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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.

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].)

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.)