Summary: It is not ethically improper for a lawyer to agree with a client to defer the payment of a fee for services rendered or to be rendered in a non-contingent civil matter and to receive from the client, as evidence of the client's indebtedness, a promissory note secured by a second mortgage on the client's home. Such a transaction may be entered into only if (1) the lawyer has made, in advance of the transaction, a full disclosure to the client of any differing interests between lawyer and client that exist or may arise as a result of this arrangement and (2) the client freely consents.
Facts: (1) A client seeks the help of a lawyer in a civil matter which is not appropriate for a contingent fee arrangement. At the outset the case will require the expenditure of thousands of dollars of the lawyer's time. The client has no funds with which to pay the lawyer at the present time, but the client does own a home. Is it unethical for the lawyer to suggest to the client that he cannot undertake the matter without assurances of payment, which assurances could take the form of a promissory note secured by a second mortgage on the client's home?
(2) The same issue is presented in the context of a situation in which the client has paid a $2,000 retainer at the outset, the retainer has been exhausted, and the lawyer's additional fees for work not yet done are projected at $5,000 to $8,000. May the lawyer advise the client that the lawyer can do no further work on the matter unless he receives a promissory note in the amount of the anticipated additional fees secured by a second mortgage on the client's home?
(3) A subsidiary question presented is what rate of interest would be ethical. For example, may the lawyer charge a rate of interest which is not above current interest rates for second mortgages on homes?
Discussion: (1) Canon 5 requires a lawyer to exercise independent professional judgment on behalf of a client. Further, the lawyer's "independent professional judgment" on behalf of the client may be subject to question if he were preparing the note, mortgage and other documents to be executed by the client. See DR 5-101(A) and DR 5-104(A) in this connection. DR 5-104(A) not only mandates full disclosure by the lawyer to the client of any differing interests that may exist between them prior to their entry into a business transaction, if the client expects the lawyer to exercise his professional judgment concerning the transaction for the client's protection, but also requires the client's consent after full disclosure. This would dictate that the lawyer make known to the client at the outset the adversity of interests between them in connection with the terms and conditions of the mortgage documents evidencing the transaction, including without limitation the rate of interest and the default provisions. See MBA Opinion No. 79-2.
(2) If, after receiving the note and mortgage, the lawyer desires, or is required, to withdraw, some difficulties may arise under DR 2-110(A)(3), which obliges the lawyer to "refund promptly any part of a fee paid in advance that has not been earned." If, after the completion of legal services, the amount of the fee is determined to be less than had been anticipated originally, the lawyer must account to the client for the unused portion of the fee. See MBA Opinion No. 78-11. This might require forgiveness of part of the debt evidenced by the client's promissory note in appropriate circumstances, particularly where the full amount of the fee had not been determined with accuracy at the outset. Although DR 2-110(C)(1)(f) may permit a lawyer to withdraw because his client ''[d]elibrately disregards an agreement or obligation to the lawyer as to expenses or fees," not only is such permissive withdrawal less than an absolute right, there may also be compelling reasons why the lawyer should not attempt to enforce the "agreement or obligation." See EC 2-23; ABA Informal Opinion 1461. We do not discuss in this opinion the issue of whether a lawyer may foreclose a mortgage on a client's residence.
(3) Although the establishment of an appropriate interest rate is generally a matter of substantive law with respect to which this committee would not offer advice, the ethical concerns governing conflicting interests and full disclosure discussed above would be equally relevant here. In addition, DR 2-106(A) recites that "[a] lawyer may not enter into an agreement for, charge, or collect an illegal or clearly excessive fee." Even if not "illegal," the interest rate chosen, under the facts and circumstances of a particular case, may render a fee "clearly excessive," especially if the rate has not been discussed thoroughly in advance with the client, including in such discussion not only the percentage figure of the rate but the dollar amount of total interest charges as well.
All of these considerations point to the need for extreme caution in structuring a transaction in which a client is to give a note and mortgage to a lawyer as evidence of the client's indebtedness for a fee and, at a minimum, require a scrupulous effort to ensure full disclosure to the client, in advance, as well as the client's comprehension of the details of the transaction and his freely given consent. The lawyer would be well advised to suggest to the client that he engage another lawyer to review the transaction.
Permission to publish granted by the Board of Delegates on June 24, 1981.
As stated in the Rules of the Committee on Profesasional Ethics, this advice is that of a committee without official governmental status.