NYSBA 2016-10-05

Can a lawyer secure unpaid legal fees by having the client sign a promissory note and a mortgage on the client's property?

Short answer: Yes, but it is a business transaction under Rule 1.8(a): the terms must be fair and reasonable, fully disclosed in writing, the client must give informed written consent, and the client must be advised in writing to seek independent counsel.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 1104: Securing legal fees with a promissory note and mortgage

Short answer: A lawyer may secure legal fees by having the client sign a promissory note secured by a mortgage on the client's property, but only by complying with Rule 1.8(a): fair and reasonable terms, full written disclosure, the client's informed written consent to the essential terms and the lawyer's role, and a written advisory that the client may seek independent counsel.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

View original opinion

Plain-English summary

A law firm wanted to secure fees for estate planning and Medicaid planning by having the client sign a promissory note secured by a mortgage on the client's property.

The opinion holds the arrangement is permitted but is a business transaction with a client governed by Rule 1.8(a). That rule bars a lawyer from entering a transaction with a client where they have differing interests and the client expects the lawyer to exercise professional judgment for the client's protection, unless: (1) the terms are fair, reasonable, and fully disclosed in writing the client can understand; (2) the client is advised in writing to seek, and given a reasonable chance to seek, independent legal advice; and (3) the client gives informed consent in a signed writing to the essential terms and the lawyer's role (¶ 3). Comment [4C] explains that ordinary fee agreements at the outset are not covered, but Rule 1.8(a) applies when the lawyer takes an interest in the client's property as payment, because the lawyer's financial interest may skew the lawyer's judgment (¶ 4). The committee cited ABA Formal Op. 02-427 and N.Y. City 1988-7 to the same effect (¶ 4).

The opinion explains why the lawyer and client have differing interests: although the mortgage is not the first source of payment, the lawyer could foreclose to recover unpaid fees, and a client who failed to pay would want to prevent enforcement, so the lawyer "ordinarily will have to comply with Rule 1.8(a)" (¶ 6). It flagged that Rule 1.5(d)(5)(ii)'s restriction on security interests applies only to domestic relations matters, not to estate or Medicaid planning (¶ 7), and declined to address executing on the note and mortgage because the inquirer did not ask (¶ 8).

In practice

The opinion holds that taking a note and mortgage on the client's property to secure fees is an acquisition of an interest in the client's property as payment, which triggers Rule 1.8(a) rather than the ordinary rules for fee agreements. To proceed, the lawyer must meet all three Rule 1.8(a) conditions: fair and fully disclosed terms in writing, a written advisory to seek independent counsel with a reasonable opportunity to do so, and the client's signed informed consent to the essential terms and the lawyer's role. The committee noted that the domestic-relations security-interest restriction in Rule 1.5(d)(5)(ii) does not reach estate or Medicaid planning work.

Common questions

Q: Is securing a fee with a mortgage allowed in New York?

A: Yes, if the lawyer satisfies Rule 1.8(a). The opinion concludes the arrangement is permitted as a business transaction with a client subject to that rule's safeguards (¶ 9).

Q: Why does Rule 1.8(a) apply to a fee mortgage rather than the ordinary fee rules?

A: Because the lawyer is taking an interest in the client's property as payment, which Comment [4C] places under Rule 1.8(a), given the risk the lawyer's financial interest could affect the lawyer's judgment (¶ 4).

Q: What are the Rule 1.8(a) conditions?

A: Fair and reasonable terms fully disclosed in writing; a written advisory to seek independent counsel with a reasonable chance to do so; and the client's signed informed consent to the essential terms and the lawyer's role (¶ 3).

Background and rules framework

The opinion applies New York Rule 1.8(a) (business transactions with clients; ABA Model Rule 1.8(a)), with Rule 1.0(j) defining "informed consent." Rule 1.8(a) governs because taking a note and mortgage as fee security is an acquisition of a property interest in the client's assets, distinct from an ordinary fee agreement.

Citations and references

Rules of Professional Conduct:

MR 1.8(a) / NY RPC 1.8(a) (business transactions with a client)
NY RPC 1.0(j) (informed consent); NY RPC 1.5(d)(5)(ii) (domestic-relations security interests); NY RPC 1.8(i) (lien to secure fees)

Other opinions cited:

ABA Formal Op. 02-427: contractual security interest in client property to secure fees must comply with Rule 1.8(a)
N.Y. City 1988-7 (1988): securing a fee with a mortgage on a client's home is a governed business transaction
N.Y. State 910 (2012), N.Y. State 1051 (2015): when a fee-agreement amendment is scrutinized under Rule 1.8(a)

Source

Landing page: https://nysba.org/ethics-opinion-1104/