Archie Attorney had fond childhood memories of helping his grandparents tend to the animals on their farm. He wanted his children to have those sorts of experiences – despite living in a city – and he fantasized about filling his urban backyard with pygmy goats, miniature horses and, especially, chickens.
He’d researched the municipal ordinances on keeping livestock and poultry and had already sketched out a plan for his backyard. In particular, he’d spent way too much time dreaming about how he’d use his treasured first car – a beat-up VW bug – as a chicken coop, with roosts positioned so it would look like the chickens were sitting in the seats.
Then he met with a potential client, Clara, an architect turned farmer who wanted to hire him to do her estate planning.
As they were chatting and getting to know each other, Clara’s eyes lit up when he told her about his backyard plans.
“I dabble in building custom chicken coops,” Clara said. She handed him her phone. “Here’s a photo of some of my chickens, followed by some of my favorite coops.”
Archie studied the chickens, then flicked through the next images. Coops that looked like the White House. A French chateau. A hobbit house right out of Lord of the Rings.
“Retrofitting your bug would be a snap,” Clara said. “I could help you make your urban farm dreams come true.”
“Oh wow,” Archie murmured as he swiped back to the first photo, imagining one of the chickens sitting in the driver’s seat. And how serendipitous, to come across someone who could provide him exactly what he wanted.
But as he handed Clara’s phone back to her, he wondered about the ethics of hiring her. He’d once bought a take-out pizza from a client’s pizzeria. He never mentioned that to the client, in part because the pizza tasted like cardboard, but also because even that brief transaction with his client’s business made him wonder if he’d done something inappropriate, either by patronizing his client’s business at all or by patronizing his client’s business but not telling the client.
As much as he wanted the chicken coop, it didn’t feel right to cut a deal with Clara.
“Let’s revisit my coop after I do your estate planning,” Archie said. “That’ll be simpler.”
“But still,” she said, “text me a photo of your vee-dub and I can start thinking about it.”
Archie began to say they should wait, but then shrugged and picked up his phone. After all, he wasn’t hiring her to do anything. Surely sharing a photo was OK to do, even if in the long run it could result in a business transaction?
Her phone dinged with his texted photo. She studied the image, then tucked her phone away.
“OK,” Archie said. “Back to our immediate business.” He slid a document across the table. “Here’s my fee agreement.”
Clara scanned it, nodding, then looked at him.
“You know,” she said, “my fee for retrofitting your VW as a coop and then filling it with chickens would be about the same as your fee for my legal work. Couldn’t we just trade? I mean, I barter vegetables for chicken feed all the time. Can’t you barter a will or whatever I need?”
Could Archie barter his legal services for chickens and the coop? And does it matter that Clara suggested the deal and thought it was a reasonable and fair exchange?
Theoretically, yes: lawyers may accept property as payment for the lawyer’s legal services. Ethical Rule (ER) 1.5, comment [4]. “Property” means something other than cash, check, or charge, and so could include anything from chickens to corporate stock. It also would include services, such the lawyer taking haircuts or handyman services from the client in exchange for legal work.
But taking something other than cash, check or charge as payment for legal services complicates the lawyer-client relationship. It turns the fee arrangement into a business transaction. The reason why is simple: “A lawyer’s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client….” ER 1.8, comment [1].
It doesn’t matter that Clara proposed the barter. Archie must comply with the business-transaction rule – ER 1.8(a) – if he wants to do it.
Don’t be misled by comment [4] to ER 1.5 – the rule that deals with fees – that says that a fee paid in property instead of money “may be subject to the requirements of ER 1.8(a) because such fees often have the essential qualities of a business transaction with the client.” [Emphasis added.] There’s no may be about it. While the ER 1.5 comment is equivocal, comment [1] to ER 1.8, which details with specific rules about conflicts of interests with current clients, makes clear that the requirements for doing business transactions with a client “must be met when the lawyer accepts an interest in the client’s business or other nonmonetary property as payment of all or part of a fee.” [Emphasis added.]
ER 1.8(a) provides:
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 terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
The first part of ER 1.8(a)(1) means that substantively, the transaction and terms must be fair and reasonable to the client.
Wait – what does “fair and reasonable” have to do with a contract? Can’t competent parties to a standard, arm’s-length transaction generally make whatever deal they want?
Yes, but a lawyer’s fee arrangement with a client is anything but an arm’s-length business contract. Our Supreme Court has pointedly said that “in fixing and collecting fees, the profession must remember that it is ‘a branch of the administration of justice and not a mere money getting trade.’” In re Swartz, 141 Ariz. 266, 273 (1984). Plus, a lawyer has a fiduciary relationship with his client.
If Archie takes property for legal services, he has to think about whether it’s a fair trade. Taking a pristine 1968 Mustang in exchange for a simple will, for example, would not be fair and reasonable to the client, even if the client offered it. Taking chickens, however, might be.
How is the fairness and reasonableness of a deal determined? By applying ER 1.5(a)’s eight factors for determining the reasonableness of a legal fee and assessing whether the deal is fair at the time of the engagement. District of Columbia Bar Op. 300; ABA Op. 00-418 (when taking stock as part of her legal fees, “[o]ne way for the lawyer to minimize the risk … is to establish a reasonable fee for her services based on the factors enumerated under Rule 1.5(a) and then accept stock that at the time of the transaction is worth the reasonable fee”). Whether the client has consulted with independent legal counsel also is relevant in determining whether the deal is fair and reasonable. ER 1.8, comment [4].
To comply with the balance of ER 1.8, Archie will need more than just his fee agreement. Assuming the transaction and terms are fair and reasonable to Clara, he’ll need a separate document in addition to his fee agreement that complies with the rest of ER 1.8(a)’s requirements. Specifically, that separate document will need to:
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Explain the transaction and terms in an understandable way. (Giving an unsophisticated client a document written in dense legalese doesn’t qualify.)
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Advise the client that it would be a good idea to consult with independent legal counsel. (Who would be independent counsel? If Archie practiced in a multi-lawyer firm, it wouldn’t be one of his co-workers.)
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Explain his role in the transaction, including whether he is representing the client in the transaction. (And, practically, he shouldn’t represent the client in the chickens-for-fees transaction.)
In addition to what’s contained in the separate document, Archie will need to give Clara a “reasonable opportunity” to consult with independent legal counsel. This means that Archie would not want to finalize the chickens-for-fees arrangement immediately but tell Clara to think about it and come back later, maybe even the next day, to sign. She doesn’t have to actually consult with independent legal counsel. She just needs to be given the explicit opportunity to do so.
Finally, Clara will need to give her informed consent and sign the separate document. ER 1.8(a)(3) is one of only three ERs that explicitly require that the client confirm something in writing and sign that confirmation. The other two are ER 1.8(g), which requires that lawyers who represent two or more clients get informed consent, confirmed in writing and signed by each client, to aggregate settlements and agreements, and ER 1.5(c), which requires that clients sign contingency-fee agreements.
As part of getting Clara’s informed consent, Archie should discuss with her both the material risks of the proposed transaction, including any risk presented by his involvement, and the existence of reasonably available alternatives, and also should explain why the advice of independent legal counsel is desirable. ER 1.8 comment [2].
Archie shouldn’t be cavalier about complying with ER 1.8(a). One of the fastest ways for a lawyer to get into licensing trouble is to do a business transaction with a current client, whether it’s taking chickens for fees or investing in the client’s multi-million-dollar business. Remember: it’s all about the fiduciary relationship between lawyer and client and the potential for overreaching.
Some barter-gone-bad cases are headline-grabbing, such as the Illinois lawyer who was suspended for, among other misconduct, arranging for his female client to perform nude dances for him in his office in return for credit on her legal fees.
But most are pretty pedestrian. For example, in In re Redondo, 176 Ariz. 334 (1993), the lawyer’s domestic-relations client needed cash and asked the lawyer to buy her wedding rings. The lawyer sent her to several pawn shops and jewelry stores but the client didn’t like the price they offered for the rings. She returned to the lawyer, who bought her rings for $500 (which, presumably, was more than the pawn shops and jewelry stores had offered the client).
Unfortunately for the lawyer, he didn’t comply with ER 1.8(a). He hadn’t told the client she should seek independent legal counsel (and because of that hadn’t given her the opportunity to do so), nor had he obtained her informed, written consent to the transaction. He also didn’t have an independent appraisal of the value of the rings, something about which the client subsequently complained. (The lawyer, who also had engaged in many other acts of misconduct, was suspended for two years.)
Arizona discipline cases that are more recent in which lawyers violated ER 1.8(a) by bartering include lawyers who:
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Accepted furniture from the client and in exchange wrote off $5,000 of her outstanding balance for legal fees;
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Did not pay a handyman’s $5,000 worth of service but then agreed to represent the handyman to work off the debt; and
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Took credits in a barter organization as an advance fee but only included in his fee agreement an acknowledgment of having received the credits.
So while taking chickens as payment for legal fees may sound cute, it’s anything but cute if it goes awry.
What about Archie’s anxiety over having bought a pizza from his client’s pizzeria? Nothing to worry about. ER 1.8(a) doesn’t apply to “standard commercial transactions between the lawyer and the client for products or services that the client generally markets to others, for example, banking or brokerage services, medical services, products manufactured or distributed by the client, and utilities services.” It would be silly for Archie to have to comply with ER 1.8(a) every time he patronized his client’s pizzeria. He didn’t even have to tell his client that he’d bought a pizza.
On the other hand, if the pizzeria client paid Archie in pizzas, then, just like chickens from Clara, it would be a business transaction and he would have to comply with ER 1.8(a).
Let’s assume Archie properly handles the barter arrangement with Clara. Could he decide he liked it so much he wants to participate in a barter organization and take other legal fees in property? Generally, yes, as long as participating didn’t mean he paid for client referrals, shared legal fees with non-lawyers, or violated other rules. See, e.g., North Carolina State Bar Op. 2010-4.
Finally, what if the client isn’t giving the lawyer chickens or pizzas but stock or other ownership interest in the client’s business as payment for doing work for the entity? ER 1.8(a) of course applies. But then in providing legal services to the client’s business, the lawyer also must “take care to avoid conflicts between the client’s interests and the lawyer’s personal economic interests as an owner … and must exercise independent professional judgment in advising the client concerning legal matters….” ABA Op. 00-418.