THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 1994-8

COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

July 27, 1994

ACTION: FORMAL OPINION

TOPIC: Duty to disclose client fraud; duty to preserve secrets of former client


OPINION:

DIGEST: Attorney must call upon client to discontinue fraudulent scheme and withdraw from further representation if client refuses to do so. Attorney may not disclose former client's past fraud, the fact of which is protected as a secret.

CODE: DRs 4-101(A), 4-101(B)(1), 4-101(C)(3), 5-108(A)(2), 7-102(A)(7), 7-102(B)(2); ECs 4-4, 4-6, 7-6; Definition 9.

QUESTIONS

(1) Is an attorney who represents a buyer of real estate and learns, prior to closing, that the client and the seller are engaging in a fraudulent scheme to evade transfer tax, required to call upon the client to discontinue such a scheme?

(2) If the client refuses to discontinue the fraudulent scheme, should the attorney withdraw from representation?

(3) If the attorney withdraws from representation, is the attorney required to disclose the fraudulent scheme to the client's successor attorney, the seller's attorney, or others?

DISCUSSION

The inquiring attorney was retained to represent a buyer of real estate ("Buyer"). In the course of the representation, the inquirer learned from Buyer post-contract and on the eve of title closing that Buyer had agreed to pay a sum of cash to the seller outside of the purchase contract "under the table." The inquirer advised Buyer about the risks and penalties for filing false returns and reports for New York City and State transfer tax, advised Buyer that Buyer should not engage in such a scheme, and informed Buyer that the inquirer would not assist Buyer and would not sign fraudulent returns. After Buyer rejected such advice and expressed an interest in consummating the transaction on such terms, the inquirer withdrew from representing Buyer. Buyer engaged substitute counsel, and the real estate transaction has since closed.

The questions raised by this inquiry implicate competing provisions of the Code of Professional Responsibility: (1) the duty to protect client confidences and secrets; and (2) the requirement not to assist in, and to attempt to rectify, fraudulent conduct.

DR 7-102(A)(7) states that a lawyer "shall not counsel or assist the client in conduct the lawyer knows to be illegal or fraudulent." DR 7-102(B)(2) provides that:

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

The inquirer refused to participate in conduct which the inquirer considered fraudulent or unlawful, and called upon Buyer to rectify such conduct. Buyer refused to do so. In the first instance, the question of whether the inquirer has a duty to disclose Buyer's conduct depends upon whether the inquirer received "information clearly establishing" that Buyer has committed a fraud. This is a factual determination that cannot be made by this Committee. In determining whether a client has committed a fraud, an attorney should be mindful that the term "fraud," as used in the Code, "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." Definition 9. In making this determination, an attorney should also be mindful of EC 7-6, which provides that, "[i]n many cases a lawyer may not be certain as to the state of mind of the client, and in those situations the lawyer should resolve reasonable doubts in favor of the client. It is for the inquirer to make the ultimate determination whether all the information available "clearly establishes" Buyer's fraud.

Should the inquirer determine that the information available "clearly establishes" a fraud perpetrated by Buyer, the inquirer nonetheless may not reveal Buyer's fraud to anyone if it is a protected "confidence" or "secret." Except in specifically circumscribed instances, a lawyer may not reveal a confidence or secret of a client. DR 4-101(B)(1). According to EC 4-4, a lawyer's obligation to preserve a client's secrets is much broader than the attorney-client privilege and "exists without regard to the nature or source of information or the fact that others share the knowledge." This obligation applies to substantially all information gained in the professional relationship. N.Y. State 528 (1981), citing 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."). The obligation to preserve client confidences and secrets continues beyond the termination of a lawyer's employment. DR 5-108(A)(2); EC 4-4; N.Y. City 1986-8.

"Confidence" refers to information protected by the attorney-client privilege as a matter of law. "Secret" is defined much more broadly, however, and refers to any information, whether or not privileged, that was gained in the professional relationship and that the client has requested be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client. DR 4-101(A); N.Y. City 1986-8. The information the inquirer received from Buyer is a "secret" under DR 4-101(A) because it was "gained in the professional relationship" and its disclosure obviously would be "detrimental" to Buyer.

One exception to the rule mandating preservation of client confidences and secrets is DR 4-101(C)(3), which permits -- but does not require -- an attorney to disclose a client's intention to commit a crime. The exception is strictly construed, however, and is applied only when a client is planning to commit a crime in the future or is continuing an ongoing criminal scheme. Whether an attorney is permitted to reveal the client's intention to commit a crime is a question of law which is beyond this committee's jurisdiction. Thus, if the inquirer concludes that Buyer intends to commit a future crime, then, and only then, may the inquirer reveal such intent. The inquirer is not, however, ethically required to reveal that information. If Buyer's alleged fraud dealt entirely with past conduct, the inquirer would not be permitted to reveal it.

In circumstances where the client refuses to rectify a fraud and the attorney is bound not reveal this misconduct, the attorney must withdraw from further representation. N.Y. County 560 (1968); N.Y. State 454 (1976). Withdrawal from employment is mandated if "[t]he lawyer knows or it is obvious that continued employment will result in violation of a Disciplinary Rule." DR 2-110(B)(2). Since DR 7-102(A)(7) forbids an attorney from "counsell[ing] or assisting the client in conduct that the lawyer knows to be illegal or fraudulent," the Code mandates withdrawal if continued employment will aid the client in perpetrating a fraud. Assuming Buyer's proposed conduct was illegal or fraudulent, the inquirer's withdrawal from further representation of Buyer was proper.

CONCLUSION

For the foregoing reasons, the Committee answers Questions 1 and 2 in the affirmative and Question 3 in the negative.