COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

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February 27, 1990

ACTION: Formal Opinion

OPINION:

Canon 4 of The Lawyer's Code of Professional Responsibility (the "Code") generally prohibits a lawyer from revealing a client's confidences and secrets. DR 4-101(C), however, delineates certain limited circumstances in which a lawyer may disclose a client's confidences or secrets -- including, for example, when disclosure is "required by law," DR 4-101(C)(2). This Committee has never addressed the circumstances under which disclosure may be made because it is "required by law." We now consider, among other issues, whether obligations imposed by court rules (in particular, the Federal Rules of Civil Procedure) are "required by law" within the meaning of DR 4-101(C)(2).

* * *

This opinion is prompted by an inquiry from a lawyer who represents the chief executive officer of a corporation that is one of five defendants in a pending civil action in federal district court. In response to a document request served by the plaintiff, the inquirer was advised by his client that the corporate defendant had previously produced all responsive documents to a government agency pursuant to an earlier subpoena, and that no copies of the documents had been retained. After confirming that responsive documents had in fact been produced to the government agency, the inquirer advised the plaintiff that neither his client nor the corporate defendant possessed any documents called for by the document request.

The inquirer subsequently learned from his client that several boxes of documents responsive to the plaintiff's document request had been stored by the client with a third person. The inquirer informed his client that the plaintiff should be advised of the existence of these documents. The client, however, took the position that the inquirer learned this information in the course of a confidential attorney-client communication and instructed the inquirer not to disclose the information.

The inquirer asked this Committee two questions: (1) whether this new information learned from the client which contradicts the client's prior representations to the inquirer and the inquirer's prior representations to plaintiff's counsel, concerning the existence of certain documents called for by plaintiff's document request, is "confidential," and (2) assuming this information is confidential, whether the inquirer is permitted to disclose the information to the plaintiff.

I.

As to the first question, we note that Canon 4 of the Code prohibits the disclosure of "confidences" and "secrets" of a client except under certain narrowly defined circumstances. The duty of a lawyer to preserve a client's confidences and secrets is one of the most solemn and significant obligations imposed by the Code. See G. Hazard, Ethics in the Practice of Law 21 (1978) ("The basic rule of confidentiality is that the lawyer should keep everything secret that he learns from or about a 'client,' except when its disclosure helps his client.")

"Confidences" are defined as "information protected by the attorney-client privilege under applicable law." DR 4-101(A). Whether the information furnished to the inquirer by his client concerning the existence of the documents is protected by the attorney-client privilege is a question of law, on which this Committee does not opine. "Secrets," in contrast, are defined more broadly to include "other information gained in the professional relationship that the client has requested to be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client." DR 4-101(A). The information the inquirer received from his client concerning the existence of the documents clearly falls within this definition and is, therefore, a "secret" within the meaning of DR 4-101(A).

II.

We next address whether the inquirer is permitted to disclose this information to the plaintiff. Although the Code generally prohibits a lawyer from revealing a client's confidences or secrets, see DR 4-101(B); EC 4-1; EC 4-5, disclosure is permitted in certain limited circumstances, see DR 4-101(C).

A. DR 4-101(C)(2) provides that a lawyer may reveal a client's confidences or secrets "when permitted under Disciplinary Rules or required by law or court order."

Rule 26(e)(2) of the Federal Rules of Civil Procedure requires a party to correct an inaccurate prior response to a document request. The 1970 Advisory Committee Note to Rule 26(e) extends this obligation to a party's attorney, where the "lawyer[] obtains actual knowledge that a prior response is incorrect." This obligation is intended to "prevent[] knowing concealment by a party or attorney." 1970 Advisory Committee Note, Fed. R. Civ. P. 26(e); see also Dorsey v. City of Detroit, 858 F.2d 336, 343-44 (6th Cir. 1988).

Although this Committee does not opine on the applicability of court rules to particular sets of facts, it is within our purview to consider whether obligations imposed by court rules are "required by law" within the meaning of DR 4-101(C)(2). In this Committee's opinion, a lawyer's obligations under Rule 26(e) are "required by law" within the meaning of DR 4-101(C)(2) since the Federal Rules of Civil Procedure "have the effect of law." 4 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 1030, at 125 (2d ed. 1987); see also Kuenzel v. Universal Carloading & Distributing Co., 29 F. Supp. 407, 409 (E.D. Pa. 1939) (Federal Rules of Civil Procedure are promulgated by the Supreme Court and thus "have the force of law"); cf. United States v. Hvass, 355 U.S. 570, 575 (1958) ("law of the United States" includes court rules that have been lawfully authorized).

Therefore, assuming the inquirer concludes that the information received from his client concerning the existence of certain documents provides the inquirer with actual knowledge that his prior response to plaintiff's document request was inaccurate, this Committee concludes that under DR 4-101(C)(2) the inquirer may disclose to the plaintiff the existence of the documents called for by plaintiff's document request, even though that information may constitute a "confidence" and/or "secret."

B. Also relevant is DR 4-101(C)(5), which is proposed to be added to the Code. * This provision states that a 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.

* DR 4-101(C)(5) is one of several amendments to the Code adopted in 1987 by the House of Delegates of the New York State Bar Association. These amendments will not become part of the Code in force throughout New York unless and until they have been approved by the four Appellate Divisions. According to recent press reports, Appellate Division approval of a majority of the amendments, including the addition of subparagraph (5) to DR 4-101(C), is expected to be forthcoming in the near future.

Assuming, as outlined above, that the inquirer believes his representation to plaintiff's counsel was based on materially inaccurate information, this Committee concludes that DR 4-101(C)(5), if adopted, would provide an independent basis for permitting the inquirer to withdraw that representation.

C. Additional Code provisions are implicated by the possibility that the inquirer's client has committed a fraud (although the inquirer has not yet so concluded). DR 7-102(B)(1) provides:

A lawyer who receives information clearly establishing that . . . [h]is client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal, except when the information is protected as a confidence or secret.

Whether a client's conduct is fraudulent is a mixed factual and legal question outside the jurisdiction of this Committee. We note, however, that in order for DR 7-102(B)(1) to come into play, a lawyer must have "actual knowledge" that his client's conduct is fraudulent. See In re Grievance Committee of the United States District Court, District of Connecticut, 847 F.2d 57, 62-63 (2d Cir. 1988). There, the Second Circuit held that a lawyer is required to disclose only information which the lawyer "reasonably knows to be a fact" and which "clearly establishes" the existence of a fraud. Id. at 62. The Court observed that "proof beyond a moral certainty" was not required, but that a lawyer "must clearly know, rather than suspect, that a fraud on the court has been committed before he brings this knowledge to the court's attention." Id.; see also N.Y. State 480 (1977); ABA Informal Op. 1379 (1976).

In determining whether a client has committed a fraud, a lawyer should always be mindful of EC 7-6, which states, in pertinent part:

In many cases a lawyer may not be certain as to the state of mind of his client, and in those situations he should resolve reasonable doubts in favor of his client.

Studious ignorance of readily accessible facts is, however, the functional equivalent of knowledge. See C. Wolfram, Modern Legal Ethics § 13.3.3, at 695-96 (1986); see also United States v. Maniego, 710 F.2d 24, 28 (2d Cir. 1983).

Were the inquirer to determine that the information in his possession clearly establishes that his client has perpetrated a fraud, the Committee concludes that DR 7-102(B)(1) would neither require the inquirer to inform, nor preclude him from informing, plaintiff's counsel of the existence of the documents in question. The affirmative disclosure obligation of DR 7-102(B)(1) would not be triggered because, as explained above, the information concerning the existence of the documents is protected as a "confidence" and/or "secret." Nevertheless, disclosure would still be permitted if the inquirer determined that either or both of the exemptions contained in DR 4-101(C)(2) and (C)(5) were applicable.

D. Should the inquirer choose not to disclose the information, he would have to consider whether continued representation of the client might violate the Code. EC 7-1 provides that it is the duty of a lawyer to represent "his client zealously within the bounds of law, which includes Disciplinary Rules and enforceable professional regulations."

Of particular relevance is DR 7-102(A), which proscribes certain conduct by a lawyer in connection with the representation of a client. For purposes of considering the propriety of continuing to represent the client in these circumstances, the Committee assumes: (1) that the inquirer has concluded in the exercise of his professional judgment that the new information learned from his client furnishes him with actual knowledge that the prior response to plaintiff's document request was inaccurate; (2) that the inquirer's client has prohibited him from disclosing this information to the plaintiff, even though the inquirer has concluded that such disclosure is required by the Federal Rules of Civil Procedure; and (3) that the inquirer has chosen not to disclose this information to the plaintiff.

DR 7-102(A)(3) provides: "In his representation of a client, a lawyer shall not . . . [c]onceal or knowingly fail to disclose that which he is required by law to reveal." Because this Committee considers obligations imposed by the Federal Rules of Civil Procedure to be ones "required by law" within the meaning of DR 7-102(A)(3), the inquirer would be required to terminate representation of the client (assuming the inquirer has concluded that Rule 26(e) requires correction of the prior discovery response), because continued representation would entail a violation of this Disciplinary Rule.

This Committee further believes that the inquirer's continued representation of the client might implicate DR 7-102(A)(7), which states that a lawyer shall not "[c]ounsel or assist his client in conduct that the lawyer knows to be illegal or fraudulent." A failure to discharge the obligations imposed on lawyers under Rule 26(e) would, in this Committee's view, constitute "illegal" conduct within the meaning of DR 7-102(A)(7).

Similarly, it is the Committee's view that if the inquirer were to continue to represent the client in these circumstances, the inquirer might be assisting the client in the perpetration of a "fraud" within the meaning of DR 7-102(A)(7). Whether the inquirer has received information establishing that the client has committed a fraud is, as noted previously, a factual determination that cannot be made by this Committee.

E. Should the inquirer determine that the continued representation of the client would violate either DR 7-102(A)(3) or DR 7-102(A)(7), the inquirer would be required to withdraw as counsel. See DR 2-110(B)(2). If, however, the inquirer concludes that neither of those provisions applies, the inquirer may nevertheless assert his right to withdraw permissively from the matter. See DR 2-110(C)(1), (2).

In the event the inquirer seeks to withdraw as counsel, we call attention to DR 2-110(A), which provides in part that:

[A] lawyer shall not withdraw from employment until he has taken reasonable steps to avoid foreseeable prejudice to the rights of his client, including giving due notice to his client, allowing time for employment or other counsel, delivering to the client all papers and property to which the client is entitled, and complying with applicable laws and rules.

THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK No. 1990-1 COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS January 29, 1990 ACTION: Formal Opinion

OPINION:

In Formal Opinion 1988-5, the Committee addressed ethical questions arising in a variety of circumstances in which lawyers who are shareholders in a cooperative apartment corporation are active in the affairs of their building or are called upon to provide legal services for different constituencies in the building, e.g., the board of directors, a fellow shareholder or a potential purchaser. The situations discussed in that opinion did not include that of a lawyer representing both a cooperative corporation and the sponsor after a conversion of the building from rental apartments, and this opinion is intended to address that subject.

The inquirer is contemplating acting as the lawyer for a sponsor during the process of converting rental apartments into cooperative ownership and then continuing as the lawyer for both the sponsor and the cooperative corporation after the conversion. The inquirer asks whether the lawyer for the sponsor during the conversion process may continue such dual representation after conversion if the lawyer agrees to withdraw from the dual representation when a specific conflict between the two clients arises. The inquirer asks further whether the fact that the tenants themselves control the board of directors of the cooperative corporation and thus have the power to discontinue the services of that corporation's lawyer is sufficient to justify such dual representation if it would otherwise be ethically impermissible.

By way of background, the inquirer notes that the sponsor typically functions throughout the conversion process in many different capacities. The sponsor usually is the owner of the building undergoing conversion at the outset. As owner of the building, the sponsor is also the landlord of the building and continues to operate as landlord after the conversion with respect to all tenants who choose to remain as rental tenants rather than purchase shares in the cooperative corporation and obtain from it a proprietary lease. The sponsor creates the cooperative corporation and initially owns all shares of such corporation. Through the conversion, the sponsor sells these shares to certain of the rental tenants, who may be represented by their own tenants' association and who generally will retain their own counsel. The sponsor usually also sells shares to certain purchasers who are not rental tenants and these purchasers typically retain their own counsel.

Initially, according to the inquirer, the sponsor is the controlling shareholder in the corporation. As the creator of the corporation and its controlling shareholder, the sponsor appoints its own agents to the board of directors of the cooperative corporation. Although some of the sponsor's directors often resign within 30 days following conversion in favor of directors appointed by the tenant shareholders, the sponsor frequently continues to be the controlling shareholder of the cooperative corporation for some period of time.

The inquirer has further advised that the sponsor may act in other capacities throughout the conversion process and may continue to act in various capacities after all the shares of the cooperative corporation have been sold. The sponsor often will act as the managing agent of the cooperative corporation. The sponsor may also be a lessee from the cooperative corporation with respect to any commercial space in the building. The sponsor also frequently is the holder of the mortgage on the building.

The inquirer already has concluded that the interests of the tenant shareholders are adverse to the interests of the sponsor in virtually all capacities in which the sponsor might act. Indeed, during the conversion process itself and prior to actual conversion, the tenants' association customarily employs independent counsel to represent its interests vis-a-vis the sponsor as the original landlord, the seller of the cooperative corporation's shares, the entity that appoints the initial board of directors of the corporation, the controlling shareholder and the holder of unsold shares. The issue, however, is the likelihood that the interests of the cooperative corporation will conflict with the interests of the sponsor after the conversion and the ethical implications of that likelihood for the lawyer proposing to represent both.

Canon 5 of The Lawyer's Code of Professional Responsibility (the "Code") requires a lawyer to exercise independent professional judgment on behalf of a client. DR 5-105(A) and (B) provide that a lawyer shall decline multiple representation, or having undertaken multiple representation shall discontinue it, if the exercise of his independent professional judgment on behalf of a client will be or is likely to be adversely affected or if it would likely involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Whether a lawyer's representation of both the sponsor and the cooperative corporation would be likely to affect adversely the lawyer's independent professional judgment on behalf of either client or involve the lawyer in representing differing interests will depend on the facts and circumstances of each case. Nevertheless, the Committee finds it difficult to conceive of a situation in which a lawyer should not conclude that his or her representation of both the sponsor and the cooperative corporation is "likely to involve" the representation of "differing interests" (defined in the Code to encompass interests that are "inconsistent" or "diverse", as well as those which are "conflicting"). In this regard, a lawyer should be mindful of EC 5-18, which admonishes that a lawyer employed or retained by a corporation owes allegiance to the corporation and not to a stockholder, director, officer, employee, representative, or other person connected with the corporation, such as in this case the sponsor.

Nevertheless, DR 5-105(C) permits a lawyer to represent multiple clients in a situation covered by DR 5-105(A) "if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each." (Emphasis added.) As the Committee indicated in Formal Opinions 80-7 and 81-4, "the touchstone of this provision of the Code is the adverse effect that competing interests of more than one client have on the attorney's capacity to exercise full professional judgment on behalf of each client." EC 5-15 notes that a lawyer should resolve all doubts against the propriety of the representation of clients having potentially differing interests.

Whether the "obviousness" test can be met depends on the particular facts and circumstances, but, in general, the more issues that are likely to arise between the sponsor and the cooperative corporation, the less likely is the test to be satisfied. See N.Y. State 162 (1970). In any event, we agree with the opinion of the New York State Bar Association Committee on Professional Ethics that "[d]ual representation should be practiced sparingly and only when it is clear that neither party will suffer any disadvantage from it." N.Y. State 38 (1966), quoted in N.Y. State 162 (1970).

Recognition should also be given to the possibility of future disputes between the sponsor and the cooperative corporation. Potential conflicts between the sponsor as controlling shareholder and the tenant shareholders and other potential problems arising from the relationship between the sponsor and the cooperative corporation may arise. Before undertaking any such multiple representation, these potential problems should be recognized, fully disclosed and consented to by both the sponsor and the cooperative corporation.

As we noted in Formal Opinion 1988-5, even if a lawyer concludes that multiple representation is initially proper in a given situation, if a non-waivable conflict later develops between the sponsor and the cooperative corporation, the lawyer may be forced to withdraw from both representations and may in some cases be forbidden by rules prohibiting disclosure of client confidences even from informing one or the other of the clients of the reasons for the withdrawal. Indeed, the Committee has been informed that in common practice if the lawyer for the sponsor does continue to represent the cooperative corporation after the conversion process, the lawyer will typically resign from representing the cooperative corporation when tenant shareholders develop interests conflicting with those of the sponsor as controlling and non-tenant shareholder. Declining representation of the cooperative corporation at the outset would spare all parties such disruption.

In conclusion, the Committee believes that the preferable course in general would be for a lawyer to decline to represent the cooperative corporation if the lawyer has represented the sponsor throughout the conversion process and proposes to continue that representation. Declining representation of the cooperative corporation at the outset would spare the lawyer's clients the expense and inconvenience caused by later withdrawal. See N.Y. City 81-27. Such a decision is consistent with the Code's admonishment to resolve all doubts against the propriety of any proposed multiple representation.