Thursday, November 10, 2011

Loan From Former Client Violated Ethics Rules

The New York Appellate Division for the First Judicial Department has held that an attorney's acceptance of a loan from a former client violated the business tranasctions with a client prohibition.

The facts: August 2002, respondent solicited and accepted an unsecured, interest-free loan of $50,000 from Vartan Harutunian, a former client. Respondent had represented Harutunian, a former police detective, as plaintiff in a lawsuit arising from a motorcycle accident in which Harutunian had been seriously injured. Respondent had settled Harutunian's personal injury action for $4.5 million in August 2001, a year before the loan in question was made. In July 2002, only about two weeks before respondent solicited the loan, Harutunian called respondent for advice about how to respond to a demand for reimbursement from his medical insurance carrier. Respondent advised Harutunian to negotiate with the insurer but had no further involvement in that matter.

It is undisputed that the terms of the August 2002 loan were not reduced to writing; that respondent did not advise Harutunian to consult with independent counsel concerning the loan; and that respondent did not obtain Harutunian's written consent to the terms of the loan or to respondent's inherent conflict of interest in the transaction. It is also plain that the terms of the loan —- no collateral, no interest, and no due date for repayment —- were objectively unfair to Harutunian.

The court agreed with a hearing panel that the referee erred in rejecting the charge:

We agree with the Hearing Panel that, under the particular circumstances of this case, respondent's conduct violated DR 5-104(A), notwithstanding that Harutunian was no longer his client at the time of the loan transaction. Although the attorney-client relationship had terminated with the settlement of Harutunian's personal injury action in August 2001, the Hearing Panel correctly observed the presence of a number of factors supporting its determination that, at the time he lent respondent $50,000 in August 2002, Harutunian still "reasonably expect[ed] [r]espondent to exercise professional judgment for the protection of [his] interest," so as to render DR 5-104(A) applicable. The relevant factors are as follows: (1) in August 2002, "Harutunian still regarded [r]espondent as his lawyer," as demonstrated by Harutunian's call to respondent for advice about his insurer's demand for reimbursement during the previous month; (2) respondent asked Harutunian for the loan in his law office, "amidst the trappings of their attorney-client relationship"; (3) respondent knew that Harutunian was in a position to lend a substantial sum of money as a result of having represented him in the personal injury action; (4) Harutunian (who said he had never before lent anyone more than $20) was willing to make the loan largely because of the attorney-client relationship; (5) Harutunian's desire to help respondent (who represented that he needed the loan to deal with a tax problem) was "very likely related to the gratitude that he felt towards [r]espondent for the excellent recovery [r]espondent had obtained for him a year earlier"; and (6) Harutunian was willing to make the loan without consulting another attorney because of his trust in respondent arising from the attorney-client relationship.

The attorney was suspended for three months. (Mike Frisch)

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