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Committee on Professional Ethics and Conduct of Iowa State Bar Association v. Mershon

Brief Fact Summary. Respondent attorney is recommended for discipline in regards to his participation in a development deal with a client in which he accepted stock in the corporation in lieu of payment.

Synopsis of Rule of Law. Attorneys should be very cautious about entering into business transactions with clients, doing so only after a full disclosure in situations in which each party has a “differing interest.”

Points of Law - Legal Principles in this Case for Law Students.

In the context of attorney-client relations, we have stated that an attorney who bargains with his client in a matter of advantage to himself must show, if the transaction afterwards is called in question, that it was in all respects fairly and equitably conducted; that he fully and faithfully discharged all his duties to his client, not only by refraining from any misrepresentation or concealment of any material fact, but by active diligence to see that his client was fully informed of the nature and effect of the transaction proposed and of his own rights and interests in the subject matter involved, and by seeing to it that his client either has independent advice in the matter or else receives from the attorney such advice as the latter would have been expected to give had the transaction been one between his client and a stranger.

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Facts. Respondent, Iowa attorney Mershon, served as personal attorney to local farmer Leonard Miller for 19 years. Miller wished to develop some of his farmland, but would not be able to pay for Respondents services or the services of the engineer he wished to help him develop it. In lieu of such fees, the three men agreed to form a corporation in which their services would be provided in exchange for shares in the property. The development deal fell through shortly before Miller’s death, however, and Respondent (who was also executor for his estate) was recommended to the board for discipline regarding his participation in the transaction.

Issue. Was Respondent’s conduct here a violation of Iowa’s rule against going into business with clients when each party has “differing interests”?

Held. Yes. Respondent and Miller clearly had “differing interests” here, in that Respondent’s fee was tied to the success of the corporation and he was effectively contracting to make himself a debtor of the corporation to ensure that his services would be performed. Miller also failed to make anything approaching the full disclosure required by the relevant Iowa rule. Reprimand recommended.

Discussion. Attorneys should generally avoid going into business with their clients. Those willing to take this risk must recognize that courts will always view the transaction in the light most favorable to the client should the situation go awry.

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