The Colorado Supreme Court last week delivered an opinion that gives attorneys guidance on how to act when entering a business relationship with a client. The court’s decision covered Colorado Rules of Professional Conduct 1.8 and 4.2.
Rule 1.8 says attorneys should not enter business transactions with clients or acquire a possessory interest where either is adverse to a client. Rule 4.2 states that an attorney cannot talk with a client otherwise represented without the other attorney present. The Supreme Court’s direction reinforces the rules’ guidance that attorneys must not enter business transactions with clients in a way that gives the attorney power over their client.
CASE BACKGROUND
James Wollrab began representing Laszlo Bagi in 1991 in various legal matters. They grew close enough to be drinking buddies and to spend holidays together. The two friends even started using a barter system for services. “He’s a longtime lawyer who cares a lot about his clients,” said Troy Rackham of Spencer Fane, a lawyer that represented Wollrab in this case.
In 2010, Bagi gained the option for the property where the offices for his HVAC company were located. To use the option, Bagi needed to provide $50,000 by April 15, 2011.
He was unable to find the funds and came to Wollrab on April 19 to see if he would help in the purchase. Wollrab was interested and encouraged Bagi to hire a corporate attorney, Clark Edwards, to represent Bagi. The two friends landed on $50,000 in exchange for a 50-percent ownership in Bagi Wollrab Investments, LLC, a company to which Bagi would give the purchasing option.
Since the agreement was late by four days and a check Bagi had written for the property bounced, Bagi went to Wollrab for a quick payment of the $50,000. In their haste, they failed to reach Edwards to have him draft a document for the transaction, so Wollrab wrote one without Edwards present.
In the end, the real estate purchase fell through. However, Bagi managed to purchase the desired property in a second attempt. Wollrab was not part of the purchase.
In return for other work done for Bagi by Wollrab, Bagi offered office space rent free. Wollrab eventually asked for a written lease to the offices. Bagi gave Wollrab a standard lease document, which Wollrab edited down to one page so that it had no standard tenant commitment left and no landlord protections.
Wollrab gave himself, “lifetime tenancy at a rate of $3 per square foot, or approximately $3,000 per year in rent, including insurance, maintenance, and taxes,” stated the opinion delivered by Justice Melissa Hart.
The process of rewriting the lease and having it signed by Bagi set Wollrab up for legal consequences. The transaction was not fair and reasonable to Bagi, Bagi was not told he should seek independent counsel, and he did not give informed written consent to the terms of the deal.
There was a falling out between Bagi and Wollrab due to Wollrab’s use of his space, leading to suits for three different actions that were consolidated and settled out of court.
The Office of Attorney Regulation Counsel filed a complaint claiming Wollrab violated the rules through the option for the failed purchase of property and with the lease that Wollrab had edited to benefit himself at the cost of Bagi.
RULE 1.8
The first of 11 sections of this rule regards entering business transactions with a client or knowingly gaining an interest in some fashion that is adverse to the client. Three provisions must be met to abide by the rule.
The transaction must be fair to the client and include full disclosure via writing in way the client understands.
The client must be told the importance of gaining independent counsel in writing and be given an opportunity to do so.
The client must give informed consent to the essential terms of the transaction and the lawyer’s role in it.
Wollrab says he did not violate the rule with his lease agreement because it was not a transaction with a client but with a non-client corporate entity. In the court’s eyes, the important question was if Wollrab purposefully harmed Bagi with the lease agreement. The court and the hearing board agree that he did.
The court makes it clear that the relationship was between an attorney and his client. In that context, the way Wollrab conducted the negotiation and closing of the lease agreement violated all three of the provisions.
The defendant denied violating rule 1.8 through the option he gained by giving Bagi $50,000 because the transaction was part of a larger deal that failed, so the rule cannot apply. The court purposefully did not address the nature of failed purchases affecting the rule, but did say that the option itself was a transaction, regardless of failure. Wollrab was given a 50 percent stake in a company in exchange for the $50,000.
The court said that regarding the option transaction, he had not violated the first two provisions as Bagi was represented by Edwards, but had violated the third. This reverses the board’s ruling that Wollrab had violated all three provisions.
RULE 4.2
This rule states that an attorney shouldn’t communicate with a represented party unless there is consent from the represented party’s lawyer.
Wollrab gave two arguments as to why he had not violated this rule. First, the plain language of the rule does not apply when a lawyer is investing in something as a business transaction. Second, there was implied consent by Bagi’s lawyer, Edwards, allowing discussions about the option without him present. Edwards knew that Bagi and Wollrab had been discussing the deal extensively and did not prohibit those conversations, which was taken as implied consent from Edwards for the two to talk without him present.
The court only addressed the second argument and said that the documents made in haste for the option’s transaction were under the scope of Edwards’ implied consent. The court reverses the board’s ruling that Rule 4.2 was violated.
“[The ruling] does provide important guidance to lawyers in the acting as participant instead of as a lawyer representing a client scenario. I think it will have a big impact there,” Rackham said.
— Connor Craven