Disclosure is key to compliance with Rule 3-300

By Diane Karpman

Karpman

Rule of Professional Conduct 3-300 seemingly allows a lawyer to go into business with a client, or obtain a security interest adverse to a client. But if that is true, where are the cases that support this proposition? Lawyers in the reported cases can’t seem to win.

For example, in Passante v. McWilliam (1997) 53 Cal. App. 4th 1240, a fledgling holographic baseball card manufacturing company was on the brink of disaster because it could not pay for the fancy Italian paper necessary for the first run of the cards.

Magically, the hardworking hero lawyer came up with the money and saved the day. The grateful client initially promised the sun and the moon and the stars. When a dispute arose later, however, the Court of Appeal denied the lawyer’s recovery in a decision that focused on contractual principles.

As a group, lawyers are nonplussed by the so-called “reality shows” dominating television. After all, none of the things that occur on those programs comes close to the bizarre reality of our daily practices. Italian paper for American baseball cards wouldn’t even cause a lawyer to blink.

Rule 3-300 is harsh and unforgiving and mandates literal compliance.

The terms must be fair and reasonable and explained to the client in writing in a manner that they can understand. The client must be advised to seek independent counsel and be given a reasonable opportunity to do so. The consent of the client to all the transaction must be obtained in writing. Even if the client obtains independent counsel, failure to obtain client consent in writing can be fatal. BGJ Associates, LLC v. Wilson (2003) 113 Cal. App. 4th 1217.

“Fair and reasonable” means that an attorney gives the client the same advice against the transaction that he would give himself. Gibson v. Jeyes (1801) 6 Vesey, 266. All aspects of the deal must be reviewed, even telling the client that a better deal can be had down the block, or that lawyer Smith is less expensive. Full disclosure protects you.

Explaining something to clients in a manner that they can understand is possibly the greatest mystery in the practice of law. Clients notoriously demonstrate selective memory. Often they only “understand” information that they want to hear. In Washington, D.C., this is sometimes called “group think.” A client, a governmental agency, or even the Administration understands and processes information that is consistent with what they want to hear.

Disclosure is the key to successful compliance with rule 3-300. Tell the client everything: the good, the bad, and the ugly. Some firms even pay for independent counsel to guarantee that the client understands. (No, it can’t be a friend down the hall). See Fletcher v. Davis (2004) 33 Cal. 4th 61, a recent case in which the Supremes apply the rule to a charging lien (a lien on the subject recovery of the case).

Check out the new Supreme Court/Court of Appeals homepage, where searchable opinions are available since 1850 (http://www.court info.ca.gov/opinions). Wonderful and free!

• Ethics expert Diane Karpman can be reached at karpethics@aol.com or 310-887-3900.