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Milo Fields Trust v. Britz

378 N.J. Super. 137, 874 A.2d 1130 (App. Div. 2005)

ATTORNEYS; CONFLICT OF INTEREST — A business transaction between an attorney and a client is presumptively invalid but not prohibited, and may be enforced by a court if both parties are found to be sophisticated and savvy businesspeople.

An investor developed and operated several physical therapy clinics. He and his wife also owned a company that managed the business affairs of a number of clinics. An officer of the company formed two limited liability companies to manage the clinics. The investor hired an attorney to perform legal services for the two limited liability companies. In exchange for his legal services, the attorney was permitted to invest in the two companies. The attorney eventually assigned his interest in the companies to his terminally ill wife. Shortly thereafter, the wife died and, under her will, her interest in the companies passed to a trust. When the two companies were sold, no distributions were made to the trust. As a result, the trust sued the investor and the investor’s wife as co-owners of the companies. The trust asserted that the investor and his wife breached their fiduciary duties by failing to make distributions to the trust after the sale. In addition, the trust asserted that the two had committed fraud and had engaged in unlawful commercial practices. It sought the dissolution of the two companies and the appointment of provisional directors for the companies. It also sought a constructive trust, various damages, attorneys’ fees, and an accounting of the companies’ financial affairs. The lower court entered a judgment for the trust in an amount equal to the trust’s interest in the two companies. The investor and his wife appealed.

The Appellate Division affirmed the lower court’s ruling. On appeal, the investor argued that the attorney should have been barred from receiving distributions from the sale of the companies because he violated Rule of Professional Conduct 1.8(a). That rule provides that a lawyer may not enter into a business transaction with a client or knowingly acquire a pecuniary interest that is adverse to his or her client unless the transaction and the terms of the lawyer’s interest are fair and reasonable to the client. The rule further provides that the terms of the transaction must be fully disclosed and transmitted in writing to the client, and that the client must be advised in writing of the desirability of seeking independent legal counsel. The client must also give written, informed consent to the essential terms of the transactions. The investor asserted that the attorney violated this rule because the terms of their agreement were never reduced to a writing. The Court rejected this argument, finding that although a business transaction between an attorney and a client is presumptively invalid, it is not prohibited. The Court further held that the transaction between the attorney and the investor was valid even though not fully in accordance with Rule 1.8(a) because the investor was a knowledgeable and experienced businessman who fully understood the transaction. Accordingly, it concluded that the trust was entitled to the distributions from the sale of the companies pursuant to the parties’ agreement.

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