Ethics Docket No. 1990-04

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 1990-04

Law firm setting up separate corporation to handle real estate settlements corporation

In your letter of July 14, 1989, you requested an opinion regarding the propriety of a law firm "contracting" with a corporation to conduct real estate settlements. The corporation would retain, for its own benefit, interest earned on monies held in escrow.

Although it is not entirely clear from your letter, it appears that you propose to refer clients seeking representation in real estate settlements to a corporation owned by spouses of members of the firm. The corporation then would employ members of the firm to conduct such settlements.

A similar situation is examined in Ethics Docket 88-84, wherein the Committee discussed the ethical implications of lawyer-owned title companies retaining interest on clients' funds held for settlement. In that opinion, the Committee noted that lawyers are bound by the ethical standards of the legal profession when engaging in law-related occupations. See also Ethics Docket 86-23. After reiterating that it is unethical for a lawyer to keep interest earned on client funds, the Committee determined that an attorney owning a title company could not ethically permit the company to retain such interest. See also Ethics Docket 81-44.

The scenario you present differs from the arrangement addressed in Ethic Docket 88-84 in only one material respect: the company retaining the interest earned on client funds is owned by the lawyers' spouses, rather than the lawyers themselves. As with attorneys owning title companies, attorneys engaged in real estate settlements are certainly involved in a law-related occupation and thus must abide by the ethical standards of the legal profession. Further, although the lawyers in the present scenario would not "own" the settlement corporation, they would nonetheless have a significant economic interest in the corporation. Profits from the corporation would presumably be distributed to the lawyers' spouses. Moreover, the lawyers would apparently receive fees from the corporation, and the amount of such fees would vary with the number of settlements conducted by the lawyers on behalf of the corporation. The fact that the lawyers themselves would not own the corporation therefore does not remove the ethical concerns underlying Ethics Docket 88-84.

The first of these concerns relates to Rule 1.7(b), which provides that "[a] lawyer shall not represent a client if the representation of that client may be materially limited … by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation." See also Rule 1.7 comment (rule prohibits referring clients to enterprises in which lawyer has an undisclosed interest). As is discussed in Ethics Docket 88-84, if a client approaches a lawyer concerning a real estate settlement, the independent exercise of professional judgment may require the lawyer to recommend establishing an account earning interest for the client. In the scenario presented by your letter, however, the lawyer could best benefit his or her own economic interest (and the interests of the lawyer's spouse) by recommending that the client allow the corporation to conduct the settlement and retain the interest. The representation of the client thus may be adversely affected by the lawyer's personal interests.

Referring clients to such a corporation could also violate the Rule 1.8 proscription of improper transactions with clients. Rule 1.8(a) proscribes such transactions "unless: (1) the transaction is fair and equitable to the client; and (2) the client is advised to seek the advice of independent counsel in the transaction and is given a reasonable opportunity to do so."

As noted above, an attorney may not keep interest earned on a client's funds held in escrow. Pursuant to the Maryland Code, such interest must be paid either to the client of the Maryland Legal Services Commission. Md. Ann. Code Art. 10, Section 44 a client to deposit his or her funds with a corporation in which the lawyer has an interest, thereby depriving the client of interest he or she otherwise would have earned while benefiting the lawyer and the lawyer's spouse, is manifestly unfair to the client and thus violates Rule 1.8(a).

Finally, Rule 8.4 provides that a lawyer may not "assist or induce another" to violate the Rules of Professional Conduct or "do so through the acts of another …" (emphasis supplied). This rule is substantially similar to DR 1-102(A), which provided in part that a lawyer "shall not: … circumvent a Disciplinary Rule through actions of another." As you quite candidly acknowledge in your letter, the sole purpose of creating a separate corporation to conduct settlements would be to circumvent various ethical and legal requirements imposed on lawyers. To become involved in such a circumvention would appear to be a direct violation of Rule 8.4(a.).

For the reasons stated above, a lawyer cannot ethically facilitate the retention of interest earned on clients' funds by a corporation in which the attorney has a personal interest.