New Jersey Legal Ethics
1.8 Rule 1.8 Conflict of Interest: Prohibited Transactions
1.8:100 Comparative Analysis of New Jersey Rule
• Primary New Jersey References: NJ Rule 1.8
• Background References: ABA Model Rule 1.8, Other Jurisdictions
• Commentary:
• NJ Commentary:
1.8:101 Model Rule Comparison
RPC 1.8(a) as adopted in New Jersey is stricter than the Model Rule 1.8(a) in one significant respect. RPC 1.8(a) requires that the attorney inform the client of the desirability of seeking independent legal advice and afford the client a reasonable opportunity to do so. The Model Rule does not require that the client be informed of the desirability of seeking independent legal advice. See ABA Model Rules of Professional Conduct Rule 1.8(a)(2) (1989).
RPC 1.8(b) is identical to Model Rule 1.8(b) except the cross-reference to RPCs 1.6 and 3.3 was deleted in RPC 1.8.
RPC 1.8(h) adds language not contained in the Model Rule 1.8(h) concerning agreements between an attorney and a client limiting the attorney’s liability for malpractice. RPC 1.8(h) provides that when a client fails to act in accordance with an attorney’s advice or refuses to permit the attorney to act in accordance with the attorney’s advice, and the attorney continues to represent the client at the client’s request, the attorney may make a prospective agreement limiting liability.
New Jersey added a new paragraph (k), which is not part of Model Rule 1.8 to affirmatively state that the provisions of RPC 1.7(c), which concerns the appearance of impropriety, are applicable as well to cases covered by RPC 1.8. See Rules of Professional Conduct, N.J.L.J., July 19, 1984, supp. at 1-16.
1.8:102 Model Code Comparison
There is no direct counterpart in the New Jersey RPCs.
1.8:200 Lawyer's Personal Interest Affecting Relationship
• Primary New Jersey References: NJ Rule 1.8(a)
• Background References: ABA Model Rule 1.8(a), Other Jurisdictions
• Commentary: ABA/BNA § 51:501 et seq., ALI-LGL § 207, Wolfram §§ 7.6, 8.11
• NJ Commentary:
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1.8:210 Sexual Relations with Clients
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1.8:220 Business Transactions with Clients
The New Jersey Supreme Court has “warned attorneys repeatedly of the dangers of engaging in business transactions with their clients.” Matter of Humen, 123 N.J. 289, 300 (1991). In addition, the New Jersey Supreme Court has stated on several occasions that “society might be `better served if practicing attorneys were to remain full-time lawyers rather than become part-time businessmen.’” See In re Palmieri, 76 N.J. 51, 52-53 (1978) (quoting In re Carlsen, 17 N.J. 338, 346 (1955)). Nevertheless, there is no outright prohibition on an attorney entering into a business relationship with his or her client. Rather, an attorney may participate in a business transaction with his or her client, provided that the lawyer complies with an extensive series of disclosure requirements. A failure to make the appropriate disclosures may subject the attorney to suspension or disbarment. See Matter of Silverman, 113 N.J. 193 (1988); Matter of Smyzer, 108 N.J. 47 (1987).
These extensive disclosure and writing requirements are intended to protect clients from an unscrupulous attorney’s overreaching or undue influence, and to deter lawyers from entering into business relationships with their clients in the first place. See Debevoise Committee Report, 112 N.J.L.J., July 28, 1983, supp. at 6. In addition, the New Jersey Supreme Court has often stated that the confidence reposed in an attorney by his or her client, along with the very real possibility of divided loyalty, warrant strict scrutiny of any transaction involving both parties. See In re Wolk, 82 N.J. 326, 332-333 (1980). As the New Jersey Supreme Court observed in Smyzer, supra, at 55,
In view of the trust placed in an attorney by his clients and the attorney’s often superior expertise in complicated financial matters, a lawyer must take every possible precaution in ensuring that his client is fully aware of the risks inherent in the proposed transaction and of the need for independent and objective advice.
Note that the requirements of RPC 1.8(a) apply when an attorney and a client form a business partnership, see Matter of Reiss, 101 N.J. 475, 479, 487 (1986), or become co-investors in a separate business venture. See Profit Sharing Trust v. Lampf, 267 N.J. Super. 174, 196 (Law Div. 1993). As the court in Lampf stated, lawyers may not use their clients to “bankroll” risky investments. See id. And see Matter of Smyzer, 108 N.J. 47, 57 (1987), observing that an attorney may not deceive his or her clients into investing in a company whose financial condition is rapidly deteriorating in order to protect the attorney’s own investment in the same company. See Section 27:1, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:300 Lawyer's Use of Client Information
• Primary New Jersey References: NJ Rule 1.8(b)
• Background References: ABA Model Rule 1.8(b), Other Jurisdictions
• Commentary: ABA/BNA §§ 55:501-55:2001 , ALI-LGL §§ 113-117A, Wolfram § 6.7
• NJ Commentary:
RPC 1.8(b) provides that “[a] lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation.” This provision is identical to ABA Model Rule 1.8(b).
1.8:400 Client Gifts to Lawyer
• Primary New Jersey References: NJ Rule 1.8(c)
• Background References: ABA Model Rule 1.8(c), Other Jurisdictions
• Commentary: ABA/BNA § 51:601, ALI-LGL § 208, Wolfram § 8.12
• NJ Commentary:
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1.8:500 Literary or Media Rights Relating to Representation
• Primary New Jersey References: NJ Rule 1.8(d)
• Background References: ABA Model Rule 1.8(d), Other Jurisdictions
• Commentary: ABA/BNA § 51:701, ALI-LGL § 48, Wolfram § 9.3.3
• NJ Commentary:
RPC 1.8(d) prohibits a lawyer from making or negotiating an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation prior to the conclusion of the representation.
1.8:600 Financing Litigation
• Primary New Jersey References: NJ Rule 1.8(e)
• Background References: ABA Model Rule 1.8(e), Other Jurisdictions
• Commentary: ABA/BNA § 51:801, ALI-LGL § 48, Wolfram § 9.2.3
• NJ Commentary:
With respect to the advancement of litigation expenses, which could also be viewed as giving a lawyer an interest in the outcome of a matter, RPC 1.8(e) provides:
[a] lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
1.8:610 Litigation Expenses
The Debevoise Committee stated in its report that living expenses may be considered litigation expenses in some situations involving indigent clients. See Debevoise Committee Report, 112 N.J.L.J., July 28, 1983, supp. at 6. See Section 19:3-2, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:620 Living and Medical Expenses
See Section 1.8:610 above.
1.8:700 Payment of Lawyer's Fee by Third Person
• Primary New Jersey References: NJ Rule 1.8(f)
• Background References: ABA Model Rule 1.8(f), Other Jurisdictions
• Commentary: ABA/BNA § 51:901, ALI-LGL §§ 215, 216, Wolfram § 8.8
• NJ Commentary:
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1.8:710 Compensation and Direction by Third Person
Generally, an attorney may enter into a fee agreement with one person covering legal services rendered to another. See Advisory Comm. Op. 51 (Nov. 5, 1964) and In re Rockoff, 66 N.J. 394, 396 (1975), which permit this practice in appropriate circumstances. Such agreements are governed by RPC 1.8(f) which states:
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) the client consents after consultation;
(2) there is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship; and
(3) information relating to representation of a client is protected as required by RPC 1.6.
The fee agreement between the lawyer and the third party (or between the third party and the client) must always be reduced to writing pursuant to the Statute of Frauds, N.J.S. 25:1-5(b).
See also RPC 5.4(c) (lawyer should not permit payor other than client to direct the lawyer). See Section 33:8, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:720 Insured-Insurer Conflicts [see also 1.7:315]
Attorneys who are employees of insurance companies or are otherwise under contract with such companies to represent insured persons enter into an attorney-client relationship with the insured person. Lieberman v. Employers Ins. of Wausau, 84 N.J. 325, 338 (1980). An insurance defense attorney assigned to represent an insured owes that person the same unqualified loyalty as if he or she had been personally retained by the insured. Id.
The dual nature of the representation poses the potential for conflicts between the attorney’s obligation to insurer and insured during representation. When the conflict between insurer and insured becomes actual, the “paramount duty of singular loyalty and professional self-abnegation owed every client by an attorney” requires that the attorney first inform the client of the conflict and then either withdraw from the case completely or terminate his representation of either the insured or the insurer. Id. at 340. See Section 13:5-2, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:730 Lawyer with Fiduciary Obligation to Third Persons [see 1.13:520]
In Petrillo v. Bachenberg, 139 N.J. 472 (1995) the New Jersey Supreme Court held that under certain circumstances an attorney may have a limited fiduciary duty toward a non-client. In Petrillo, the attorney for the seller of real estate failed to provide reliable information to a potential buyer regarding percolation tests. When the buyer learned of the test results, she refused to complete the purchase and brought an action for damages against the attorney, among others, alleging that it was foreseeable that she would rely on the percolation report he provided. The New Jersey Supreme Court held that the attorney should have foreseen that the prospective buyer would rely on the facts set forth in the report he submitted and that the attorney owed a duty to that buyer, which included the obligation to provide information about unsuccessful, as well as successful, percolation tests. Id. at 478-479. More broadly, the New Jersey Supreme Court stated:
We also recognize that attorneys may owe a duty of care to non-clients when the attorney knew, or should know, that non-clients will rely on the attorney’s representations and the non-clients are not too remote from the attorneys to be entitled to protection.
Id. at 483-484. See Section 13:6-1, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:800 Aggregate Settlements
• Primary New Jersey References: NJ Rule 1.8(g)
• Background References: ABA Model Rule 1.8(g), Other Jurisdictions
• Commentary: ABA/BNA § 51:375, ALI-LGL § 209, Wolfram § 8.15
• NJ Commentary:
With respect to the settlement of cases in which the attorney represents two or more clients, see RPC 1.8(g), which prohibits a lawyer from “making an aggregate settlement of the claims of or against the clients, or in a criminal case an aggregated agreement as to guilty or no contest pleas, unless each client consents after consultation, including disclosure of the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement.”
In N.J. Advisory Comm. on Professional Ethics Comm. Op. 616 (Sept. 22, 1988), the Committee ruled that an attorney may represent multiple plaintiffs in a case even when the defendant can create a potential conflict by making a “tie-in” settlement offer that one client wishes to accept and another does not. If such an offer is made, the Committee held, the attorney need not withdraw from the representation of either client, as long as he or she complies with the requirements of RPC 1.8(g). The Committee reasoned that under that rule “there was no decision to be made by [the lawyer] which would put him in the position of favoring one client over another, or having to make a decision in favor of one client to the detriment of the others.... [T]he determination or decision was not made by the [lawyer] but, rather, by the ... plaintiffs.” The Committee also noted that there was nothing unethical about a defendant or a defendant’s attorney making such a tie-in, or “blanket,” settlement offer. The Committee did not address how the lawyer was to counsel the respective parties to the proposed blanket settlement, and whether a conflict might arise if they disagreed. See Section 19:2-1, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:900 Agreements Involving Lawyer's Malpractice Liability
• Primary New Jersey References: NJ Rule 1.8(h)
• Background References: ABA Model Rule 1.8(h), Other Jurisdictions
• Commentary: ABA/BNA § 51:110l, ALI-LGL § 76, Wolfram § 5.6.7
• NJ Commentary:
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1.8:910 Prospective Limitation of Malpractice Liability
RPC 1.8(h) prohibits an attorney from entering into an agreement prospectively limiting his or her liability to the client for malpractice unless the specific conditions set forth in RPC 1.8(h) are satisfied. See Sections 19:3-2 and 34:5-5, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:920 Settlement of Legal Malpractice Claim
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1.8:1000 Opposing a Lawyer Relative
• Primary New Jersey References: NJ Rule 1.8(i)
• Background References: ABA Model Rule 1.8(i), Other Jurisdictions
• Commentary: ABA/BNA § 51:1301, ALI-LGL § 203, Wolfram § 7.6.6
• NJ Commentary:
RPC 1.8(i) provides that lawyer related to another lawyer as parent, child, sibling or spouse shall not represent a client in a representation directly adverse to a person who the lawyer knows is represented by the other lawyer except upon consent by the client after consultation regarding the relationship.
The enumerated relationships are presumed to create a conflict of interest, requiring each attorney involved to consult with his or her client and to obtain an appropriate consent. Cf. DeBolt v. Parker, 234 N.J. Super. 471, 474, 476-477 (Law Div. 1988), observing that RPC 1.8(i) affirmatively permits related attorneys to represent adverse interests, provided that the rule’s conditions are met. The DeBolt court also notes that spouses are no longer per se disqualified from representing adverse interests. See id. at 477-479.
Whether consultation and consent are necessary in the event of a more distant relationship between adverse attorneys may depend on the facts of the particular case. Cf. N.J. Advisory Comm. on Professional Ethics Op. 600 (July 30, 1987).
Note that client consent is required only when at least one of the related attorneys is directly involved in the representation; if neither of the related attorneys is working on the matter, the lower standard of insulation and disclosure applies. See id.
RPC 1.8(k) also applies New Jersey’s “appearance of impropriety” doctrine to conflicts of interest resulting from family relationships between lawyers, which are governed generally by RPC 1.8(i). See Sections 23:1 and 23:6-1, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:1100 Lawyer's Proprietary Interest in Subject Matter of Representation
• Primary New Jersey References: NJ Rule 1.8(j)
• Background References: ABA Model Rule 1.8(j), Other Jurisdictions
• Commentary: ABA/BNA § , ALI-LGL §§ 47, 53, 55, Wolfram §§ 8.13, 9.6.3
• NJ Commentary:
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1.8:1110 Acquiring an Interest in Subject Matter of Representation
RPC 1.8(j) prohibits a lawyer from acquiring a proprietary interest in a client’s litigation matter. This rule provides that “[a] lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may: (1) acquire a lien granted by law to secure the lawyer’s fee or expenses, (2) contract with a client for a reasonable contingent fee in a civil case.” See Section 19:3-2, Michels, New Jersey Attorney Ethics (Gann Law Books, Newark, 2000).
1.8:1120 Contingent Fees [see also 1.5:600]
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1.8:1130 Lawyer Liens
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1.8:1140 Retention of Files to Collect Fees
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