The Rules of Professional Conduct: A Basis For Civil Action Or Remedy?

The Washington Supreme Court’s recent decision in LK Operating, LLC v. The Collection Group, LLC calls into question the extent that a violation of the Rules of Professional Conduct (“RPCs”) may be used as a basis for civil action. Ultimately, the Washington Supreme Court affirmed the rescission of a contract based on a violation of RPC 1.8(a).

This case involved a joint venture transaction regarding a debt collection business. The parties to the joint venture included LK Operating, LLC (“LKO”) and The Collection Group, LLC (“TCG”). The members of LKO, Leslie Powers and Keith Therrien, are both Washington attorneys who worked for the same law firm (the “Law Firm”). One of the members of TCG, Brian Fair, initially asked Mr. Powers and Mr. Therrien if they, along with their Law Firm, would be interested in investing in TCG and operating a joint venture. The proposal involved each party to the joint venture contributing fifty percent of all required funds, Mr. Fair providing administrative and management services, and the Law Firm and Mr. Powers providing legal services.

This initial proposal was followed up with an email from Mr. Fair to Mr. Power at Mr. Power’s Law Firm email address. In this email, Mr. Fair again set out his joint venture proposal and attached a purchase and sale agreement for a debt portfolio company. In response, Mr. Power emailed Mr. Fair an extensively edited purchase and sale agreement. This response email, however, “did not respond directly regarding [Mr.] Fair’s earlier email.”

After receiving Mr. Power’s response, Mr. Fair contacted the Law Firm and requested half of the funds to purchase the debt portfolio. Subsequently, Mr. Fair received the check, which indicated it was from LKO. The check was signed by an employee of the Law Firm. Additionally, other funds were contributed to the joint venture and Mr. Power provided the joint venture with certain legal services, in accordance with the initial proposal. No written agreement was ever executed though.

Ultimately, the parties had a disagreement and LKO filed a lawsuit against Mr. Fair and TCG for breach of contract, breach of fiduciary duty, and for declaratory relief regarding the allocation of ownership interests in TCG. In response, Mr. Fair and TCG filed a separate action against Mr. Powers for legal malpractice. These actions were then consolidated by the trial court. The parties then moved for cross summary judgment. Mr. Fair and TCG moved for summary judgment on grounds that the joint venture agreement was void as violative of public policy because Mr. Powers violated RPC 1.8(a). TCG also asserted that Mr. Powers violated certain other RPCs, including RPC 1.7. Mr. Powers, in turn, moved to dismiss the legal malpractice claim on grounds that he personally was not a party to the joint venture agreement and that no violation of an RPC could have occurred.

The trial court granted Mr. Fair and TCG’s motion, denied Mr. Powers’ motion, and dismissed LKO’s lawsuit against Mr. Fair and TCG. The trial court determined that Mr. Powers violated RPC 1.7 and that, as a result, the joint venture agreement was voidable. The trial court then rescinded the agreement. The Court of Appeals affirmed. In doing so, however, the Court of Appeals held that rescission was not proper for a violation of RPC 1.7. But that Mr. Powers violated RPC 1.8, making rescission proper.

LKO and Mr. Powers appealed, arguing that the Court of Appeals violated their due process rights in analyzing Mr. Powers’ alleged violation of RPC 1.8 on the merits; that the Court of Appeals erred in holding Mr. Powers violated RPC 1.8(a); and that, rescission was not an appropriate remedy. The Washington Supreme Court affirmed:

  • Mr. Powers did not assert any protected property interest because professional reputation is not protected and his interest in his license to practice law was not implicated.
  • The proceedings below satisfied procedural due process as to LKO.
  • Mr. Powers provided TCG legal services pursuant to the business transaction contemplated by the joint venture, and Mr. Powers did not satisfy RPC 1.8(a).
  • Mr. Powers violated RPC 1.7.
  • Contracts, like the business transaction contemplated by the joint venture, formed in violation of the RPCs are unenforceable to the extent they contravene public policy and contracts entered in violation of RPC 1.8(a) are presumptively unenforceable.

Judge Madsen filed a dissenting opinion. The dissent concluded that the majority’s reliance on a violation of the RPCs as a basis for civil remedy was improper. The dissent based its reasoning on the Scope section of the RPCs and the court’s prior decision in Hizey v. Carpenter, 119 Wn.2d 251, 258, 830 P.2d 646 (1992).