New California Ethics Opinion Addresses Whether There Is Duty To Disclose Ethics Consultation to Clients
The State Bar of California Standing Committee on Professional Responsibility and Conduct issued Formal Opinion No. 2019-197 about what ethical obligations arise when an attorney seeks ethics advice from outside counsel and/or law firm in-house counsel. The Committee determined that when attorneys have questions regarding their ethical obligations, they should seek advice and counsel, and doing so does not create an ethical conflict with a client. If, through the advice and counsel, an attorney learns of an ethical conflict with the client, that conflict must be disclosed. However, the fact that the attorney may have learned that information from a consultation with another attorney does not always need to be disclosed and depends on whether the facts cause such consultation to be a material development requiring disclosure under California Rule of Professional Conduct 1.4(a)(3). This same rule applies to in-house counsel at a law firm.
The Committee described two hypothetical situations. The attorney represented the client in litigation arising out of a contract dispute. During the course of the litigation, the attorney sought ethics advice from outside counsel on two points. In the first, the attorney requested guidance on ethical obligations in discovery. In the second, the attorney sought an opinion on whether or not he had missed a statute of limitations to bring a cross-complaint on the client’s behalf.
With regard to the discovery dispute, the attorney followed outside counsel’s advice and advised the client about steps necessary to comply with document collection and production. With regard to the statute of limitations question, the attorney followed outside counsel’s advice by informing the client that he had likely missed the statute of limitations for filing a cross-complaint, and, therefore, the client would be unable to pursue those potential remedies; due to this fact, there was a conflict of interest between the attorney and the client, and the attorney could not continue with representation without informed written consent.
The Committee evaluated whether the attorney had met his ethical obligations, and specifically whether the attorney had a duty to disclose to the client that he had received ethical guidance from outside counsel. “When a lawyer consults with another lawyer about matters involving the first lawyer’s current client, ethical questions arise concerning what disclosures if any the lawyer must make to the client about that consultation.” Formal Op. No. 2019-197 at p. 2. These questions implicate the duties of communication under Rule 1.4 and loyalty to the client under Rule 1.7.
The Committee noted that the duty to communicate requires that an attorney disclose “significant developments relating to the representation.” Formal Op. No. 2019-197 at p. 6. The Committee drew a distinction between the fact of the consultation and the conclusions reached as a result of the consultation as described below.
The duty of loyalty requires an attorney to obtain informed written consent from a client when there is a “significant risk that a lawyer’s representation of a client may be materially limited by the lawyer’s personal interests, including interests that are actually or potentially adverse to the client’s interests.” Formal Op. No. 2019-197 at p. 5. The Committee compared predecessor Rule 3-310(B)(4) and new Rule 1.7(b), which adopts the framework set forth in Model Rule 1.7(a)(2), and noted that Rule 1.7(b) requires not only written disclosure, but also informed written consent from the client and that the attorney reasonably believe that he can provide competent and diligent representation.
The Committee concluded that obtaining advice about ethical compliance with discovery requests does not create a conflict of interest with the client. “The principle that a lawyer seeking legal advice to ensure compliance with ethical obligations does not in itself create adversity between the client’s and the lawyer’s interests seems clearly correct. Lawyer and Client have a shared interest in ensuring that Lawyer meets his professional obligations.” Formal Op. No. 2019-197 at p. 6. In this scenario, the attorney did not need to disclose the fact that he had consulted with outside counsel regarding discovery compliance. The fact that an attorney has secured legal advice concerning compliance with the rules and standards would not “normally” constitute a “significant development” requiring disclosure to the client.
“If a lawyer becomes aware of facts that may give rise to a conflict, the lawyer must take action to investigate, analyze the situation and take any additional steps required by the rules.” [Emphasis added.] Formal Op. No. 2019-197 at p. 8. At the point the attorney requested advice from outside counsel, there was only a possibility that he had committed prejudicial error. Therefore, the attorney was obligated to investigate further, which he did by consulting with outside counsel. An attorney “is not necessarily disloyal to a client ‘by seeking legal advice to determine how best to address [a] potential conflict [with a current client].’ ” Id., quoting Palmer v. Superior Court of Los Angeles County, 231 Cal.App.4th 1214, 1233, 180 Cal.Rptr.3d 620 (2d Dist. 2014). Once the attorney obtained the opinion that he likely had committed prejudicial error, he was obligated to disclose that information to the client. (NOTE: The attorney’s obligation is to disclose the material facts potentially giving rise to any legal malpractice claim against the attorney. However, the attorney cannot advise or provide advice to the client on the merits of any malpractice claim. The attorney must disclose the conflict, describe limitations on advising the client, and advise the client to consult independent counsel.) Under these facts, it did not appear to the Committee that the attorney’s consultation with outside counsel was a significant fact requiring disclosure (“who made the determination makes no difference to what happened or what options are available” [Emphasis in original.] (Formal Op. No. 2019-197 at p. 9)). The opinion does not describe scenarios in which the consultation would be a significant fact requiring disclosure.
The opinion provides a concise “to-do” list for an attorney who believes he or she has committed prejudicial error: (1) carefully consider whether attorney may ethically continue to represent client or if he or she should withdraw; (2) cease to represent unless he or she will be able to provide competent, diligent representation; (3) inform the client of the circumstances and facts of the error and the resulting conflict of interest; (4) advise client to seek independent counsel as to whether or not to continue with attorney’s representation; (5) obtain informed, written consent from client before continuing with the representation.
The Committee evaluated whether the ethical implications of the attorney’s scenarios would be changed if the attorney had sought advice from in-house rather than outside counsel. The opinion notes with approval that courts have acknowledged the potential benefits to clients when firms employ in-house counsel, including the opportunity to enhance ethical compliance, early identification of mistakes, and the possibility of correcting errors. The opinion concludes that there is no conflict in an attorney undertaking a preliminary investigation into potential mistakes, whether or not the evaluation is conducted by in-house or outside counsel. Participation of in-house counsel also does not require disclosures under the scenarios presented.
This opinion provides an in-depth analysis of California’s new Rules of Professional Conduct related to communication with and loyalty to clients. It confirms that attorneys can — and should — seek ethical guidance from outside counsel and in-house counsel, to investigate concerns or potential errors and learn how to best proceed. The opinion also provides an endorsement of law firm in-house counsel and their ability to provide ethical advice to law firm attorneys without creating a conflict of interest with firm clients.
Fifth Circuit Declines To Broaden Exceptions to Attorney Immunity in Stanford Ponzi Scheme Litigation
In Troice v. Greenberg Traurig L.L.P., 921 F.3d 501 (5th Cir. 2019), the Fifth Circuit declined to recognize exceptions to the general rule of attorney immunity to non-clients for (1) non-litigation practice, (2) criminal acts, and (3) violations of the Texas Securities Act (TSA). Accordingly, Greenberg Traurig, L.L.P., was not liable to victims of the Stanford Ponzi scheme due to the participation of one of its attorneys in the scheme.
The Stanford Ponzi Scheme was centered on the sale of certificates of deposit through Stanford International Bank, Ltd. The scheme worked by taking the funds raised from the CD sales and reissuing them to purchasers as if they were returns from investments. Ultimately, the scheme collapsed, and the government and others brought both criminal prosecutions and civil suits against Stanford and others.
The receiver for the estate — the Official Stanford Investors Committee and three defrauded investors — sued Greenberg under the theory of respondeat superior. The plaintiffs alleged that a Greenberg attorney conspired with Stanford to further the fraud.
The district court granted Greenberg’s motion for judgment on the pleadings on the grounds that attorney immunity under Texas law precluded the plaintiffs’ claims. The plaintiffs were not Greenberg’s clients and no exception to this immunity for liability to non-clients existed. The plaintiffs appealed and also moved for the Fifth Circuit to certify the state law questions to the Texas Supreme Court.
The Fifth Circuit declined to certify the state law questions to the Texas Supreme Court. Although the Texas Supreme Court had not directly answered questions presented in this case, the Texas court of appeals had presented sufficient guidance about what the Supreme Court would hold. Therefore, the Fifth Circuit was able to make a “principled rather than conjectural conclusion” on questions of state law. 921 F.3d at 504.
On appeal, the plaintiffs argued that despite the comprehensive affirmative defense of attorney immunity that protects attorneys from liability to non-clients, Texas law provides for three exceptions that permit such liability: (1) acts outside the litigation context; (2) criminal acts; and (3) acts that violate the Texas Securities Act. The Fifth Circuit affirmed that none of these exceptions existed here.
With regard to attorney immunity in the non-litigation context, the Fifth Circuit declined to limit attorney immunity to only the litigation context. The plaintiffs did not cite any opinions in their favor. The plaintiffs’ reliance on a dissent to a Texas Supreme Court decision was not sufficient to overcome the history of Texas courts of appeal applying the immunity broadly to allow attorneys to practice their profession without making themselves liable to non-clients.
The Fifth Circuit also acknowledged that criminal conduct can negate attorney immunity, but does not necessarily do so. For example, an attorney who assaults opposing counsel is not acting within the scope of representation. Therefore, attorney immunity would not protect such an act from prosecution and liability. The Fifth Circuit examined Texas appellate court decisions discussing conduct that was “criminal,” but was also “ ‘squarely within the scope’ of representation.” 921 F.3d at 507, quoting Highland Capital Management, LP v. Looper Reed & McGraw, P.C., No. 05-15-00055-CV, 2016 WL 164528, *6 (Tex.App. Jan. 14, 2016). The court recognized that while criminal conduct does not automatically negate immunity, in the usual case, it will be outside the scope of representation. However, in this action, the plaintiffs did not argue that Greenberg’s acts were outside the scope of representation, so the court did not address that factual question.
Finally, the Fifth Circuit analyzed whether the TSA creates an exception to immunity for liability to non-clients. Under Texas law, statutes that purportedly create liability unknown to the common law must be strictly construed. The Fifth Circuit found that the TSA contains no explicit abrogation of immunity. Although the Texas Supreme Court has held that the TSA should be “given the widest possible scope,” the Texas courts of appeal have applied immunity to bar claims under the similar Texas Deceptive Trade Practices Act. 921 F.3d at 508. Further, there is no indication that the “purposes of the TSA [would be] impeded if attorneys are immunized while they work within the scope of their representation of clients.” Id. Therefore, the TSA does not provide an exception to the general rule of attorney immunity to non-clients.
The Fifth Circuit declined to broaden the exceptions to the Texas rule of attorney immunity with respect to liability to non-clients in the non-litigation context, for criminal acts, or for violations of the Texas Securities Act. Therefore, the law firm that employed an attorney who allegedly may have participated and aided a fraudulent Ponzi scheme was not liable to non-client victims of the scheme.
For more information about ethics and professional responsibility, see ATTORNEYS’ LEGAL LIABILITY — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.