Washington Lawyer

Legal Ethics: Opinion 319 — Purchase by a Lawyer of a Legal Claim From a Nonlawyer

From Washington Lawyer, May 2003

(The May 2003 “Speaking of Ethics” column addressed the issue of a lawyer purchasing a “chose in action” from a non-client, which is the focus of Opinion 319. Opinion 319 mentions Rule 1.8(a) (Business Transaction With a Client), Rule 8.4 (c) (Lawyer Misconduct) and briefly Rule 7.1 (Communications Concerning a Lawyer’s Services) and maintains that it is permissible for an attorney to purchase a “chose in action” from a non-client, but the attorney must attend to important considerations.)

This Committee has received an inquiry asking whether a lawyer may purchase a chose in action from a nonlawyer who is not the lawyer’s client, with the lawyer acting either on his or her own behalf or as an agent for a corporation created and controlled by the lawyer. …

(T)he topic is not at least directly covered in the D.C. Rules of Professional Conduct … Under D.C. law, a chose in action can be assigned, and the assignee may sue in the assignee’s name. D.C. Code § 28-2304.

We conclude that while prudence will often counsel lawyers strongly against such purchases, with some restrictions the D.C. Rules of Professional Conduct do not forbid a lawyer’s purchase of a chose in action.

If X has a chose in action, then X has a legal claim against another that might be pursued in court. Selling the chose in action is a way for X to obtain some value for this claim without having to bear the cost and risk of litigation. It thus may be a desirable goal for X. A lawyer with an understanding of litigation might be an apt purchaser for such a claim. Accordingly the sale transaction would appear to be potentially beneficial to both. …

Our Rules of Professional Conduct afford more consideration for persons who may have significant legal problems or opportunities but who do not have existing counsel and a lawyer may advise a prospective client of the possibility of litigation as long as the requirements of Rule 7.1 are met. …

(T)he provisions of Rule 8.4 govern all conduct of lawyers, whether client-related or not. Rule 8.4(c) declares it to be misconduct for a lawyer to engage in conduct “involving dishonesty, fraud, deceit, or misrepresentation.” This places obvious limits on the negotiation and execution of any transaction, including one with a non-client.

A critical feature of the inquiry is the statement that the seller of the chose in action is not the lawyer’s client and that the lawyer is not acting on behalf of a client when engaged in the purchase. If the seller were a client, then the severe restrictions of Rule 1.8 would apply to any business transaction between the lawyer and client, including the purchase of a chose in action from the client. Under Rule 1.8(a), any business transaction between a lawyer and a client must be objectively fair and reasonable to the client and documented in a writing that can reasonably be understood by the client, and the client must consent in writing. Moreover, the client must be “given a reasonable opportunity to seek the advice of independent counsel” for the transaction.

…(W)here the seller is an ordinary person who has a chose in action that the lawyer views as potentially valuable, there may well be a significant disparity of knowledge between the lawyer as a prospective purchaser and the lay seller. … In a negotiation between them the lawyer-purchaser may make (or appear to make), and the seller may rely on, representations concerning such matters as the worth of the chose in action, the difficulty of success, and so on.

In addition, there may be other factors further increasing the disparity of bargaining power between them. …

…(W)e think that lawyers would be well advised to avoid situations in which the seller is a person not represented by counsel, for the following reasons. Because a negotiating buyer typically urges the seller to accept, it would also be difficult in many circumstances to distinguish between such representations made in negotiating such a transaction and the provision of legal advice. The seller may not understand that the lawyer’s adversity in the sale transaction should be a warning that the lawyer may not have the buyer’s interests at heart in stating legal reasons or providing legal advice to the seller as to whether to agree to the transaction. In such circumstances—even if everything said by the lawyer-purchaser were absolutely correct—there would be a danger that representations as to legal questions made by the buyer and reasonably relied on by the seller would create ambiguity regarding the existence of a lawyer-client relationship between the two, converting the situation to one in which Rule 1.8 applied. …

The question of what circumstances give rise to a lawyer-client relationship is one of substantive law rather than professional responsibility under the Rules of Professional Conduct, and accordingly we go no further than to suggest the significant possibility of such a result. But, as noted above, the existence of a lawyer-client relationship would trigger the applicability of Rule 1.8, which imposes strict substantive and procedural requirements on commercial transactions between a lawyer and a client. The lawyer-purchaser in such circumstances would find himself or herself in difficult circumstances, as Rule 1.8(a) requires a written waiver from the client, an opportunity for the client to obtain independent counsel, and that “the transaction [be] . . . fair and reasonable to the client and transmitted to the client in a manner which can be reasonably understood by the client. . . .”

Therefore, while the D.C. Rules of Professional Conduct do not forbid a lawyer from purchasing a chose in action from a nonlawyer, the purchasing lawyer should be aware of the risk that, given the legal nature of the thing sold, the seller may rely on representations by the buyer as to legal matters and later claim that an attorney-client relationship resulted, imposing Rule 1.8 requirements. To avoid misunderstandings and to protect both the seller and the buyer, we recommend that if possible the would-be purchaser seek to deal only with sellers who are represented by counsel and that the purchaser strongly suggest representation by counsel for sellers who are not represented. In the absence of such independent representation, the risk is that Rule 1.8 will later be argued to have applied, with the consequences, among others, that the deal will be subject to examination (probably after the fact and perhaps when the deal has proven decidedly favorable to the lawyer-purchaser) as to whether it was objectively fair and reasonable to the seller pursuant to Rule 1.8(a)(1).

If the seller refuses to obtain independent representation, it may be possible for the purchasing lawyer to (1) convince the seller to disclaim any intention of relying on the purchaser for legal advice or (2) avoid the making of representations in negotiation concerning the legal questions underlying the valuation of the chose in action, and by either or a combination of these to avoid a later claim by the seller of a lawyer-client relationship. However, we cannot state with certainty what would or would not be sufficient to establish that an unrepresented person had disclaimed such a relationship … because… that is a question of substantive law rather than professional responsibility.

Adopted: March 2003