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A partner in a law firm (Partner A) represents a client in the purchase of heavy equipment.  Partner A drafted the key sales documents.  A year later, the client and the seller have a disagreement over the seller's obligations if the equipment fails to perform certain tasks.  In the meantime, Partner A has retired.  The client comes to another partner in the law firm (Partner B) to seek assistance in resolving the dispute.  If the parties cannot agree, they must, pursuant to one of the documents, submit to binding arbitration.  Partner B retrieves Partner A's files on the purchase and reviews the documents.  A key provision in one of the documents that might greatly affect the result seems ambiguous.  Partner B gets several "second opinions" from other lawyers in the firm.  Partner B concludes that the provision is indeed ambiguous and that other lawyers in the firm have routinely been using another version of that provision that is much more clear.

        Should the firm take the case?  The glib answer is that it depends.  On a more serious note, the issue of whether a law firm can handle a dispute when it might involve its earlier work has become seriously troubling.  Law firms used to do this all the time.  The problem is that conflicts of interest have become so prominent and dangerous in malpractice cases.  If the law firm were to take the case, and the result is a bad one, the client will go to another law firm for an evaluation.  That law firm may very well come up with a three-part analysis that will be very difficult to counter.

1. "They made the wrong arguments."  First, the new law firm may conclude that one of the reasons the original law firm lost the case is that it made the wrong arguments – that it avoided arguments that were apt to focus on its conduct in handling the underlying transaction.

2. "Did they discuss the credibility issue with you?"  Second, the new law firm will point out that the original firm surely knew that it would have to call at least one of the transactional lawyers in the firm as a witness.  Although most states’ versions of Model Rule 3.7 allow a lawyer to try a case even though his partner will be a witness, doing so could create credibility issues with the trier of fact.  The new law firm may not be kind in its analysis of the credibility point.

3. "You mean they did not discuss settlement with you at all?"  Last, is the question of settlement.  The new law firm may conclude that the original firm did not press settlement as it should have.  Part of the reasoning may very well be that the original law firm knew that because of its handling of the underlying transaction, it would have to be a third party at the settlement table.  Because it did not want to focus on its own involvement and potential liability, it avoided settlement.  In effect, it deprived its client of an opportunity to settle the case on terms much more favorable than the resulting verdict.
       
        We are aware of several situations where the plaintiff’s lawyer in the resulting malpractice case made precisely these arguments, and the original law firm and its carrier(s) settled the case, rather than risk an adverse verdict or award.

        A case confronting these very principles is Eurocom, S.A. v. Mahoney, Cohen & Co., 522 F. Supp. 1179 (S.D.N.Y. 1981).  Large Firm attempted to represent a plaintiff in a case arising out of a transaction it had handled.  The defendant moved to add Large Firm as a third-party defendant or, in the alternative, to disqualify Large Firm as counsel for plaintiff in the case.  The court granted the motion to disqualify for the reasons discussed above.  The court briefly discussed the lawyer-as-witness rule, but minimized its effect, because the lawyers who would have been witnesses were either dead or gone.  Taking a broader view, however, the court said:

A potential conflict arises between Cleary, Gottlieb and its own client. Under Hercules [Chemical Co., Inc. v. North Star Reinsurance Corp., 72 A.D.2d 538, 421 N.Y.S.2d 67 (1st Dept. 1979)], plaintiff's recovery is subject to possible diminution by Cleary, Gottlieb fault (assumed arguendo for the sake of this discussion only). n1 If the jury reached such a conclusion, Cleary, Gottlieb would presumably face a malpractice action, brought by its own client. In these circumstances, Cleary, Gottlieb has its own interest in minimizing its role during the underlying commercial transaction, and maximizing that of the plaintiff's own representatives, so that any factors tending to reduce plaintiff's recovery would not be laid at the door of Cleary, Gottlieb. Secondly, the theory defendant asserts against Cleary, Gottlieb constitutes an inevitable complicating factor in settlement discussions. The possibility of settlement is always encouraged by the Court; but the parties are entitled to advice on that subject from counsel who are entirely uninhibited by any personal involvement of their own in the merits.

        Eurocom was a disqualification case.  Yet, it would not take much effort for a plaintiff's lawyer, in the appropriate case, to transform the same reasoning into a breach of fiduciary duty claim for damages.

        Another Disqualification Case.  Jamieson v. Slater, 2006 U.S. Dist. LEXIS 86712 (D. Ariz. Nov. 27, 2006).  Lawyer represented Husband No. 2 in dissolution action against Wife.  During the dissolution proceeding Lawyer filed lis pendens against Wife’s real estate.  The dissolution court, finding that Husband No. 2 had no claim to Wife’s real estate, ordered the lis pendens released.  Lawyer also filed a quiet title action against Wife’s real estate on behalf of Husband No. 1.  As a result of this meddling with Wife’s title, Wife filed this action against Husbands 1 and 2 and against Lawyer.  Lawyer appeared for himself and Husbands 1 and 2.  Wife, claiming Lawyer had a conflict, moved to disqualify Lawyer.  In this opinion the court granted the motion.  As to Wife’s standing, the court held that given the seriousness of the conflict, Wife did not need standing (analysis of standing not that clear).  As to the conflict, the court identified various ways Lawyer’s conflicts could adversely impact not only Wife but also Husbands 1 and 2.  In discussing Lawyer’s underlying work problem, the court said:

In the present case, the interests of [Husband No. 1] and [Husband No. 2] conflict with the interests of [Lawyer] because the actions of [Lawyer] while he represented [Husband No. 2] and [Husband No. 1] in lawsuits against [Wife] is the primary wrongdoing for which [Wife] seeks to recover damages.  Because [Lawyer] is a named co-defendant in the present case, there is a significant risk that his ability to consider, recommend, and carry out an appropriate course of action on behalf of [Husband No. 2] and [Husband No. 1] will be materially limited as a result of his exposure to personal liability (bold and italics, the court’s).

        Crews v. County of Nassau, 2007 U.S. Dist. LEXIS 6572 (E.D.N.Y. Jan. 30, 2007).  This is a civil rights case arising out of the criminal prosecution of one of the plaintiffs (“Plaintiff”).  Lawyer, who is representing Plaintiff in this case, also defended Plaintiff in the criminal case.  The defendants moved to disqualify Lawyer because he would be a witness in this case, but also because he would have a conflict of interest arising out of his work on the criminal case.  In this opinion the court granted the motion on both grounds.  As to the latter ground, the court said in part:

If, as defendants argue, [Lawyer] erred in his representation of [Plaintiff] in state court, [Lawyer] would have a significant incentive to tailor his representation of plaintiffs in this case so as to avoid revealing or belaboring his alleged errors.?

        Ia. Op. 09-03 (Aug. 25, 2009).  This is a discussion of the situation where a law firm handled a transaction and is subsequently asked to handle litigation arising out of the transaction.  The opinion contains a lengthy discussion of the issues raised by the lawyer-as-witness rule, Rule 3.7, and well as the material limitation issues raised by Rule 1.7.

Special Note on Bond Practice

        The Internal Revenue Service has been aggressively auditing tax-exempt transactions.  Typically the IRS goes to the issuer for information.  If the IRS believes the bond issue in question should be taxable, it will first negotiate with the issuer to see if the issuer will pay the resulting tax, rather than the bondholders.  Such a resolution is called a "closing agreement."   This process usually results in the issuer bringing pressure on other participants in the transaction to contribute to the settlement.  Frequently, the issuer or other participant will seek help from the law firm that represented it in the original transaction.  As often as not, this will be "bond counsel;" that is the law firm that issued the opinion on state law and federal income tax issues.

        Should that law firm get involved in the audit?  Again, it depends.  Certainly, if the IRS is going after the structure of the transaction, and the law firm in question was largely responsible for that structure, the law firm may simply decline.  At the other end of the spectrum, the IRS concerns may involve the conduct of one or more participants long after the law firm concluded its work.  There, the law firm's prior work may simply not be an issue.  In between those two situations, the law firm will have to do a careful analysis.

        The law firm may recommend that the client get independent advice on the conflict issues.  Or, the law firm may recommend that the client hire another law firm to be co-counsel and protect the client on conflict issues.  A very important part of any analysis is the issue of whether the law firm should contribute to the settlement.  One could argue that the law firm is in no position to provide the required objectivity on that issue.

        The good news is that bond lawyers are becoming increasingly sensitive to these issues.  The bad news is that IRS officials continue to observe law firms that are up to their necks in exposure continue to represent their clients in audits with no apparent independent supervision.  It is now at the point that the IRS requires law firms in this position to obtain conflict waivers from their clients before the IRS will deal with the firm.

Tax Court Gets It

Whether a lawyer is taking a tax-exempt matter or some other federal tax matter to Tax Court, the Rules of Practice & Procedure of the United States Tax Court have a fairly specific provision to address the underlying work situation.  Rule 24 provides as follows:

(g) Conflict of Interest: If any counsel of record (1) was involved in planning or promoting a transaction or operating an entity that is connected to any issue in a case, . . . then such counsel must either secure the informed consent of the client . . . withdraw from the case; or take whatever steps are necessary to obviate a conflict or other violation of the ABA Rules of Professional Conduct . . . . The Court may inquire into the circumstances of counsel's employment in order to deter such violations.  See Rule 201.

Other Cases

       We are not aware of any other opinions that address this issue directly as those above.  However, Streber v. Hunter, 221 F.3d 701 (5th Cir. 2000) is very close to being such a case and also involves tax advice and an IRS proceeding.  The lawyer had given tax advice to two sisters.  The IRS assessed the sisters back taxes and penalties.  The sisters challenged the assessment in court, and the same lawyer represented them in that proceeding.  It turned out badly for the sisters.  They sued the lawyer, his firm, and others in the firm, for malpractice.  The claim included the allegedly bad advice the firm gave the sisters initially and the allegedly bad advice the firm gave the sisters about the litigation.  The court did not state specifically that handling both matters created a conflict of interest; however the court could not have been impressed favorably by that conduct, either.  One of the sisters settled before the appeal.  The Fifth Circuit affirmed the verdict for the other sister and against the lawyer, the firm, and others, for $839,000.

        A case that contains an element of the underlying work problem is Chang v. Chang, 597 N.Y.S.2d 692 (N.Y. App. 1993).  The court was concerned about the fact that the lawyer was handling a case in which he would have to testify about his underlying work.  The case was also complicated by the fact that the lawyer was a defendant in the case along with his clients.  Nevertheless, the court's concern about the lawyer's underlying work is apparent from the following:

As a defendant himself, Mr. Cartelli (the lawyer) was in a hopelessly compromised position. He had represented the corporation in all the complained-of transactions. He was exposed to the possibility of a finding of professional malpractice or being part of a scheme to defraud. A finding against his own clients, the Changs, even as to the fifth cause of action, might well exonerate him of all liability.

        Sammis v. Brobeck, Phleger & Harrison, 2002 Cal. App. Unpub. LEXIS 1896 (Cal. App. June 4, 2002).  This appeal is from a summary judgment for Brobeck in a malpractice suit brought by its former client, Sammis.  The case is in its early stages, so not much significance can be assigned to the opinion, which, among other things, was ordered not to be published.  However, the following language did appear:

Additionally, Sammis alleged that Brobeck urged him to settle with Lorenz to hide Brobeck's own conflict of interest, arising from its malpractice in the Saiga transaction.

        Main Events Productions, LLC v. Lacy, 220 F. Supp. 2d 353 (D.N.J. 2002).  Patrick English represented Main Events in negotiating and drafting a promotion agreement with Jeff Lacy, a boxer.  This case concerns the agreement drafted by English.  For that reason, Lacy has moved to disqualify English as Main Events’ lawyer.  One of the bases for the motion was that English might be a witness.  The court brushed that aside, noting that another lawyer would try the case.  Lacy also contended that English’s role in drafting the agreement in question creates a “personal interest” and would cause him to justify his conduct in ways not necessarily in the interests of his client.  The court simply disagreed saying, in effect, that the concern was speculative.  The court did not say as much, but it could not have hurt that English had brought in another lawyer to try the case.  Further, while the court did not discuss Lacy’s standing the make the motion, one wonders whether Lacy's not being the "victim" of the alleged conflict might have influenced the court.

       Dahlin v. Jenner & Block, L.L.C., 2002 U.S. Dist. LEXIS 23973 (N.D. Ill. December 12, 2002).  Malpractice case against Jenner & Block.  Because it is only the denial of Jenner’s motion for summary judgment, it would not be useful to present the facts in detail.  Essentially, Jenner is accused of botching a commercial lease for a landlord/client.  After allegedly misdrafting the lease, Jenner continued to advise the landlord.  One of the allegations is that this subsequent advice was not in the landlord’s best interests because Jenner was driven by it concern over the lease allegation. 

        Hetos Investments, Ltd. v. Kurtin, 1 Cal. Rptr. 3d 472 (Cal. App. 2003).  Gray Cary prepared a promissory note on behalf of the borrower.  Later, the firm filed an action for the borrower against the lender, alleging, among other things, that the note was usurious.  The lender moved to disqualify Gray Cary because the firm was attacking the validity of the note that it prepared.  The trial court denied the motion, and the appellate court affirmed.  The court considered the applicability of California Rule 3-210 (not applicable because only clients are protected by it), ABA Model Rule 1.16(a) (ABA Model Rules have no force in California), and the “appearance of impropriety” test under old ABA Canon 9 (recognized by some California courts, but not applicable here).  The court noted that if anyone were to be harmed by the alleged conflict it would be Gray Carey’s client, the borrower, not the movant, the lender.  At bottom, the court felt that no harm would come to anyone by Gray Carey’s remaining in the case.

        Firm Avoided Problem Where "Sophisticated Client" Made the Questionable Decision in the Subsequent Litigation.  Town of North Hempstead v. Winston & Strawn, LLP, 814 N.Y.S.2d 237 (N.Y. App. 2006).  Winston & Strawn (“W&S”) represented North Hempstead in entering into a waste disposal agreement.  When the waste disposal project did not go well, one of the parties sued North Hempstead.  W&S handled the defense, but the plaintiff recovered a jury verdict of some $32 million.  North Hempstead then sued W&S for malpractice in its handling of the litigation.  One of the grounds was that W&S did not assert an available affirmative defense.  North Hempstead claimed that W&S did not assert the defense because it had a conflict arising out of the way it handled the underlying transaction.  The trial court denied W&S’ motion for summary judgment.  In this opinion the Appellate Division reversed.  As to W&S’ failure to assert the affirmative defense, the court emphasized that it was the decision of the Town Attorney (“a sophisticated client”) not to assert the affirmative defense.  Moreover, the court said, the defense was not a sure thing, and W&S could not be held liable for exercising “professional judgment on a question that was not elementary or conclusively settled by authority.”  [Note: several of the facts recited above were not in the opinion, but surfaced in press reports regarding the unpublished trial court’s opinion.]

       Patent Litigation.  Breckenridge Pharm., Inc. v. Metabolite Labs., Inc., 2007 U.S. Dist. LEXIS 7775 (S.D. Fla. Feb. 2, 2007); and Landmark Graphics Corp. v. Seismic Micro Tech., Inc., 2007 U.S. Dist. LEXIS 6897 (S.D. Tex. Jan. 31, 2007).  In both cases law firms litigating over patents they had prosecuted.  The courts did not treat them as "underlying work" problems, but rather as lawyer-as-witness problems.

        Hillis v. Heineman, 2009 U.S. Dist. LEXIS 29914 (D. Ariz. Mr. 25, 2009).  Plaintiff sued the defendants and their lawyer ("Lawyer") for fraud and related causes of action.  Lawyer appeared for all defendants, including himself.  Plaintiff moved to disqualify Lawyer because he should be a witness.  The court denied the motion without prejudice because it was not yet clear whether Lawyer should be a witness.  What the court did not mention, and what the parties apparently did not raise, was the propriety of Lawyer defending himself as well as the other defendants, especially in light of Lawyer's having earlier represented the company involved in the case.

        Finkel v. Frattarelli Bros. Inc., 2010 U.S. Dist. LEXIS 96280 (E.D.N.Y. Sept. 15, 2010).  Plaintiffs are trustees of employee welfare plans.  They are suing several corporations and individuals for defrauding the plans.  The defendants moved to disqualify the law firm for the plaintiffs ("Law Firm") under the lawyer-as-witness rule and because it had a conflict of interest.  The court disposed of the lawyer-as-witness argument by holding that the defendants had not shown that the lawyers' testimony would be needed.  The conflict of interest argument was that Law Firm would be put in the position of defending their earlier work in representing the trusts while the alleged frauds were occurring -- essentially an "underlying work" argument.  The court rejected that argument holding that the focus of this case was the conduct of the defendants, not the operation of the trusts by the plaintiffs or the conduct of Law Firm in representing the plaintiffs.

        Martin v. Turner, 2011 U.S. Dist. LEXIS 17021 (E.D. Pa. Feb. 18, 2011).  Client hired Lawyer No. 1 to assist Client in collecting on a note From Company No. 1.  Lawyer No. 1 negotiated a settlement between Client and Company No. 1.  One term of the settlement was that Client would have a security interest in a claim by Company No. 1 against Company No. 2.  Lawyer No. 1 filed a UCC-1 in connection with this security interest.  Five years later, no one filed a UCC-3 continuation statement.  When Client learned this could be a problem, Client fired Lawyer No. 1 and hired Lawyer No. 2.  Lawyer No. 2 filed a malpractice action (this case) on behalf of Client against Lawyer No. 1, citing the failure to file the UCC-3.  Lawyer No. 1 moved to disqualify Lawyer No. 2, claiming Lawyer No. 2 had a conflict of interest.  The alleged conflict was that Lawyer No. 2 should have taken the position that the UCC-3 was unnecessary and should have prevented Company No. 2 from paying a creditor other than Company No. 1 or Client.  By claiming in this case that Lawyer No. 1's failure to file the UCC-3 was the sole cause of Client's loss, Lawyer 2 was deflecting attention from Lawyer No. 2's failure to prevent Company No. 2 from paying the disputed funds to another creditor, a classic "underlying work" problem.  In this opinion the court denied the motion to disqualify.  Oddly, the court did not take a position on whether the UCC-3 was necessary to preserve Client's priority.

        Jacques H. Geisenberger, Jr., P.C. v. DeAngelis, 2011 U.S. Dist. LEXIS 108916 (M.D. Pa. Sept. 23, 2011).  In this opinion the district judge affirmed the bankruptcy judge's order disqualifying Debtor's counsel ("Lawyer").  The disqualification was largely due to Lawyer's failure to disclose his pre-petition relationships and compensation.  However, there was another feature.  Before the bankruptcy, Lawyer had handled for Debtor the sale of stock but had failed to comply with federal and state securities laws.  That resulted in litigation between the buyer and Debtor.  That litigation was pending when the bankruptcy was filed and Lawyer's appointment as Debtor's counsel was approved.  The court found that to be a conflict because Lawyer could not have given Debtor objective advice about the buyer's claim given Lawyer's intimate involvement in the sale.

        XTL-NH, Inc. v. N.H. State Liquor Comm’n, 2014 N.H. Super. LEXIS 17 (N.H. Super. Oct. 1, 2014). Lawyer, in private practice, was hired by the state to assist the Liquor Commission in screening bids for a liquor warehousing contract. Party A won the contract over Party B. Party B sued the Commission, and Lawyer appeared for the Commission. Party B sought the deposition of Lawyer. In this opinion the court denied the deposition. In passing, the court noted that Party B also took the position that Lawyer could not handle this case because of Lawyer’s underlying work on the bidding process. The court summarily rejected that claim.


        Conn. Inf. Op. 2014-05 (June 18, 2014). This opinion discusses the extent to which a lawyer, who has made a mistake, can continue to represent the client. The opinion says that this is permissible where the lawyer explains everything to the client, encourages the client to seek the advice of another lawyer, and is satisfied that the earlier mistake will not cause him to represent the client inappropriately.

        Criminal Practice Twist. Christeson v. Roper, No. 14-6873 (U.S. Jan. 20, 2015). Defendant was convicted of murder. His lawyers missed the 1-year deadline for filing habeas proceedings. He sought substitution of counsel, which the district court denied. The Eighth Circuit affirmed. In this opinion the Supreme Court reversed. Relief from the final judgment is theoretically a available via a FRCP 60(b) motion, but the lawyers would have to argue that their own malfeasance caused the late filing. The Court ruled that such an argument created a conflict of interest for the lawyers requiring substitution.

        Duty of Disclosure to Client where Lawyer Aware of Mistake.  Leonard v. Dorsey & Whitney, 553 F.3d 609 (8th Cir. 2009) (extensive discussion of duty to report malpractice to client); People v. Greene, 276 P.3d 94 (Col. 2011); In re Hoffman, 700 N.E.2d 1138 (Ind. 1998); Olds v. Donnelly, 150 N.J. 424 (N.J. 1997); Circle Chevrolet Co. v. Giordano, Halleran & Ciesla, 662 A.2d 509 (N.J. 1995); Beal Bank, SSB v. Arter & Hadden, LLP, 167 P.3d 666 (Cal. 2007); Olds v. Donnelly, 696 A.2d 633 (N.J. 1997); Shumsky v. Eisenstein, 726 N.Y.S.2d 365 (N.Y. 2001); In re Tallon, 447 N.Y.S.2d 50 (N.Y. App. Div. 1982); In re Knappenberger, 90 P.3d 614 (Ore. 2004) (lawyer disciplined in part for his failure to apprise client of error and obtain waiver of conflict); Beal Bank, SSB v. Arter & Hadden, LLP, 66 Cal. Rptr. 3d 52 (Cal. 2007) (effect on Statute of Limitations of failure to disclose malpractice); DeLuna v. Burciaga, 223 Ill. 2d 49 (Ill. 2006); Ill. State Bar Ass’n Mut. Ins. Co. v. Frank M. Greenfield & Assocs., 2012 IL App (1st) 110337 (Ill. Ct. App. Nov. 9, 2012) (ins. pol. prohibition against admitting fault does not trump Rule 1.4; must defend and indemnify.); Maryland v. Pennington, 876 A.2d 642 (Md. 2005); ABA Informal Op. 1010 (1967); Col. Op. 113 (Nov. 2005) (excellent research tool); Minn. Op. 21 (Oct. 2009); N.J. Op. 684 (1998); N.Y. Ops. 734 (2000), 295 (1973), 275 (1972); N.Y. City Op. 1092 (May 2016) (must tell client of co-counsel’s mistake; great research tool); N.Y. City Op. 1995-2 (1995); N.C. Op. 2015-4 (July 2015); Wis. Op. E-82-12 (1984); Restatement § 20, cmt. c; 2 Mallen & Smith, Legal Malpractice §14.22 (2007); Charles E. Lundberg, Self-Reporting Malpractice or Ethics Problems, 60 Bench & Bar 24 (2003); Brian Pollock, Surviving a Screwup, 34 ABA Lit. Mag. 2 (Winter 2008); Benjamin P. Cooper, The Lawyer’s Duty to Inform His Client of His Own Malpractice, 61 Baylor L. Rev. 174 (2009).


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