Can a lawyer take a security interest in a client's real property to secure payment of fees, including during a divorce case?

Plain-English summary

A lawyer in a marital dissolution case asked whether she could take a security interest in the separate real property of her client, where a prenuptial agreement (negotiated with independent counsel on each side) designated the property as that client's separate property. The committee addressed two variations: one where the security interest is bargained for at the time the initial fee agreement is signed, and one where it is bargained for later, with the fee agreement silent on the issue.

The committee concluded there is no absolute prohibition on a lawyer taking a security interest for fees. RPC 1.8(i) permits a lawyer to acquire a lien authorized by law to secure fees, and the committee, following ABA Formal Opinion 02-427, treated a contractual security interest in real property as such a lien. The committee then turned to RPC 1.8(a), which governs business transactions with a client. It reasoned that negotiating the initial fee agreement is generally not a "business transaction" because the attorney-client relationship has not yet formed and the prospective client can walk away, but that any later modification of the fee agreement to add a security interest is a business transaction subject to RPC 1.8(a)'s fairness, written-disclosure, independent-counsel, and informed-consent requirements.

The committee noted that even a security interest acquired during the initial fee negotiation should, as the careful practice, comply with RPC 1.8(a), citing authority from other jurisdictions and ABA Formal Opinion 02-427. It also flagged dissolution-specific complications: RCW 26.16.030 requires both spouses to execute documents encumbering community property; the characterization of property as separate or community is for the court; preliminary restraining orders under RCW 26.09.060 may bar encumbering "any property"; and under RCW 26.09.080 the court may award the secured property to the non-client spouse, leaving the security interest valueless.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee held that a lawyer may take a contractual security interest in a client's real property to secure fees, and that a deed of trust under RCW 61.24 is an available method. The opinion holds that if the security interest is acquired through a modified fee agreement after the relationship has formed, the lawyer must meet RPC 1.8(a): fair and reasonable terms disclosed in writing, advice in writing about seeking independent counsel, and the client's written informed consent. The committee identified the initial-versus-modified distinction as the factor that controls whether RPC 1.8(a) is mandatory, and treated compliance with RPC 1.8(a) as the careful course even at the initial-agreement stage.

Common questions

Q: Can a Washington lawyer take a security interest in a client's property to secure unpaid fees?

A: Yes. The committee concluded RPC 1.8(i) permits a lawyer to acquire a lien authorized by law to secure fees, and a contractual security interest in real property qualifies as such a lien.

Q: Does RPC 1.8(a) apply when the security interest is part of the initial fee agreement?

A: The committee said it generally does not, because the attorney-client relationship has not yet formed at that point, but it advised that complying with RPC 1.8(a) is nonetheless the careful course, citing authority from other jurisdictions.

Q: What changes if the security interest is added after the case is underway?

A: A later modification to add a security interest is a business transaction with a client, so the committee held the lawyer must satisfy RPC 1.8(a): fair terms, written disclosure, written advice to seek independent counsel, and written informed consent.

Q: What dissolution-specific risks did the committee flag?

A: The committee noted that the court may treat the property as community or award it to the other spouse (rendering the interest valueless), that RCW 26.16.030 requires both spouses to sign documents encumbering community property, and that a restraining order under RCW 26.09.060 may prohibit encumbering any property.

Background and rules framework

The opinion interprets Washington RPC 1.8(i) (Model Rule 1.8(i), proprietary interest in litigation, with an exception for liens authorized by law to secure fees) and RPC 1.8(a) (Model Rule 1.8(a), business transactions with a client). It also addresses Washington statutes governing deeds of trust (RCW 61.24), community property execution requirements (RCW 26.16.030), dissolution restraining orders (RCW 26.09.060), and property distribution in dissolution (RCW 26.09.080). The committee relied on ABA Formal Opinion 02-427 for the proposition that a contractual security interest is a lien "authorized by law" under Rule 1.8(i).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8(i) / Washington RPC 1.8(i) (lien authorized by law to secure fees)
• Model Rule 1.8(a) / Washington RPC 1.8(a) (business transactions with a client)

Statutes:

• RCW 61.24 et seq. (deeds of trust)
• RCW 26.16.030 (execution of community-property instruments)
• RCW 26.09.060 (dissolution restraining orders)
• RCW 26.09.080 (disposition of property in dissolution)

Cases:

• Perez v. Pappas, 98 Wn.2d 835, 659 P.2d 475 (1983), scrutiny of fee agreements renegotiated after the attorney-client relationship is established

Other opinions cited:

• ABA Formal Opinion 02-427: a security interest to secure a fee is a lien authorized by law under Rule 1.8(i)

See also

• ABA Formal Op. 02-427: security interest to secure a fee
• ABA Formal Op. 00-416: purchase of accounts receivable from a client

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1663

Original opinion text

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

Advisory Opinion: 2209
Year Issued: 2012
RPC(s): RPC 1.8(a), 1.8(i), RCW 26.09.060, RCW 26.16.030, RCW 61.24 et.seq.
Subject: Lawyer Taking Security Interest in Client Property

This opinion concerns whether a lawyer may take a security interest in real property of a client in a dissolution proceeding, where a prenuptial agreement provides that the property is the separate property.

Question Presented

Inquiry 1: May an attorney take a security interest in the separate real property of a client in a divorce proceeding where the client and spouse have signed a prenuptial agreement (each having independent counsel for the agreement), which agreement provides that the identified separate property of each party shall remain their separate property and that neither spouse shall later claim an interest in such property in the event of a divorce proceeding and where the agreement regarding the security interest is bargained for at the time the initial fee agreement is signed and the client understands and acknowledges the attorney does not represent the client until the fee agreement is signed?

Inquiry 2: Same facts as above, except the security interest is bargained for after the fee agreement is signed and the fee agreement is silent on the issue?

Rules of Professional Conduct/Statutes Implicated

Rule of Professional Conduct 1.8

RCW 26.09.060 RCW 26.16.030 RCW 61.24 et. seq.

Discussion

There is no absolute prohibition on an attorney asking a client to provide security interest for payment of fees. See RPC 1.8(i); see also ABA Formal Opinion 02-427. However, there are important ethical considerations that are implicated when an attorney accepts a contractual security interest in real property.

Washington’s RPC 1.8(a), adopted from the ABA Model Rule 1.8(a), embodies the fundamental principle of loyalty to the client and outlines the requirements an attorney must meet when engaging in business transactions with clients. Rule 1.8(a) focuses on unfairness and overreaching in the transaction itself. This issue is clearly in the forefront when an attorney is negotiating an interest in real property, because the attorney’s self interest may affect her representation of her client, particularly when representation has already commenced.

Is obtaining a consensual security interest from a client permitted under RPC 1.8(i)?

RPC 1.8(i) states [note 1] :

A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:

(1) acquire a lien authorized by law to secure the lawyer's fee or expenses; and

(2) contract with a client for a reasonable contingent fee in a civil case.

An attorney may acquire a proprietary interest in the cause of action or subject matter of litigation (as may occur in the context of a dissolution) as provided by RPC 1.8(i) if the lien is authorized by law. In ABA Formal Opinion 02-427, the ABA concludes that the use of the word “authorized” in 1.8(i) in place of the former “granted” is intended to permit any legally recognized lien to secure fees to be acquired in property that is the subject of litigation. A contractual security interest in real property is such a lien.

Application of RPC 1.8(a)

Washington’s RPC 1.8 (a) states:

A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to the client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner than can be reasonably understood by the client;

(2) The client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3) The client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

The negotiation of the terms of the initial fee agreement is not generally considered a “business transaction” with a client. This is because at the time of the negotiation of the initial fee agreement, the attorney-client relationship is not yet formed. Thus the attorney does not owe the same duty to a prospective client as she would to an existing client. Additionally, the prospective client can walk away from the transaction. On the other hand, any subsequent modification of the fee agreement is generally considered a business transaction. See Comment [1] to RPC 1.8 (“[RPC 1.8] does not apply to ordinary fee arrangements between client and lawyer, which are governed by Rule 1.5, although its requirements must be met when the lawyer accepts an interest in the client's business or other nonmonetary property as payment of all or part of a fee.”).

However, there is some authority from other jurisdictions that RPC 1.8(a) applies even to security interests acquired during the negotiation of the initial fee agreement. See ABA Formal Opinion 02-427. Thus, it is the Committee’s opinion that the best practice would include compliance with RPC 1.8(a).

Modifications after the attorney-client relationship has been formed

Once the attorney-client relationship has been established, the attorney’s obligations change drastically because the attorney now owes a fiduciary duty to her client. This limits the attorney’s ability to subsequently modify an existing fee agreement.

In Washington, the review of an attorney's fee agreement renegotiated after the attorney-client relationship was established requires particular attention and scrutiny. See Perez v. Pappas, 98 Wn.2d 835, 841, 659 P.2d 475 (1983). If the only modification is the acceptance of a security interest for the payment of already negotiated fees, the attorney will be required to comply with the terms of RPC 1.8(a) as this constitutes a business transaction.

Application of other statutes/prenuptial agreement considerations

Deeds of trust are authorized in Washington as a method for obtaining security in real property and may be used by attorneys to secure fees. See RCW 61.24 et seq. However, when there is an on-going dissolution action, other statutes, including RCW 26.16.030 are implicated. RCW 26.16.030 requires both spouses to execute any document encumbering community property. Whether property is considered community or separate property is beyond the scope of this opinion, but a lawyer accepting a security interest on what appears to be the client’s separate property should be aware that the court may not award that property to the lawyer’s client. See RCW 26.09.080.

An attorney considering taking a security interest in real property that is the subject of marital dissolution litigation should also determine whether or not any orders prohibiting the encumbrance of property have been entered. See RCW 26.09.060. Preliminary restraining orders in dissolution matters may be entered that prohibit the encumbrance of “any property.” Thus, even if the property was the separate property of the client spouse, he may be violating a court order by executing any security instruments against his separate property.

Conclusion

Under RPC 1.8(i), an attorney may accept a contractual security interest in a client’s real property. Washington courts have not squarely addressed the application of RPC 1.8(a) to the acceptance of a security interest during the initial negotiation of the fee agreement, but the careful attorney would comply with its provisions. If the security interest is created pursuant to a modified fee agreement, the attorney must comply with RPC 1.8(a).

In the context of dissolution proceedings, all property, both separate and community is before the Court for a just and equitable distribution; thus even in the face of a facially valid prenuptial agreement, there is a risk that what was understood to be the client’s separate property may be deemed community property or otherwise may be awarded to the non-client spouse, rendering the security interest valueless. The practitioner should also ensure there are no court orders prohibiting the encumbrance of property subject to division in the dissolution.

Endnotes

1. Comment [16] states: Paragraph (i) states the traditional general rule that lawyers are prohibited from acquiring a proprietaryinterest in litigation. Like paragraph (e), the general rule has its basis in common law champerty andmaintenance and is designed to avoid giving the lawyer too great an interest in the representation. In addition, when the lawyer acquires an ownership interest in the subject of the representation, it will be more difficult for a client to discharge the lawyer if the client so desires. The Rule is subject to specific exceptions developed in decisional law and continued in these Rules. The exception for certain advances of the costs of litigation is set forth in paragraph (e). In addition, paragraph (i) sets forth exceptions for liens authorized by law to secure the lawyer's fees or expenses and contracts for reasonable contingent fees. The law of each jurisdiction determines which liens are authorized by law. These may include liens granted by statute, liens originating in common law and liens acquired by contract with the client. When a lawyer acquires by contract a security interest in property other than that recovered through the lawyer's efforts in the litigation, such an acquisition is a business or financial transaction with a client and is governed by the requirements of paragraph (a). Contracts for contingent fees in civil cases are governed by Rule 1.5.