The Money Pit is a 1986 film directed by Richard Benjamin and starring Tom Hanks and Shelley Long. Hanks plays Walter Fielding, a young New York entertainment lawyer, who with his girlfriend Anna (Long) are forced to find a new place to live on short notice when Anna’s ex-husband returns from Europe, tossing them out of his apartment, where they had been living. They discover what appears to be a lucky break in the form of a stately old mansion which is being forcibly sold to pay for legal fees.
Walter is himself in fairly hot water when the movie begins. Sometime prior to the events of the film, his father, a former partner in what seems to have been a father-and-son law practice, absconded with $2.9 million in client funds. It’s not clear precisely how this was done, but the substance of it seems to be that he made off with the firm’s trust account. Walter is left paying the bill.
To secure the sale of the house, Walter borrows $200,000 from a client. The client happens to be a minor and a stupidly successful pop star, so he can afford it.
So the questions here are (1) whether Walter really would be left to pay his father’s debts, and (2) whether it’s legal and ethical to borrow money from a client under those circumstances.
I. Law Firm Partnerships
The movie clearly indicates that because Walter and his father were partners in a law firm, when the father takes off for Rio with the trust account funds, Walter is responsible for paying the bill. Is this true?
Yes, but probably not anymore. Until the early 1990s, most law firms were general partnerships, a business form wherein any partner can bind the partnership, and all partners are personally responsible for the liabilities of the entire partnership. Scary as that sounds, the form does have several advantages. For one thing, it’s simple. Just like a solo business person who doesn’t take any special steps is operating as a sole proprietorship, two or more people that go into business together who take no special steps are a general partnership. This provides maximal authority—and thus maximal flexibility—for all of the partners. Also, partnerships offer a simplified taxation scheme compared to a corporation, as partners only pay taxes on income they actually realize from the enterprise. The partnership can even hold property in its own name, so that one partner’s personal problems won’t affect the larger partnership. And what’s more, the fact that any partner can bind all the partners gives some incentive to keep tabs on what the other partners are doing. Most law firms and other professional groups operated as general partnerships until the early 1990s, significantly for that last reason. It was thought that operating as a general partnership was something of a demonstration of bona fides to clients, i.e., all of the partners stand by the work and competence of all of the other partners.
So as this movie was released in 1986, it’s safe to assume that this is how things operated. If dad incurred a major debt on the firm, Walter is going to be left holding the tab.
What happened in the 1990s that caused the change? The introduction of limited liability partnerships. And why were they introduced? Because in the aftermath of the savings and loan crisis of the late 1980s, a number of law firms and accountancy firms went belly up when some of their partners—frequently a very small percentage—did some really dumb and even criminal stuff. This led to innocent and upstanding professionals being bankrupted, which was considered to be somewhat unfair. So states introduced the LLP, which treats partners more like owners in a corporation in terms of liability. The particular rules vary from state to state, but the general rule is that the liabilities of the partnership are only liabilities of the partnership, and that partners are not personally liable. Even the biggest law firms have moved away from the general partnership model by now, and most are LLPs, or occasionally PCs (professional corporations). Under that regime, Walter would not be personally liable for the firm’s debts, and there would be nothing to stop him from simply withdrawing from the firm and taking his clients with him.
II. Borrowing From Clients
Then there’s the question of whether it’s ethical to borrow money from clients, particularly clients who are minors. As a first-order matter, it’s worth pointing out that if they were trying to put together money for a down payment, borrowing that money probably constitutes mortgage fraud. Using borrowed money for a down payment without disclosing that the money is borrowed would constitute a material misrepresentation on the application. This is a felony. People go to prison for that. But we’ll assume that they were simply paying cash, because that’s plausible under the circumstances.
So is it ethical to borrow money from clients? Well. . . it can be. Under certain circumstances. Now we’re getting into the nitty-gritty of Rule 1.8. And under that rule, this is clearly unethical. The loan would need to occur under the following criteria:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
None of those requirements were met here. Even if the terms were “fair and reasonable,” there was no writing. The client was not advised to seek independent counsel, nor given opportunity to do so. And the client did not give informed consent in the form of a signed writing. So that’s right out.
Further, this client, as a minor, falls under the protections of Rule 1.4. Here, Walter clearly took advantage of the client’s minority. The inducement to lend the money? “I won’t like you anymore!” Clearly not something one would try with a normal client.
So the movie is actually an accurate picture of the way law firm obligations existed in the mid-1980s. The savings and loan crisis was just starting to get going when the movie was released, and it would be five-odd years before law firm obligations would really start moving towards its modern form. But the loan from the client is unethical. It could have been done ethically, but it wasn’t.