Tuesday, February 20, 2018

Why Shouldn't a Lawyer Be Allowed to Pay a Client's Bills? Reflections on Michael Cohen, Donald Trump, and Stormy Daniels

by Michael Dorf

Donald Trump's lawyer Michael Cohen claims that he paid Stephanie Clifford, aka Stormy Daniels, $130,000 out of his own pocket in exchange for her keeping quiet about her alleged adulterous liaison with Trump. As discussed in a lurid story in yesterday's NY Times, the payment may have violated federal campaign finance law (as an unreported and cap-exceeding donation of in-kind services to the Trump campaign) as well as New York's ethics rules.

The story also raises questions of journalistic ethics: Is it ever proper for a newspaper (even a gossipy tabloid) to pay for the rights to a story for the purpose of killing the story as a favor to the politically connected friends of the paper's publisher? (The tabloid publishers deny that was their goal in this and other instances, but the Times story cites sources to the contrary).

That's all fascinating stuff. Here I want to focus more narrowly on the rule of legal ethics that Cohen might have violated by making an apparent gift of $130,000 to his client.

Let's begin with the ethics rules. ABA Model Rule 1.8(e) provides:
A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
The NY Rule is substantially similar, containing an additional exception that has no bearing here.

If Cohen were to argue that he did not violate the rule, what might he say? For one thing, he could say that the payment was not "in connection with pending or contemplated litigation." That might not work, however, depending on how broadly "contemplated litigation" were to be construed. Suppose Clifford told her story and Trump sued her for defamation, claiming that they never had an affair. If the worry is that Trump might lose the suit or even if the worry is that the adverse publicity from the suit would be too damaging, then paying Clifford off in advance could be construed as a payment "in connection with  . . . contemplated litigation."

Even if so, Cohen might say that the payment to Clifford was not in his capacity as Trump's lawyer but as his friend. In this view, Cohen was concerned that the Clifford allegations, even if false, would damage his friend's reputation or upset his family. I suppose that's possible if one sets aside the fact that this is Donald Trump we're talking about.

But that raises a different question. Why pay Clifford at all? Viewed against the backdrop of all the worse things Trump has done, why bother to pay someone $130,000 not to talk about a consensual affair? I suspect the closest thing we have to a satisfactory answer to that question is that when Cohen began negotiations with Clifford, he didn't realize just how much of Trump's bad behavior his supporters would overlook (or even reward).

What about the general rule? Why do legal ethics rules forbid lawyers from paying their clients' litigation expenses? Rule 1.8 more broadly is partly about avoiding conflicts of interest. It does so by trying, among other things, to keep the lawyer's financial interests separate from the client's. That certainly makes sense with respect to Rule 1.8(a), which forbids lawyers from entering business relationships with clients that could result in their ending up on adverse sides. But what is the justification for Rule 1.8(e)?

Here is the ABA's official explanation:
Lawyers may not subsidize lawsuits or administrative proceedings brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation.
Huh? There are three basic problems with the foregoing.

First, it's incredibly formalistic. Rule 1.8(e)'s exceptions allow a lawyer to front litigation expenses as an advance against possible recovery in a contingent fee situation. A lawyer who will receive a contingent fee of between 1/3 and 2/5 of the ultimate recovery clearly has a financial stake in the outcome, regardless of what it is called. If the concern is that at some level financial assistance from the lawyer makes the lawyer's stake too great, then that could justify a cap on how much a lawyer can advance, but not a ban that is easily circumvented (at least for plaintiffs' attorneys) via a contingent fee.

Second, it's not clear why a lawyer shouldn't have a large financial stake in the litigation. Law could cap contingent fees as a form of consumer protection, but that's not because one worries that the lawyer's stake is too large; the worry would be that the client's stake would be too small, that her recovery would be insufficient to cover her damages. That's a real concern, but again, it should be phrased in terms of consumer protection. The legal system should want lawyers to have a large stake in their clients' cases because that aligns the lawyer's interest with the client's interest.

Third, the Rule states that it would be bad if lawyers were to "encourage clients to pursue lawsuits that might not otherwise be brought." But why? The only such lawsuits that will be brought are ones that have a fair chance of winning. A prudent lawyer would not advance money to a client against a likely loser of a lawsuit. And so one might think that a lawyer's advance of money to a client to bring a lawsuit that she otherwise wouldn't bring promotes justice.

Thus, it appears that the ethical rule that Cohen might have violated by indirectly paying Clifford as a way of conferring a financial benefit on Trump is a foolish rule. That's hardly a justification for Cohen's having violated it, however, if he indeed violated it.


Shag from Brookline said...

There's a lot more fascinating stuff about this whole brouhaha. Consider the reported connections between Michael D. Cohen and Stormy's attorney.

Query: If Stormy opened up, would Trump directly be in a position to enforce the NDA?

Joe said...

Orin Kerr as noted by Rick "Election Blog" Hasen has pointed out the lawyer said he "facilitated" the payment, which doesn't necessarily mean he "paid" off Stormy Daniels [for those who wish to do research, one or more of her films can be found Showtime on Demand].

Joe said...

As to Shag's comment, Stephanie Gregory Clifford (her real name) reportedly feels the statement by Michael Cohen broke the agreement and she might be able to comment. Beforehand, she went on a late night talk show and spent the whole time not saying anything.

Shag from Brookline said...

Stormy with her silence said a lot, just as Trump's silence on certain matters (e.g., no references to guns, but focus on mental health following the Parkland massacre).says a lot.

The contents of the NDA in the Cohen/Stormy matter have not, to my knowledge, been made public. A review of the contents would be helpful in addressing the query raised in my comment. The contents might also be helpful in addressing legal ethics rules that is the subject of this post rather than relying on Conen's statements about the source of the payment to Stormy.

Jim said...

This arrangement definitely seemed like something a lawyer shouldn't be doing, so thanks for addressing the specific ethical duties implicated by the payoff. A couple additional points:

- Assuming the non-disclosure was negotiated in connection with the hush money payment, doesn't that make it even more difficult for Cohen to argue the payment wasn't made in connection with contemplated litigation? A non-disclosure agreement is essentially a threat to sue if you talk, right?

- If Cohen made the payment in a capacity other than Trump's lawyer, it seems like the payment could be viewed as a violation of Rule 1.8(a). If the Trump organization paid hush money, it would obviously be in order to advance the interests of the business by avoiding harm to the reputation of the owner. Seems like Cohen's payment for the same reason would serve the same business interests, and therefore could be construed as protecting the shared business interests of Trump and Cohen.

CJColucci said...

Many years ago, I had a small but contentious matter in which the parties (now both dead) narrowed the difference between them to $150, but neither would budge from there. No way I was litigating this case over $150. I paid $75 from my own pocket, telling my adversary that my client had budged. I told my client that my adversary blinked.
As I said, that was a long time ago and both parties are now dead. So I'm probably safe.

Shag from Brookline said...

I recall back in my active days of practice 50s-90s hearing stories from several attorneys whose "good" (paying) clients would complain about the "illegal" parking tickets they got in Boston visiting their offices. These attorneys would say, "Give me the ticket, I'll take care of it." Many such clients thought the attorneys would "fix" the tickets. It was cheaper for the attorneys to pay out of their own pockets. Of course this may have been followed with increases in hourly rates - or just in hours billed such a client. I would consider this a sort of a gatekeeper role.

Shag from Brookline said...

Over at the Take Care Blog, its Daily Update references this post but perhaps in a slightly misleading manner.