Summary: It is unethical for an attorney who represents a client in a divorce proceeding to receive, as a retainer fee from the client, a promissory note secured by a mortgage on the marital home, where the home will foreseeably be part of the subject matter of the divorce. However, after the divorce proceeding has been concluded, the attorney may receive a note and/or mortgage from the client on any real estate awarded to the client in the divorce proceeding, subject to certain general ethical considerations. In addition, subject to these same general ethical considerations, after a divorce proceeding is over, an attorney may take as payment for the attorney's fees and expenses incurred in the divorce proceeding an assignment of a promissory note given by the adverse spouse to his divorce client.
Facts: Two related, but separate, fact situations are considered. In the first situation, an attorney who represents a client in a divorce proceeding wishes to receive, as a retainer fee, a note and mortgage on the marital home, which is the principal marital asset. In the second situation, an attorney wishes to take an assignment, after the divorce proceeding is over, in payment of his fee, of a promissory note given to the client by his former wife as a result of the divorce proceeding that is the source of the client's debt to the attorney.
Discussion: In general, there is no ethical prohibition against a lawyer accepting payment of legal fees unequivocally due by taking an assignment of a promissory note or taking a promissory note secured by a mortgage on an interest in real estate owned by the client. A lawyer may charge lawful interest on the amount provided that the client has notice and a reasonable opportunity to pay the balance due without interest. See Opinion No. 83-1.
In making the decision to take such a note and/or mortgage, the lawyer must take into account the client's legal sophistication, the reasonableness of the fee, the client's financial condition and ability to pay the note according to its terms, and the availability of less stringent means by which the fee matter may be resolved.
It is always possible, of course, that a subsequent effort by the lawyer to collect on the note would create some kind of conflict between the lawyer's interests and those of the client. Such a conflict may interpose an obstacle to the lawyer's attempt to enforce the note when it becomes due. In our view, in general, it does not, however, prevent the lawyer from taking the note in the first place.
However, the ethical considerations with respect to taking such a note and mortgage on a marital asset (i.e, the marital home) during pendency of divorce litigation present additional considerations. The applicable rule, DR 5-103(A), provides:
A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client except that he may:
(1) acquire a lien granted by law to secure his fee or expenses.
A lawyer who takes a note and/or mortgage on any marital asset is therefore potentially in danger of violating the rule, regardless of whether a divorce complaint has been filed or not. While the committee's rules generally prevent us from addressing questions of substantive law, such as what sort of a lien, if any, would be "granted by law," we note that subparagraph (1) of DR 5-103(A) generally has been assumed to apply to attorney liens granted by statute or common law, and not to contractual liens or voluntary encumbrances.
In a divorce, the division of marital property, whether the marital home will be sold presently or in the future, and what share of any sale proceeds each party will receive, are often principal (and hotly contested) issues in the litigation. If a lawyer holds a note and mortgage on real estate that is or becomes the major subject matter of such controversies, the lawyer will of necessity be affected by the outcome of the litigation and hence violate DR 5-103(A).
The Maine Board of Bar Overseers Professional Ethics Commission in Opinion 97 (May 3, 1989), considered similar ethical problems that were raised when an attorney brought action against the wife of his client for waste and failure to pay property taxes on a parcel of marital property. The lawyer represented the husband in a divorce proceeding and took a mortgage to secure legal fees on the husband's 1/2 interest in the marital home. Both spouses sought physical custody of their minor children, and the wife sought to live in the home with the children. The Maine Commission concluded that it was unethical for an attorney to acquire such a lien since that would create an unacceptable risk that the judgment of the attorney would be affected by the acquisition of this interest.
The committee is aware of one state that permits a lawyer to take such a note and mortgage, subject, however, to modification by the court with respect to the reasonableness of the fee, the security terms, and the disposition of the property. The opinion concludes that the lawyer cannot take any action to dispose of the mortgage to a bona fide purchaser or otherwise put it beyond the court's power of modification. See Connecticut Bar Association Committee on Professional Ethics Informal Opinion No. 87-3 (June 18, 1987).
This committee agrees with the reasoning of Maine Opinion 97 and thus concludes that in the first factual situation described above, it is unethical for an attorney to take such a note and mortgage during the pendency of a divorce matter in which the disposition of the parcel of real estate involved is or may be the subject of controversy. After the divorce litigation has been concluded, the client may give a note and mortgage to the attorney on any real estate that has been awarded to the client, subject to the general ethical considerations mentioned at the beginning of our discussion. For a general discussion, see Widett & Widett v. Snyder, 392 Mass. 778 (1984).
As to our second factual situation, the committee concludes that, subject to the general ethical considerations mentioned at the beginning of our discussion, DRs 5-101 and 5-103 do not apply and an attorney may take such an assignment of the promissory note because the attorney is acquiring his interest after divorce litigation.
Finally, the committee notes that should the fee arrangement be improper as a matter of domestic relations or other substantive law (an issue that is beyond the power of the committee to address), the Disciplinary Rules further prohibit a lawyer from engaging in dishonest conduct or from entering into an agreement for or collecting an illegal fee. See DR 1-102(A)(4), (5) and DR 2-106(A).
Permission to publish granted by the Board of Delegates on June 7, 1991. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.