Indiana’s Supreme Court recently decided a case that discusses financial transactions between lawyers and their clients, apart from the client’s fee obligation that is present in most attorney-client representations. It provides a nice opportunity to muse about the topic of lawyer-client business transactions.

Lawyers as Fiduciaries

Lawyers and their clients stand in a fiduciary relationship with each other. Fiduciary agents have special obligations to their principals.   The Supreme Court has described a fiduciary relationship as one marked by the “utmost in good faith” in the agent’s dealings with the principal. Sanders v. Townsend, 582 N.E.2d 355, 358 (Ind. 1999).  This is due, in part, to what is usually the lawyer’s superior bargaining position vis-à-vis the client, and the lawyer’s ethical duty of client loyalty.

Potentially Conflicting Interests

Financial transactions in which lawyer and client interests are potentially adverse are viewed with disfavor. This is a species of concurrent conflict of interest governed generally by Rule of Professional Conduct 1.7, and specifically by Rule 1.8(a).  While Rule 1.8(a) does not prohibit financial transactions with clients, it does impose rigorous conditions before they will be considered proper.

Fairness, Disclosure and Documentation

First, the transaction and its terms must be objectively fair and reasonable. Rule 1.8(a)(1).  Second, the transaction and its terms must be fully disclosed to the client in writing in a form that the client can understand.  Id.  Third, the lawyer must inform the client in writing that the client should seek advice of independent legal counsel in the matter.  Rule 1.8(a)(2).  Fourth, the lawyer must give the client a reasonable opportunity to consult with independent counsel before entering into the transaction.  Id.  Finally, the client must give written, signed informed consent to the essential terms of the transaction.  This writing must include a description of the lawyer’s role in the transaction and whether the lawyer will representing the client in the transaction.  Rule 1.8(a)(3).

Comment [1] to Rule 1.8 points out that these obligations exist even when the transaction has no relationship to the subject matter of the representation. That same comment also points out that this rule does not generally apply to the one business transaction that typically marks the beginning of every attorney-client relationship—the fee agreement.  The usual understanding is that the fee agreement is part of the discussions leading up to the creation of an attorney-client relationship.  Thus, negotiations over the fee are arms-length in nature since a fiduciary relationship has not yet formed.  But the comment goes on to say that some types of fee agreements must comply with the Rule 1.8(a) protocol—specifically, “when the lawyer accepts an interest in the client’s business or other nonmonetary property as payment of all or part of a fee.”

Changing the Deal: Heads I Win, Tails You Lose

So far, these limitations are all identical to the ones in the ABA Model Rules of Professional Conduct. But Indiana added a sentence to Comment [1] that is, so far as I know, unique to our state.  “Paragraph [1.8](a) applies when a lawyer seeks to renegotiate the terms of a fee arrangement with the client after representation begins in order to reach a new agreement that is more advantageous to the lawyer than the initial fee arrangement.”  This comment probably had its genesis in Matter of Hefron, 771 N.E.2d 1157 (Ind. 2002).  In Hefron, the lawyer undertook to represent a client on an hourly fee basis, being skeptical of the value of the client’s claims.  After investigating the matter on an hourly fee basis and verifying that a substantial recovery was likely, the lawyer induced the client to sign a contingent fee agreement.  Ultimately, the fee recovered by the lawyer under the contingent fee agreement was far more lucrative for the lawyer than the hourly fee agreement would have been.

A last exception, also covered in Comment [1] pertains to standard commercial transactions between lawyers and clients for goods or services that the client is in the business of marketing to the public. Thus, if a lawyer represents the local grocer, she need not comply with Rule 1.8(a) before rolling up to the checkout counter with a cart full of food.

Civil Liability Standard

Rule 1.8(a) sets the ethical standard by which lawyers should govern their own behavior and to which they will be held accountable in the event of a disciplinary action. But does it set the standard for civil malpractice liability?  The Supreme Court recently answered this question “no” in Liggett v. Young, 877 N.E.2d 178 (Ind. 2007).  In Liggett, Liggett was a homebuilder.  Young, a lawyer, represented Liggett on a legal matter.  During that representation, Young and his wife contracted with Liggett to have him build them a new home.  Various changes to the original plans were made during construction and, as is often the case, a dispute arose over the cost of those changes.  Young argued that Liggett was contractually barred from being compensated because the change orders were not in writing, contrary to a provision that Young had drafted and inserted into the construction contract.  Litigation ensued.  A key question in the case was whether a heavier burden should fall on Young to justify the fairness of his legal claims because of the fact that the underlying transaction was one between lawyer and client.

Whether a violation of Rule 1.8(a) supports a private cause of action was a question on which there had been fairly recent, conflicting Supreme Court authority. The majority opinion concluded that a lawyer’s breach of the client protections found in Rule 1.8(a) does not create a private cause of action.  The Court said the client’s claim, if any, must be grounded in the common law of constructive fraud that applies to transactions between fiduciary agents and their principals.

Constructive Fraud

Discussing constructive fraud, the Court found that Rule 1.8(a) was largely a restatement of the common law. The Court stated that, “transactions entered into during the existence of a fiduciary relationship are presumptively invalid as the product of undue influence.  Transactions between an attorney and client are presumed to be fraudulent, so that the attorney has the burden of proving the fairness and honesty thereof.”  877 N.E.2d at 184 (citations omitted.)

Not a Standard Commercial Transaction

One interesting question in Liggett was whether, because Liggett was in the business of building homes, this transaction was exempt from the usual limitations on dealings between lawyers and their clients because it was a standard commercial transaction, which the Court found to be an exception at common law as it is under Rule 1.8(a).  In this case, because Young, who had the burden of proof on these elements, had not designated summary judgment materials that supported a finding that this was a standard commercial transaction or was objectively fair and honest, he had failed to overcome the presumption of fraud and was not entitled to summary judgment.

Boehm Concurs

Justice Boehm’s concurrence was straightforward and is worth reading, especially his analysis of the standard commercial transaction exception. First, he said that a contract for a custom home drafted by the lawyer/homeowner plainly does not fall within the exception for standard commercial transactions.  He didn’t think that exception would ever apply to a transaction based, as here, on a unique contractual document prepared by the lawyer.  More to the point, though, in this case, it was not the original contract that was the source of the legal dispute between lawyer and client.  It was the oral change orders.  The lawyer sought to avoid liability for the oral change orders by relying defensively upon a contract term that he had drafted requiring that change orders be in writing.  Justice Boehm believed the lawyer’s posture, which would have resulted in an economic windfall to the lawyer and a corresponding burden on the client, was inherently unfair and unreasonable.  “This is simply an application of the basic principle that a fiduciary who deals with his beneficiary must look out for the beneficiary’s interests above his own.”  877 N.E.2d at 187.


The result in Liggett would probably be the same whether analyzed as constructive fraud or under Rule 1.8(a).  Since January 1, 2005, Rule 1.8(a) imposes written documentation requirements on lawyers that were not in the rule at the time of the transaction between Liggett and Young and that go well beyond the requirements of the common law doctrine of constructive fraud.

Lawyers often have multifarious relationships with their clients. They may have friendships or business relationships that pre-date any attorney-client relationship.  But once an attorney-client relationship arises, any business transaction with a client will no longer be considered arms length; and if the deal goes bad, the lawyer will bear a heavy burden to demonstrate that the transaction was both procedurally and substantively fair to the client.


In my March 2008 column, I mentioned the magistrate judge’s $8.5 million sanction order against Qualcomm and its outside counsel in Qualcomm v. Broadcom as a noteworthy 2007 case.  On March 5, 2008, U.S. District Judge Rudi M. Brewster of the Southern District of California overturned the magistrate judge’s entry and remanded the matter back to the magistrate judge for further proceedings on the discovery sanction issue.  Judge Brewster reasoned that once the client filed papers purporting to blame its counsel for the discovery problems, the self-defense exception to the attorney-client privilege should have allowed the lawyers to introduce evidence that would otherwise have been protected by the privilege.  With the privileged information now available to the lawyers, the magistrate judge will have to reconsider whether his sanctions order should apply against the lawyers as well as the client.