If a lawyer holds a mortgage on the property in dispute to secure unpaid fees, does advising the client on a settlement that would make that mortgage more valuable create a conflict of interest?

Plain-English summary

A lawyer represents a defendant sued for breach of contract and fraud, with the plaintiff asserting a constructive trust over a parcel and having filed a lis pendens; the client counterclaimed for money damages. The client could not pay the agreed hourly fees, so the client gave the lawyer a promissory note for the unpaid and future fees secured by a mortgage recorded against the property. The plaintiff had earlier made an offer of judgment (dismiss its claims in exchange for dismissal of the counterclaims), which was rejected. The inquiry asked whether a renewed offer of judgment would create a conflict, because dismissing the plaintiff's claims (and removing the lis pendens) would make the lawyer's mortgage more secure and more collectible.

The committee concluded that Rules 1.5 and 1.8 do not prohibit a lawyer from taking an interest in property to secure a fee if both rules' requirements are met. Rule 1.8(a) permits acquiring a security interest adverse to a client where the terms are fair, reasonable, and in writing, the client is advised in writing to seek independent counsel and given a reasonable opportunity to do so, and the client gives informed written consent to the essential terms; comment 1 makes those requirements apply when a lawyer accepts an interest in the client's property as payment of a fee. Rule 1.8(i) bars acquiring a proprietary interest in the subject of litigation but excepts a lien authorized by law to secure the fee, and comment 17 extends that exception to liens acquired by contract with the client, so a mortgage securing fees is permissible even where the mortgaged property is part of the subject matter, provided the formalities of Rules 1.8 and 1.5 are observed.

Turning to the conflict question, the committee observed that virtually every litigation decision, including every settlement offer, potentially affects the amount or recoverability of the fee on either an hourly or contingent basis. Rule 1.2 balances that inherent tension by reserving to the client the authority to decide whether to make or accept a settlement (Rule 1.2(a) and comment 1; In re Belding) while leaving tactical decisions to the lawyer after consultation (Palacio v. State). Where there is a significant risk that the representation will be materially limited by the lawyer's personal interest, a potential conflict arises under Rule 1.7(a)(2): the lawyer must determine whether he reasonably believes he can still provide competent and diligent representation; if not, he must withdraw (comment 4), and if so, the client must give informed consent confirmed in writing to continue (Rule 1.7(b)(4)). The committee said it is beyond its authority to decide for the lawyer whether this particular offer presents such a risk, but noted that because the lawyer must already obtain the client's written consent to the mortgage under Rule 1.8, the best practice may be to seek the client's informed consent to the potential Rule 1.7 personal-interest conflict at the same time.

In practice

The opinion holds that, under South Carolina Rules 1.8(a), 1.8(i), and 1.5, a lawyer may take a mortgage on the disputed property to secure unpaid fees if the business-transaction formalities and fee-reasonableness requirements are met. It holds that advising on a settlement that would increase the mortgage's value does not by itself create a conflict, because the client retains the Rule 1.2(a) authority to decide whether to settle; a potential Rule 1.7(a)(2) personal-interest conflict arises only where there is a significant risk that the lawyer's interest will materially limit the representation, in which case the lawyer must either reasonably conclude he can still provide competent and diligent representation and obtain the client's informed written consent under Rule 1.7(b)(4), or withdraw. The opinion notes the committee cannot decide for the lawyer whether this offer presents such a risk, and states the best practice may be to seek the Rule 1.7 consent together with the Rule 1.8 mortgage consent.

Common questions

Q: Can a lawyer take a mortgage on the property being litigated to secure unpaid fees?

A: Yes, if the formalities are met. The committee said Rule 1.8(i)'s lien exception (extended by comment 17 to liens by contract) and Rule 1.8(a)'s business-transaction requirements, together with Rule 1.5's reasonableness requirement, allow it even where the property is part of the subject matter.

Q: Does advising on a settlement that helps the lawyer's mortgage create a conflict?

A: Not automatically. The committee said nearly every litigation and settlement decision affects the fee, and a conflict arises only where there is a significant risk the lawyer's personal interest will materially limit the representation under Rule 1.7(a)(2).

Q: Who decides whether to accept the offer of judgment?

A: The client. The committee said Rule 1.2(a) reserves to the client the authority to decide whether to make or accept a settlement, citing In re Belding.

Q: What must the lawyer do if the personal interest does create a conflict?

A: Assess and either get consent or withdraw. The committee said the lawyer must determine whether he reasonably believes he can still provide competent and diligent representation; if so, the client must give informed consent confirmed in writing under Rule 1.7(b)(4); if not, the lawyer must withdraw.

Background and rules framework

The opinion interprets South Carolina Rule 1.8(a) (business transactions and security interests adverse to a client), Rule 1.8(i) (proprietary interest in litigation, with the lien-to-secure-fee exception), Rule 1.5 (reasonable fees), Rule 1.2(a) (allocation of settlement authority to the client), and Rule 1.7(a)(2) and 1.7(b)(4) (material-limitation personal-interest conflicts and consent), which correspond to the like-numbered Model Rules. The analysis separates the permissibility of the fee mortgage from the conflict question, which turns on whether the lawyer's personal interest creates a significant risk of materially limiting the representation.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / SC Rule 1.8(a) (security interest adverse to a client), 1.8(i) and Comments 1, 17 (lien to secure fee)
• MR 1.5 / SC Rule 1.5 (reasonable fee)
• MR 1.2 / SC Rule 1.2(a) and Comment 1 (client decides whether to settle)
• MR 1.7 / SC Rule 1.7(a)(2), 1.7(b)(4) and Comment 4 (personal-interest conflict; consent or withdrawal)

Cases:

• In re Belding, 356 S.C. 319, 589 S.E.2d 197 (2003), client's authority over settlement
• Palacio v. State, 333 S.C. 506, 511 S.E.2d 62 (1999), tactical decisions within the lawyer's authority

See also

• SC Bar Ethics Op. 12-02: Land Interest as Contingent Fee
• TX Ethics Op. 610: Security Interest in a Client's Cause of Action
• ABA Formal Op. 02-427: Security Interest to Secure a Fee

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-12-07/
• Original PDF: https://www.scbar.org/media/nlth4iih/12-07.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 12-07

SC Rules of Professional Conduct: 1.2, 1.5, 1.7, 1.8

Facts

Lawyer represents Client, who is the defendant in a lawsuit alleging breach of contract and fraud and asserting a constructive trust over a piece of real property (the “Property”). Plaintiff has filed a lis pendens over the Property to secure the constructive trust claim. Client has, through Lawyer, filed an answer and counterclaim seeking money damages from the plaintiff.

Client and Lawyer have entered into an hourly rate fee agreement. Client has been unable to pay the Lawyer’s fees as agreed, and therefore the Client and the Lawyer have entered into a modified fee agreement whereby the client has executed a promissory note to Lawyer for the unpaid fees, including future advances, and secured the note with a mortgage recorded against the Property.

Before entering into the modified fee agreement, Plaintiff made an offer of judgment offering to dismiss its claims in return for a dismissal of the counterclaims. This offer was rejected.

Question

Given the arrangement set forth above, would a renewal of the offer of judgment whereby the plaintiff would dismiss its claims in return for a dismissal of the counterclaims create a conflict of interest, because the dismissal of the claims would make the Lawyer’s mortgage more valuable and increase the Lawyer’s chances of collecting the fees owed?

Summary

Rules 1.5 and 1.8 do not prohibit an attorney from obtaining an interest in property to secure payment of a fee, as long as the requirements of both Rules are met. The fact that a client requires advice regarding a particular course of action and that course of action may impact the amount or collectability of the attorney’s fee does not create a conflict of interest, unless the attorney reasonably believes he cannot provide competent and diligent advice to the client under Rule 1.7. Because the lawyer must get the client’s written consent to the mortgage transaction pursuant to Rule 1.8 in the first instance, the best practice may be to seek the client’s informed consent to the potential conflict created by the creation of a personal interest of the lawyer under Rule 1.7 at the same time.

Opinion

Rule 1.8 permits a lawyer to acquire an ownership, possessory, security or other pecuniary interest in property adverse to a client as long as the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are transmitted in writing in a manner that can be reasonably understood by the client, the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek advice of independent legal counsel on the transaction, and the client gives informed consent in writing as to the essential terms of the transaction. (Rule 1.8(a)). Comment [1] to Rule 1.8 makes it clear that, while this Rule “does not apply” to ordinary fee arrangements between a lawyer and a client, its requirements must be met when the lawyer “accepts an interest in the client’s business or nonmonetary property as payment of all or part of a fee.” Because a mortgage is an interest in property, the requirements of Rule 1.8 must be met, along with the requirements of Rule 1.5 that the fee be reasonable under the circumstances set forth therein.

Rule 1.8 further prohibits a lawyer from acquiring a proprietary interest in the “subject matter of litigation the lawyer is conducting for a client” but specifically excepts “a lien authorized by law to secure the lawyer’s fee or expenses.” (Rule 1.8(i)). Comment [17] to Rule 1.8 makes it clear that this exception applies to “liens acquired by contract with the client.” Therefore, the granting of a mortgage by the client to secure the lawyer’s fees, even though the Property so mortgaged is part of the subject matter of the litigation, does not violate Rule 1.8 or Rule 1.5 as long as the formalities of those Rules are observed.

Given that the mortgage itself is permissible, the analysis turns to whether an offer of judgment wherein the Client is asked to surrender his counterclaims in return for a dismissal of the Plaintiff’s causes of action, including the cause of action for constructive trust and removal of the lis pendens, would create a conflict of interest between the client and the attorney because the dismissal of the constructive trust claim and lis pendens would move the Attorney’s mortgage into a more secure position and make recovery of the fees then owed more likely.

Virtually every decision made in the course of representing a client, such as whether and how much discovery to engage in, what motions to research and file, and every offer of settlement, potentially impacts either the amount or recoverability of the attorney’s fee, whether the case is on an hourly rate or a contingent fee basis. The Rules balance this inherent conflict by allocating the authority with respect to a case between the attorney and the client in Rule 1.2, which reserves to the client the authority to decide whether to make or accept a settlement offer (Rule 1.2(a) and Comment [1]; See In Re Belding, 356 S.C. 319, 589 S.E.2d 197 (2003)) and preserves for the attorney, after communication and consultation with the client, authority to make decisions as to tactics used in a case, consistent with the lawyer’s duties to the court, opposing counsel, the opposing party and the rule of law. (See, e.g., Palacio v. State, 333 S.C. 506, 511 S.E.2d 62 (1999) (decision whether to strike a juror inherently falls within the authority of the lawyer)).

That being said, anytime there is a significant risk that the representation of a client will be materially limited by the personal interest of the lawyer, a potential conflict of interest arises under Rule 1.7(a)(2). In dealing with this potential conflict of interest, the lawyer must determine whether he reasonably believes that he will be able to provide competent and diligent representation to the client in light of the potential conflict. If the lawyer determines that he cannot, then the lawyer must withdraw. (See Rule 1.7, Comment [4]). If the lawyer determines that he can provide competent and diligent representation despite the conflict between the client’s interest and the lawyer’s personal interest (i.e., the mortgage), then the client must give informed consent, confirmed in writing, to the continued representation. (Rule 1.7(b)(4).)

It is beyond the scope of the Committee’s authority to determine for Lawyer whether the potential offer of judgment described in the facts will present a significant risk that Lawyer’s representation of Client will be materially limited, or whether, if so, Lawyer reasonably believes that he can nonetheless provide competent and diligent representation to Client despite the conflict. However, because the Lawyer must get the Client’s written consent to the mortgage transaction pursuant to Rule 1.8 in the first instance, the best practice may be to seek the client’s informed consent to the potential conflict created by the creation of a personal interest of the lawyer under Rule 1.7 at the same time.