Some professionals are regularly presented with the opportunity to engage in business ventures with their clients. Whether the professional is retained to review an investment opportunity for a client, provides advice regarding a client’s business, or invites a client to invest in a new venture, professionals may occasionally find themselves transitioning from the role of advisor, into that of a business partner. However, blurring the line between professional advisor and partner can easily lead to ethics violations and civil liability.
Consider this example. In In re Spencer, an attorney/ real estate broker met with a client regarding a potential bankruptcy filing. The client told the attorney that she anticipated receiving proceeds from the sale of real property. The attorney informed the client that she could take advantage of an exemption in the bankruptcy law if she used the proceeds to buy a new home within one year of the sale of the property. When the client stated that she could not secure a loan, the attorney explained that he was a real estate broker and could look for an owner-financed property for her.
The attorney located a new home, and advised the client to make an offer, with the understanding that the attorney would split the sales commission with the owner’s real estate agent. The sale closed, and the attorney received his half of the commission. The attorney then prepared the client’s bankruptcy petition. Shortly afterwards, the client received a letter from the city stating that the property was not in compliance with code. The client contacted a second lawyer who questioned the attorney’s handling of the real-estate purchase.
Based on her new lawyer’s advice, the client filed an adversary action against the attorney in bankruptcy court, alleging that he had breached his professional duty regarding the purchase of the home. The state bar followed suit with its own complaint against the attorney for violation of ethics rules barring business transactions with clients. On appeal, the Supreme Court concluded that the real estate transaction was a “business transaction” for purposes of Rule of Professional Conduct 1.8. The Court continued that a lawyer may enter into a business transaction with a client if the terms are fair, the client is advised to seek independent legal advice, and the client consents in writing. However, in the matter before the court, the attorney failed to obtain written consent from the client before arranging the real estate deal, thus breaching the code of professional conduct. As a consequence, the attorney’s license was suspended for 30 days.
This decision makes clear that transacting business with clients is a risky proposition. In addition to potential ethics violations, professionals become targets in civil suits where the transaction turns sour. Moreover, the professional that wears multiple hats faces potential insurance coverage issues. If professionals proceed in a business transaction with a client, they must take several steps to mitigate the risk. First, professionals should be sure to comply with local ethics rules, which at a minimum entail obtaining written consent of the professional’s role(s). Further, the professional should be sure to recommend that the client obtain independent advice. Finally, the professional should investigate the extent of her insurance coverage. Barring a special need, however, professionals may be better served by playing it safe and resisting the temptation to act as advisor and business partner.