MCLE Self Study

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April 2014  |  Earn one hour of MCLE Credit in Legal Ethics

Ethical duties to third parties

By Jennifer A. Becker

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Becker

MCLE Self-Assessment Test

April 2014

SAMPLE TEST QUESTIONS

BELOW ARE SAMPLE QUESTIONS FROM THIS MONTH'S MCLE SELF-ASSESSMENT TEST.

1. Attorneys acting for their clients can be personally liable for fraudulent conduct toward third parties.


2. An attorney who makes a representation to a third party about insurance coverage available for claims against the attorney’s client must not misrepresent the coverage available for a claim.


3. An attorney’s demand letter to a third party on behalf of a client that includes a threat to expose the third party to public scrutiny will be protected by the litigation privilege under any circumstances.


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A primary duty of an attorney is to zealously advocate on the client’s behalf. Yet, not all zealous conduct constitutes acceptable advocacy. Courts draw the line at unethical and illegal acts by attorneys, who may find themselves liable to non-clients as a result.

General rule: Attorneys owe no duty to third parties

The most effective way to protect zealous advocacy is to preclude a claim by a non-client against an attorney based on the attorney’s representation of his or her client. An opposing party’s ire is often directed at a party’s counsel, and this ire may develop into a lawsuit. Generally, courts protect attorneys against such claims by finding the attorney does not owe a duty to the non-client.

In the seminal case of Goodman v. Kennedy (1976) 18 Cal.3d 335, stock purchasers alleged they were damaged as a result of negligent advice given by an attorney to his clients concerning the issuance of stock. After purchasers bought the stock from the clients, it was determined the sale violated securities laws and the stock was rendered valueless. The California Supreme Court rejected the purchaser’s negligence claim, concluding the attorney had no relationship with the purchasers, and thus no duty of care.

The court noted the attorney’s advice was not communicated to the non-client purchasers, or given to enable the clients to satisfy any obligation to the purchasers. The complaint did not allege purchasers had any relationship to the clients or the corporation when the lawyer gave advice. The court also reasoned the purchasers were not parties the clients intended to benefit; they were only parties the clients negotiated a bargain with at arm's length. Moreover, the court concluded a finding of duty under the circumstances would impose an undue burden on the profession and a diminution in the quality of Id. at 343-344.

Limited duty to third parties is grounded in ethical principles

Business & Professions Code § 6068(d) states an attorney’s duty is:

To employ, for the purpose of maintaining the causes confided to him or her those means only as are consistent with truth, and never to seek to mislead the judge or any judicial officer by an artifice or false statement of fact or law.

This limitation delineates conduct at the far end of the unacceptable spectrum — an attorney’s duty not to misrepresent facts. An attorney who steps over this ethical line dealing with third parties is not always protected from liability.

In Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54 (rev. denied 7/16/03) an insurer waived its reservation of rights for intentional and willful acts in the context of a construction defect dispute. After plaintiffs prevailed against the insured contractor on fraud claims, the insurer’s counsel asserted there was no coverage for fraud damages, a misrepresentation given the insurer’s waiver. The plaintiffs agreed to a settlement consistent with the attorney’s representation, forgoing recovery for intentional claims. When the plaintiffs learned of the misrepresentation, they sued the attorney and his law firm for fraud.

Drawing heavily on the “Restatement (Third) of Law Governing Lawyers” and Cicone v. URS Corp. (1986) 183 Cal.App.3d 194, the court stated that attorneys, even when acting for their clients, can be personally liable for fraudulent conduct toward third parties. Shafer, supra, 107 Cal.App.4th at 70-72. Further, the court held the attorney’s misrepresentation about the available insurance coverage was a false statement of fact, not a non-actionable legal opinion.

The Shafer court considered whether the litigation privilege, Civ. Code § 47, should protect the attorney from liability. It has been applied in numerous cases involving fraudulent communication or perjured testimony. Silberg v. Anderson (1990) 50 Cal.3d 205, 218; Home Ins. Co. v. Zurich Ins. Co. (2002) 96 Cal.App.4th 17, 20, 22–26 [attorney's misrepresentation of available insurance policy limits to induce the settlement of a lawsuit]; Doctors' Co. Ins. Services v. Superior Court (1990) 225 Cal.App.3d 1284, 1300 [subornation of perjury]; Carden v. Getzoff (1987) 190 Cal.App.3d 907, 915 [perjury]; Steiner v. Eikerling (1986) 181 Cal.App.3d 639, 642–643 [preparation of a forged will and presentation of it for probate]; O'Neil v. Cunningham (1981) 118 Cal.App.3d 466 [attorney's letter sent in the course of judicial proceedings allegedly defaming his client]. The privilege has also been held to apply to “statements made prior to the filing of a lawsuit.” Hagberg v. California Federal Bank, (2004) 32 Cal.4th 350, 361. However, Shafer held certain provisions of the Insurance Code put plaintiffs in the shoes of the insured, and rendered application of the litigation privilege inconsistent with the statutory scheme. Shafter, supra, 107 Cal.App.4th at 78.

Similarly, in People v. Persolve (2013) 218 Cal.App.4th 1267 the court held, as a matter of statutory construction, unfair communicative practices proscribed by the federal and california debt collection acts are not protected by the litigation privilege. The debt collection statutes are specific, and thus prevail over the more general litigation privilege statute. The court declined to apply the litigation privilege to statements that violated debt collection statutes because doing so would render the statutory scheme meaningless. Id. at 1275. Accordingly, fraudulent communications within the litigation context will not be protected if a plaintiff can establish a specific statutory scheme would be rendered pointless by application of the privilege.

Subsequent cases outside of the litigation setting have consistently reasoned there is no protection for attorneys from claims by non-clients when an attorney engages in affirmatively deceitful conduct. In Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282 (rev. den. 10/27/04) the buyer’s attorneys in a corporate acquisition withheld a disclosure about their client’s financing which would have revealed its precarious financial condition. In addition, the attorneys provided the seller’s counsel with a “sanitized” disclosure and prepared a misleading consent form which the seller signed. Shortly before the closing, the attorneys filed a public document which revealed the client’s financial condition. The seller did not see the document and learned of the true condition of the client long after the closing.

In Vega, the court held that under the circumstances the attorneys were potentially liable to the non-client. The court noted the attorneys did not merely express a non-actionable opinion about their client’s financing. Instead, they actively concealed facts by providing a sanitized version of the disclosure. The court noted active concealment or suppression of facts by a non-fiduciary is the equivalent of a false representation, which is actual fraud and is not protected by limitations on an attorney’s professional duty of care to non-clients. Id. at 292.

The court in Vega also held the public filing did not absolve the attorneys’ concealment in the transaction disclosure. The mere fact that information exists somewhere in the public domain is not conclusive on the issue of whether the attorneys intentionally concealed information to induce Vega to believe the transaction was standard. Id. at 295.

Favila v. Katten, Muchin, Rosenman, LLP (2010) 188 Cal.App.4th 189 again applied the fraud exception in a transactional setting. In Favila a law firm represented a corporation when the founding shareholder sold 80 percent of his stock to the corporation, but the transaction was never consummated. After the founding shareholder died, the law firm helped the corporation’s minority shareholder sell the assets of the corporation to his new corporation. The estate of the founding shareholder alleged the attorneys conspired with the majority shareholder to defraud the estate by making false statements that the shareholders had agreed to the sale. The case was allowed to move forward because the attorney had affirmatively made a false statement in the context of the transaction. Id. at 211-12.

Illegal conduct is not constitutionally protected

Business and Professions Code § 6068(a) imposes a duty on attorneys to “support the Constitution and laws of the United States and of this state.” It has long been the case that attorneys convicted of crimes, even those unrelated to the practice of law, can be disciplined or disbarred for failing to respect the law. An attorney who engages in criminal activity, whether or not it’s prosecuted as a crime, is not entitled to expeditious dismissal of third-party claims.

In Flatley v. Mauro (2006) 39 Cal.4th 299 a celebrity dance impresario was threatened by an attorney asserting Flatley had raped his client. The attorney threatened to “go public” if a large settlement was not paid within a short amount of time. Flatley sued the attorney for civil extortion. The attorney filed a motion to strike under C.C.P. § 425.16, California’s anti-Strategic Lawsuit Against Public Participation (SLAPP) statute, which permits prompt dismissal of third-party claims against attorneys premised on constitutionally protected conduct. The attorney asserted his conduct was constitutionally protected petitioning activity covered by the litigation privilege as a pre-litigation demand. The attorney did not, however, challenge the characterization of this conduct as extortion.

The Supreme Court disagreed with the attorney, reasoning a defendant who engages in illegal communicative conduct, even in the context of litigation, cannot claim the conduct is constitutionally protected activity. Id. at 609, 619. The Flatley court did not resolve the question of whether, at a later stage of the proceeding, the attorney could successfully claim the demand letter was protected by the litigation privilege. Flatley represents an extreme circumstance where a defendant was subject to third-party liability because actions taken in the name of advocacy went so far as to constitute extortion.

Since the Flatley decision, courts have struggled to define conduct that crosses the line from proper, protected advocacy to overzealous criminal extortion. In Kleveland v. Siegel & Wolensky, LLP, (2013) 215 Cal.App.4th 534 the Court of Appeal decided an attorney’s litigation conduct crossed the line and refused to protect the attorney. In that case, the client, Leach, retained Siegel to challenge his uncle Kleveland’s handling of his grandparents’ estate. Siegel aggressively filed and pursued a petition for breach of trust and Kleveland’s removal as trustee. During the course of litigation, Siegel made a demand for a major estate asset in exchange for dismissal of the petition.

After Kleveland was vindicated in the trial court, he filed a malicious prosecution action against Siegel. Although Siegel asserted the litigation privilege protected his conduct, the court failed to consider or analyze the litigation privilege. The court, citing contentious litigation events and the settlement demand in the underlying case, held Kleveland demonstrated the requisite lack of probable cause and malice for a successful malicious prosecution claim against Siegel. Id. at 554. The court went into great detail describing the conduct of the litigation in very negative terms, and appeared to base its opinion at least in part upon distaste for that conduct. The court’s holding is questionable because the court failed to analyze whether the conduct was protected by the litigation privilege. Although the lawsuit was highly unpleasant, it appears to have been conducted within rules that apply to litigation, and Siegel’s conduct should be protected by the litigation privilege. Nonetheless, Kleveland is a published decision, and a potential barrier to expeditious dismissal of third-party claims against attorneys.

By contrast, in Malin v. Singer (2013) 217 Cal.App.4th 1283, the court held an attorney’s demand letter was covered by the anti-SLAPP statute and protected by the litigation privilege. Malin jointly owned a restaurant with attorney Singer’s client. Singer sent Malin a demand letter and a draft complaint accusing him of misusing company resources to arrange sexual liaisons. In response, Malin sued Singer and his client for civil extortion, violation of civil rights, and intentional and negligent infliction of emotional distress.

The court rejected plaintiff’s claim that Singer’s demand letter constituted extortion. The court pointed to the fact the letter did not expressly threaten to disclose Malin’s alleged wrongdoings to a prosecuting agency or the public at large. Instead, the letter accused Malin of embezzling money and noted the filing of a complaint would reveal the use of the embezzled funds for a provocative purpose. Therefore, the court held, the threatened exposure of Malin’s activities would not subject him to any more disgrace than would be generated by the claim that he was an embezzler. Id. at 1299.

Further, the court held the demand letter was protected under the litigation privilege. A protected pre-litigation communication must relate to litigation contemplated in good faith and under serious consideration. Id. at 1300. Because the sexual misconduct allegations in the complaint were related to the demand letter that preceded the complaint, and were logically connected to litigation contemplated in good faith and under serious consideration when the letter was sent, the court held those allegations were protected. Id. at 1301.

On the other hand, remaining causes of action premised on wiretapping and computer hacking alleged illegal conduct by the attorney. The court held illegal conduct was not constitutionally protected petitioning activity subject to scrutiny under C.C.P. § 425.16, and the plaintiff was allowed to proceed with those claims. Id. at 1303.

Conclusion

Third-party liability is often grounded in an attorney’s ethical duty to be truthful and to obey the law. Although the litigation privilege offers some protection for communicative conduct, it will not be applied when doing so would undermine a more specific statutory scheme. The litigation privilege does not apply to attorney communications in a transactional setting. Illegal communications are not constitutionally protected petitioning activity subject to an expeditious resolution under C.C.P. § 425.16, although they may be protected by the litigation privilege.

Honesty, civility, and professionalism are the best prophylactic against claims of all kinds.

Jennifer A. Becker is a partner in the San Francisco office of Long & Levit. Her practice focuses on handling professional liability matters involving attorneys, architects, engineers and accountants. She is a certified specialist in Legal Malpractice law by the State Bar of California’s Board of LegalSpecialization. She is also a member of the State Bar of California’s Standing Committee on Professional Responsibility and Conduct. This article appears in the California Bar Journal as part of COPRAC’s outreach and educational effort. For more information on COPRAC go to calbar.ca.gov/ethics. The opinions expressed herein are her own.


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