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NJ: Securing Payment of Fees with a Mortgage on Client Property

Petit-Clair v. Nelson, 782 A.2d 960 (N.J. Super. Ct. App. Div. 2001)

NJ: Underlying Client Mortgage to Secure Payment of Legal Fees

Student Contributor: Le-el D. Sinai

Facts: The defendants in this case are business owners who hired the plaintiff attorney to represent their businesses in litigation. During litigation, defendants agreed to give the plaintiff attorney mortgage on their home in order to pay the legal fees they owed him. Once the litigation was complete, the defendants executed a mortgage with the plaintiff in the amount of $41,299, which secured the payment of the legal fees. The defendants eventually defaulted, so the plaintiff filed a foreclosure complaint against them.

Issue: Did the ethical rules governing attorney-client relationships invalidate the plaintiff attorney’s agreement with the defendant clients?

Ruling: Yes.  

RPC 1.8(a) requires 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 manner and terms that should have reasonably been understood by the client, (2) the client is advised of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent counsel of the client’s choice of the transaction, and (3) the client consents in writing thereto.

Plaintiff attorney should have adhered to point (2) of RPC 1.8(a), above.

Lesson: Attorneys should take extreme care when entering into business transactions with their clients. Following the RPC is only a start. Such transactions will always be subject to close scrutiny, as attorneys will always be bound to the highest degree of fidelity and good faith in such dealings. Most important follow each of the steps set forth in the RPC. Make sure the client gets independent counsel before entering the transition. 

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Posted in: New Jersey