Ethics Opinion No. 296
Adopted May 16, 1980
It is proper for an attorney to acquire a mortgage or security interest in the property of his client to secure the client’s obligation to pay the attorney’s fee when that property is the subject of litigation in which the attorney represents that client?
The relevant provisions of the ABA Code of Professional Responsibility (1978) include: Disciplinary Rule (“DR”) 5-103(A)(1) and Ethical Considerations (“EC”) 5-2, 5-3 and 5-7. Also, Ethical Consideration 9-2.
The Code provision bearing most directly on this problem is DR 5-103(A)(1), which reads as follows:
“[A] A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client, except that he may:
(1) acquire a lien granted by law to secure his fee or expenses.”
The forerunner of DR 5-103(A), prohibiting the acquisition of “a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client, …” is ABA Canon 10 which read:
“Acquiring Interest in Litigation. A lawyer shall not purchase any interest in the subject matter of the litigation which he is conducting.”
ABA Opinions 176 (1938), 246 (1942) and 279 (1949) discuss this problem. However, in each, there was a business investment being made by the lawyer and a potential profit motive over and above simply acquiring an interest in the subject matter of the client’s litigation as security for the payment of a reasonable attorney’s fee. Because of the investment character of each, ABA Canon 10 and the three formal opinions referenced above all seem to be distinguishable from the situation at hand.
DR 5-103(A) used the word “proprietary.” This is consistent with the philosophy of ABA Canon 10 and the three formal opinions in that it prohibits a lawyer from having both a personal profit motive in a transaction as well as the likelihood of securing the payment of a reasonable attorney’s fee. Ethical Consideration 5-7 also incorporates the concept of the acquisition of a “proprietary interest.” It reads in pertinent part:
“The possibility of an adverse effect upon the exercise of free judgment by a lawyer on behalf of his client during litigation generally makes it undesirable for the lawyer to acquire a proprietary interest in the cause of his client or otherwise to become financially interested in the outcome of the litigation. However, it is not improper for a lawyer to protect his right to collect a fee for his services by the assertion of legally permissible liens, even though by doing so he may acquire an interest in the outcome of the litigation …”
The question then becomes: Is a mortgage or a security interest taken to secure a fee a “proprietary interest”? We think not. Black’s Law Dictionary, Fourth Edition, defines proprietary rights as “those rights which an owner of property has by virtue of his ownership.” In addition, Oklahoma has considered proprietary as meaning “belonging or pertaining to a proprietor, considered as property, owned.” Edwards v. Trash, 26 Okla. 472, 109 P. 832 (1910). Without citation of voluminous authorities, the Oklahoma definition seems to be widely held. See Asch v. First National Bank in Dallas, 304 S.W.2d 179 (Tx.Civ.App.1957); Douglas v. Taylor, 497 S.W.2d 308 (Tx.Civ.App.1973). On the contrary, a judgment lien (similar in character to a security interest or mortgage) has been held not to be a proprietary right in the lands of the judgment debtor. Jones v. Hall, 15 S.E.2d 108 (Va.1936). The common understanding of the word “proprietary” makes it synonymous with ownership. The taking of a mortgage or a security interest does not seem to be tantamount to the acquiring of a proprietary interest either in light of the historical background of this disciplinary rule or the traditional understanding of the word “proprietary.”
ABA Informal Decision No. 593 (October 25, 1962), a copy of which is attached, seems to indicate that there is nothing improper about an attorney taking a real estate mortgage in property to secure his fee but it is not clear whether the property mortgaged was the subject of the litigation.
Oklahoma has long recognized the propriety of an attorney taking a lien in the subject matter of the cause of action and indeed in the cause of action itself. See 5 O.S.1971 §§ 6 through 10. The attorney’s lien statutes have never been held to be in violation of Oklahoma’s Canons of Professional Ethics or Code of Professional Responsibility. Of course, either a security interest or a mortgage are authorized under Oklahoma law to be taken by anyone, including attorneys. Either a security interest or mortgage are “legally permissible liens” as are contemplated by EC 5-7.
In summary, if the lawyer is taking a security interest or mortgage to secure the payment of a reasonable attorney’s fee he may do so even though it involves the taking of a security interest in the subject matter of his client’s litigation. Of course, the lawyer should advise the client of the potential for a conflict of interest prior to the taking of the interest in order to keep the client fully informed and in order to avoid the appearance of impropriety. However, the lawyer should not purchase or invest in the subject matter of the litigation so as to acquire a proprietary interest in it separate and apart from that mortgage or lien interest absolutely necessary to secure the payment of the reasonable attorney’s fee.