Misdeeds of Clients & Lawyer’s Response

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By Lazar Emanuel
[Originally published in NYPRR November 1999]


One of the recurring debates among legal ethicists revolves around the responsibility of the lawyer to report the misdeeds of his client. The conflict is between the lawyer’s duty of confidentiality to his client and his responsibility to the integrity of the judicial system and to society as a whole.

The continuing debate will intensify over the next year as the ABA’s Ethics 2000 Commission considers a proposed amendment to ABA Rule 1.6. The amendment creates a new Rule 1.6(b) that would permit a lawyer to “reveal information” which he reasonably believes necessary to prevent a client from committing a crime or fraud that is likely to result “in substantial injury to the financial interests or property of another” when the client has used or is using the lawyer’s services to further the crime or fraud.

The proposed amendment would also permit a lawyer to reveal information about a current or former client “to rectify or mitigate substantial injury to the financial interests or property of another resulting from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services.”

Present ABA Rule 1.6

As presently written, ABA Rule 1.6 permits a lawyer to reveal information about a client in only two circumstances:

1. To prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm; and

2. To enable the lawyer himself: (a) to establish a claim or defense in a controversy with the client, (b) to establish a defense in a criminal or civil action against the lawyer based upon conduct in which the client was involved, and (c) to respond to allegations in a proceeding concerning the representation.

The amendment proposed by the Ethics 2000 Commission would thus add to these limited circumstances information relating to the commission of any crime or fraud causing injury to the financial interests or property of another.

New York’s DR4-101(C)(3)

The New York Rules relating to reporting client wrongdoing are contained in DR4-101(C)(3) and DR7-102(A) and (B). DR4-101(C)(3) permits an attorney to reveal “the intention of a client to commit a crime” when “the information is necessary to prevent the crime.” DR4-101(C)(3) is one of five enumerated items under DR4-101(C) which an attorney may (but is not obligated to) reveal.

Although this provision of the Rule would appear to create a broad duty of disclosure, its impact is circumscribed by the following limitations:

1. Disclosure by the attorney is discretionary, not compulsory.

2. The provision applies only to crimes and not to civil wrongs, such as civil frauds, defamation and other non-criminal intentional torts; and

3. The provision deals only with the “intent” to commit a future crime, thus leaving outside its scope any past criminal conduct by the client.

The New York Rule is broader than present ABA Rule 1.6 in that it covers other crimes than those that threaten imminent death or substantial bodily harm. At the same time, it is less broad than the proposed new ABA Rule 1.6(b) in that it covers only intended future crimes, not all frauds (including civil frauds) that are likely to result in substantial injury to the financial interests or property of another.

Also, the proposed ABA Rule permits the attorney to disclose information of past wrongdoings by the client “to rectify or mitigate substantial injury to the financial interests or property of another.” (Note, however that the New York Rule is broader than proposed ABA Rule 1.6(b) in one respect — the New York Rule permits disclosure of all intended crimes by the client, whether or not the attorney’s services have helped to promote them, while the proposed ABA Rule is limited to client crimes or fraud “in furtherance of which the client has used or is using the lawyer’s services.”)

New York’s DR7-102(A) and (B)

At least two other New York Rules must also be considered when a lawyer is faced with client wrongdoing. DR7-102(A) advises each lawyer that he shall not:

(A)(3) Conceal or knowingly fail to disclose that which a lawyer is required by law to reveal.

(A)(4) Knowingly use perjured or false evidence.

(A)(5) Knowingly make a false statement of law or fact.

(A)(7) Counsel or assist the client in conduct that the lawyer knows to be illegal or fraudulent.

(A)(8) Knowingly engage in other illegal conduct or conduct contrary to a Disciplinary Rule.

To trigger the application of DR7-102(A)(7), the provision which is most directly on point, the lawyer must himself have actual knowledge that the client’s conduct is illegal or fraudulent; it’s not enough that the conduct appear illegal to others or that the lawyer suspect that the conduct may be illegal.

DR 7-102(B) requires that the attorney reveal “to the affected person or tribunal” any information received by him concerning a fraud committed by the client which the client has refused or is unable to rectify after being called upon by the attorney to rectify it, except, however, when the information is protected as a confidence or secret.

This is one of those cases in which the exception negates the rule. As Professor Roy Simon notes in his Commentary (Simon’s New York Code of Professional Responsibility Annotated, 1999 Edition, p. 354), “In virtually no circumstances will a lawyer have information about a client’s fraud that will escape DR4-101(A)’s definition of ‘confidence’ or ‘secret’.”

New York’s DR5-109(B)

This is a new DR incorporated within the comprehensive set of amendments to the DR’s issued by the Appellate Division on July 14, 1999. The new Rule tracks ABA Rule 1.13 and deals with lawyers who represent organizations. It instructs the organization lawyer who knows that an officer or employee of the organization has committed a violation of a legal obligation or a violation of law which might be imputed to the organization, to take appropriate action. This action may include: (a) asking the officer or employee to reconsider his action; (b) advising that a separate opinion on the matter be sought and referred to someone who can act for the organization; and (c) referring the matter to a higher authority or, if warranted, to the highest authority, within the organization.

If the lawyer’s appeals to the appropriate authorities within the organization are ignored, the lawyer may resign. In any case, he is not permitted to disclose his information to anyone outside the organization.

Summarizing Limits on Disclosure

If we ignore for the moment the obligations facing the organization lawyer under DR5-109(B), we find the following limits on the obligation of a New York lawyer to reveal wrongdoing by his client:

1. The wrongdoing must be manifested by the client’s intent to commit the wrongdoing in the future, not by acts committed by him in the past.

2. The lawyer has discretion whether or not to reveal the wrongdoing and is not required to do so.

3. The lawyer may not reveal the wrongdoing if to do so would violate a client confidence or secret.

Neither the proposed ABA Rule 1.6(b) nor any provision of New York’s DRs requires disclosure of client wrongdoing by a lawyer representing an individual client. Only in the case of an organization lawyer under new DR5-109(B) would action by the lawyer seem to be required, and then only within the organization itself.

Implications for MDPs

As lawyers and accountants organize and work together in MDPs, the issues surrounding disclosure of client wrongdoing will become more compelling. Accountants are not bound by the same rules which govern the lawyer-client privilege or client’s confidences and secrets, and in many instances they have an affirmative obligation to disclose client fraud and illegality.

If lawyers and accountants in a particular MDP are confronted with client fraud, whose rules will apply — the lawyers’ or the accountants’? And if the accountants’ rules are deemed to apply even in limited circumstances — as in a proceeding by the SEC — how will the lawyers reconcile their rules and standards and their interest in preserving client confidences with the MDP’s obligation to disclose.

The powerful and seemingly inevitable march to the proliferation of MDP’s will ultimately supply the answers to these questions. And the answers will probably involve increased pressure on lawyers to play by the accountants’ rules and to expand their duty to disclose.

Many lawyers welcome this development. These lawyers consider disclosure of client crime and fraud more essential to society and to a sound judicial system than the preservation of client secrets and confidences.

But many lawyers deplore these changes. Their arguments center around the sanctity of the lawyer-client relationship. They argue that attacks upon this relationship would breed client mistrust and force lawyers to become policemen.

As the ABA’s Ethics 2000 Commission debates these issues over the next several months, it will be interesting and instructive to watch the contributions which New York lawyers will make to the debate.

Lazar Emanuel is the Publisher of the New York Professional Responsibility Report. He is Executive Vice President and General Counsel of Emanuel Publishing Corp., publisher of study aids for law students.

DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.

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