Can a lawyer take a security interest in a client's real property to secure payment of the lawyer's fees?

Plain-English summary

The Committee considered whether an attorney may take a security interest in a client's real property to secure payment of the attorney's fees. The opinion was issued under Nevada's then-current Supreme Court Rules and relied on SCR 158(1), the predecessor to current NRPC 1.8(a), which governs business transactions with a client and the acquisition of interests adverse to a client. The opinion did not address accepting something other than money as a legal fee.

The Committee concluded that accepting a security interest in a client's property to secure a fee is the acquisition of an interest adverse to the client and is therefore governed by SCR 158(1). That rule allows such a transaction only if the transaction and its terms are fair and reasonable to the client and fully disclosed in writing in a manner the client can understand, the client is given a reasonable opportunity to obtain the advice of independent counsel, and the client consents in writing. The rationale, the opinion explains, is the temptation for a lawyer to temper loyalty where the lawyer's own financial interests are involved.

The opinion surveys supporting authority. In Hawk v. State Bar of California, the California Supreme Court held that taking a note secured by a deed of trust on the client's property is an interest adverse to the client, reasoning that non-judicial foreclosure lets the lawyer summarily extinguish the client's interest without an opportunity to dispute the fee. In Petit-Clair v. Nelson, a New Jersey court voided a mortgage on the clients' residence because the attorney failed to advise the clients to seek independent counsel, holding the safeguards apply even where foreclosure would be judicial. Nevada's own In re Discipline of Singer scrutinizes all transactions between attorney and client, applies a strong presumption of impropriety to any transaction in which an attorney obtains a business advantage from a client, and requires the lawyer to overcome it with clear and satisfactory evidence that the transaction was fundamentally fair, free of professional overreaching, and fully disclosed; technical compliance alone does not shield the lawyer.

Based on Singer, the Committee concluded an attorney may accept a security interest in a client's real property only after complying with SCR 158(1), but that because of the strong presumption of impropriety and the lawyer's heavy burden of proof, such transactions are not advisable. The opinion adds that subsequent events could create a material-limitation conflict under SCR 157(2), and that if the real property is the subject matter of the litigation, SCR 158(10) further limits the lawyer's ability to enter the transaction.

In practice

The opinion holds that, under the Nevada rules as they stood at the time, a lawyer who wants to secure fees with an interest in a client's real property must meet the SCR 158(1) safeguards (fair terms, written disclosure, opportunity for independent counsel, written consent), and even then faces a presumption of impropriety and the burden of proving fairness by clear and satisfactory evidence, so the Committee characterized the practice as not advisable. Because this opinion predates the current numbering, SCR 158(1), 157(2), and 158(10) now correspond to NRPC 1.8(a), 1.7, and 1.8(i); verify the current rule text before relying on it.

Common questions

Q: Can a lawyer put a lien on a client's house to make sure the fees get paid?

A: Per the opinion, only by satisfying the SCR 158(1) (now NRPC 1.8(a)) safeguards: a fair and reasonable transaction, full written disclosure, a reasonable opportunity to consult independent counsel, and the client's written consent.

Q: Who has to prove the arrangement was proper if it is challenged?

A: The opinion explains the transaction is presumed improper and the burden is on the lawyer to prove, by clear and satisfactory evidence, that it was fundamentally fair, free of overreaching, and fully disclosed; technical compliance alone is not enough.

Q: Is it a good idea even if the lawyer follows the rule?

A: The Committee concluded such transactions are not advisable, given the strong presumption of impropriety and the lawyer's heavy burden, and noted added limits where the property is the subject of the litigation.

Background and rules framework

The opinion interprets the business-transaction rule then codified at SCR 158(1) (now NRPC 1.8(a)), which governs a lawyer's acquisition of an ownership, possessory, security, or other pecuniary interest adverse to a client, together with the material-limitation conflict standard of SCR 157(2) (now NRPC 1.7) and the special limit of SCR 158(10) for property that is the subject of litigation. It applies Nevada's In re Discipline of Singer and out-of-state authority.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8 / Nev. SCR 158(1) (now NRPC 1.8(a)) (business transactions; interests adverse to a client)
• Model Rule 1.7 / Nev. SCR 157(2) (now NRPC 1.7) (material-limitation conflict)

Cases:

• In re Discipline of Singer, 109 Nev. 1117, 865 P.2d 315 (1993), presumption of impropriety in attorney-client transactions
• Hawk v. State Bar of California, 754 P.2d 1096 (Cal. 1988), security interest in client property as adverse interest
• Petit-Clair v. Nelson, 782 A.2d 960 (N.J. Super. Ct. App. Div. 2001), mortgage voided for lack of independent-counsel advice
• In re Snyder, 35 S.W.3d 380 (Mo. 2000), discipline for unsafeguarded security interest

Other opinions cited:

• D.C. Bar Formal Op. 300 (2000); LACBA Formal Op. 492 (1998); Conn. Bar Informal Op. 97-4 (1997)

See also

• ABA Formal Op. 00-418: acquiring an ownership interest in a client
• NV Ethics Op. 45: business transactions with a client and ancillary-business referrals

Source

• Landing page: https://nvbar.org/for-lawyers/ethics-discipline/ethics-opinions/
• Original PDF: https://nvbar.org/wp-content/uploads/opinion_37.pdf