Gifts Versus Business Transactions

Gifts Versus Business Transactions

A lawyer can come to own a client's lakeside cabin by two routes, and the rules treat them very differently. Rule 1.8(a) governs the route of exchange: 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 a client, unless a set of safeguards is met.¹ Rule 1.8(c) governs the route of gift: a lawyer shall not solicit a substantial gift from a client, or prepare an instrument giving the lawyer or a related person a substantial gift, unless the lawyer or other recipient is related to the client.² The first route stays open to a careful lawyer. The second, as the earlier sections showed, does not.

Rule 1.8(a) lists three safeguards, all of which must be met, and each does separate work:

1. The terms on which the lawyer acquires the interest must be fair and reasonable to the client, and they must be fully disclosed and transmitted in writing in a manner the client can reasonably understand.³
2. The client must be advised in writing of the desirability of seeking independent legal counsel on the transaction and must be given a reasonable opportunity to do so.⁴
3. The client must give informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in it, including whether the lawyer is representing the client in the transaction.⁵

These safeguards can work because a business transaction is an exchange, and an exchange can be measured against an outside standard: the terms must be fair and reasonable to the client. Written disclosure tells the client what she is agreeing to. Written advice and a reasonable opportunity to consult independent counsel let her test the deal with a lawyer who is not the other party. The signed consent records that she accepted the essential terms and the lawyer's role. Because the rule demands more than consent, it is called a consent-plus rule: the terms must also be fair and reasonable to the client. Rule 1.8(c), by contrast, sits among the provisions that establish non-consentable conflicts.⁶ A gift offers no comparable yardstick. Nothing is exchanged, so there is no price to set against value and no fairness standard to apply. If the lawyer who would receive the gift also drafts the instrument, written disclosure and a signature would merely ratify a transfer that nothing in the transaction can test.

The two cabins are worth the same, and in both scenes the lawyer gave careful written disclosure. What separates the outcomes is whether the client received anything in return. The deed in the first scene falls under Rule 1.8(c), which contains no exception for consent or independent advice, and the sale in the second falls under Rule 1.8(a), whose safeguards were written for an exchange.⁷

Real facts do not always sort so cleanly. A transfer at a price far below value has the form of a sale and much of the substance of a gift. The rule text sets no price threshold at which one becomes the other, so the lawyer cannot count on the label. If the transfer is a sale, a price far below value strains the requirement that the terms be fair and reasonable to the client. If it is really a gift, the Rule 1.8(c) prohibition applies instead. An exam answer should therefore identify the facts bearing on each rule and say which characterization they support before choosing one. The risk is practical as well as doctrinal. Clients often suggest a mutual business arrangement with their lawyer, perhaps in exchange for a discount or in lieu of fees for associated work. A lawyer's business dealings with a client receive intense scrutiny for overreaching, and an ethics complaint and litigation are almost certain if the client later becomes dissatisfied with the relationship.⁸

Rule 1.8(a) also reaches well beyond outright purchases, because it covers any pecuniary interest adverse to the client. A lawyer who represents a start-up company in exchange for some of its stock must comply with it.⁹ For the gift problem, the working contrast is this: a lawyer may acquire a client's property by exchange if the three safeguards are met, and may not take it by a gift the lawyer solicits or drafts.