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Spadoro v. Gentile

A-0971-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

ATTORNEYS — An attorney bears the burden of establishing the fairness and equity of a business transaction between the attorney and his or her client by showing that there was full and complete disclosure for all facts known to the attorney, absolute independence of action on the part of the client, fairness and equity in the transaction, lack of overreaching, and the client’s understanding of the importance of independent representation.

An individual was the principal of a company that owned two gas stations. He subsequently obtained title to three tracts of land. After defaulting on a loan affecting his property and being indicted on a dishonored check charge, the principal hired an attorney to represent him. The attorney handled both matters successfully, but the principal did not pay the attorney. On motion from one of the principal’s creditor’s, a Chapter 7 liquidation proceeding was instituted. The principal attempted to convert the Chapter 7 into a Chapter 11 bankruptcy. The attorney who represented the principal in the prior criminal matter, together with another investor, agreed to fund a plan to take the principal out of Chapter 7 in return for a partial ownership interest in the subject property. Upon the suggestion of the criminal attorney, the principal hired independent counsel to represent him in working out a deal with the principal’s criminal attorney and the other investor. The bankruptcy proceeding was ultimately dismissed and the attorney who represented the principal in the criminal matter and the other investor forwarded deeds to the principal so that he could transfer to them the agreed upon interest in the property. When the principal refused to make the transfer as agreed upon, the attorney sued the principal seeking specific performance and damages.

The lower court granted specific performance in favor of the attorney. It believed that the principal’s testimony was not credible. The principal appealed, questioning the validity of the contract, in light of the ethical obligations imposed upon the criminal attorney by Section 1.8(a) of the Rules of Professional Conduct (RPC). The principal also challenged the propriety of the equitable remedy of specific performance.

The Appellate Division affirmed. It began by reciting that an otherwise enforceable agreement between an attorney and client that violates the ethical rules governing their relationship is regarded as a “constructive fraud” and is invalid. It also recited that an attorney bears the burden of establishing the fairness and equity of the transaction by showing full and complete disclosure of all facts known to the attorney, absolute independence of action on the part of the client, the fairness and equity of the transaction, the lack of overreaching, and the client’s understanding of the importance of independent representation. Here, the Court found that nothing unethical occurred because the criminal attorney established that: (a) the deal was fair; and (b) the former client had independent counsel representing him on the conduct matter. It agreed with the lower court’s finding that the former attorney emphasized the need for the principal to have independent counsel. Further, the Court found the contract was approved by independent counsel who possessed all relevant information to judge the fairness of the agreement. Moreover, the Court noted that any argument that the former attorney should have done more ignored the RPC that mandates that an attorney cannot communicate about a subject with a person the attorney knows to be represented by another attorney. Further, the Court found it noteworthy that the property owner never called the attorney who represented him in his dealings on the contract to testify at trial on his behalf. Also, none of the attorneys hired by the principal during the period the contract was in effect voiced any concerns about the contract. Thus, the Court held that the principal could not “hide behind his lack of counsel, particularly when any attempt to [do so] – would generate a wholly inequitable consequence.” It also noted that the principal never repudiated the contract when he, in good conscience, should have advised the criminal attorney of his intentions to do so, rather than permit him to commit additional funds for the principal’s benefit. The Court observed that the criminal attorney’s actions in reliance of the owner’s promises, as memorialized in an enforceable contract, resulted in extremely harsh consequences - the loss of his home. The Court also concluded that the property owner’s assertion of the invalidity of the contract was suspect because he initially admitted the criminal attorney was entitled to an interest in the property. It noted that the lower court held that the other investor and the principal had entered into their own secret agreement to exclude the criminal attorney while still demanding that the criminal attorney perform the contract to the principal’s sole benefit. In addition, the Court found that it was the principal who approached the attorney to offer the deal with full knowledge of the property’s value, i.e. the principal was not an innocent victim of a deal that he merely assented to.

As a result, the Court mandated specific performance of the contract because the contract was valid and enforceable; its terms were sufficiently clear so that the court could determine with reasonable certainty the duties of each party and the conditions under which performance was due; and such relief was not oppressive to the opposing party. The Court found that this remedy to be particularly appropriate in light of the property owner’s “sharp conduct in seeking to eliminate plaintiff’s valid claim to an interest in the property.”

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