State Bar of Arizona Ethics Opinions
95-05: Gift; Personal Injury Representation
An attorney in a personal injury case, who has received his full fee, may accept the client's portion of the personal injury settlement, as a gift from the client, if: (1) the attorney complies with the requirements set forth in ER 1.8 regarding business transactions with clients; (2) the attorney does not attempt to prepare a legal instrument to perfect the gift; and (3) the client is competent to make an informed decision. These requirements do not apply to token gifts from clients. [ERs 1.5, 1.8, 1.14)
The inquiring attorney represents a bicyclist who was injured in an accident with a motor vehicle. The client suffered head and shoulder injuries, and required extensive rehabilitation. She made an excellent recovery from her injuries, has returned to work, and has minimal, if any, residual problems.
The attorney settled the case for policy limits of $65,000.00 and received a one-third contingent fee of $21,666.67. The attorney paid several thousand dollars in medical expenses which were not covered by insurance, and then obtained a reduction of the health insurance lien from approximately $130,000.00 to $15,000.00. After deducting costs, fees, and the medical expenses and health insurance lien amount, a net settlement for the client of $28,434.20 remained. The attorney notified the client and her spouse that she would be receiving this amount as her share of the personal injury settlement. His client responded that she would not take her share of the settlement and wished to make a gift of it to the attorney. The attorney then advised her that she should give it to her church or to charities of her choice. The client, who is a fundamentalist Christian, told the attorney to give it to his church or a charity of his choice.
Thereafter, on two occasions, the attorney paid the money to the client and each time she returned it to him. The client and her husband then sent a notarized letter to the attorney indicating that they wanted to give him the money as a gift. The letter advised him that the client did not "need, want, nor covet the money," and stated that the attorney could use the money personally as he saw fit for his immediate or extended family. The attorney thereupon placed the money in an interest-bearing trust account and sought direction from this Committee as to whether he could accept the gift.
May an attorney in a personal injury case, having received a full fee pursuant to his contingent fee agreement with the client, thereafter accept a gift from the client of the client's portion of the personal injury settlement?
RELEVANT ETHICAL RULES
(a) A lawyer's fee shall be reasonable . . . .
ER 1.8Conflict of Interest: Prohibited Transactions
(a) 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 on 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 which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto.
(c) A lawyer shall not prepare an instrument giving the lawyer or a person related to the lawyer as parent, child, sibling, or spouse any substantial gift from a client, including a testamentary gift, except where the client is related to the donee.
PRIOR ARIZONA ETHICS OPINIONS
No prior ethical opinions concerning this issue under the Rules of Professional Conduct have been found, either in Arizona or any other state. There are two opinions relating to gifts by a client under the prior Arizona Code of Professional Responsibility, as well as two opinions under the Code from other jurisdictions.
In Arizona Formal Opinion 74-24, issued September 29, 1974, an attorney prepared a will for a client naming the attorney's wife and children as beneficiaries under the terms of the will. EC 5-5, which was relied upon by the Committee, provided as follows:
A lawyer should not suggest to his client that a gift be made to himself or for his benefit. If a lawyer accepts a gift from his client, he is peculiarly susceptible to the charge that he unduly influenced or over-reached the client. If a client voluntarily offers to make a gift to his lawyer, the lawyer may accept the gift, but before doing so, he should urge that his client secure disinterested advice from an independent, competent person who is cognizant of all the circumstances. Other than in exceptional circumstances, a lawyer should insist that an instrument in which his client desires to name him beneficially be prepared by another lawyer selected by the client.
The Opinion observed that "[u]nder ordinary circumstances, it is unethical for an attorney to prepare a will in which the attorney is named as a beneficiary." Id. The Committee found that naming the attorney's wife or children as beneficiaries should fall within the same rule; any other holding would allow a clear circumvention of EC 5-5.
In Arizona Formal Opinion 76-20, issued by the Committee on November 8, 1976, the inquiring attorney had for a number of years advised his clients, who were also close personal friends, regarding a program of gifts that the clients made to certain relatives. The clients then offered stock of significant value as gifts to the attorney. The attorney refused the gifts and the clients then made gifts of the stock to the attorney's minor children. While EC 5-5 dealt exclusively with gifts from a client to a lawyer, the Opinion found that the same standards and conditions were applicable to gifts to members of the lawyer's family. The Opinion held that if the requirements of EC 5-5 were met, there is no ethical impropriety in accepting the gifts. Id.
Informal Ethics Opinion CI-1011, May 15, 1984, by the Ethics Committee of the State Bar of Michigan reached a similar result. In that Opinion, decided under Michigan's version of the Code of Professional Responsibility, the attorney represented the clients concerning the wrongful death of their son. The attorney ultimately settled the case and received a contingent fee of one-third of the recovery. Thereafter, the clients, unsolicited by the attorney, made a gift to the attorney of their deceased son's automobile in further appreciation for the work the attorney had performed. The Committee noted that there was no reference to the car as payment for fees in the contingent fee agreement. The attorney made an attempt to persuade the clients not to make the gift, and the clients indicated their understanding that they were under no obligation to give the automobile to the attorney but simply wanted to make a gift to him. On these facts, the Committee concluded that the attorney should consider the automobile as a gift and not as part of his fee.
Finally, in Opinion 810, issued July 25, 1986, the Standing Committee on Legal Ethics of the State Bar of Virginia determined that an attorney who represented a client on a volunteer basis on a referral from a pro bono agency may accept a gift from the client under the following conditions (which were requirements imposed by the referral agency); any monetary gift had to be reported to the agency; and the gift must not have been directly or indirectly solicited by the lawyer.
The relevant portions of the Arizona Rules of Professional Conduct that address gifts from a client to a lawyer are found in ER 1.8. At first glance, ER 1.8(a) appears to be directed solely towards business relationships and not gifts. The only specific mention of gifts from a client to a lawyer is found in ER 1.8(c). That provision prohibits a lawyer from preparing an instrument giving the lawyer or one of the lawyer's enumerated relatives any substantial gift from a client unless the client is related to the donee.No other provision in the rules addresses gifts from clients to lawyers.
The comment to ER 1.8 is instructive but the reach of comments is limited. "Comments do not add obligations to the rules but provide guidance for practicing in compliance with the rules . . . . The comment accompanying each rule explains and illustrates the meaning and purpose of the rule . . . . The comments are intended as guides to interpretation, but the text of each rule is authoritative . . .. "
17 Ariz.R.S.Ct. Preamble, Rule 42, Arizona Rules of Professional Conduct (February 2, 1985).
The portions of the comment to ER 1.8 relevant to gifts provide as follows:
As a general principle, all transactions between clients and lawyers should be fair and reasonable to the client. In such transactions a review by independent counsel on behalf of the client is often advisable.
. . . .
A lawyer may accept a gift from a client, if the transaction meets general standards of fairness. For example, a simple gift such as a present given at a holiday or as a token of appreciation is permitted. If effectuation of a substantial gift requires preparing a legal instrument such as a will or conveyance, however, the client should have the detached advice that another lawyer can provide. Paragraph (c) recognizes an exception where the client is a relative of the donee or the gift is not substantial.
The rule thus does not allow a lawyer to prepare an instrument for a client giving the lawyer, or his close relatives, any substantial gift unless the client is related to the donee. The negative pregnant, recognized by the comment, is that a lawyer may prepare such an instrument as long as the gift is not substantial. The comment also implicitly recognizes that substantial gifts may be given that do not require a legal instrument to effectuate their transfer. But without guidance from the rules, there is no authority for the unequivocal statement in the comment to ER 1.8 that a gift from a client may be accepted by the lawyer if the general standards of fairness are met. Given the absence of any rules on point, it must be assumed that ER 1.8(a) does apply to gifts.
Although ER 1.8(a) is directed towards business relationships with clients, the language appears sufficiently broad to encompass a gift. Thus, under ER 1.8(a), a lawyer shall not "knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client" unless the subparts of the rule are satisfied. Giving a literal construction to the terms, an attorney who accepts a gift from a client is acquiring an ownership or possessory interest in the gift adverse to the interest of the client.
The elements for an inter vivos gift in Arizona are: "donative intent, delivery, and the vesting of irrevocable title upon such delivery." Armer v. Armer, 105 Ariz. 284, 289, 463 P.2d 818, 823 (1970). Furthermore, when a gift is executed completely, such as when a sum of money is given to the donee without any limitation, the donor loses all right and title to the fund and the donee may use the gift as he sees fit. Steward v. Damron, 63 Ariz. 158, 168, 160 P.2d 321, 325 (1945). Once made, inter vivos gifts are irrevocable. McNabb v. Fisher, 38 Ariz. 288, 290, 299 P. 679 (1931). The Committee finds this is sufficient to constitute the requisite "adverse" interest necessary to come within the scope of ER 1.8(a).
The Committee is mindful, however, that if it were to construe ER 1.8(a) as generally applicable to all situations involving gifts from clients to attorneys, the consequences would be both absurd and troublesome. For example, every time an attorney was given a bottle of scotch or a dozen homemade tamales by a client, the provisions of 1.8(a) would be implicated and the attorney would be required to scrutinize the transaction to ensure that it is fair and reasonable, make a written disclosure to the client, advise the client of his opportunity to seek independent counsel, and obtain the client's consent. The comment to ER 1.8 clarifies that such a result was never intended by ER 1.8(a); simple token gifts such as those postulated above do not trigger the scrutiny required by ER 1.8(a).
Two Arizona disciplinary cases, while addressing business relationships between a lawyer and client, are instructive on the issue before us. In In Re Wade, 168 Ariz. 412, 418, 814 P.2d 753, 759 (1991), the court cited approvingly to the following passage from the Restatement (Third) of the Law Governing Lawyers Section 207 (Tent, Draft No. 4, April 10, 1991):
A lawyer's legal skill and training together with a relationship of trust and confidence required between client and lawyer, create the possibility of overreaching when a lawyer enters into a business transaction with a client. Furthermore, a lawyer who engages in a business transaction with a client might be tempted to arrange the form of the transaction or color later legal advice so as to protect the lawyer's interests rather than advancing the client's interests. Proving fraud or actual overreaching is sufficiently difficult that the law does not require such a showing on the part of the client who complaints of such a transaction.
In In Re Breen, 171 Ariz. 462, 830 P.2d 462, 466 (1992), the following language is found:
[W]hen a lawyer receives a personal benefit apart from the client's fee from a transaction in which he represents a client, the lawyer's ethical obligation is not always fulfilled by merely disclosing the existence of the personal stake, explaining the potential consequences, and obtaining the client's consent. There is an inherent potential for conflict of interest in such situations, and the lawyer must always ensure that his or her personal interest does not interfere with the unfettered exercise of professional judgment the client is entitled to expect under the circumstances. The best way to achieve this, of course, is to see that the client has independent advice. [Footnote omitted].
One other decision dealing with gifts to one in a fiduciary capacity merits examination. In Amado v. Aguirre, 63 Ariz. 213, 161 P.2d 117 (1945), the court observed that where the donee is acting in a fiduciary capacity towards the donor, a gift to the donee must be carefully scrutinized and will be upheld only on clear and convincing evidence of lack of undue influence. Id. at 219. The court further held that while independent advice to the donor was not essential to the validity of such a gift, "[t]he absence of such advice is a circumstance to be considered in determining whether the gift should be avoided because of undue influence or fraud." Id. at 220.
Turning now to the circumstances before us, the Committee finds that the proposed gift here is neither a simple nor token gift, but rather is substantial, both because of its amount and because it represents the client's entire share of the personal injury settlement. Next, to determine the validity of the proposed gift, we examine the three subparts of ER 1.8(a). Those provisions require that the transaction and terms by which the lawyer acquires the interest must be fair and reasonable, fully disclosed to the client in writing, that the client must be given a reasonable opportunity to seek advice of independent counsel, and that the client must consent in writing.
The Committee admits to some difficulty in attempting to apply the provisions of ER 1.8(a)(1) to the gift context. By what standard should we analyze whether a gift of over $28,000.00 from a client to an attorney is "fair and reasonable"? The clients have orally expressed on three occasions their clear intention to make a gift, and have then memorialized that intention by a notarized letter to the attorney. The Committee finds that an intention to make a gift, unequivocally expressed on four separate occasions, is fair and reasonable to the clients since they alone possess the right to determine how to dispose of that asset. See Amado v. Aguirre, 63 Ariz. at 218 (competent person has the right to give away all or part of her property and such a gift will not be set aside merely because it is improvident). The clients have already consented in writing under the facts presented, thus satisfying
ER 1.8(a)(3). This leaves, as the only unmet requirement, the provision giving the client a reasonable opportunity to seek independent counsel.
With respect to the applicability of ER 1.5, which requires that a lawyer's fee be reasonable, the Committee joins in the reasoning expressed in the previously cited Informal Opinion from Michigan. There is no indication that the gift in the case before us was intended as a part of the lawyer's fee. The lawyer has already received his entire fee pursuant to the contingent fee agreement and the additional amount that the clients now wish to give him is not in the nature of a fee, but rather a gift. Consequently, we find that the provisions of ER 1.5 are not implicated.
Finally, as noted above, the client in this case suffered a head injury at the time of the accident. The facts provided by the inquiring attorney indicate that the client is left with extremely minimal, if any, residual problems as a result of her injuries. It is unclear from the facts presented whether or not any of the residual injuries from which the client might suffer involve the head injury. To the extent that they do, or to the extent that the attorney has independent grounds for believing that the client might be under a disability, the attorney should comply with the provisions of ER 1.14. Obviously, if the client is not competent by reason of the head injury or other independent factors, the attorney cannot accept the gift from the client.
The inquiring attorney should urge the clients to seek independent counsel and give them a reasonable opportunity to do so. If the clients either decline to seek outside counsel or still wish to make a gift after seeking such advice, the attorney is free to accept the gift, but should not, in compliance with ER 1.8(c), prepare any instrument that effectuates transfer of the gift.
 Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceeding. ã State Bar of Arizona 1995
 Numerous cases, most often arising in the disciplinary arena, have interpreted Model Rule 1.8(c). Even before the adoption of the Model Code and the subsequent Model Rules, courts historically have regarded gifts from clients to lawyers with suspicion and have subjected them to close scrutiny. See, Radin v. Opperman, 64 A.D.2nd 820, 407 N.Y.S.2d 303 (N.Y.App. 4th Div. 1978). In situations where the attorney has drafted a will or other testamentary document giving the attorney or his relatives a bequest, most courts engage in a presumption that the gifts arose from undue influence on the part of the lawyer. This has the effect of shifting the burden to the lawyer to come forward with evidence that the transaction was fair and just and that the gift was not the result of undue influence. See, e.g., Ohio Holding Co. v. Grove City, 58 Oh. St.3d 605, 567 N.E.2d 1291 (1991); Klaskin v. Klepak, 126 Ill.2d 376, 534 N.E.2d 971 (1989). Arizona follows this rule. See In Re Estate of Thompson, 1 Ariz. App. 18, 398 P.2d 926 (1965).
A minority of courts hold that there is no presumption of undue influence even where the attorney is the recipient of a substantial bequest, See, e.g., In Re Estate of Loomis, 810 P.2d 126 (Wyo. 1991) (lawyer-scrivener's designation as trustee for one million dollars in assets did not create a presumption of undue influence). At least one court has applied the presumption of undue influence to inter vivos gifts. See Meara v. Hewitt, 455 Pa. 132, 314 A.2d 263 (1974).
This conclusion is further supported by the reference in the comment to the "fairness" standard, a term used nowhere in ER 1.8 other than the requirement in ER 1.8(a) that a transaction within the scope of the provision be "fair and reasonable."
We do so notwithstanding the cases in which significant sums have not been deemed substantial enough to find a violation of the prior Code provisions relating to gifts. See In Re Conduct of Tonkon, 292 Or. 660, 642 P.2d 660 (1982) (disciplinary charges dismissed against a lawyer who drafted a will providing that he would receive a lifetime annuity of $12,000.00 per year which was four and one-half percent of the estate); In Re Barrick, 87 Ill.2d 233, 429 N.E.2d 842 (1981) (no violation of DR 5-101(a) where a lawyer drafted a will leaving himself a $75,000.00 gift from a client, which "though substantial represented a minor fraction of the estate.")