Advisory Opinion: 2209
Year Issued: 2012
RPC(s): RPC 1.8(a), 1.8(i), RCW 26.09.060, RCW 26.16.030, RCW 61.24 et.seq.
Subject: Lawyer Taking Security Interest in Cient Property


This opinion concerns whether a lawyer may take a security interest in real property of a client in a dissolution proceeding, where a prenuptial agreement provides that the property is the separate property.

Question Presented

Inquiry 1: May an attorney take a security interest in the separate real property of a client in
a divorce proceeding where the client and spouse have signed a prenuptial
agreement (each having independent counsel for the agreement), which
agreement provides that the identified separate property of each party shall
remain their separate property and that neither spouse shall later claim an
interest in such property in the event of a divorce proceeding and where the
agreement regarding the security interest is bargained for at the time the initial
fee agreement is signed and the client understands and acknowledges the
attorney does not represent the client until the fee agreement is signed?

Inquiry 2: Same facts as above, except the security interest is bargained for after the fee
agreement is signed and the fee agreement is silent on the issue?

Rules of Professional Conduct/Statutes Implicated

Rule of Professional Conduct 1.8

RCW 26.09.060
RCW 26.16.030
RCW 61.24 et. seq.

Discussion

There is no absolute prohibition on an attorney asking a client to provide security interest
for payment of fees. See RPC 1.8(i); see also ABA Formal Opinion 02-427. However, there are
important ethical considerations that are implicated when an attorney accepts a contractual
security interest in real property.

Washington’s RPC 1.8(a), adopted from the ABA Model Rule 1.8(a), embodies the
fundamental principle of loyalty to the client and outlines the requirements an attorney must
meet when engaging in business transactions with clients. Rule 1.8(a) focuses on unfairness
and overreaching in the transaction itself. This issue is clearly in the forefront when an attorney
is negotiating an interest in real property, because the attorney’s self interest may affect her
representation of her client, particularly when representation has already commenced.

Is obtaining a consensual security interest from a client permitted under RPC 1.8(i)?

RPC 1.8(i) states [note 1] :


A lawyer shall not acquire a proprietary interest in the cause of action or subject matter
of litigation the lawyer is conducting for a client, except that the lawyer may:

(1) acquire a lien authorized by law to secure the lawyer's fee or expenses; and

(2) contract with a client for a reasonable contingent fee in a civil case.

An attorney may acquire a proprietary interest in the cause of action or subject matter of
litigation (as may occur in the context of a dissolution) as provided by RPC 1.8(i) if the lien is
authorized by law. In ABA Formal Opinion 02-427, the ABA concludes that the use of the word
“authorized” in 1.8(i) in place of the former “granted” is intended to permit any legally recognized
lien to secure fees to be acquired in property that is the subject of litigation. A contractual
security interest in real property is such a lien.

Application of RPC 1.8(a)

Washington’s RPC 1.8 (a) states:

A lawyer shall not enter into a business transaction with a client or knowingly acquire an
ownership, possessory, security or other pecuniary interest adverse to the client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and
reasonable to the client and are fully disclosed and transmitted in writing in a manner
than can be reasonably understood by the client;

(2) The client is advised in writing of the desirability of seeking and is given a
reasonable opportunity to seek the advice of independent legal counsel on the
transaction; and

(3) The client gives informed consent, in a writing signed by the client, to the
essential terms of the transaction and the lawyer’s role in the transaction,
including whether the lawyer is representing the client in the transaction.

The negotiation of the terms of the initial fee agreement is not generally considered a
“business transaction” with a client. This is because at the time of the negotiation of the initial
fee agreement, the attorney-client relationship is not yet formed. Thus the attorney does not
owe the same duty to a prospective client as she would to an existing client. Additionally, the
prospective client can walk away from the transaction. On the other hand, any subsequent
modification of the fee agreement is generally considered a business transaction. See Comment
[1] to RPC 1.8 (“[RPC 1.8] does not apply to ordinary fee arrangements between client and
lawyer, which are governed by Rule 1.5, although its requirements must be met when the
lawyer accepts an interest in the client's business or other nonmonetary property as payment of all or part of a fee.”).

However, there is some authority from other jurisdictions that RPC 1.8(a) applies even to
security interests acquired during the negotiation of the initial fee agreement. See ABA Formal
Opinion 02-427. Thus, it is the Committee’s opinion that the best practice would include
compliance with RPC 1.8(a).

Modifications after the attorney-client relationship has been formed

Once the attorney-client relationship has been established, the attorney’s obligations
change drastically because the attorney now owes a fiduciary duty to her client. This limits the
attorney’s ability to subsequently modify an existing fee agreement.

In Washington, the review of an attorney's fee agreement renegotiated after the
attorney-client relationship was established requires particular attention and scrutiny. See Perez v. Pappas, 98 Wn.2d 835, 841, 659 P.2d 475 (1983). If the only modification is the acceptance of a security interest for the payment of already negotiated fees, the attorney will be required to comply with the terms of RPC 1.8(a) as this constitutes a business transaction.

Application of other statutes/prenuptial agreement considerations

Deeds of trust are authorized in Washington as a method for obtaining security in real
property and may be used by attorneys to secure fees. See RCW 61.24 et seq. However, when there is an on-going dissolution action, other statutes, including RCW 26.16.030 are implicated. RCW 26.16.030 requires both spouses to execute any document encumbering community property. Whether property is considered community or separate property is beyond the scope of this opinion, but a lawyer accepting a security interest on what appears to be the client’s separate property should be aware that the court may not award that property to the lawyer’s client. See RCW 26.09.080.

An attorney considering taking a security interest in real property that is the subject of
marital dissolution litigation should also determine whether or not any orders prohibiting the
encumbrance of property have been entered. See RCW 26.09.060. Preliminary restraining
orders in dissolution matters may be entered that prohibit the encumbrance of “any property.”
Thus, even if the property was the separate property of the client spouse, he may be violating a
court order by executing any security instruments against his separate property.

Conclusion

Under RPC 1.8(i), an attorney may accept a contractual security interest in a client’s real
property. Washington courts have not squarely addressed the application of RPC 1.8(a) to the
acceptance of a security interest during the initial negotiation of the fee agreement, but the
careful attorney would comply with its provisions. If the security interest is created pursuant to a modified fee agreement, the attorney must comply with RPC 1.8(a).

In the context of dissolution proceedings, all property, both separate and community is
before the Court for a just and equitable distribution; thus even in the face of a facially valid
prenuptial agreement, there is a risk that what was understood to be the client’s separate
property may be deemed community property or otherwise may be awarded to the non-client
spouse, rendering the security interest valueless. The practitioner should also ensure there are
no court orders prohibiting the encumbrance of property subject to division in the dissolution.

Endnotes

1. Comment [16] states:
Paragraph (i) states the traditional general rule that lawyers are prohibited from acquiring a proprietaryinterest in litigation. Like paragraph (e), the general rule has its basis in common law champerty andmaintenance and is designed to avoid giving the lawyer too great an interest in the representation. In addition, when the lawyer acquires an ownership interest in the subject of the representation, it will be more difficult for a client to discharge the lawyer if the client so desires. The Rule is subject to specific exceptions developed in decisional law and continued in these Rules. The exception for certain advances of the costs of litigation is set forth in paragraph (e). In addition, paragraph (i) sets forth exceptions for liens authorized by law to secure the lawyer's fees or expenses and contracts for reasonable contingent fees. The law of each jurisdiction determines which liens are authorized by law. These may include liens
granted by statute, liens originating in common law and liens acquired by contract with the client. When a lawyer acquires by contract a security interest in property other than that recovered through the lawyer's efforts in the litigation, such an acquisition is a business or financial transaction with a client and is governed by the requirements of paragraph (a). Contracts for contingent fees in civil cases are governed by Rule 1.5.

Advisory Opinions are provided for the education of the Bar and reflect the opinion of the Rules of Professional Conduct Committee. Advisory Opinions are provided pursuant to the authorization granted by the Board of Governors, but are not individually approved by the Board and do not reflect the official position of the Bar association. Laws other than the Washington State Rules of Professional Conduct may apply to the inquiry. The Committee's answer does not include or opine about any other applicable law than the meaning of the Rules of Professional Conduct. Advisory Opinions are based upon facts of the inquiry as presented to the committee.