Bar News - November 15, 2017
Ethics Corner: Bartering Legal Fees for Goods or Services from Client
Dear Ethics Corner,
I have a new client who is an architect. She asked me to draft her will, and wanted to pay my bill in part by providing me with plans for my new office. Do you see any problems with bartering legal fees for goods or services from a client?
– Yankee Trader
Bartering is permitted under the New Hampshire Rules of Professional Conduct ("NHRPC"). There are, however, several portions of the Rules that you will need to carefully consider.
Rule 1.5. A lawyer may not charge or collect an "unreasonable fee". NHRPC Rule 1.5(a). So, you first need to make sure that the value of your services is commensurate with the value of the goods or services received.
Rule 1.8. A "fee paid in property instead of money may be subject to the requirements of Rule 1.8(a) because such fees often have the essential qualities of a business transaction with the client". ABA Com. 4 to Model Rule 1.5. The ABA comments further provide that the requirements of Rule 1.8 "must be met when the lawyer accepts … nonmonetary property as payment of all or part of a fee." Com. 1 to Model Rule 1.8 (emphasis added).
The Committee recently reviewed the application of Rule 1.8 to barter transactions and reached the following conclusion:
The lawyer will need to comply with all the provisions of NHRPC Rule 1.8(a), including the requirement to advise the client in writing of the desirability of seeking the advice of independent legal counsel, in any agreement to exchange goods or services for legal fees entered into at the outset of legal representation or during the course of such representation. Even if the lawyer strictly complies with Rule 1.8(a), however, the courts may view the transaction as voidable if the client later feels aggrieved by the transaction.
"Providing Legal Services in Exchange for a Client's Goods and Services," Ethics Committee Advisory Opinion #2017-18/01.
Taking Stock. The Committee reached a similar conclusion with respect to NHRPC Rules 1.8 and 1.5 when considering the specific situation where a lawyer takes an ownership interest in the client in exchange for legal work.
A lawyer who takes stock in payment of legal fees or as an investment enters into "a business transaction with a client" and must satisfy Rule 1.8(a). The first requirement of that rule is that the transaction and its terms must be "fair and reasonable to the client."
"Taking Stock in Your Client As Legal Fees Or An Investment," NHBA Ethics Committee, Practical Ethics Article (November 8, 2000).
Rule 1.15. In a barter situation, you may receive some or all of the goods or services prior to completion of the agreed-upon legal services. In that case, the "fees" may not have been earned yet, and will likely be viewed as the client's property. This implicates NHRPC Rule 1.15(a) which requires a lawyer to "hold property of clients … that is in a lawyer's possession in connection with a representation separate from the lawyer's own property."
How a lawyer complies with this rule may depend on the nature of the goods or services. If you receive architectural drawings or a case of wine, you may be able to keep those items segregated, and not used or consumed until earned. On the other hand, it would be difficult to comply with the rule in the case of pastries or a pedicure.
One way around this problem of "payment" before legal services might be to pay the client in cash for the goods or services as they are provided. The client could then turn around and give the lawyer the cash back in settlement of her responsibilities under the fee agreement. That way, the lawyer could segregate unearned funds in the usual way. Unfortunately, this may somewhat defeat the ostensible purpose of the barter.
Taxes. The lawyer should advise the client of the tax consequences of the transaction. "The value of products or services from bartering is normally taxable income" to both parties. "Bartering Produces Taxable Income and Reporting Requirements," IRS Tax Tip 2016-46 (March 23, 2016). If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. IRS Publication 525.
Clear Prohibitions. There are a few types of barter, however, that are clearly prohibited. NHRPC Rule 1.8(d) prohibits a lawyer, prior to the conclusion of representation, from making an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation. NHRPC Rule 1.8(j) prohibits sexual relations with clients, so that cannot form the basis of a bargain. See Cleveland Bar Assn. v. Feneli, 712 N.E.2d 119 (Ohio, 1999) (attorney's misconduct in having sexual relations with female client and proposing that she barter sexual favors for legal fees that she owed him warranted 18-month suspension).
The Ethics Committee provides general guidance on the New Hampshire Rules of Professional Conduct and publishes brief commentaries in the New Hampshire Bar News. New Hampshire lawyers may contact the Committee for confidential and informal guidance on their own prospective conduct or to suggest topics for “Ethics Corner” commentaries by emailing Robin E. Knippers.