By Mary C. Daly [Originally published in NYPRR August 2000]
This article discusses DR 4-101(C)(5), an often overlooked provision in the Code that permits a “noisy withdrawal,” allowing a lawyer to disclose protected client information in circumstances in which the Code might otherwise prohibit disclosure.
The task of representing a client who may be perpetrating a fraud on a third person is an ethically perilous one. DR 7-101 of the Lawyer’s Code of Professional Responsibility admonishes a lawyer to represent a client zealously. But DR 7-102 reminds the lawyer to act “within the bounds of the law” and not assist the client in conduct that the lawyer knows to be illegal or fraudulent. The line between zealous representation and assisting a client in a fraud is not always a bright one. Not all conduct that is commonly labelled “fraudulent” falls within the Code definition, which is expressed in negative rather than positive language. See Definitions # 7:
“Fraud” does not include conduct, although characterized as fraudulent by statute or administrative rule, which lacks an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations which can be reasonably expected to induce detrimental reliance by another. [The New York definition is different from the definition in the ABA Model Rules, which define “fraud” as “conduct having a purpose to deceive and not merely negligent misrepresentation or failure to apprise another of relevant information.”]
If a lawyer discovers that she has participated unwittingly in client conduct that satisfies the Code’s definition, the ethical obligation to preserve a client’s confidences and secrets is sorely tested by the lawyer’s own interest in disassociating herself from the client’s conduct.
Withdrawal Required When Rule Violation Is Known or Obvious
DR 2-110(B)(2) requires withdrawal if “the lawyer knows or it is obvious that continued employment will result in violation of a Disciplinary Rule.” From the lawyer’s perspective, withdrawal without disclosure increases the likelihood that an injured third party or government regulator may subsequently sue the lawyer, charging her with complicity in the client’s wrongdoing. [See, e.g., Meyerhofer v. Empire Fire & Marine Ins. Co., 497 F. 2d 1190 (2d Cir.), cert. denied, 419 U.S. 998 (1974).] Moreover, if the lawyer learns of the wrongdoing after the representation is completed, withdrawal is obviously impossible.
Imagine the following scenario adopted from ABA Formal Opinion 92-366. A lawyer represents a small privately held company. In connection with a bank loan, the lawyer has submitted an opinion letter reciting that the contracts between her client and its customers are enforceable obligations under applicable law. The lawyer later learns that some of the contracts were fraudulently altered before he examined them. The client admits the wrongdoing, but refuses to disclose it to the bank. How should a New York lawyer proceed in these circumstances?
The answer to that question requires a brief overview of the Code’s rules on confidentiality. At first glance, DR 7-102(B) appears to be the most directly relevant provision. It provides that in cases of fraud upon a person or tribunal, a lawyer “shall promptly call upon the client to rectify the [fraud], and if the client refuses or is unable to do so, the lawyer shall reveal the fraud to the affected person, except when the information is protected as a confidence or secret.” The problem with this provision is self-evident. The “except” clause swallows the mandate to disclose. Given the broad sweep of the definition of “confidences” and “secrets” in DR 4-101, it is almost impossible to conceive of a situation in which the lawyer ‘s disclosure of the client’s fraud would be required. DR 7-102(B)(1) offers no solace to a lawyer who is trapped in the fact pattern under Opinion 92-366.
DR 4-101 is the next provision requiring scrutiny. Entitled “Preservation of Confidences and Secrets of a Client,” it generally reflects a public policy choice favoring nondisclosure. Subsection (C) identifies five circumstances in which a lawyer may reveal protected information. [Note: The Code mandates disclosure only in the very unusual instance in which a lawyer “receives information clearly establishing” that a non-client has perpetrated a fraud upon a tribunal. [See, DR 7-101(B)(2). See also, Doe v. Federal Grievance Committee, 847 F.2d 57 (2d Cir. 1988); Bruce A. Green, Doe v. Grievance Committee: On the Interpretation of Ethical Rules, 55 Brook. L. Rev. 485 (1989).]
DR 4-101(C)(3)-(5) Relate to Disclosure for Client Fraud
Subsections (C)(3)-(5) of DR 4-101 are the provisions most relevant to disclosure issues relating to client fraud. Subsection (C)(3) permits disclosure of “the intention of a client to commit a crime and the information necessary to prevent the crime.” Thus, a lawyer who learns of a client’s intent to commit a fraud in the future may reveal the information necessary to prevent the fraud. Two caveats are in order, however. First, every fraud is not a crime. The lawyer must carefully examine the client’s conduct to be sure that it violates a criminal statute. Second, the lawyer must be circumspect in making the disclosure. Only “the information necessary” may be revealed. [See, EC 4-7.] Thus, if the client in our illustration adopted from Opinion 92-366 had confided in the lawyer its intention to obtain a future bank loan fraudulently, DR 4-101 would permit disclosure — regardless of any involvement by the lawyer in the loan process — because the client’s future conduct would violate federal law. Of course, before making the disclosure, the lawyer would have to remonstrate with the client and advise against proceeding with the criminal conduct. In most cases, the client will deny the intention to act criminally, in which case the lawyer may no longer have the discretion to disclose the client’s plan. [See, Leslie C. Levin, Testing the Radical Experiment: A Study of Lawyer Response to Clients Who Intend to Harm Others, 47 Rutgers L. Rev. 81 (1994).]
Subsection (C)(4) permits the lawyer to reveal protected information “to defend the lawyer or his or her employees or associates against an accusation of wrongful conduct.” The lawyer in the Opinion 92-366 fact pattern could reveal protected client information if a third party or government regulator accused her of assisting in the wrongdoing. [See, Meyerhofer, supra. Meyerhofer involved two disclosures, an initial one to the SEC, and a later one to the opposing party in a threatened litigation against the lawyer. Whether the disclosure to the SEC was appropriate is highly debatable.]
‘Noisy Withdrawal’ Under DR 4-101(C)(5)
While Subsections (C)(3) and (4) permit disclosure in a narrow class of situations, they are of no use to a lawyer who discovers that her services have been used to further a fraud in the past and before any accusation, formal or informal, of wrongful conduct has been raised against the lawyer. Subsection (C)(5), the Code’s “noisy withdrawal” provision, addresses this very situation, however. It provides that the lawyer may reveal “confidences or secrets to the extent implicit in withdrawing a written or oral opinion or representation previously given by the lawyer and believed by the lawyer still to be relied upon by a third person where the lawyer has discovered that the opinion or representation was based on materially inaccurate information or is being used to further a crime or fraud.”
To avail herself of Subsection (C)(5)’s permissive disclosure option, the lawyer in Opinion 92-366 would have to take three separate steps: (1) examine any written or oral opinions or representations she gave to the bank; (2) determine if the bank was still relying on any opinion or representation; and (3) conclude that the opinion or representation “was based on materially inaccurate information or is being used to further a crime or fraud.” Each one of these inquiries is fact specific. Even if the lawyer is satisfied that Subsection (C)(5) permits disclosure, the lawyer must exercise restraint in making the permitted disclosure. The lawyer may only withdraw the opinion or representation itself. She may not directly disclose the client’s wrongdoing.
Step (2) is particularly problematic. It may be difficult to gauge reliance by a third party without asking that party a pointed question. If the third party is no longer relying on the opinion or representation, Subsection (C)(5) does not allow disclosure. The mere making of the inquiry, moreover, may be enough to suggest to the third party that something is amiss in the client’s conduct.
The lawyer’s decision in Step (3) is hampered by Subsection (C)(5)’s use of the present tense in the phrase “or is being used to further a crime or fraud,” supra. This language suggests a finding of on-going activity’ in contrast to the use of the past tense in an earlier phrase of the same sentence: “was based on materially inaccurate information.”
In some instances, the lawyer may have a solid suspicion, but not solid proof, of the client’s wrongful conduct. If the lawyer alerts the third party, but is later shown to have been mistaken, the client is likely to sue the lawyer for malpractice or breach of fiduciary duty. The mere fact of the lawsuit may cause significant damage to the reputation of the lawyer and her firm. These built-in impediments in Subsection (C)(5) may explain why there is no reported case law applying this provision. Anecdotal accounts of lawyers availing themselves of the Subsection’s permissive disclosure are also sparse. Of course, it is also possible that lawyers have been successful in remonstrating with their clients, using Subsection (C)(5) as a cudgel to persuade the clients to cease their wrongful conduct and take appropriate remedial measures.
Growing Interstate Practice Complicates Lawyer’s Decision
The application of Subsection (C)(5) is further complicated by the growing interstate nature of legal practice and the lack of uniform ethical standards among the states. Resolving the dilemma of the lawyer in Opinion 92-366 was particularly difficult because the ABA Model Rules of Professional Conduct do not have a provision comparable to Subsection (C)(5). Furthermore, the Model Rules permit permissive disclosure of a future crime only to prevent imminent death or substantial bodily harm. [See, Model Rule 1.6(b)(1); but see also, Model Rule 1.6, Comment , suggesting that a noisy withdrawal is nonetheless permissible.] While Opinion 92-366 ultimately concluded that the inquiring lawyer could make a noisy withdrawal under some circumstances and alert the bank to her client’s fraud, the Opinion did so in the face of a vigorous dissent. Whether a court or a disciplinary authority would agree with the conclusion is unclear.
Muddying the waters even more is the fact that some states have adopted rules of professional conduct that go beyond the Code’s permissive authority and may mandate disclosure of a client’s fraud. This crazy patchwork quilt of ethics rules on confidentiality places a particular burden on lawyers who are licensed in more than one jurisdiction or who work in law firms with offices in more than one state. In the 1999 amendments to the Code, an effort was made to assist lawyers in resolving interstate choice of law dilemmas in the application of different states’ rules of professional conduct. [See, DR 1-105. This provision was discussed in my article entitled “Crossing State Lines — Which Law Governs,” NYPRR, Sept. 1999.]
In short, a lawyer who is licensed in New York and another jurisdiction must exercise special caution in considering how to respond to situations in which she has unwittingly given an opinion or made a representation based on materially inaccurate information or participated in a client’s fraud or criminal activity. The lawyer’s right to make a noisy withdrawal pursuant to DR 4-101(C)(5) depends upon the threshold application of DR 1-105.
Mary C. Daly is James H. Quinn Professor of Legal Ethics at Fordham Law and Chair, Committee on Professional and Judicial Ethics, Association of the Bar of the City of New York.
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