The Current State of Play on The Lush Life, Hush Money, and Slush Funds of Michael Cohen (and Shush, Rudy!)

by Diane Klein

As the Michael Cohen/Stormy Daniels/Donald Trump $130,000 "hush money" payment scandal continues to roil the airwaves, most American law students are immersed in final exams, with the July 2018 bar exam looming for this month's law grads, and the Multistate Professional Responsibility Exam (MPRE) either just behind them or ahead for August 2018.  Many are dutifully working through hypotheticals in professional responsibility - the law governing lawyers - which is among the most frequently bar-examined subjects, and is obviously crucial to the ethical discharge of an attorney's obligations.  Meanwhile, the real-world behavior of highly-placed lawyers, including Michael Cohen (who now has his own lawyer, David Schwartz) and Rudy Giuliani, who recently joined Trump's legal team, has become so central to our understanding of the issues that even MSNBC commentators like Rachel Maddow have had to take a break from covering the antics of the major players - like Trump himself - to hold informal on-air "law schools" to try to unravel the issues for their viewers.

With that in mind, please consider the following hypothetical PR/election law/contract law "crossover" question...

Lawyer # 1 represents Client, a flashy New York millionaire real estate developer.  Client, a married man, has occasional extramarital affairs, which he would prefer to keep quiet.  Among the services Lawyer # 1 provides to Client is negotiating "non-disclosure agreements" (NDAs), by which, in exchange for a lump sum payment, a woman who alleges she was sexually involved with Client, agrees never to discuss the (alleged) affair.  These NDAs are frequently negotiated using pseudonyms for both Client and the woman in question; the payments are sometimes made through an LLC created for that purpose.  On some occasions, Client does not actually sign the NDA.  In addition, in order to preserve "plausible deniability," Client instructs Lawyer # 1 not to share specific details with him (of the allegations or the payments), giving Lawyer # 1 settlement authority up to a fixed amount per agreement.

The agreements are funded in the following way:  Lawyer # 1 borrows against his own real estate holdings and uses the cash to pay the settlements as needed.  Client pays Lawyer # 1 a fixed amount each month, sufficient over the course of a year to cover Lawyer # 1's fees and expenses, as well as the settlement amounts. 

At a certain point in time, Client becomes a candidate for elected federal office.  During Client's candidacy, in the aftermath of an unrelated sex scandal involving Client, Lawyer # 1 negotiates an NDA with Porn Star, a woman who allegedly was sexually involved with Client nearly ten years earlier.  The negotiations and payment conclude in the two week period before the election.  The NDA is not signed by Client, but the lump sum payment is made in full.  By its own terms, the NDA provides for very large penalties in the event of its violation by Porn Star, and requires arbitration of any disagreement.  Client is elected.  Client's Federal Election Commission (FEC) disclosures do not include any NDA payments made or loans received.

Some time later, the details of this NDA emerge through reporting in the national press. Porn Star publicly confirms details of her involvement with Client.  Porn Star also alleges duress relating to the execution of the NDA.  The matter attracts a great deal of publicity, and both Porn Star and her attorney make numerous public statements about both Client and Lawyer # 1.   Client's initial public position is denial of involvement or knowledge of the NDA, which Client on at least one occasion states was undertaken by Lawyer # 1 personally.  Lawyer # 1 on at least one occasion stated that he was not reimbursed.  Client also seeks to enforce the NDA against Porn Star; Porn Star later counterclaims for defamation based on statements made about her by Client.

Later still, Client retains Lawyer # 2 as one of his personal lawyers.  Lawyer # 2 makes public statements, including on television, denying any alleged FEC violations on the basis that "no campaign funds were used."  He states that the payment to Porn Star would have been made regardless of Client's candidacy (for the sake of Client's "marriage" or "family"), though he also speculates about the negative impact had the information come out during the campaign.  He further states that Client's personal (rather than campaign) funds were used to reimburse Lawyer # 1, as described above.  He also states that Lawyer # 1 did not inform Client in advance of the NDA with Porn Star, although other of his statements suggest knowledge on Client's part of the arrangement. 

Client identifies both Lawyer # 1 and Lawyer # 2 as "my lawyer" or "one of my lawyers" on numerous occasions.

Address the following questions under New York law, federal law, and the New York Rules of Professional Conduct (RPC).

1.  Is the NDA enforceable?  Please discuss all applicable claims and defenses.
2.  Is either lawyer subject to discipline? Please cite applicable Rules of Professional Conduct.
3.  Are there any violations of federal campaign finance laws?

Model Answer

1.  Is the NDA enforceable? 


There is nothing that requires contracting parties to enter into agreements under their legal names.  As long as everyone involved knew the identities of the other parties (not in question here), this is not a defense to enforcement.

Lack of signature

In some circumstances, a party's failure to sign an executory contract might result in its unenforceability.  Here, however, the party seeking enforcement (Client) is not denying the existence of the agreement.  Moreover, Client has fully performed; no one is questioning whether the payment was made in its entirety.  This is therefore not a basis for non-enforcement.

Third-party beneficiary

An alternate theory of enforcement here is that the NDA was entered into between Porn Star and the entity from or through which was made, with Client as a third-party beneficiary (who therefore would not be required to have signed in order to benefit from or enforce the agreement).


Neither the subject matter of the agreement (silence in return for a substantial payment) nor the amount ($130,000) appear to be "unconscionable."  Non-disclosure agreements are generally enforceable when freely entered into, etc., as this one appears to have been; however, Porn Star's later allegations of duress may cast this in a different light.  If, in fact, she was intimidated or threatened into signing, it may be more difficult to enforce the agreement against her.

Public policy

The timing of the NDA with Porn Star may make this a more viable argument than it would be under other circumstances.  In general, agreements like this are favored or at least tolerated; public policy favors settlement over litigation, and favors private agreements between willing parties whose subject matter is not otherwise illegal.  Here, however, the silence purchased may be on a matter of genuine public concern (rightly or wrongly), the private sexual conduct of a candidate for high office.  As a result, silencing Porn Star may be problematic (although this would go more to the enforceability of the penalty for its violation, than to the agreement itself).

2.  Is either lawyer subject to discipline?

Lawyer # 1

Failure to communicate/scope of representation

This is addressed by New York RPC 1.2 and 1.4, which track the ABA Model Rules.

New York RPC 1.2 provides that "a lawyer shall abide by a client's decisions concerning the objectives of representation and, as  required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued."

RPC 1.4(a)(1) requires that a lawyer "promptly inform the client of...material developments in the matter including settlement...offers"; (a)(2) requires the lawyer to "keep the client reasonably informed about the status of the matter"; and (a)(4) requires the lawyer to "promptly comply with a client's reasonable requests for information."  RPC 1.4(b) states, "A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."

RPC 1.2 also states, "A lawyer shall abide by a client's decision whether to settle a matter."

On this basis, if Client has communicated the twin objectives of securing the silence of Porn Star (and other similarly-situated persons), and doing so without notifying Client of specific details (to preserve Client's plausible deniability or for any other reason), Lawyer # 1 would not be subject to discipline for following those instructions from Client.  If Lawyer # 1 is willing to provide further details to Client, but Client does not want to know them, so long as Lawyer # 1's explanation satisfies RPC 1.4(b), it is hard to see how Lawyer # 1 would be subject to discipline.  Here, Client (a sophisticated person) has made what appears to be an "informed decision" about how he wishes Lawyer # 1 to handle such (recurrent) situations.  So long as Lawyer # 1 stayed within those bounds, there is no violation here.

Loan to Client

Regardless of the source of the funds Lawyer # 1 used to pay the settlement agreement (which may raise separate issues of bank fraud beyond the scope of this question), when a lawyer makes a loan to a client (for any purpose), this triggers RPC 1.8(a).  New York's rule here is not quite the same as the Model Rule, and is actually more permissive.  While the Model Rule requires certain written disclosures, including informed written consent to the transactions and its terms, for any "business transaction with a client," the New York RPC 1.8(a) limits this to "a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise professional judgment therein for the protection of the client."

Loans to clients are such transactions; the Comment [1] to Model Rule 1.8 identifies "a loan" as a covered transaction.

So under the New York rules, the threshold question is whether Lawyer # 1's loan to Client, that Client is to repay over time (no facts are given about whether this is, for example, an interest-free loan), is a transaction in which they have "differing interests."  Arguably, they do: Lawyer # 1's interest is in getting the loan repaid; Client may or may not desire to do that, especially if Client wants later to be able to deny any knowledge of it, or even to characterize it not as a loan, but as a gift.  With respect to whether "the client expects the lawyer to exercise professional judgment therein for the protection of the client," at least to the extent that Client may expect the arrangement to be covered by attorney-client privilege or confidentiality, it would satisfy this requirement.

The loan from Lawyer # 1 to Client therefore appears to be covered by RPC 1.8(a).  To avoid professional discipline, there must be an appropriate "paper trail."  (See also Comment [2] to Model Rule 1.8.) Lawyer # 1 is subject to discipline if the transaction fails to be "fair and reasonable to the client" (unlikely); was not fully disclosed and transmitted in writing (unknown); if Client was not informed in writing of the desirability of seeking independent counsel (unknown); or if there is no informed consent confirmed in writing to the essential terms of the transaction (also unknown).

RPC 1.8(e) addresses "financial assistance" from attorney to client, and provides, "While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client, except that: (1) a lawyer may advance court costs and expenses of litigation."  This rule is very similar to the Model Rule, and Comment [10] explains it this way "Lawyers may not subsidize lawsuits...brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses."  However, there is no "prohibition on a lawyer lending a client court costs and litigation expenses...because these advances are virtually indistinguishable from [permitted] contingent fees."  Clearly, this Comment contemplates at least an impecunious, if not an indigent, client, which is (theoretically) not the case here.  Nevertheless, if Lawyer # 1 "subsidizes" NDAs by funding them, and then being repaid by Client (for reasons of privacy or concealment, depending on one's sympathy for the arrangement), if this falls within "expenses of litigation," it would be permitted, but not otherwise (except as provided by RPC 1.8(a)).

(It also may be that Lawyer # 1's loan to Client is not being made "in connection with contemplated or pending litigation."  It is a non-litigation matter, and the purpose of the loan is privacy/secrecy.  This would still be covered by RPC 1.8(a), of course.)

Conduct involving dishonesty/prejudicial to the administration of justice

RPC 8.4(c) is a "catch-all" provision that prohibits lawyers from engaging in "conduct involving dishonesty, fraud, deceit or misrepresentation," and RPC 8.4(d) prohibits conduct "prejudicial to the administration of justice."  To the extent that Lawyer # 1 made false statements about the source of the funds, whether he was reimbursed, etc., this rule might be implicated.  But when this is in tension with Client's desire for privacy or discretion, it seems less likely Lawyer # 1 would be subject to discipline on this basis.

If the loan and reimbursement approach were undertaken as a conspiracy to violate the FECA or the Internal Revenue Code, of course, that would go beyond these more general prohibitions, and violate RPC 1.2(d), which prohibits a lawyer from "counsel[ing] a client to engage, or assist[ing] a client, in conduct that the lawyer knows is illegal or fraudulent."  Whether Lawyer # 1 knows enough election law to know that such payments must be disclosed, is another question.

(It is also possible that Lawyer # 1 has not properly earmarked and segregated Client retainer/reimbursement funds, as required by RPC 1.15, but considerably more facts would need to be known.  In addition, loans have tax consequences that are also beyond the scope of this question.)

Lawyer # 2

Breach of Confidentiality

Contrary to popular belief, a lawyer's voluntary statements revealing confidential communications do not (necessarily) implicate attorney-client privilege (a rule of evidence regarding what a lawyer may be required to testify about), but rather the professional duty of confidentiality, found at RPC 1.6(a).  This rule states that "A lawyer shall not knowingly reveal confidential information...or use such information to the disadvantage of a client or for the advantage of the lawyer or a third person, unless (1) the client gives informed consent."  To that extent, even if Lawyer # 2 learned of the payment arrangements through confidential communications with Client, if Client gave Lawyer # 2 permission to make the statements that he did about Client's financial arrangements with Lawyer # 1, there is no breach of confidentiality.


RPC 1.1(a) - literally, the very first rule - is that a lawyer "provide competent representation," including "the legal knowledge...reasonably necessary for the representation."  Furthermore, RPC 3.1 prohibits a lawyer from "assert[ing] or controvert[ing] an issue...unless there is a basis in law and fact for doing so that is not frivolous." Lawyer # 2's statements may or may not reflect the factual position being taken by his Client about either his knowledge of the NDA, the source of the funds used, or the financial relationship between Client and Lawyer # 1.  His statements about campaign finance law, however, are demonstrably, repeatedly, false.  While Lawyer # 2 probably did not violate RPC 1.2(c)(2), that "a lawyer shall not intentionally...prejudice or damage the client during the course of the representation," he certainly may unwittingly have done so.

Trial Publicity

There is pending litigation with respect to the enforceability of the NDA, and a follow-on suit for defamation, both involving Client.  This triggers RPC 3.6, concerning trial publicity.  RPC 3.6(a) prohibits "an extrajudicial statement that the lawyer knows or reasonably should know will be disseminated by means of public communication and will have a substantial likelihood of materially prejudicing an adjudicative proceeding in the matter."  Certainly, Lawyer # 2's televised statements qualify, as they relate to "the character, credibility, [and] reputation...of a party."

However, under RPC 3.6(d), "a lawyer may make a statement that a reasonable lawyer would believe is required to protect a client from the substantial prejudicial effect of recent publicity not initiated by the lawyer or the lawyer's client."  Still, under this rule, "A statement made pursuant to this paragraph shall be limited to such information as is necessary to mitigate the recent adverse publicity."  Because Porn Star and her counsel have been making statements intended to affect the outcome, Lawyer # 2 is probably not subject to discipline for his defensive statements under RPC 3.6.

Both Lawyers

By the way, characterizing the services provided by Lawyer # 1 as those of a "fixer" (rather than a lawyer), and of Lawyer # 2 as a "spokesman" or "legal spokesman" (rather than a lawyer), does not change these results. 

Under RPC 5.7, lawyers providing "nonlegal services," whether "distinct from legal services being provided to that person by the lawyer or law firm" (RPC 5.7(b)), or not distinct from them (RPC 5.7(a)), are still subject to the Rules, "if the person receiving the services could reasonably believe that the nonlegal services are the subject of a client-lawyer relationship."  Client's public statements to this effect more than satisfy this requirement.

3.  Are there any violations of federal campaign finance laws?

The Federal Election Campaign Act (FECA) governs both campaign "contributions" and campaign "expenditures," and the disclosure requirements related to each of them.  Contrary to Lawyer # 2's statements, these laws do not only govern the use of "campaign funds" (i.e., expenditures made by a campaign committee or of funds raised by a committee or PAC).

As an initial matter, campaign contributions by individuals are subject to a $2700 limit per individual per election cycle.  If the $130,000, funded by Lawyer # 1, were a campaign contribution, it would grossly exceed those limits, and if not reported, would also violate reporting requirements. 

This problem is not avoided by characterizing it as a "loan."  There is no question that a loan can be a campaign contribution.  FECA Sec. 30101(8)(A) states, "The term 'contribution' includes -(i), advance, or deposit of money or anything of value made by any person for the purpose of influencing any election for Federal office."

So a key question is whether the purpose of the payment.  Was it made to influence the election?  It seems clear that it was.  Two facts support this conclusion: the timing, and the statement by Lawyer # 2.  The negotiations over the NDA and the execution of the NDA -- concerning events that allegedly occurred a decade before -- took place just weeks before the election, a res ipsa loquitur argument showing its purpose.  But if there were any doubt, it was removed by Lawyer # 2, when he explicitly identified the potential campaign damage had no NDA been in force during the campaign.  Thus, Lawyer # 2's statement (perhaps on behalf of Client) that the payment would have been made anyway, regardless of Client's candidacy, is irrelevant.  An act can be performed for more than one purpose; FECA does not require that the loan be made for no other purpose to fall within its ambit.

Under FECA, an individual may make unlimited "independent expenditures."  If the $130,000 was funded by Lawyer # 1, and not reimbursed, but could be treated as an independent expenditure in support of Client's candidacy, it would not violate this limit (but would still be reportable and a violation if unreported).  However, under Sec. 30101(17) of FECA,  "The term 'independent expenditure' means an expenditure by a person (A) expressly advocating the election or defeat of a clearly identified candidate; and (B) that is not made in concert or cooperation with or at the request or suggestion of such candidate."  This expenditure fails both prongs: an NDA with a pseudonymous Client that does not even mention the candidacy fails (A); and because it was made by Client's lawyer acting as such, it fails (B).

Similarly, the candidate himself (Client in this case), may spend unlimited amounts of his or her own money - but again, this is subject to disclosure and reporting.  Admittedly, violation of the record-keeping and reporting provisions generally exposes the violator at worst to small fines and potential imprisonment of less than 1 year. 

And now, back to real life...

With respect to the real-life enforceability of the Stormy Daniels NDA, a number of legal experts have concluded it is probably a valid contract (unless duress is shown), although the $1 million per disclosure is probably an illegal and unenforceable penalty.  Moreover, given that the actual NDA, covering events that allegedly occurred in 2006, was executed on October 28, 2016, it was almost certainly "for the purpose" of affecting the election, by protecting Donald Trump, in the aftermath of the "Access Hollywood" tape, from further escalating sex scandals.

IRL (as the digital natives say), Cohen has made millions as a New York real estate investor himself, buying buildings for a few million dollars and selling them just a few years later for far more, in all-cash transactions all handled by a single LLC for an unnamed buyer.  As described above, if Cohen used his own funds (whatever the source) to make a loan to Trump to make the $130,000 payment to Stormy Daniels, New York's RPC 1.8(a) requires a substantial "paper trail" documenting the transaction, which may or may not exist.  But Cohen lawyer David Schwartz's televised statement that Trump did not know about the NDA - even if it must later be reshaped into a claim that Trump did not know in detail about the agreement, or did not know in detail in advance about the agreement - does not land Cohen in hot water over failures to communicate or act within the scope of his representation agreement with Trump.  If, as I speculate above, the standing agreement between Trump and his lawyer-fixer was, as Giuliani put it on Fox News, "to make it go away," Cohen probably did not violate any New York Rules of Professional Conduct in doing so.  (That is distinct from whether he obtained all proper written consent forms for such transactions, as well as for the purported "loan"; and distinct from whether the finances of Cohen's law office comply with rules for client trust accounts and so on.)

Cohen and Giuliani's fundamental misunderstanding of federal election law notwithstanding, whether the $130,000 was a gift or a loan, if its purpose was to help Trump get elected, it (at least) needed to be reported (and even the loan may be an illegal campaign contribution).

As for Giuliani, his "advocacy" for Trump has resulted in a farrago of lies, mistakes, distortions, and incoherencies, only amplified by his mendacious and unreliable client.  On Fox News, Giuliani described the payment (which Trump, on April 5, 2018, explicitly denied making or knowing about) as "funneled through" Cohen's "law firm," and then reimbursed (including after the election) by Trump's $35,000/month (!) retainer.  Except that in October 2016, Michael Cohen did not have a "law firm."  He was a Vice President of the Trump Organization, a position from which he did not resign until January 2017.  Michael D. Cohen & Associates, PC was only incorporated on March 21, 2017, and its registered address is at his Trump Park Avenue apartment.  The Stormy Daniels NDA was negotiated many months before, as (some suspect) were others like it.

A further wrinkle is the looming possibility of a criminal conspiracy to violate federal election laws.  Under Title 18, Sec. 371 of the federal criminal code, "if two or more persons commit any offense against the United States," that is a crime punishable by up to five years in prison (or less, if the crime itself is a misdemeanor).  If Cohen and Trump agreed to enter into this NDA, for the benefit of candidate Trump, intending not to report the loan as a contribution or expenditure, as appropriate, that raises the specter of conspiracy.  The ever-changing stories add nothing to Trump's already battered credibility - and neither does the (mis)conduct of his lawyers.