UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 96-26
Attorney has been approached by a client to enter a business venture involving the purchase and sale of "heir" property (i.e. property held by ascertained and unascertained persons.) Client has asked Attorney to form a limited liability company to purchase interests in "heir" properties, bring a partition action, and purchase the remaining 1interest for the limited liability company at a public auction. The client wants the attorney to be a principal with him in the limited liability company.
Questions:
Can an attorney enter into a business agreement with a client?
Summary:
An attorney may enter into a business transaction with a client if he or she satisfies the requirements of Rule 1.8 (a) (1) (2) and (3), and further considers the propriety of a transaction between the attorney and the client, which might impair the exercise of independent professional judgment on the part of the attorney. The attorney in business dealings with a client is not governed by the "arms length rule"1.
Opinion:
The attorney must be mindful that courts look upon business transactions between an attorney and a client with suspicion and disfavor. The business transaction between the attorney and client will be closely scrutinized by the courts which will not favor the attorney.
Rule 1.8 "Conflict of Interest; Prohibited Transactions" provides as follows: "(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 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."
Rule 1.8 provides safeguards to protect a client from the advantage that an attorney may gain out of the attorney-client relationship when the attorney enters into a business relationship with the client. The attorney must be mindful that all transactions or dealings between the attorney and the client are regarded with suspicion and disfavor, are discouraged by the policy of the law, and will be closely scrutinized by the courts which do not favor the attorney. This rule does not prohibit the attorney-client business transactions and is not applicable in situations where the attorney is acquiring services that the client ordinarily provides to the general public and in which the attorney has no advantage as a result of the attorney-client relationship. See Comments to Rule 1.8. 1The "arms length rule" that permits parties in an ordinary business or mercantile transaction to deal primarily for their individual benefit or interest is inapplicable in business dealings between an attorney and his client. The basis for the rule is the special relationship between an attorney and client. An attorney not only must exercise reasonable care and diligence in acting for his or her client, but he or she is bound to conduct themselves as a fiduciary occupying a position of highest trust and confidence, so that, in all the relations and dealings with their client, it is their duty to exercise the utmost honesty, good faith, fairness, integrity, and fidelity. "All transactions between an attorney and his client are closely scrutinized by the courts and the attorney's duty in these circumstances is a much higher duty than is required in ordinary business dealings where the parties trade at arms length." Arey v. Davis 233 GA 951 (1975).