Attorneys Who Enter Business Agreements with Friends Should Use the Same Standards as Business Agreements with Clients

Rule 3-300 of the Rules of Professional Conduct provides that a member of the State Bar shall not enter into a business transaction with a client unless certain requirements have been satisfied.  The main requirement is that the client is advised in writing to seek the advice of independent counsel and given a reasonable opportunity to seek that advice.

In a recent State Bar prosecution, the attorney met a friend in 1998.  Between 1999 through 2002, the attorney performed occasional legal services.  In 2005, the attorney entered into an agreement to purchase a residential duplex from the friend for $700,000.00, and to finance the entire transaction.

When complications arose in financing, the attorney listed the property for sale for $959,000.00, without telling her friend.  The attorney accepted an offer of $895,000.00, subject to the close of the escrow sale with her friend.

When the friend learned of the sale, the friend canceled the joint escrow.   The attorney sued her friend for breach of contract and specific performance.  The friend cross-complained for breach of fiduciary duty and fraud. A jury found for the attorney with a total award of $372,693.85, and found the attorney had done nothing wrong.

The State Bar proceedings against the attorney, the case of In the Matter of Maria Darlene Allen (Nov. 19, 2010) No. 06-O-13329, were dismissed by the trial court and the Review (appellate) Department of the State Bar Court affirmed the dismissal, finding that an attorney/client relationship at the time of the business transaction is an essential element to a violation of Rule 3-300 stating that, “The duration of an attorney/client relationship is dependent upon the nature and scope of the relationship.”

The State Bar ordeal could have been avoided had the attorney treated her friend like an existing client and given her friend a written advisement and opportunity to seek the advice of an attorney of the friend’s choice about the fairness of the transaction.  The frequency of business deals going sour with strangers applies equally to business deals with friends.