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RE: Advisory
Opinion 2003-01
Professional
Ethics Committee
Arkansas
Bar Association
DATE: February
18, 2003
SUBJECT:
Compensation from Trust Company to Attorney for Trust
Services Provided to Client
Facts:
A trust company has
approached an attorney and proposed that they enter
into an "Independent Contractor Agreement".
Under the terms of the agreement, the attorney will
provide "sales referral services to assist the
trust company in selling its trust and investment
products and services." It is envisioned that
the attorney will refer his clients to the trust company
for trust services. Under the terms of the agreement
the attorney will be compensated by the trust company.
The amount of compensation will be based on the value
of the client's estate or the complexity and nature
of services to be rendered by the trust company to
the client or for the benefit of the client.
Analysis:
It is important to clarify
what issues and Rules of Professional Conduct are
not implicated in this proposal. First, the lawyer
is not sharing legal fees with a non-lawyer. Rule
5.4. Second, the lawyer is not providing law related
services through an entity controlled by the attorney.
See Model Rule 5.7, as discussed in our Advisory Opinion
98-01. Third, the lawyer is not giving a fee to a
person in return for referring a prospective client.
See Rule 7.2(c). Fourth, an attorney's fee is not
divided as a result of a referral of the client to
another lawyer. See Rule 1.5(e).
The rules
that are most applicable are Rule 1.7(b) and 1.8(a).
The attorney is proposing or suggesting that the client
enter into a business transaction, not with the client
as clearly contemplated and governed by Rule 1.8(a),
but with a third party. However, as a reward, the
third party will compensate the attorney. In effect,
the trust company will give a kickback to the attorney
in the compensation.
Arkansas
Rule 1.7(b) prohibits conflicts between the interests
of the client and the personal interests of the attorney.
The interests of the client are paramount to the interests
of the attorney. Notably, the 6th Comment to that
Rule states: "A lawyer may not allow related
business interests to affect representation, for example,
by referring clients to an enterprise in which the
lawyer has an undisclosed interest."
Rule 1.8(a)
governs business relations between attorneys and clients:
"(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 matter 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."
Comment
1 provides:
"As a general principle,
all transactions between client and lawyer should
be fair and reasonable to the client. In such transactions
a review by independent counsel on behalf of the client
is often advisable. Furthermore, a lawyer may not
exploit information relating to the representation
to the client's disadvantage. For example, a lawyer
who has learned that the client is investing in specific
real estate may not, without the client's consent,
seek to acquire nearby property where doing so would
adversely affect the client's plan for investment.
Paragraph (a) does not, however, 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.
In such transactions, the lawyer has no advantage
in dealing with the client, and the restrictions in
paragraph (a) are unnecessary and impracticable."
The
Restatement of the Law Governing Lawyers (2000)
states that: "A lawyer may not participate in
a business or financial transaction with a client...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.
Section 126. As the comment states, the lawyer's legal
skill and training, when combined with the trust that
the client places and is encouraged to place in the
attorney, create the possibility of overreaching by
the attorney. Because of the general fiduciary requirement
of fair dealing with a client, the transaction must
be fair from the perspective of an objective observer.
A client has a special trust in, and is frequently
dependent upon, the independent judgment of the lawyer,
which is to be exercised in the client's best interest.
The possibility of referral of legal clients to a
business from which the lawyer will profit introduces
an extraneous and potentially conflicting motive,
which can threaten or interfere with the lawyer's
independence of judgment.
We note
that the recent addition to Rule 1.8(a) by the American
Bar Association requires the attorney to notify the
client in writing of the desirability of seeking independent
legal advice, and further require the client to give
"informed consent, confirmed in writing"
to the essential terms of the transaction and to the
lawyer's role. That rule, while not yet adopted in
Arkansas, does provide valuable guidance and protection
to the attorney. We would advise that written notice
and consent be followed in some appropriate way.
Your ethical
requirement, when suggesting to your client the desirability
of trust services, is to inform them that a variety
of businesses offer such plans and the client is free
to compare and select the most appropriate provider.
Further, you must inform the client that, although
you will not be providing legal services, you will
benefit financially. The client must understand that
you will not have an attorney-client relationship
with the client in regard to the trust service.
Such disclosure and consent is necessary to avoid
the "appearance of impropriety." The Supreme
Court has described the appearance of impropriety
concept as "a rock upon which are built the rules
guiding lawyers in their moral and ethical conduct",
and likewise it should guide this committee in interpreting
the rules of professional conduct. Burnette v.
Morgan, 303 Ark. 150, 156, 794 S.W. 2d 145, 148
(1990).
Conclusion:
At a minimum,
the client is to be informed that the trust services
are available from a variety of providers, that the
attorney will receive compensation from this particular
trust company, and that the client is under no obligation
to employ this particular trust company. It goes without
saying that the attorney must make a full disclosure
and must truthfully answer any inquiries, including
those concerning the relationship of the attorney
and the trust company.
NOTICE
"This
is an opinion only of the Arkansas Bar Association
which is a voluntary association of attorneys licensed
to practice in the State of Arkansas, and reliance
thereon is voluntary and relieves any Association
member from liability for the content hereof. This
opinion is intended to be the Association's best interpretation
of the Model Rules of Professional Conduct as promulgated
by the Supreme Court of Arkansas as that code applies
to the written facts presented to the Committee."
ARKANSAS
BAR ASSOCIATION
By: ______________________________________
Howard W. Brill
Reporter for Professional Ethics Committee
HWB/ji
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