Can a lawyer take a mortgage on a client's home to secure payment of the legal fee, and what conditions apply?

Plain-English summary

A lawyer represented the principal of a public company under SEC investigation. The client's only asset was his home, and he promised to pay the lawyer's $30,000 retainer when the home was sold. The lawyer asked whether he could secure that promise with a mortgage and promissory note. The committee answered yes, subject to conditions.

The committee first explained that DR 5-103(A)(1), which bars acquiring a proprietary interest in the cause of action while permitting liens granted by law, did not resolve the question: the proposed mortgage was created by contract, not by operation of law, and covered the client's home, which was unrelated to the subject of the litigation. The committee then turned to DR 5-104(A), which bars a lawyer from entering a business transaction with a client where they have differing interests and the client expects the lawyer to exercise professional judgment, unless the client consents after full disclosure. A mortgagee's interests differ from the mortgagor's, and a client would expect the lawyer to exercise judgment in drafting the mortgage.

The committee parted from the New York State Bar's view in N.Y. State 550 (1983), which had treated the creation of a fee-securing mortgage as outside DR 5-104(A). The committee concluded that such a mortgage should be treated as a business transaction under DR 5-104(A), because the rule protects clients against an attorney's position of influence and superior knowledge, and a mortgage presents a marked opportunity for overreaching. The committee found its conclusion reinforced by ABA Model Rule 1.8(a), which specifically governs a lawyer's acquisition of a security interest adverse to a client.

To comply, the committee directed that the lawyer obtain the client's consent after full disclosure, that the disclosure be made in writing as the better practice, and that the client (especially an unsophisticated one, or where the mortgage is complex) be given the opportunity to obtain independent advice. The committee also read DR 5-104(A) to require that the transaction be substantively fair to the client, because a lien unfair to the client cannot be the product of professional judgment exercised for the client's protection.

Currency note

This opinion was issued in 1988, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. Business transactions with clients and security interests in client property are now governed by Rule 1.8(a), which requires fair and reasonable terms, written disclosure, a chance to consult independent counsel, and written informed consent. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer take a mortgage on a client's house to secure the fee?

A: The committee concluded yes, a fee-securing mortgage does not by itself violate the Code, provided the conditions of DR 5-104(A) are met.

Q: Does the lien rule, DR 5-103(A)(1), bar this?

A: The committee concluded no; DR 5-103(A)(1) addresses liens granted by law in the subject of the litigation, while this mortgage was created by contract and covered the client's home, which was unrelated to the litigation.

Q: What does the lawyer have to do before taking the mortgage?

A: The committee concluded the lawyer must obtain the client's consent after full disclosure, preferably in writing, and should give the client (particularly an unsophisticated one) the opportunity to obtain independent legal advice.

Q: Do the mortgage terms themselves have to be fair?

A: The committee concluded yes; DR 5-104(A) requires the transaction to be substantively fair to the client, since a lien unfair to the client cannot result from professional judgment exercised for the client's protection.

Background and rules framework

The opinion applied New York Code DR 5-104(A) (business transactions with a client where interests differ) and DR 5-103(A)(1) (acquiring a proprietary interest in the litigation; liens granted by law), under Canon 5's requirement of independent professional judgment. The committee treated ABA Model Rule 1.8(a), which governs a lawyer's acquisition of a security interest adverse to a client, as addressing the same concerns; the analysis corresponds to Model Rule 1.8.

Citations and references

Rules of Professional Conduct:

• New York Code DR 5-104(A), DR 5-103(A)(1) (applied in the opinion)
• MR 1.8(a) (business transactions and security interests adverse to a client)

Cases:

• Matter of Fraser, 128 A.D.2d 190 (4th Dep't 1987), DR 5-104(A) violated by undisclosed loan transactions
• Hawk v. State Bar of California, 45 Cal. 3d 589 (1988), security interest in a client's property
• Greene v. Greene, 56 N.Y.2d 86 (1982); Howard v. Murray, 43 N.Y.2d 417 (1977), doubts resolved against the attorney in lawyer-client contracts

Other opinions cited:

• N.Y. State 550 (1983): security for a fee, including a mortgage; the committee declined to follow its DR 5-104(A) analysis
• N.Y. City 1988-5; N.Y. City 525 (1940): independent advice and fairness in lawyer-client dealings

See also

• NYC Bar Formal Op. 1988-5: Lawyer-Tenants in Cooperative and Condominium Buildings
• NYC Bar Formal Op. 1988-6: Publication and Production Rights to a Client's Story

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-1988-7/