843 P.2d 1385 (Colo. 1993) (lawyer disbarred).

Lawyers’ business transactions with clients continue to be a fertile ground for legal malpractice claims and disciplinary actions. See, e.g., In re Quiat, 979 P.2d 1029 (Colo. 1999); see Mason, 938 P.2d 133 (lawyer suspended after he took an interest in a client’s mountain cabin that was the subject of litigation); People v. Bennett, 843 P.2d 1385 (Colo. 1993) (lawyer disbarred). While clients often invite lawyers to invest with them, lawyers should very carefully comply with the requirements of Colo. RPC 1.8(a) and Restatement § 126.

Loans From Clients

Lawyers who borrow money from clients are especially at risk for a malpractice lawsuit or discipline, particularly when the parties do not memorialize the loan with a promissory note or the terms of the promissory note are inadequate or unfavorable to the client. See, e.g., People v. Robinson, 853 P.2d 1145 (Colo. 1993) (lawyer was suspended after he borrowed money from client but failed to disclose the differing interests involved and failed to collateralize the loan); People v. Schindelar, 845 P.2d 1146 (Colo. 1993) (lawyer was disbarred after he borrowed funds from vulnerable client, failed to disclose inadequacy of security for the loans, failed to provide appropriate legal documents to ensure repayment, and failed to discuss conflicts of interest with client); see also, e.g., People v. Potter, 966 P.2d 1060 (Colo. 1998); People v. Barbieri, 61 P.3d 488 (Colo. PDJ 2000); People v. Attorney B, Case No. 00SA338 (Nov. 20, 2001); People v. Doering, 35 P.3d 719 (Colo. PDJ 2001); In re Cimino, 3 P.3d 398 (Colo. 2000).

Gifts From Clients

The Rules of Professional Conduct restrict lawyers from accepting gifts from clients, particularly if a lawyer drafts the instruments effecting the gift. Colo. RPC 1.8(c) prohibits such gifts, with very limited exceptions:

(c) A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client. For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the lawyer or the client maintains a close, familial relationship.

The Restatement (Third) of the Law Governing Lawyers echoes Colo. RPC 1.8(c)’s restrictions, but discusses the prohibition and exceptions in more detail:

§ 127. A Client Gift to a Lawyer

1. A lawyer may not prepare any instrument effecting any gift from a client to the lawyer, including a testamentary gift, unless the lawyer is a relative or other natural object of the client’s generosity and the gift is not significantly disproportionate to those given other donees similarly related to the donor.
2. A lawyer may not accept a gift from a client, including a testamentary gift, unless:
   1. the lawyer is a relative or other natural object of the client’s generosity;
   2. the value conferred by the client and the benefit to the lawyer are insubstantial in amount; or
   3. the client, before making the gift, has received independent advice or has been encouraged to, and given a reasonable opportunity, to seek such advice.

The rationale behind Colo. RPC 1.8(c) and Restatement § 127 is that “[a] client’s valuable gift to a lawyer invites suspicion that the lawyer overreached or used undue influence.” Restatement § 127, cmt. b. Comment b to Restatement § 127 notes, somewhat wryly, that “[i]t would be difficult to reach any other conclusion when a lawyer has solicited the gift.” Testamentary gifts are particularly concerning because clients are often old and feeble when the lawyer drafts the will; elderly clients may be particularly susceptible to even modest influence by the lawyer or others, and it is difficult to ascertain the client’s true intentions after the client has died. Id.; see also In re Polevoy, 980 P.2d 985, 987-88 (Colo. 1999) (“The conflict of interests, the incompetency of an attorney-beneficiary to testify because of a transaction with the deceased, the possible jeopardy of the will if its admission to probate is contested, the possible harm done to other beneficiaries and the undermining of the public trust and confidence in the integrity of the legal profession, are only some of the dangers which a lawyer must consider.”); State v. Horan, 123 N.W.2d 488, 490 (Wis. 1963) (citation omitted); see generally R.E. Barber, Annotation, “Drawing Will or Deed Under Which He Figures as Grantee, Legatee, or Devisee as Grounds of Disciplinary Action Against Attorney,” 98 A.L.R.2d 1234 (1964).
Note that Restatement § 127 expands on the principles of Colo. RPC 1.8(c) when a lawyer is related to the donor-client. Even when a lawyer is a natural object of the client’s affection, if the lawyer drafts the instrument, the gift may not be disproportionate to gifts to other relatives similarly related to the donor. Restatement § 127. The rationale behind this rule is that a disproportionate gift to the lawyer-relative invites suspicion of undue influence and overreaching; the lawyer then bears the burden of proving that he or she did not unduly influence the client. Restatement § 127, cmt. e.

The Colorado Supreme Court has stated that other than in exceptional circumstances, a lawyer should insist that another lawyer selected by the client prepare an instrument in which the client desires to beneficially name the lawyer. In re Polevoy, 980 P.2d at 987.The penalties for failing to insist that the client obtain another lawyer to draft the instrument can be quite severe. Id. (lawyer suspended for a year and a day where the lawyer prepared a will for a client and named herself a devisee); People v. Berge, 620 P.2d 23 (Colo. 1980).
A lawyer may generally accept a gift from a client if the gift has nominal or insubstantial value. Restatement § 127(2)(b); Colo. RPC 1.8, cmt. [6].

Sex With Clients

Sexual relationships with clients raise serious ethical, moral, and legal issues. A lawyer who engages in sexual relations with a client may open himself or herself to civil liability or a disciplinary action.

Colorado appellate courts have not addressed a lawyer’s civil liability for engaging in a sexual relationship with a client. They have, however, considered such conduct in a disciplinary context. See, e.g., People v. Boyer, 934 P.2d 1361 (Colo. 1997); People v. Good, 893 P.2d 101 (Colo. 1995); People v. Zeilinger, 814 P.2d 808 (Colo. 1991); People v. Gibbons, 685 P.2d 168 (Colo. 1984). The Colorado Supreme Court has held, in essence, that sex with a client is a per se violation of the Rules of Professional Conduct. People v. Riddle, 35 P.3d 146, 149-51 (Colo. PDJ 1999); see also Good, 893 P.2d at 104.

If there was before any doubt that the Colorado Supreme Court discourages sex with clients, that doubt has been removed by the Comments to the current Rules of Professional Conduct. Rule 1.8(j) now explicitly prohibits a lawyer from engaging in a sexual relationship with a client unless a consensual sexual relationship predated the representation. Colo. RPC 1.8(j); see also Colo. RPC 1.7, cmt. [12].

A lawyer is prohibited from representing a client with whom the lawyer has a sexual relationship, in most circumstances, because the lawyer’s representation of the client is materially limited by the lawyer’s own interests. Colo. RPC 1.7(a)(2). A sexual relationship may violate numerous professional rules, including Colo. RPC 1.7(a)(2) (lawyer shall not represent the client if representation may be materially limited by lawyer’s own interests); Colo. RPC 3.7(a) (lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness); and Colo. RPC 8.4(h) (a lawyer shall not engage in conduct that adversely reflects on the lawyer’s fitness to practice law). See, e.g., Riddle, 35 P.3d 146, People v. Easley, 956 P.2d 1267 (Colo. 1998); People v. Bauder, 941 P.2d 282 (Colo. 1997); People v. Barr, 929 P.2d 1325 (Colo. 1996).

In 1992, the ABA issued a formal opinion concluding that a sexual relationship between a lawyer and client could impair the lawyer’s ability to represent the client competently. ABA Comm’n On Professional Ethics and Grievances, Formal Opinion 364 (1992). The ABA further opined that a sexual relationship between lawyer and client is improper because the “inherently unequal” balance of power between a lawyer and client allows the lawyer to exploit and manipulate the client. While lawyers do not always have more power than the client and, indeed, the reverse may be true, a lawyer’s sexual involvement with a client does implicate a lawyer’s obligation of loyalty to the client and to have the client’s interests foremost in the lawyer’s mind. A lawyer, being human, cannot give the clear and objective advice to which a client is entitled if the lawyer is sleeping with the client.

Thus, a lawyer should avoid sexual entanglement with a person with whom the lawyer has a pre-existing client-lawyer relationship. The risks to the lawyer — and the client — can be quite serious. If the client is unhappy with the relationship or the representation, the lawyer is at risk for discipline or for a malpractice claim. Even if the relationship and the representation are successful, the client-lover’s former spouse or significant other may sue or grieve the lawyer. And, the fact that a lawyer has had a sexual relationship with the client will almost always significantly complicate any legal malpractice action.

§Other Transactions With Clients
Colo. RPC 1.8 also regulates transactions with clients involving a lawyer’s interest in the media or literary rights to a client’s story (Colo. RPC 1.8(d)), financial assistance to a client during litigation (Colo. RPC 1.8(e)), compensation from third parties for the representation (Colo. RPC 1.8(f)), aggregate settlements (Colo. RPC 1.8(g)), and prospective limitation of a lawyer’s liability to the client (Colo. RPC 1.8(h)). Each of these types of transactions implicates a lawyer’s duties of loyalty and confidentiality to the client, and a potential conflict between the lawyer’s interest and the client’s interest.

In a 2012 case involving Colo. RPC 1.8(e), the Colorado Supreme Court held that a lawyer handling a contingent fee matter for a client, but who did not feel competent to handle the appeal, was permitted to associate with appellate counsel and advance the client’s attorney fees to the appellate counsel without violating Rule 1.8. Mercantile Adjustment Bureau, LLC v. Flood, 278 P.3d 348 (Colo. 2012).