MALPRACTICE LIABILITY/FEE FORFEITURES
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Civil Liability
Conflicts of interest have
become one of the most serious causes of malpractice liability for lawyers and
law firms with sophisticated business practices. Notice the reference to
the business practice. For many years, lawyers believed that conflicts
were something that litigators worried about: the fear of disqualification and
the accompanying embarrassment and potential loss of fees. That still
happens, but the real monetary exposure is in the business practice.
Following will be a list of jury
verdicts, appellate decisions and press articles about significant payments by
law firms and their insurance carriers in just the past few years. These
are the tip of the iceberg. Dozens of cases, which are not public, are
being settled every year for millions of dollars resulting from good lawyers'
insensitivity to real or perceived conflicts of interest.
Examples. Baldasarre
v. Butler, 604 A.2d 112 (N.J. App. 1992) (upholding a $1.9 million judgment
against a lawyer and his law firm for attempting to represent both the seller
and buyer of real estate); [Law Firm] v. Boon,
13 F.3d 537 (2d Cir. 1994) (upholding a $2 million verdict for a firm's allegedly
dropping one client and then representing another in purchasing property that
the first client had tried to purchase); Schlesinger v. Herzog, 672 So.
2d 701 (La. App. 1996) (upholding a $5.5 million verdict against lawyer who
represented both sides of a business acquisition); Automated Marine Propulsion
Systems, Inc. v. Sverdlin, No. 97-02103, Harris County, Texas (according
to the January 31, 1999 Texas Lawyer, a prominent Dallas law firm paid $20
million to settle a case in which it was alleged that the firm abandoned one
client in order to assist other clients in taking away his business) ; Swank
v. Cunningham, 2008 Tex. App. LEXIS 2207 (Tex. App. March 27, 2008)
(fighting over the $20 million described just above); Wall St. J., Nov. 17,
1992 (Pepper, Hamilton & Scheetz paid a $3 million settlement for allegedly
betraying one client in representing other clients); Interclaim Holdings Ltd. v. Ness, Motley, Loadholt,
Richardson & Poole, 298
F. Supp. 2d 746 (N.D. Ill. 2004) (denial of post trial motions where jury verdict was $8.3 million in
compensatory damages and $27.7 million in punitive damages; law firm had
allegedly turned on its client); and Wall St. J., Oct. 29,
1992 (Oklahoma lawyer hit with $120 million jury verdict for allegedly changing
sides in an oil field development dispute); Lawrence Savings Bank v. Levenson, 797
N.E.2d 485 (Mass.
App. 2003) (upholding $1.5 million jury verdict against bank's
former lawyers) In In Re Kujawa,
256 B.R. 598 (8th Cir. 2000), the court imposed a $100,000 sanction
against a lawyer for representing creditors in a proceeding in which the
lawyer's client was the debtor. In Gunster,
Yoakley & Stewart, P.A. v. McAdam, 965 So. 2d 182 (Fla.
App. 2007), a law firm allegedly caused an estate to hire a bank,
with which the law firm had an allegedly undisclosed relationship, resulting
in a $1 million malpractice judgment.
New York? In In re TCW/Camil Holding L.L.C., 2004 U.S. Dist. LEXIS
9659 (D. Del. May 12, 2004), the
court held that under New York law a plaintiff cannot base a cause of action
against a lawyer on a conflict of interest.
Then, weeks later a New York appellate division held just the
opposite in Tabner v. Drake, 780 N.Y.S.2d 85 (N.Y. App. 2004).
Here is a case of no liability: First
Interstate Bank of Arizona, N.A. v. Murphy, Weir & Butler, 210 F.3d 983
(9th Cir. 2000). A law firm hired a former judicial clerk. As a
result, the judge for whom the clerk worked recused himself from one of the
firm's cases. The client sued the law firm. The Ninth Circuit
affirmed the trial court's summary judgment for the law firm.
Mis-directed Fax, but no
Liability. Poway Land,
Inc. v. Hillyer & Irwin, 2002 Cal. App. Unpub. LEXIS 10786 (Cal.
App. November 21, 2002). The law firm faxed a letter meant for its
client to a lawyer for the other side. The client sued the law
firm. The court upheld a summary judgment for the law firm, because
there was no showing that the mistake contributed to the client's
loss. [Note: this is the first case of which we are aware in
which a serious claim was made against a law firm for accidentally sending a
client communication to the other side.]
Possible Liability of Board Member to other Client of Firm.
Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150 (Tex.
2004)
A
lawyer (Joe) was the member of the city council.
His partner represented a local real estate developer. Joe sponsored an ordinance that imposed a moratorium on
apartment development. Because
of the moratorium the developer was unable to develop some of his property
as he wished. He sued Joe and
his law firm. The trial court
granted summary judgment. The
appellate court reversed, essentially calling this a
conflict of interest. Among
other things the court said more should have been disclosed to the developer
so that he could have adopted a strategy to avoid the effects of the
moratorium. In this opinion the Texas Supreme Court reversed the
appellate court, holding, in part, that telling the developer about the
council proceedings was not within the firm's scope of representation.
The court also made rulings about legislative immunity under Texas law.
Julia D.
Gray, Pillsbury Winthrop Accused of Malpractice in Atlanta
Trust Fund Case, Fulton
County Daily
Report, December 19, 2001. Following is a summary of the
article. Timothy Cobb is the divorced father of two sons, each of whom
is beneficiary of a trust. Crichlow is a partner at Pillsbury, and
until November 2000, was trustee of the trusts. Pillsbury represented
the trusts. The new trustee is Madelyn Adams, former wife of Cobb and
mother of the beneficiaries. She has sued Cobb, Crichlow and Pillsbury
Winthrop. It seems that the trust had made loans to Cobb's company,
edaflow, totaling $2.4 million. Crichlow is an investor in
edaflow. The trusts made additional loans totaling some $400,000 to
other companies in which Cobb and Crichlow had interests. Much of the
money has been lost. Among other claims, Adams claims Crichlow had
violated the prudent investor rule (the trusts had a total value of $6.5
million). She also claims Crichlow and the firm had a conflict of
interest and were guilty of malpractice.
Firm Enjoined from
Representing Competitors; Later Paid Large Settlement. Maritrans GP
Inc. v. Pepper, Hamilton & Scheetz, 602 A.2d 1277 (Pa. 1992)
(injunction granted). Later the law firm paid a settlement of $3
million to aggrieved former client.
Canadian Supreme Court;
Side-Switching. Strother v.
3464920 Canada Inc., 2007 SCC 24 (Can). A
lawyer represented Client A on a series of matters.
The lawyer told Client A that the law no longer permitted the types
of transactions they were doing. While
still representing A the lawyer began representing a former employee of A in
doing the same type of transaction. A
sued the lawyer and his firm for breach of fiduciary relationship.
The trial court found for the lawyer.
The Court of Appeal of British Columbia reversed, and the Supreme
Court affirmed, as to the individual lawyer's liability.
No Fiduciary Duty Among Co-Counsel, but Indemnification for Malpractice
Damages Is Allowed. Beck v. Wecht, 48 P.3d 417
(Cal. June 27, 2002). Michael and Ronald Stephens hired
Daniel Beck to represent them in a product liability suit against General
Motors. Beck brought in Ronald Wecht as local counsel. They both
were on a contingent fee agreement. During trial GM offered $6 million
to settle the case. Nevertheless, the case went to the jury, which
found for GM. Beck sued Wecht for not conveying the settlement offer,
thereby depriving Beck of his contingent fee. Reconciling a conflict
between two California appellate courts, the California Supreme Court
disallowed the claim, holding that co-counsel do not have fiduciary duties
to one another. However, on the same day,
in Musser v. Provencher, 48 P.3d 408 (Cal. June 27,
2002), the court held that the policies that prohibit co-counsel from suing
each other for breach of fiduciary duty do not apply where one seeks
indemnification from the other in a malpractice damages context. In Mazon v. Krafchick, 144 P.3d 1168 (Wash. 2006), the
court reached the same result as Beck. In Scheffler
v. Adams and Reese, LLP, 950 So. 2d 641
(La. 2007)
, the
court followed Mazon. In
Forensis Group, Inc. v. Frantz, Townsend & Foldenauer, 29 Cal. Rptr. 3d 622 (Cal. App. 2005), the court allowed an engineering
expert witness being sued by an unsuccessful client for malpractice to sue
the lawyers who had represented the client.
Aiding and Abetting Breach
of Fiduciary Duty. Anstine v. Alexander, 128 P.3d 249 (Col. App. 2005). This is not a conflicts case.
But, because a breach of fiduciary duty could be asserted against a
lawyer with a conflict of interest, the decision is of interest.
It confirms that in Colorado a lawyer can be sued for aiding and
abetting a breach of fiduciary duty of a non-client to other non-clients.
Same in Pennsylvania, Reis v.
Barley, Snyder, Senft & Cohen LLC, 484 F. Supp. 2d 337 (E.D. Pa.
2007)
. Suits against lawyers alleging aiding and abetting breaches of
fiduciary duty are increasing; however, the court rejected the theory in LeRoy
v. Allen, Yurasek & Merklin, 872 N.E.2d 254 (Ohio
2007). The court in LeRoy did
recognize a cause of action by non-client, minority shareholders where "fraud, collusion
or malice" is present.
No Damages Shown. Sentinel Products Corp. v. Platt, 2002 U.S. Dist. LEXIS 13217 (D. Mass. July 22,
2002). Sentinel sued Dickinson
Wright for malpractice, arising out of patent prosecution work Dickinson did
for Sentinel. The Patent and
Trademark office denied two Sentinel applications, citing a patent of a
former employee of Sentinel, Dennis Knaus.
Dickinson had represented Knaus in obtaining that patent. The work for Knaus and Sentinel were more or less during the
same time period. Sentinel
reworked and resubmitted its applications, and patents ultimately issued.
In the malpractice case Sentinel claimed that Dickinson had a
conflict of interest and that Sentinel was damaged by the delays caused by
the Knaus patent. The court
granted Dickinson a summary judgment because Sentinel could not show how the
alleged conflict caused Sentinel damage.
More No Damages Shown Cases. Nordwind
v. Rowland, 2007 U.S. Dist. LEXIS 75764 (S.D.N.Y. Oct. 10, 2007) (law
firm represented competing heirs to German confiscated assets);
Kuhlman Electric Corp. v. Chappell, 2005 Ky. App. LEXIS 252 (Ky.
App. Dec. 2, 2005); Baker
Botts, L.L.P. v. Cailloux, 224 S.W.3d 723
(Tex. App. 2007)
(reversing $65.5 million verdict involving representation of wealthy
family and bank as fiduciary).
No Duty to Warn Prospective
Client of Statute of Limitations. In Flatt v. Superior Court,
885 P.2d 950 (Cal. 1994), the court held that a lawyer did not have a duty
to advise a declined client about the statute of limitations if doing so
would disadvantage an existing client.
Release of Lawyer Effective. Peebles
v. Sheridan Healthcare, Inc., 853
So. 2d 559 (Fla. App. 2003). A group of
doctors sold their practices. Their
lawyer had a relationship with the purchasers.
In connection with the sale the parties signed very broad releases,
including a release of any liability to their lawyer, although their lawyer
was not a party to the agreements. When
some of the doctors later sued the purchasers, including the lawyer for
having a conflict of interest, the defendants relied upon the releases.
In this opinion the court found that the releases were so clear, that
the plaintiffs were bound by them, even as to their claim against their lawyer.
Florida has the ABA Model Rule version of Rule 1.8(h).
The court did not discuss the rule.
Plaintiff Must Prove Case within a Case in Both Legal Malpractice Case
and Breach of Fiduciary Case. Weil, Gotshal & Manges
v. Fashion Boutique of Short Hills, Inc., 780 N.Y.S.2d 593 (N.Y. App. 2004).
Inadvertent Breach of Screen Can Be Cause of Action for Damages.
Spur Products Corp. v. Stoel Rives LLP, 122 P.3d 300 (Ida. 2005).
Can't Sue other Side's Lawyer for Litigation Conduct. Clark
v. Druckman, 624 S.E.2d 864 (W. Va. 2005).
One party to litigation sued the other side’s law firm for its
conduct in the litigation. The trial court certified to the West Virginia Supreme Court
of Appeals the issue of whether such an action could be maintained.
The court in this opinion ruled that it could not.
Among other things, the court said that allowing such actions would
put lawyers in an impossible conflict of interest.
Estate
Planning Lawyer Should Inquire into the Relationship between Husband and
Wife Clients. Smith v. Hastie, 626 S.E.2d 13 (S.C. App. 2005). Lawyer
represented H and W in the creation of a family limited partnership.
Later W discovered that her interest in the partnership could be
impaired. She sued Lawyer for malpractice.
H and W had a history of marital problems. Lawyer claims he did not know that when he did their estate
plan. For that reason the trial
court granted Lawyer’s motion for summary judgment.
The appellate court, in this opinion, reversed.
It relied principally on an expert witness affidavit of an
experienced estate-planning lawyer. The expert opined that Lawyer should have inquired about H
and W’s relationship before recommending a specific estate plan.
This might have, among other things, caused Lawyer to recommend that
W seek other counsel.
Standing Required to Sue
Lawyer with Conflict. Sadler v. Creekmur, 821 N.E.2d 340 (Ill. App.
2004).
"Simple" Breach
of Fiduciary Duty Does Not Qualify for Award of Punitive Damages. Fortnow
v. Hughes Hubbard & Reed, LLP, 814 N.Y.S.2d 561 (N.Y. Misc. 2005).
Excessive Reliance on
Ethics Rules in Complaint Results in Dismissal. Lear Corp. v. Butzel Long, PC, 2006 Mich. App. LEXIS 1697 (Mich.
App. May 18, 2006).
But, in Recker v. Malson, 2006 Mich. App. LEXIS 2543 (Mich. App. Aug. 17,
2006), the court held that ethics rules could be admissible in a malpractice
action.
Interesting Malpractice
Insurance Coverage Case. Milgrub
v. Continental Cas. Co., 2007 U.S. Dist. LEXIS 80 (W.D. Pa. Jan. 3,
2007). Lawyer and Lawyer's wife
sold their residential real estate to Purchasers, husband and wife.
Lawyer represented Purchasers in the transaction, which, in the
court's words was a "scenario that tests the boundaries of professional
ethics and common sense." Later,
Purchasers sued Lawyer and Lawyer's wife for fraud, etc.
One of the counts was against Lawyer for breach of fiduciary duty,
largely due to Lawyer's conflict of interest.
Lawyer's malpractice carrier denied coverage, asserting the
contractual liability exclusion (in this case, the real estate sales
contract). That exclusion
carried an exception for situations in which the lawyer would have been
liable absent the contract. Lawyer
filed this case, seeking coverage. The
court granted Lawyer a judgment on the pleadings, finding that Lawyer could
be found liable for breach of fiduciary duty even had there been no
contract.
Client "Waives"
Civil Cause of Action against Lawyer for Conflict of Interest by not Moving
to Disqualify Lawyer in Earlier Matter.
Swilley v. Tipton, 2007 U.S. Dist.
LEXIS 7481 (E.D. Ky. Jan. 30, 2007).
Class representative barred from suing class counsel where court had earlier
found settlement to be reasonable.
Koehler v. Brody, 483 F.3d 590 (8th Cir. 2007)
.
In re The Brown Schools, 368 B.R. 394 (D. Del.
2007).
This opinion dealt with a motion to dismiss, so we should not make
too much of it at this stage. Nevertheless, it is illustrative of what a bankruptcy trustee
can allege against the former law firm for the debtor. The claims here included breach of fiduciary duty (motion
denied), aiding and abetting a breach of fiduciary duty (motion granted with
leave to replead), aiding and abetting a fraudulent transfer (motion granted
with leave to replead), deepening insolvency (motion denied pending further
developments in the Delaware courts), civil
conspiracy (motion granted with leave to replead), and a declaratory finding
that the law firm’s claim for fees should be subordinated (motion granted
- no mention of repleading). As
to deepening insolvency the bankruptcy judge said that the opinion in Trenwick
Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch.
2006), was “well reasoned,” but she denied the motion pending a decision
by the Delaware Supreme Court.
Need for Expert
Witness. Hoagland v. Sandberg, Phoenix & Von Gontard, P.C.,
385 F.3d 737 (7th Cir. 2004).
This is a suit against a law firm arising out of the firm’s
conflict of interest. The
plaintiff did not call an expert witness.
For that reason the trial court “entered judgment” for the law
firm (procedural history all but nonexistent).
The Eighth Circuit affirmed. A similar case is Strong
v. Baker, 2008 Tenn. App. LEXIS 200 ( Tenn. App. March 31, 2008).
No Need for Expert Witness.
Wilson v. Vanden Berg, 687 N.W.2d 575 (Iowa 2004).
Discusses Need for Expert
Witness. Floyd v. Hefner,
2008 U.S. Dist. LEXIS 25642 (S.D. Tex. March 31, 2008).
Presumption of Shared
Confidences in Disqualification Context Does not Apply in Malpractice Action.
Capital City Church of Christ v. Novak,
2007 Tex. App. LEXIS 4148 (Tex. App. May 23, 2007).
Lawyer for Executor not Lawyer for the Heirs.
Campbell v. Johnson, 2007 Wash. App. LEXIS 2930 (Wash. App. Oct. 29,
2007).
Common Law Breach of Fiduciary Duty and
"Standard-Commercial-Transaction" Exception.
Liggett v. Young, 877 N.E.2d 178 (Ind.
2007).
Liggett, a building contractor, brought a claim against his lawyer
(“Lawyer“), for whom Liggett built a house.
Lawyer had drafted the construction contract using a standard form, which
among other things, said that only lawyers should complete the form.
Lawyer also added a paragraph to the form.
Liggett’s claim was based on Lawyer’s violation of Indiana’s
version of Model Rule 1.8(a), and Lawyer’s breach of his common law fiduciary
duty to Liggett. Lawyer based his
defense, in part, on the “standard-commercial-transaction” exception to Rule
1.8(a), and the same exception to Lawyer’s common law fiduciary duty to
Liggett. The trial court granted
Lawyer summary judgment on Ligget’s claim.
In this opinion the Indiana Supreme Court reversed, holding there were
questions of fact to be resolved by a trier of fact.
The supreme court made two important findings: (1) regardless of the
Preamble to Indiana’s ethics rules, Liggett could still maintain an action for
breach of the common law fiduciary duties owed by lawyers to clients; and (2)
the transaction in question was not a “standard commercial transaction.”
The court based the finding upon the fact that only lawyers should
complete the standard form, and the fact that Lawyer had added a custom clause
to the contract.
Cannot Avoid Statute of Limitations Problem by Calling a Negligence Claim a
Breach of Fiduciary Duty or Fraud.
Murphy v. Gruber, 2007 Tex. App. LEXIS 9707 (Tex. App. Dec. 13,
2007). Legal malpractice
action. The complaint purported
to plead negligence, fraud, and breach of fiduciary duty.
In this opinion the court affirmed the trial court’s dismissal of
the action based upon the statute of limitations.
The court held that all three counts were merely negligence claims,
for which the statute was two years.
Denial of Motion to Disqualify in One Suit Constitutes Collateral Estoppel
in Subsequent Suit for Damages.
Weinberger v. Tucker, 2007 U.S. App. LEXIS 29419 (4th Cir.
Dec. 20, 2007), but not if appellate court affirmed trial court on laches
grounds only, Zevnik v. Superior Court, 2008 Cal. App. LEXIS
84 (Cal. App. Jan. 18, 2008).
Duty of Confidentiality Versus Duty to Keep Client Informed. Sitar
v. Sitar, 2008 N.Y. App. Div. LEXIS 2964 (N.Y. App. April 1, 2008). In this opinion the Appellate Division reversed the trial
court’s order granting a motion to dismiss in favor of Lawyer.
Lawyer had represented both sides in the sale of business assets.
This is a classic illustration of the tension created in a multiple
representation between the duty of confidentiality and the duty to keep clients
informed. In the words of the
court:
Here, the plaintiffs alleged that McGraw
represented both sides of the transaction, and was thereby burdened by a
conflict of interest, and that he was aware of information critical to the
purchase price of Business Computing but withheld that information from
the plaintiff John Sitar, who was his client. These allegations were
sufficient to state a cause of action to recover damages for legal
malpractice . . . .
Failure to Report Theft of Colleague Can Be Cause of Action. In
re Estate of Spencer, 2008 N.J. Super. LEXIS 90 (N.J. Super. April 23,
2008). This is a suit against a
lawyer for failing to report the theft of funds from several estates by a
fellow lawyer. It is very state
specific and the interrelationships are complex.
At bottom, here is the court’s holding:
. . .
[A]n attorney such as Averna who has a close and interdependent business
relationship with another lawyer, and who is performing
legal work for a common client at that lawyer's request,
has a duty to report that lawyer if he or she develops
actual knowledge that the lawyer has been stealing funds
from their common client.
Fee Forfeitures
The black letter of Restatement § 37 provides as follows:
A lawyer engaging in clear and serious
violation of duty to a client may be required to forfeit some or all of the
lawyer's compensation for the matter. Considerations relevant to the
question of forfeiture include the gravity and timing of the violation, its
willfulness, its effect on the value of the lawyer's work for the client,
any other threatened or actual harm to the client, and the adequacy of other
remedies.
The Reporter's
Note to § 37 cites a number of state and federal court opinions upholding
the principles contained in the black letter. Those cases dealing with
conflicts of interest appear below, along with more recent cases. We
are not aware of any cases standing for the proposition that a
lawyer's fees may never be the subject of forfeiture as the result of a
conflict.
The cases.
Following are cases in which fee forfeitures were upheld because of the punished
lawyer's, or law firm's, conflict of interest. In some cases this occurred
even where no harm resulted from the conflict. In other cases the court
ignored the good faith or lack of knowledge of the conflict by the lawyer.
Hendry v. Pelland, 73 F.3d 397 (D.C. Cir. 1996) (no harm); In re
Eastern Sugar Antitrust Litigation, 697 F.2d 524 (3d Cir.
1982) (failure of opposing law firms to disclose law firm merger negotiations); Silbiger
v. Prudence Bonds Corp., 180 F.2d 917 (2d Cir. 1950); Allapattah Services, Inc. v. Exxon Corp., 454 F. Supp. 2d 1185 (S.D. Fla.
2006) (class counsel's fee was reduced from $21
million to $15 million); Warnell v. Ford Motor Co., 205 F. Supp. 2d 956 (N.D. Ill. June
11, 2002); In re Estate of
Brandon, 902 P.2d 1299 (Alaska 1995; Moses v. McGarvey, 614 P.2d 1363
(Alaska 1980) (lawyer's motive irrelevant); Holmes v. McClendon, 76 S.W.3d 836 (Ark. 2002); Crawford & Lewis v.
Boatmen's Trust Co. of Arkansas, Inc., 1 S.W.3d 417 (Ark. 1999); Little
Rock v. Cash, 644 S.W.2d 229 (Ark. 1982); A.I. Credit Corp., Inc. v. Aguilar, 2003 6
Cal. Rptr. 3d 813 (Cal.
App. 2003); Jeffry v. Pounds, 136 Cal.
Rptr. 373 (Cal. App. 1977) (lawyer's knowledge irrelevant); Rice v. Perl,
320 N.W.2d 407 (Minn. 1982) (no harm); Ulico Cas. Co. v.
Wilson, Elser, Moskowitz, Edelman & Dicker LLP, 843 N.Y.S.2d 749 (N.Y.
Sup. Ct. 2007); Burrow v. Arce, 997 S.W.2d 229
(Tex. 1999) (no harm); Cotton v. Kronenberg, 44 P.3d 878 (Wash. 2002); and Eriks v. Denver, 824 P.2d 1207 (Wash. 1992)
(no
harm).
Dewey
v. R. J. Reynolds Tobacco Co., 536 A.2d 243 (N.J. 1988), is unique. It
is a tobacco product liability case. The plaintiffs' law firm hired a
lawyer from the defendant's firm and failed to obtain the consent of the
defendant. New Jersey is not a screening state. The defendant moved
to disqualify the plaintiffs' firm. The court denied the motion because
disqualification would have badly prejudiced the plaintiffs. Instead, the
court ordered the plaintiffs' firm to continue but for no fee.
In Alaska
Native Tribal Health Consortium v. Settlement Fund, 84
P.3d 418 (Alas. 2004) the court held that a lawyer may be entitled to fees
even though he had a conflict of interest.
The
bankruptcy cases. The "Bankruptcy" page of this site
discusses the Bankruptcy Code's unique conflict-of-interest rules under 11 U.S.C.
§ 327(a) (To go there, click here.). 11
U.S.C. § 328(c) authorizes the court to deny compensation to lawyers acting
contrary to § 327(a). That is, if the counsel for the debtor or
creditor's committee is not "disinterested" or has an "interest
adverse to the estate." Following are bankruptcy cases in which fees
and expenses were denied, reduced, or ordered forfeited, for these types of
conflicts: In re Network Cancer Care, L.P., Debtor, 2006 U.S. App. LEXIS 18103 (5th
Cir. July 19, 2006) (entire fee of $60,000 forfeited); In re West Delta Oil Co., Inc.,
Debtor, 432 F.3d 347 (5th Cir. 2005) (failed to disclose intent to invest in debtor); In re Gary Mercury, Debtor, 2004 U.S. App. LEXIS 25481 (2d Cir. Dec. 10,
2004) (not a lot of money, but very ugly conflict); In re Milwaukee Engraving Co., Inc., 219 F.3d 635 (7th Cir.
2000); United States v. Gellene, 182
F.3d 578 (7th Cir. 1999) (this was the lawyer's criminal appeal; however,
the court noted that the firm had forfeited $1.8 million in fees); In re
Crivello, 134 F.3d 831 (7th
Cir. 1998); In re Jore Corp., 298 B.R. 703 (D.
Mont. 2003) ($1.6 million); In re Hot Tin Roof, 205
B.R. 1000 (1st Cir. 1997);
Rome v. Braunstein, 19 F.3d 54
(1st Cir. 1994) ($140,000); Electro-Wire Products,
Inc. v. Sirote & Permutt, P.C. (In re Prince), 40
F.3d 356 (11th Cir. 1994) ($200,000); In re
Futuronics Corp., 655 F.2d 463 (2d Cir. 1981) ($250,000); In re Arlan's
Dep't Stores, Inc., 615 F.2d 925 (2d Cir. 1979); In
re Matco Electronics Group, Inc., 2008 WL 141908 (N.D.N.Y. Jan. 11,
2008) (partial forfeiture for failing to disclose relationships);
In re Congoleum
Corp., 03-51524 (D.N.J. Feb. 7, 2006) ($13 million); In re EToys, Inc.,
331 B.R. 176 (D. Del. 2005); In
re Big Rivers Electric Corp., 2002
U.S. Dist LEXIS 16174 (W.D. Ken. August 13, 2002) (examiner tried to negotiate
special fee with three major creditors); In re Ponce
Marine Farm, Inc., 259 B.R. 484 (D.P.R. March 9, 2001);
In re Granite Partners, L.P., 219 B.R. 22 (S.D.N.Y. 1998) ($2.7 million); In
re Angelika Films 57th, 227 B.R. 29 (S.D.N.Y. 1998); In
re Leslie Fay Companies Inc., 175 B.R. 525
(S.D.N.Y. 1994) ($1 million); In re Granite Sheet Metal Works, 159 B.R.
840 (S.D. Ill. 1993).
In
In re Bruno, 327 B.R. 104 (E.D.N.Y. 2005), the court denied fees to a
law firm that had attempted to represent the driver and passengers in an
auto accident case.
Treatises
dealing with fee forfeitures for conflicts generally. Hazard
& Hodes, §§ 8.21, 10.11 & 13.12; Rotunda & Dzienkowski
§ 1.10-7(c).
Role of Conflicts Rules in
Malpractice Litigation
The "Scope" statement that appears
at the beginning of the ABA Model Rules of Professional Conduct provides that
the Rules were not designed to create civil causes of action against lawyers.
Yet, experience has been that the Rules, including the rules relating to
conflicts of interest, are frequently brought into such
actions, typically through the testimony of expert witnesses. Moreover,
the Scope statement was amended in 2002 to provide that the violation of an
ethics rule can be evidence in a civil liability case against a lawyer.
Section 52(2) of the
Restatement reflects this reality and provides as follows:
(2) Proof of a violation of a rule or
statute regulating the conduct of lawyers:
(a) does not give rise to an implied
cause of action for lack of care;
(b) does not preclude other proof concerning the duty of care in Subsection (1);
and
(c) may be considered by a trier of fact as an aid in understanding and applying
the standard of Subsection (1) to the extent that
(i) the rule or statute was designed for
the protection of persons in the position of the claimant and
(ii) proof of the content and construction of such a rule or statute is relevant
to the claimant's claim.
The Reporters’ Note
appearing after the Comment to Restatement § 52 reflects that a
majority of jurisdictions treat admissibility of the ethics rules in malpractice
actions.
Court may instruct
jury on ethics violation. Mainor v. Nault, 101 P.3d 308 (Nev. 2004).
The above Reporters' Note cites several cases to the same effect.
In Azzar v. Tolley, 2004 Mich. App. LEXIS 2979
(Mich. App. Nov. 2, 2004), the court said:
[T]his Court has found a rebuttable
presumption that violations of the Code of Professional Conduct constitute
actionable malpractice, Beattie v. Firnschild, 394 N.W.2d (Mich. App.
1986).
Another case to the same effect is Hart
v. Comerica Bank, 957 F. Supp. 958 (E.D. Mich. 1997).
Maritrans GP, Inc. v. Pepper, Hamilton and Scheetz, 602 A.2d 1277
(Pa. 1992), is one of the few opinions nationwide that hold that ethics rules
are not admissible in malpractice actions. Meyers
v. Sudfeld, 2007 U.S. Dist. LEXIS 7634 (E.D. Pa. Feb. 2, 2007), cites Maritrans
for the proposition that mere violation of an ethics rule does not establish a
cause of action.
Pollen v. Comer, 2007 U.S. Dist. LEXIS 46906 (D.N.J. June 28, 2007).
In this legal malpractice case the judge granted the lawyer/defendant
summary judgment. One of the
counts dealt with an alleged conflict of interest.
The court said that the plaintiff incorrectly pleaded the count by
alleging a violation of ethics rules. The
court acknowledged New Jersey authority that a violation of ethics rules can
be evidence of malpractice. The
court said that regardless of the pleading deficiency the plaintiff could show
no proximate cause for his alleged losses.
Relating to the above
discussion, see Berkeley Ltd. Partnership v. Arnold, White &
Durkee, 118 F. Supp. 2d 668 (D. Md. 2000).
Arnold, White & Durkee represented Berkeley Limited Partnership,
plaintiff in patent litigation against IBM. Berkeley is now suing AWD
for malpractice, alleging AWD did not disclose to Berkeley that it
represented Intel while it was representing Berkeley against IBM.
Intel made chips for the IBM computers that were the subject of the patent
litigation. Berkeley is claiming that it also had causes of action
against Intel that would have enhanced its overall claim, but AWD talked it
out of suing Intel. The cited opinion accompanies several summary
judgment rulings. The key conflict-of-interest ruling gives Berkeley a
summary judgment as follows:
Therefore as to the issue of liability only, Defendant's representation
of both BLP and Intel constitutes a conflict of interest pursuant to D.C.
Bar rule 1.7.
That's it. What does it mean? Does that mean the firm was
negligent? Does it mean the firm breached its fiduciary duty to
Berkeley? Recall that the ABA Model Rules, at a section called
"Scope," say that breach of a rule does not create a civil cause
of action. The D.C. Rules contain an almost unintelligible version of
the Model Rule language and is far less specific about the rules not
creating a cause of action. Is the court saying that breach of
D.C. Rule 1.7 constitutes civil liability? What makes the holding even
more odd is the fact that the discovery evidence is in conflict as to
whether AWD told Berkeley's General Partner about its relationship with
Intel.
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Freivogel on Conflicts