December 1998
Ethics And The Law
Gifts and Loans to or from Clients
by Barrie Althoff, WSBA Chief Disciplinary Counsel
Opinions expressed herein are the author's and are not official or unofficial WSBA positions.
For lawyers struggling to collect billed fees and costs, the thought that a client might not only willingly pay those amounts, but also give the lawyer a gift, may seem inconceivable. From time to time, however, clients do offer their lawyer a gift or a loan. May you accept such a gift or loan from your client? May you prepare instruments effecting the gift or loan? Obversely, may you make a gift or a loan to your client? This article looks at these and some related questions.
Gifts from Your Client
Because of your fiduciary relationship with your clients, transactions between you and them are subject to close scrutiny to assure that you have not exercised undue influence or overreached. Your role is to look after your client's interests, not your own. Thus, any transaction benefiting you rather than your client, such as a gift, involves a possible conflict of interest and is suspect as possible self-dealing and undermining your objectivity.
Many of us develop solid friendships with our clients. Giving gifts is a natural expression of friendship and gratitude. One authoritative ethics treatise proclaims a cautionary and useful guiding principle, however: "Beware of clients bearing gifts." ABA/BNA Lawyers' Manual on Professional Conduct (§51:601). In view of this, may/should a lawyer graciously and thankfully accept such a gift, or must the lawyer churlishly reject them on the basis of ethical principle?
As a general rule, you may accept nominal gifts from clients, but should be very cautious on accepting gifts which are substantial in amount, especially if the gift is not from a person related to you. In some cases, discussed below, you are prohibited from preparing any gifting instruments if you or related persons are the recipients of the gift. As a practical matter, unless the client has had the benefit of independent counsel, you should view any gift as a voidable gift and be prepared to return it on demand. If the gift is substantial in amount, you should unequivocally advise your client in writing to consult independent counsel and require any documentation needed to effect the gift be prepared by independent counsel.
The general rule stated above is not immediately apparent from either Washington's Rules of Professional Conduct (RPCs), or from the American Bar Association's Model Rules of Professional Conduct on which our rules are based. Neither set of rules directly deals with the receipt of gifts by lawyers from clients. Instead, they prohibit a lawyer from preparing documents that would effect certain gifts, without addressing a direct gift which does not require legal documentation. A noted authority has observed, however, that "it would plainly be incongruous if the Rules were interpreted to prohibit the preparation of any instrument of gift to a lawyer, even a perfectly fair one, but to permit all gifts, regardless of fairness, so long as they were not made by a written instrument." Wolfram, Modern Legal Ethics §8.12.2 (West, 1986).
This view is supported in dictum in In re Gillingham, 126 Wn.2d 454, 463-4, note 7, 896 P.2d 656 (1995), wherein the Supreme Court noted:
The RPC governing gifts does not forbid attorneys from accepting gifts from clients. RPC 1.8(c). Instead, it "establishes a general prohibition against a lawyer's drafting an instrument giving her or him or a close relative a substantial gift from a client. [Citation omitted]….We emphasize that although RPC 1.8(c) does not specifically prohibit cash gifts from clients, neither are such gifts always permissible. For example, accepting cash gifts from clients without adequate documentation that the gift is made in a fully informed and voluntary manner may expose an attorney to a civil action for breach of the heightened duty lawyers owe to clients.
Thus, the RPC prohibitions against a lawyer documenting certain gifts are a useful starting point for considering whether you may accept a gift from a client, whether or not you prepare any legal instruments effecting that gift.
The commentary to the Model Rules, although not adopted by Washington, provides a useful overview of the basic rule governing gifts from clients:
A lawyer may accept a gift from a client, if the transaction meets general standards of fairness. For example, a simple gift such as a present given at a holiday or as a token of appreciation is permitted. If effectuation of a substantial gift requires preparing a legal instrument such as a will or conveyance, however, the client should have the detached advice that another lawyer can provide. Paragraph (c) [of Rule 1.8] recognizes an exception where the client is a relative of the donee or the gift is not substantial." [Comment 2 to Model RPC 1.8].
RPC 1.8(c), to which the commentary refers, provides that a lawyer "shall not prepare an instrument giving the lawyer or a person related to the lawyer as parent, child, sibling, or spouse any substantial gift from a client, including a testamentary gift, except where the client is related to the donee." This prohibition applies even if your client wants you to prepare the instrument; it is not subject to client waiver. Hazard & Hodes, The Law of Lawyering (3d ed.) §1.8.401. Stated positively, under RPC 1.8(c), you may prepare an instrument (for example, a deed of gift, a conveyance, or a will) effecting a gift to you (or to your parents, children, siblings, or spouse) if (1) the gift is not "substantial," or (2) the gift is from "a client related to the donee." There is little useful authority on what is "substantial," but, given your fiduciary relationship with your client, anything other than a purely token amount is likely to be viewed as being "substantial."
The Washington Supreme Court has stated that RPC 1.8(c) prohibits lawyers from drafting wills in which they receive substantial gifts because "the practice is inherently permeated with the dangers of self-dealing and undue influence" and the failure to have the instrument drafted by uninvolved counsel deprives the client of an independent point of view and exposes the client to "the inherent conflict of interest the rule is designed to eliminate." In re Gillingham, 126 Wn.2d 454, 466-467, 896 P.2d 656 (1995).
RPC 1.8(c) twice uses the phrase "related to." The first occurrence refers to the relationship between the lawyer and the recipient of the gift. It prohibits you from preparing gift instruments if the recipient of the gift is you or certain persons "related to" you, namely, your parents, children, siblings or spouse. It does not prohibit you from preparing a gift instrument which gives a gift to, for example, your grandchildren, or your grandparents, or your spouse's parents, or your aunt or uncle or cousin. In such a case, however, the transaction would still be subject to the other provisions of RPC 1.7 and 1.8 relating to conflicts of interest involving the lawyer's own interests.
The second occurrence of the phrase "related to" in RPC 1.8(c) refers to the relationship between the donor and the recipient of the gift. It provides that the prohibition against preparing gift instruments for gifts to you or to specified persons related to you does not apply if the donor of the gift is related to the recipient of the gift. Since this occurrence of the phrase "related to" is not qualified by the categories of "parent, child, sibling, or spouse" used earlier in the rule, you may document a gift, even a very substantial gift, to yourself or to your parent, child, sibling, or spouse, where your donor client is in any way related to the donee, regardless of how remote that relation is. This thus allows you, for example, to draft your parent's will which leaves you a substantial bequest. Theoretically, this would also allow you to draft wills for your fourth cousin twice-removed and your spouse's thirty-second cousin, neither of whom you have ever before met, also leaving you substantial bequests. Given the underlying concern of fairness to the client, such a gift might still be set aside as overreaching unless the client has had the advice of independent counsel. The more remote the relationship, and the more substantial the gift, the more clearly you should see red flags signaling it would be wise to have the potential donor client consult an independent counsel about the potential gift and that you should refrain from preparing any of the documents. Even drafting wills for your own parents, clearly authorized by the rule, is not necessarily a good idea, especially if you have siblings who might contest any disproportionate bequest to you.
If you may and do accept any gift from a client, you would be wise to document it as a gift unless the gift is wholly nominal in amount. The RPC 1.8(c) ban on preparing instruments refers to legal instruments which effect a gift, such as a will, a conveyance, or a deed of gift. It does not ban documents acknowledging receipt of a gift, such as a simple letter thanking the client for the gift. If the gift is substantial in amount, your letter should also make it clear that you advised the client to seek independent legal advice before making the gift to you, or if it came to you unexpectedly, you may want, after receipt of it, to suggest that the client seek independent legal advice and that in the meanwhile you will hold the gift for the client until the client has an opportunity to do so. Even if you fully document such a gift, persons related to the donor may contest the gift, particularly if the gift is a testamentary gift or if the donor is in any way under a disability.
Loans from Clients
The RPCs provide clearer guidelines for loans from clients than they do for gifts. A loan is merely a form of a business transaction, even if in offering the loan the client is motivated by friendship with, or by being related to, the lawyer. You may accept a loan from a client, but to do so you must be careful to meet the stringent case law and RPC requirements for doing so, and know that the burden will be entirely on you to prove that you met each requirement. As a practical matter, you would be wise to seek any loans from independent persons and not from your clients, and recognize that if no one else will lend you the money, there is a high likelihood that any client loan to you will be suspect as unfair to your client and in violation of your ethical requirement. If your client is your lender of last resort, you will have a great burden proving that any client loan to you is not unfair.
The Washington Supreme Court outlined its strict approach to lawyer-client business relations in In re McGlothlen, 99 Wn.2d 515, 524-525, 663 P.2d 1330 (1983):
The disclosure which accompanies an attorney-client transaction must be complete. Moreover, the burden upon the attorney defending his or her actions is a great one. "So strict is the rule on this subject that dealings between an attorney and his client are held, as against the attorney, to be prima facie fraudulent, and to sustain a transaction of advantage to himself with his client the attorney has the burden of showing not only that he used no undue influence, but that he gave his client all the information and advice which it would have been his duty to give if he himself had not been interested, and that the transaction was as beneficial to the client as it would have been had the client dealt with a stranger." [citations omitted] . . . Thus, an attorney attempting to justify a transaction with a client has the burden of showing (1) there was no undue influence; (2) he or she gave the client exactly the same information or advice as would have been given by a disinterested attorney; and (3) the client would have received no greater benefit had he or she dealt with a stranger."
The Supreme Court in In re McMullen, 127 Wn.2d 150, 164, 896 P.2d 1281 (1995), quoting the above, stated that "Although McGlothlen was decided under the former Code of Professional Responsibility, this rule applies equally under the RPC." 99 Wn.2d 515, 525.
RPCs 1.7 and 1.8 specify what you must do to carry the burden that the transaction with the client is not fraudulent. RPC 1.7 prohibits you from representing a client if the representation may be materially limited by your own interests unless: (1) you reasonably believe the representation will not be adversely affected, and (2) the client consents in writing after consultation and full disclosure of the material facts.
RPC 1.8(a) prohibits you from entering a business transaction with a client unless: (1) the transaction and terms are fair and reasonable to the client, (2) the transaction and terms are fully disclosed and transmitted in writing to the client, (3) the disclosure and transmission are accomplished in a manner which can be reasonably understood by the client, (4) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction, and (5) the client consents to the transaction and the terms. Commenting on these requirements, the Supreme Court in In re Gillingham, 126 Wn.2d 454, 462 note 5, 896 P.2d 56 (1995), noted that while RPC 1.8 does not explicitly require the lawyer's advice to seek independent counsel to be in writing, or that the client's consent to the transaction be in writing, "the prudent attorney will advise the client in writing . . . A prudent attorney will normally obtain the consent of the client in writing as well."
Each of these requirements must be fully satisfied for the loan from a client to you to be permissible under the RPCs. In McGlothlen the Supreme Court declared its intent to hold lawyers to a high standard in meeting these requirements wherever the lawyer's status as a lawyer gives him or her disproportionate influence over the persons with whom he or she is dealing. 99 Wn.2d 515, 517. It found in that case that although the lawyer's "conduct as measured against ordinary standards was entirely proper, it did not meet the stringent requirements imposed upon an attorney dealing with his or her client." [99 Wn.2d 515, 525]. The Court concluded, however, that, "Inasmuch as we are announcing a new standard . . . it would be unfair to impose discipline here." In that case, the lawyer had failed to provide full disclosure to the sole beneficiary of an estate from whom he had purchased a house (the sole asset of the estate), including the existence of an appraisal of the house, which he later resold at a profit.
The Court disbarred a lawyer in In re Stock, 104 Wn.2d 273, 704 P. 2d 611 (1985), for numerous conflicts of interest, including loaning, without client consent, to one client funds in the lawyer's trust fund belonging to another client. The lawyer advised another client to loan money to a corporation in which the lawyer had an interest without disclosing that interest and without advising the client to seek independent counsel. The lawyer also represented that same corporation when it was sued by another client who had also invested in the corporation at the lawyer's invitation.
The Court suspended a lawyer from practice in In re Johnson, 118 Wn.2d 693, 826 P.2d 186 (1992), for twice borrowing money from clients without providing them with full written disclosure of his precarious financial situation. The Court suspended another lawyer in In re Gillingham, supra, for including himself in his client's will (which was changed before the client's death) and for borrowing money from his client without meeting the RPC requirements, even though it appears the client had originally offered to give the money to the lawyer, but, at the lawyer's request, instead loaned the funds to the lawyer.
The Court also suspended a lawyer from practice in In re McMullen, 127 Wn.2d 150, 164, 896 P.2d 1281 (1995), for borrowing money from a financially unsophisticated client on terms unfair and unreasonable to the client and for not fully disclosing material facts to the client, including the fact that the lawyer was not a good credit risk. The interest rate was viewed as unfair because although it was at a rate then current for secured loans, the loan in question was unsecured, thus suggesting the client was entitled to a higher rate of interest. The investment in question was also inappropriate for the client in terms of the client's age and need for current income.
Similarly, in In re James J. Stefnik (unreported Supreme Court order, Washington State Bar News, May 1997, page 33), the Supreme Court suspended a lawyer from practice, pursuant to the lawyer's stipulation to discipline, for, among other things, borrowing $40,000 from a client on terms unfair to the client (for example, inadequate security and a period of interest-only payments), without full disclosure of material terms (for example, the lawyer being a very poor credit risk who could not secure a loan from conventional sources), and without securing a written waiver of conflict of interest.
Gifts and Loans from Lawyers to Clients
Gifts and loans from lawyers to clients are far more common than gifts and loans from clients to lawyers. Usually lawyer gifts to clients are in the form of pro bono services, where the lawyer willingly gives free or reduced-rate legal services to his or her client. Indeed, the RPCs encourage the gift of such services by providing in RPC 6.1 that "A lawyer should render public interest legal service. A lawyer may discharge this responsibility by providing professional services at no fee or a reduced fee to persons of limited means . . ." Thus, a lawyer is ethically permitted, even encouraged, to give clients gifts of legal services. The practical limitation is that a lawyer cannot take on so many nonpaying clients as to endanger his or her ability to fully serve all of the lawyer's clients.
A lawyer may also make a gift or loan of cash to a client, or advance or guarantee financial assistance to a client, except while representing the client in connection with litigation. Thus, if you do not represent a client in pending or contemplated litigation, you may make loans or gifts to your client. If you do represent your client in contemplated or pending litigation, however, you may loan, but not give, advances for directly related litigation expenses. Your client, however, must ultimately be liable for the expenses.
These rules are mostly set out in Washington's RPC 1.8(e):
A lawyer who is representing a client in a matter . . . (e) Shall not, while representing a client in connection with contemplated or pending litigation, advance or guarantee financial assistance to his or her client, except that: (1) A lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses; and (2) In matters maintained as class actions only, repayment of expenses of litigation may be contingent on the outcome of the matter.
Our RPC 1.8(e) requires that the client be ultimately liable for the advanced costs. Unlike most of our other RPCs, this provision is not based on the American Bar Association Model Rules, but rather is a carry-over from our prior Code of Professional Responsibility. In enacting its RPC 1.8(e), Washington rejected Model RPC 1.8(e), which provides:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter and (2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
The rationale given for the rejection by the WSBA Task Force on the Rules of Professional Conduct is as follows:
The Task Force amended paragraph (e) in response to...remarks at the Seattle hearing. The WSTLA Board was concerned that this rule, coupled with the advertising rule, would give an unfair advantage to those who could afford to advance costs and expenses. The Task Force members felt the rule might create excise tax liability for lawyers where repayment of the advance was contingent on the result. Therefore, DR 5-103(B) [the predecessor to RPC 1.8(e)] was substituted, in its entirety, for the model rule.
Thus, it appears that under Washington's RPCs you: (1) may not pay court costs and expenses of litigation on behalf of an indigent client, (2) may advance litigation-related costs which are listed in RPC 1.8(e), but only those costs, and only if the client remains ultimately liable for them, and (3) may not advance living or any other expenses to a client while representing that client in litigation or contemplated litigation (but if not so representing the client, you may give or loan money to the client for any expenses). It is possible that public-policy considerations and the need for indigent clients to have access to justice may have an effect on interpretation of these rules. In any case, however, any transactions with a client remain fully subject to all of the provisions of RPC 1.7(b) and 1.8(a), discussed above, they must be fair and reasonable to the client, full disclosure must be made, and so on. Thus, you have the burden of proving you met each of the requirements, and if you fail to do so, the transaction (especially loans) may be viewed as unfair to your client.
The prohibitions against giving financial aid to a client in connection with pending or contemplated litigation, as well as the RPC 1.8(j) prohibition against acquiring a proprietary interest in a lawsuit other than a reasonable contingent fee or lien, continue similar common-law prohibitions of champerty (investing in a client's cause of action) and maintenance (providing living expenses to the client). The concern was that the lawyer's financial assistance would encourage a client to continue a lawsuit that might otherwise be forsaken, or, more generally, would encourage lawyers to subsidize their clients' lawsuits, and that a lawyer's objectivity may be sacrificed if he or she has a direct financial interest in the lawsuit. See Hazard & Hodes, The Law of Lawyering (2d ed.) §1.8:601, and ABA Center for Professional Responsibility, Annotated Model Rules of Professional Conduct (3d ed., 1996), page 130.
Conclusion
In general, any transaction with a client is likely to be viewed as fraudulent to the client unless you can meet your heavy burden of proving it is fair and reasonable to the client, that you fully disclosed all material facts, and that your client consented to the transaction and the conflict of interest. You may give to clients, and receive from them, both gifts and loans, but the RPCs and case law set out some significant restrictions. You may not prepare legal instruments effecting gifts to you or your immediate family unless the donor is related to you or the amount is insubstantial. Even where the gift is insubstantial, or the donor is related to you, however, you would be wise to have independent counsel handle the transaction. In general, beware of gift-giving clients, and remember that while you can give clients your time, you cannot give them your money (other than for certain specified litigation-related expenses) if you are representing them in litigation.
