NOTE: See also JI-150.

CI-1079

April 15, 1985

SYLLABUS

1. If a lawyer purchases a one-person professional corporation from another lawyer who becomes a judge, the lawyer may not appear before the judge on any matter as long as there are payments outstanding between the judge and the lawyer.

2. If a judge has been paid in full the agreed price for which a practicing lawyer has purchased the judge's one-person professional corporation:

   1. The judge is disqualified in any case which may be brought by the lawyer representing a former client of the judge, if the judge was consulted as a lawyer on the matter in controversy.

   2. The judge is disqualified as to a new matter if the judge served as lawyer for the litigant within the preceding two years.

   3. The judge is disqualified if the judge was a member of the law firm representing a party within the prior two years, even if the judge did not personally represent the client.

3. If money is due to a judge from cases referred by the judge to other lawyers or firms before assuming the bench, any portion of the fee which the judge may ultimately receive must be reasonable and must be related to the amount of services performed and the responsibility assumed by the judge prior to assuming the bench.

4. A judge and a lawyer purchasing the judge's practice or a lawyer to whom the judge had referred a case may agree to discount the fees due to the judge in a cash-out price mutually agreeable to the judge and the lawyer. If a judge has referred a case to a law firm prior to assuming the bench, the judge may not hear the matter which has been referred but may, once final and full payment of the referral fee has been made, hear other cases brought by the firm to which the case was referred.

5. A judge is disqualified from hearing cases involving a former client to whom the judge rendered legal advice on the matter in controversy, regardless of the amount of advice offered by the judge. If a new matter involving a former client is presented to the judge and is one on which the judge has not given advice, a two-year period of disqualification is required, after the time when the judge no longer has a continuing financial interest.

References: MCJC 2, 5C; MCPR DR 2-106, DR 2-107; C-228; CI-293, CI-383; CI-502, CI-470, CI-890, CI-923; MCR 2.003(B)(3) and (4); ABA i1385.

TEXT

Three new judges have asked a series of questions relating to problems encountered after moving from private practice to the bench.

1. The first series of questions deals with the sale of a one-person professional corporation to another lawyer and under what circumstances is the selling judge disqualified from presiding in matters in which the purchasing lawyer appears.

During the period when the lawyer is continuing to pay the judge the agreed price, C-228, CI-293, CI-890 and CI-923 control. The critical issue is whether a judge has a financial interest in the outcome of a matter before the court. If a lawyer appearing before a judge owes the judge money for the purchase of the judge's practice, the judge has a financial interest in the lawyer's successful prosecution of the matter. It does not matter whether or not the judge's expectation of financial gain is related to the specific case before the court. The restraints placed on a judge by these opinions apply when the judge has sold a one-person professional corporation, a sole practice, an interest in a partnership or shares in a multi-shareholder professional corporation.

A slightly different issue is presented if the sale price was paid in cash before the judge assumed the bench. In that case, the judge would not have the same continuing financial interest in the outcome of the case brought by the lawyer-purchaser. MCR 2.003(B)(3) requires disqualification as to any case in which the judge had been consulted as a lawyer. MCR 2.003(B)(4) requires disqualification if the judge was a lawyer for the litigant within the preceding two years. MCR 2.003(B)(4) also requires disqualification if the judge was a member of the appearing firm within the prior two years, whether or not the matter before the court was one on which the judge was consulted as a lawyer. Finally, MCR 2.003(B)(4) requires disqualification if the judge was a member of an appearing firm within the prior two years, whether or not the party being represented by the firm is a former client of the judge.

Since, in the case of a one-person professional corporation, the judge was the firm, a judge may not hear any matter brought before the court by a lawyer to whom the judge sold the law practice until a period of two years has passed from the date the sale was completed. Completion of the sale means completion of all matters related to the sale, including rendering any advice to the purchasing lawyer to assist in the transition.

Situations in this category must be scrutinized with great care by a judge. MCJC 2 states:

Prior opinions have recognized the burdens that may arise for lawyers and former clients as a result of these restrictions, but the appearance of an honorable, independent judiciary outweighs any inconvenience.

• "A judge must avoid all impropriety and appearance of impropriety. He must expect to be the subject of constant public scrutiny. He must therefore accept restrictions on his conduct that might be viewed as burdensome by the ordinary citizen and should do so freely and willingly."

2. The next series of questions are related to the first and deal with situations where money is due to a judge from cases referred to other lawyers or firms by the judge before assuming the bench.

MCPR DR 2-106 and 2-107 address whether there are limitations on the judge's portion of the fee. MCPR DR 2-106 prohibits unreasonable fees and provides guides for determining the reasonableness of a fee in a given situation. If the referral was originally made with the expectation that the judge would have been available to assist in the case, the proper fee must reflect the judge's unavailability. The judge's portion of a fee cannot be stated as a specific percentage of the ultimate fee without considering the factors listed in MCPR DR 2-106(B).

MCPR DR 2-107 sets out specific steps that must be taken if a lawyer is to divide a fee with another lawyer. Any division of fees must be made in proportion to the services performed and the responsibility assumed by each lawyer. Since the judge would ultimately provide less service and have less responsibility, the fee ultimately paid will necessarily be affected.

May a judge discount and cash out referral contingent-fee cases, and if so, how can the fairness of a cash out price be determined? As stated in C-228:

"To deny a newly-elected judge just compensation for valued service performed while a practicing lawyer would be inequitable and would tend to discourage qualified persons from accepting judicial office. Similarly, consideration must be given to the client who is compelled to employ the services of a new lawyer during the pendency of a case."

As long as the requirements of MCPR DR 2-106 and DR 2-107 are met, a judge and purchasing lawyer may agree to discount such fees in the cash out price and in an amount mutually agreeable. Whether or not the price is fair is not an ethical consideration as long as the Code is followed as noted above.

3. Is the judge disqualified as to any matter brought before the court by any member of the firm paying the referral fee for two years after the final referral-fee payment?

The judge could never hear the matter which had been referred. As to other cases brought by the firm to which the case was referred, the Committee believes that Canon 2 and MCR 2.003(B)(4) require disqualification on any matter until full payment of the final referral fee. Once final payment is made, the lawyers may appear before the judge. See CI-890.

3. The next series of questions relates to appearances before a judge by either a lawyer who bought the judge's sole practice or by a former partner of a judge who purchased the judge's interest. It is assumed for purposes of this series of questions that the judge has no continuing financial interest in either the former professional corporation or the former law partnership.

If the lawyer appearing before the judge is representing a former client of the judge, is disqualified required?

The above-cited Canons, opinions and MCR 2.003(B)(3) clearly mandate the permanent disqualification of a judge to hear cases involving a former client of the judge to whom the judge rendered legal advice on the matter in controversy. It does not matter how little advice or legal work the judge did on a client's behalf, or whether the advice was collateral to the case on which the client was represented.

The two-year period of disqualification is required by MCR 2.003(B)(4) if the matter presented is new and is a matter on which the judge had not given advice either in sole practice or as a member of a firm.

4. The last series of questions deals with the area of disqualification when the judge has business dealing with lawyers appearing in the judge's court.

Can a judge, after being elected, purchase an office building with a group of lawyers? This question is governed by MCJC 5C. There is no outright prohibition against the financial investment proposed, but individual circumstances may effect the result.

• Prior opinions have arrived at different conclusions depending on the factual circumstances. For example, in CI-383, the Committee advised a judge that investment in an independent local newspaper to be circulated in the judge's jurisdiction was acceptable. However, it is noted that in that inquiry it was assumed that the judge would not be an officer, director or employee of the business in which investment was being made, and further that the judge would not allow his name to be used so as to give the appearance that he was using judicial office to promote a commercial enterprise. Under those conditions, the proposed activity was permitted.

In CI-502, a judge inquired whether it would be ethical to conduct a mail-order business, either as a sole proprietor or in corporate form, the judge being the sole shareholder and both a director and officer. This Committee answered affirmatively, but emphasized that it reached that conclusion because the judge proposed to be either a sole proprietor or sole shareholder. By implication, the activity would have been prohibited if the judge were acting in concert with others.

In CI-470, a judge was told that it would be unethical to serve as an officer of a corporation organized by the judge, the judge's wife and three other couples to develop certain real estate which the parties owned jointly. That opinion and others cite ABAi1385 where a judge asked if it would be ethical to serve as a bank director. The Committee believe that the ABA opinion controls the instant question and cite pertinent language. After quoting MCJC 5C, the Committee stated:

Therefore, the Committee conclude that a judge may enter such an arrangement after election, but only if the judge is not a director, officer, manager, advisor or employee of the venture, and the judge's involvement is in the form of passive business activity of a personal character not involving an active personal association in the direction or operation of the venture.

Assuming that the two-year disqualification period has passed, and assuming the judge has complied with the conclusion of the answer to Question #1, if the former law partners of the judge, who are now partners with the judge in such a real estate venture, do not either individually or as a law firm rent space from the real estate partnership, may the former partners appear before the judge if the judge and former partners each have an equal ownership share, and a real estate management firm manages the building? MCJC 5C(3) is relevant:

While a set of circumstances could be imagined which would permit a judge to sit in such cases, the Committee believes the answer to this question follows from previously cited opinions which prohibit appearance before a judge with whom the appearing lawyer has an ongoing financial relationship. If the lawyer or lawyers were allowed to appear, it would "tend to reflect adversely on the judge's impartiality or the judge's judicial office, interfere with the proper performance of the judge's judicial duties, exploit the judge's judicial position, or involve the judge in frequent transactions with lawyers or persons likely to come before the court in which the judge serves." If frequent disqualification would result from the judge's business relationship, it is all the more reason why the judge should avoid such business ventures.

• • "Under MCJC 5C(2) a judge may engage in certain forms of remunerative or other business activity but the Canon prohibits a judge from serving as a 'director, manager, advisor . . . of any business.' The intent of that provision is to allow a judge to engage in forms of passive business activity of a personal character which do not involve an active personal association in the direction or operation of business organizations."

  "A judge should manage his investments and financial interests to minimize the number of cases in which he is disqualified. As soon as he can do so without serious financial detriment, he should divest himself of investments and other financial interests that require frequent disqualification."

May the lawyers appear before the judge if each party, including the judge, was personally responsible for a mortgage on the building?

The inquirer suggests, appropriately, that the judge would be interested in having solvent co-debtors. The Committee believes the answer to Question 2a immediately preceding controls and prohibits the appearance of the lawyers before the judge.

May the lawyers appear if one of the other parties to the venture managed the real estate holding and received an hourly wage or a fixed percentage of rentals for the service?

For the reasons previously given, the Committee's opinion is that the lawyer may not appear. The basis used for compensating the lawyer/manager is immaterial. The lawyer is the judge's employee and the appearance of impropriety prescribed by MCJC 2 is to evident, the potential for interference with the proper performance of the judge's judicial duties too great. The same result would be required whether those with whom the judge is associated in the real estate venture were former law partners or members of the judge's firm.

If a judge and spouse own a cottage which the judge and the judge's spouse rent by the week for the summer, can it be rented to a lawyer who occasionally appears before the court, where the terms and conditions of the rental are identical to those for nonlawyers, the rental fee is fair and reasonable for the cottage given a fairly clear market price for such rentals in the area, and the total rentals for the summer result in no real profit to the judge but merely help pay the interest, taxes, and other cottage expenses for those weeks which the cottage is rented, but not for the weeks the judge and the judge's spouse use the cottage?

C-228 states:

As stated in MCJC 2A:

Therefore, the Committee concludes that such a proposed rental relationship is prohibited.

• "An impartial judiciary--in both fact and appearance--is essential to our system of justice. When a judge has a financial relationship with anyone representing a litigant, his or her impartiality is subject to scrutiny. On a close question, might the judge tip the scale of justice in favor of the side with which the judge has a special interest? Or, might the judge unnecessarily compromise, to avoid the appearance of treating one party unfairly?"

  "A judge must avoid all impropriety and appearance of impropriety. He must expect to be the subject of constant public scrutiny. He must therefore accept restrictions on his conduct that might be viewed as burdensome by the ordinary citizen and should do so freely and willingly."