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THE SEVEN
DEADLY SINS WHY
ATTORNEYS
GET STUNG BY JURIES IN
LEGAL MALPRACTICE CASES
Harry W.R. Chamberlain II
Harry W.R. Chamberlain
II
is a shareholder of
BuchalterNemer
in Los Angeles where his practice
emphasizes the representation of lawyers
and other professionals in complex
litigation. He is certified as an
Appellate Specialist by the California
State Bar Board of Legal Specialization,
and has argued hundreds of appeals on
behalf of clients in multiple
jurisdictions.
The following article is an edited
version of Mr. Chamberlain's 2007 AIM CLE lecture on this subject.
The two
"sins"
discussed
below were originally part seven in a
paper adapted from presentations to the
American Board of Professional Liability
Attorneys, numerous bar associations and
professional liability insurance groups.
[Sins 6 and 5* respectfully, edited]
*Two of the deadliest sins.
Deadly Sin: Doing Business With Clients
Becoming involved in a client's entrepreneurial
activities is "risky business." The lawyer's acquisition of any pecuniary
interest as an owner must be "fair and reasonable to the client," and requires
the client's written consent after full disclosure and the opportunity to seek
independent legal advice. (Cal. R. Prof.
Cond. 3-300; 3-310; ABA Model R. Prof.
Resp. 1.8; Legal Malpractice Claims in the 1990s, at 21 (noting fewer
claims against lawyers involving business transactions with clients during past
five years due to clearer ethics rules governing, and in some states
prohibiting, such transactions and related disclosure and consent
requirements).) Even those steps may not completely eliminate the financial
responsibility for a business failure. The message from professional liability
experts is: "Don't get involved in a client's business unless you're prepared to
cover losses." (E. Gregory Martin & Michael G. Martin, When Doing Deals Is
Risky, 82 ABA J., July 1996, at 80.)
The lawyer "doing business" with a client not only
risks increased exposure to legal malpractice claims, but also the prospect of
being denied the compensation bargained for with the client (e.g., an
interest in the client corporation). (Pearl J. Piatt, A Lot At Stake,
L.A. Daily Journal, Aug. 25, 1997, at 5, 10 (interviewing malpractice defense
counsel, including the author, about the many pitfalls of doing deals with
clients); see also Mirabito v. Liccardo, 4 Cal.App.4th 41, 44-46, 5
Cal.Rptr.2d 571, 572-74 (Cal. App. 1 Dist. 1992) (attorney who encouraged client
to make investments in violation of ethical rules held responsible for all of
client's economic losses and consequential damages); Passante v. McWilliam,
53 Cal.App.4th 1240, 1243-49, 62 Cal.Rptr.2d 298, 299-303 (Cal. App. 4 Dist.
1997) (attorney for corporation who failed to comply with disclosure and consent
rules denied recovery of corporate stock valued at $32 million).)
By the same token, lawyers who serve as directors
or officers for their corporate clients impair their effectiveness in both
roles. For instance, the lawyer-director may be precluded from business
decisions involving the firm's work for the corporation, and her "dual capacity"
jeopardizes confidential information otherwise shielded by the attorney-client
privilege. (Robert E. O'Malley & Harry H. Schneider Jr., Danger: Lawyer On
Board: If Your Client Offers You A Corporate Directorship, Just Say No, 79
ABA J., July 1993, at 102 (hereafter "Danger: Lawyer On Board").)
Statistically, the lawyer-director and her firm
will enjoy increased exposure to malpractice actions and to third party suits by
disgruntled investors. (Ibid.; Schaefer, Avoiding Malpractice Claims,
at 587-88; Hon. E. Norman Veasey (Chief Justice of Delaware), The Defining
Tension in Corporate Governance in America, 52 Bus. Law. 393, Feb. 1997, at
405 & nn. 60-61 (asking whether the lawyer-director qualifies for limitation of
liability under "independent director" standard?).) Plaintiffs' class action
attorney Joseph W. Cotchett suggests that evidence of wrongdoing against lawyers
is easy to obtain from other corporate insiders, who defend themselves by
claiming "my attorney made me do it." (Don J. DeBenedictis, Lawyer Deep
Pockets: Attorneys Face Malpractice Claims For Clients' Dubious Deals, 76
ABA J., Jan. 1990, at 34.)
The lawyer who wears "two hats" might also wind up
without insurance coverage. Most legal malpractice policies exclude claims
arising out of the lawyer's activities as a director, officer or owner of a
business outside the firm. And coverage under the corporation's D&O policy is
generally limited to a defendant who is serving "solely" in that capacity. (Danger:
Lawyer On Board, at 102, Professional Liability Insurance Issues For
Lawyers Sitting On Corporate Boards, 25 The Brief 8, 10-12 [Winter 1996].)
Deadly Sin: Disregard Conflicts And Ethical
Considerations
Undisclosed conflicts of interest are a minefield for
lawyers in malpractice cases. Harry H. Schneider Jr., past chair of ABA's
Standing Committee on Lawyers' Professional Liability, describes the
simultaneous representation of multiple clients with differing interests as a
"surefire" way to get sued. (Schneider, See You In Court, at para. 1.)
Mr. Schneider observes that a conflict of interest "at
once supplies the trier of fact with an explanation and motive for the lawyer's
failure to give legal advice that would have avoided the client's problem. It
also satisfies the breach of duty element of the malpractice claim." (Harry H.
Schneider Jr., An Invitation To Malpractice: Ignoring Conflict-Of-Interest
Rules Can Open A Pandora's Box, 78 ABA J, Nov. 1992, at 104.) In other
words, no further "explanation" is necessary for the jury to decide that the
lawyer committed malpractice and should be held responsible for any losses the
client sustained. (Ibid.) Therefore, potential conflicts should always be
checked before receipt of new assignments, and whenever you hire a new lawyer or
staff member from another firm.
Assuming that the conflict can be waived without
adversely affecting the interests of either client, the Rules of Professional
Conduct require: (1) full disclosure of the nature of the conflict, (2) in
writing and (3) the informed consent of each client (preferably after receiving
the advice of independent counsel). (Cal. R. Prof. Cond. 3-310; ABA Model R.
Prof. Resp. 1.7; see also Harry H. Schneider Jr., An Invitation To
Malpractice (Part II), 79 ABA J., Jan. 1993, at 100.) In the absence of
effective waiver and consent, a lawyer representing conflicting interests faces
the prospect of considerable liability.
Example
Newlywed Robyn Kennedy and her husband, Craig, went for a ride in the couple's new Toyota
pickup truck. Driving down a winding country road just after
sunset, Craig encountered a horse standing a few yards ahead,
frozen in the glare of the truck's headlights. Craig swerved the
truck off the road and down an embankment, colliding with a
tree. Craig died and Robyn was paralyzed from the chest down.
Craig's family contacted the Miller
firm to represent Robyn and Craig's estate. Miller negotiated a
settlement with the horse owner's insurer without revealing that
the firm had previously represented that company's insureds. The
firm also failed to investigate a potential products-liability
claim against Toyota, and did not identify conflicts of interest
regarding Robyn's potential claims against Craig's estate. Robyn
sued her lawyers for malpractice.
After hearing the expert testimony
about numerous undisclosed conflicts and ethical violations, the
jury returned a verdict against Robyn's lawyers for $7.3 million
in compensatory damages. (Charles-Edward Anderson, Malpractice Award: D.C. Jury Awards $7.3 Million Against
Arlington Law Firm, 76 ABA J., Mar. 1990, at 18.)
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