NJ: Doing Business With Your Clients: DON'T!
Profit Sharing Trust for Marprowear Corporation v. Lampf, Lipkind, Prupis, Petigrow & Labue
267 N.J. Super. 174, 630 A.2d 1191 (1993)
NJ Underlying Investment Transaction
Student Contributor: Natalie Resto
Facts: A law firm asked a long term client if it would be interested in investing money in an insurance group. Without advice from independent legal counsel, the client invested $449,600 in the insurance group relying on the assurance of the firm's attonreys. The law firm, however, did not reveal either in writing or verbally the fact that attorneys of the law firm were directors of the insurance group or that the law firm also represented the insurance group. The insurance group eventually filed for bankruptcy.
Later, the law firm sued the client for unpaid legal fees. Client counterclaimed for legal malpractice claiming that it would not have made the investment if they had been provided the notices that were required under R.P.C. 1.8, and advised that the losses were foreseeable at the time of investment. The law firm argued that it did not proximately cause the damages sought.
Issue: Was the law firm’s negligence the proximate cause of the plaintiff’s damages?
Ruling: The court found that the law firm’s failure to inform Marprowear and the Trust of its relationship with the insurance group directly caused Manprowear and the Trust to invest. The court held that a reasonable jury could find, as the jury did, that the law firm’s failure to disclose its relationship was the legal and proximate cause of the injury.
Lesson: R.P.C 1.8(a) states that 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 in 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 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 of the client’s choice concerning the transaction; and
(3) the client gives 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.
Editor's Note: Here the Court was particularly upset that the law firm used the confidential information of the client's financial well being to target it as a potential investor.
If proximate cause is ultimately a question of fairness and policy, imposing liability on these facts is both fair and good policy. Lawyers who fail to inform clients of their own interests, fail to advise clients to seek other counsel, unabashedly sell their clients the notion that an investment with them or their colleagues is a good and safe one, and use their clients as sources of investment funds, must accept responsibility for the outcome. Lawyers may not burrow their way into their clients' confidences and then exploit those confidences for their own ends. This is the law in New Jersey.
Is it really wise to allow a lawyer to enter into any business transaction with his client? Even if the lawyer satisfies all the requirements of the disclosure and consent rules, wouldn’t he still have an unfair advantage over the client? The attorney has at least two things that give him such an advantage: the client’s trust and confidential information. No matter how much the client knows about the deal and consents to it, the dangers may outweigh the potential benefits.
I strongly agree with the Court's opinion in this case. Attorney's are privy to otherwise private information about their clients and they can use this information to their advantage, unfairly. Thus, in situations such as these the attorneys undoubtably proximately cause the plaintiff's damages. The nature of an attorney client relationship is such that it does not lend itself to a subsequent business relationship without casting serious doubt that the attorney did not take advantage. The law firm in this case engaged in particularly reprehensible behavior by not even disclosing their relationship to the insurance group. I certainly hope they were subject to further ethical scrutiny outside of this malpractice action.
I agree. To me, it mimics the idea of the unconscionable contract. Despite any informed consent, the bargaining power in inherently unequal because of the lawyer's position of power.
While I agree with what has been said, perhaps the court has gone to far. If you are a company with nearly half of a million dollars available to invest, an officer or director must realize that someone asking for that money might be problematic. It seems like greed got the best of corporation here. Many people in the U.S. make millions through consumer scams and fraud, just look at the banks and mortgage brokers.
I agree with all the previous posts above. Aside from all the scams that an attorney is capable of getting away with without the clients knowledge in a situation such as this, it just seems unethical for an attorney to be able to go into business with a client. The mere fact that an attorney has that much more knowledge about contracts and the law, and has the ability to protect himself and defend endlessly against anything he doesn't like, this seems like an unfair advantage.
While it is not advisable that an attorney and client involve themselves in a business deal outside of their attorney - client relationship, if the attorney follows the rules and requirements of disclosure they should not be liable to the client for the losses of the investment. Investors should be aware that when they invest their money they are taking a risk that sometimes the investment fails.
It is true that the attorney has an unfair advantage in this situation when he knows the client's assets, but when full disclosure is provided and the required rules are followed, the playing field is essentially leveled where the client turned investor is in the same position as any other investor would be. It is likely more common that many of the same situations provide clients with more valuable investment opportunities than others would have had the ability to invest in were it not for the relationship with their attorney.
I have to agree with the above. There is always a danger when an attorney performs a business transaction with a client that the attorney will use the information he/she has learned about the client to exploit the client for his/her own ends as happened in Lampf.
I would prefer that New Jersey go further than RPC 1.8a and make a business transaction with a client unrelated to the representation of that client a per se violation of the Rules of Professional Conduct.
While 1.8c provides significant protections to the Client, the client’s trust in his/her attorney may result in the client not seeking out independent counsel despite being told of the desirability of doing so. Additionally, the attorney involved may lack a good faith definition of "fair and reasonable to the client", so an attorney may attempt to exploit the client. A bright line rule here would eliminate close cases here and also help reduce the courts' docket, however insignificantly.
I agree with Evan. Although one would want to believe that lawyers and their clients can both enter into a business transaction on a level playing field, it does not seem to be possible. The lawyer not only has the advantage of power, but add to that the client's confidential information. The lawyer could use that information to his benefit when it comes to barganing and it is doubful that the client has anywhere near that amount of "inside" information about the lawyer. It simply is not a fair situation.
It would seem that age old wisdom and adage would guide the client and the attorney not to engage in business together. but what about heightened disclosure standards and transparency for transactions and business arrangements between attorneys and their clients? Don't the rules promulgated by the RPC divine a higher standard.
I couldn't agree with Mr. O'Donnell more. As he so aptly asserts, "Investors should be aware that when they invest their money they are taking a risk that sometimes the investment fails."