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NJ: Doing Business With Your Clients: DON'T!

Profit Sharing Trust for Marprowear Corporation v. Lampf, Lipkind, Prupis, Petigrow & Labue
267 N.J. Super. 174, 630 A.2d 1191 (1993)

NJ Underlying Investment Transaction

Student Contributor: Natalie Resto

Facts: A law firm asked a long term client  if it would be interested in investing money in an insurance group. Without advice from independent legal counsel, the client invested $449,600 in the insurance group relying on the assurance of the firm’s attonreys. The law firm, however, did not reveal either in writing or verbally the fact that attorneys of the law firm were directors of the insurance group or that the law firm also represented the insurance group. The insurance group eventually filed for bankruptcy.
Later, the law firm sued the client   for unpaid legal fees. Client counterclaimed for legal malpractice claiming that it would not have made the investment if they had been provided the notices that were required under R.P.C. 1.8, and advised that the losses were foreseeable at the time of investment. The law firm argued that it did not proximately cause the damages sought.

Issue: Was the law firm’s negligence the proximate cause of the plaintiff’s damages?

Ruling: The court found that the law firm’s failure to inform Marprowear and the Trust of its relationship with the insurance group directly caused Manprowear and the Trust to invest. The court held that a reasonable jury could find, as the jury did, that the law firm’s failure to disclose its relationship was the legal and proximate cause of the injury.

Lesson: R.P.C 1.8(a) states that 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:
(1) the transaction and terms in which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be 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 of the client’s choice concerning the transaction; and
(3) the client gives 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.

Editor’s Note:  Here the Court was particularly upset that the law firm used the confidential information of the client’s financial well being to target it as a potential investor.

 If proximate cause is ultimately a question of fairness and policy, imposing liability on these facts is both fair and good policy. Lawyers who fail to inform clients of their own interests, fail to advise clients to seek other counsel, unabashedly sell their clients the notion that an investment with them or their colleagues is a good and safe one, and use their clients as sources of investment funds, must accept responsibility for the outcome. Lawyers may not burrow their way into their clients’ confidences and then exploit those confidences for their own ends. This is the law in New Jersey.

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Posted in: Fiduciary Duty, New Jersey, Rules of Professional Conduct (RPCs)