In a recent Corporate Counsel article, the authors describe a Federal Trade Commission ruling about the disclosure of connections between corporate advertisers and those who shill, directly or indirectly, the advertisers’ wares. 

Last week, the Wall Street Journal Law Blog wrote about a recent New York ethics opinion approving legal advertising on Groupon and other group coupon sites.  These services allow consumers to pay one price up front for a service that is more valuable. A restaurant, for example, may offer a $50 meal for $25 that is paid immediately. An attorney, like this one, for example, may offer to provide a will for $99.  New York wasn’t the first state to weigh in on the issue--South Carolina has, too--and it probably won’t be the last. 

Two undeniable and interconnected facts: the U.S. housing market remains virtually stagnant and the number of lawsuits against real estate professionals is on the rise.  Existing home sales have dropped steadily since 2005.  There is a glut of product on the market, yet relatively few ready, willing and able buyers.  During the same period, delinquency and foreclosure rates have grown at an alarming rate.  Real estate professionals have been under considerable pressure to adapt to the conditions of this weak and sputtering market.  Many have not fared so well, as there has been a noticeable increase in lawsuits filed against agents, brokers, inspectors and other real estate professionals.

With the federal and many state governments facing record deficits, legislatures and various governmental agencies have set their sights on the practice of Independent Contractor Misclassification as a way of adding billions of dollars to their revenues. It has been estimated that the misclassification of employees as independent contractors will cost the U.S. Treasury Department an estimated $7 billion in lost payroll tax revenue over the next 10 years. Recent audits by the California Employment Development Department (EDD) netted $140 million in additional tax revenues from companies that had misclassified 70,000 workers. Since 2009, multiple states have passed laws giving labor enforcement agencies more authority in auditing and penalizing companies that illegally classify employees as independent contractors. And although federal legislation aimed at enforcing improper classification has stalled in Congress, the 2011 federal budget appropriated $25 million to aid the Department of Labor in identifying and attacking employee misclassification. Similarly, the Internal Revenue Service is implementing a tax audit program that has also been fully funded in President Obama’s budget.

On August 4, 2001, the American Bar Association's standing committee on ethics and professional responsibility issued formal opinion 11-461 entitled, "Advising Clients Regarding Direct Contacts with Represented Persons."  As a general rule under ABA model rule 4.2, a lawyer cannot communicate with a person that a lawyer knows is represented by counsel without the opposing counsel's consent to the communication.  This rule extends to the use of an intermediary as an agent to communicate with the represented person.  However, it is also sometimes useful for litigants or parties to a transaction to be able to communicate with each other even though they have their own counsel.  In such instances, the parties maintain the right to communicate directly.  Sometimes these communications may require a lawyer's assistance.

Advising your clients on this point is considered proper.  The primary question addressed in the newly issued opinion is whether a lawyer can advise and assist a client in communicating directly with a represented party without violating Rule 4.2.  The ABA Committee felt that there was tension regarding the lawyer's ability to assist the client and effectuating direct client to client contact. 

The ABA Committee had previously stated in formal opinion 92-362 that a lawyer can ethically advise a client to communicate directly with a represented adversary to determine if the adverse party's lawyer had informed them of a settlement offer.   In the new opinion, the committee states directly that "the decision to communicate directly with a representative person may be the client's idea or the lawyer's.  Some decisions and opinions suggest the counsel may be violating the rules prohibiting communication with a representative party by encouraging or failing to discourage a client speaking directly to the other party."  A concern remained under existing rules that a lawyer might run afoul of Rule 4.2 by "scripting" or "masterminding" a client's communication with a represented person.   The Committee stated that "what constitutes 'scripting' or 'masterminding' the communication is not clear, but such a standard, if too stringently applied, would unduly inhibit permissible and proper advice to the client regarding the content of the communication, greatly restricting the assistance the lawyer may appropriately give to a client."  The Committee concluded that without violating Rules 4.2 or 8.4, a lawyer can give assistance to a client regarding substantive communications with a represented party that could include what subjects are to be addressed regardless of whether the lawyer or the client proposes that the communication take place.  The lawyer may review, redraft and approve a letter or an outline for a conversation that the client wishes to use in the communications with the adversary.  The client may also request that the lawyer draft the basic terms and an agreement that he or she wishes to discuss with an adversary.   Nonetheless, some examples of overreaching do remain. 

The committee references several of them in its opinion stating that they include "assisting the client and securing from the represented person an enforceable obligation, disclosure of confidential information, or admissions against interest without the opportunity to seek the advice of counsel.  To prevent such overreaching, a lawyer must, at a minimum advise her client to encourage the other party to consult with counsel before entering into allegations, making admissions or disclosing confidential information.  If counsel has drafted a proposed agreement for the client to deliver to her represented adversary for execution, counsel should include in such agreement conspicuous language on the signature page that warns the other party to consult with his lawyer before signing the agreement."  

A matrimonial lawyer and her Hackensack, NJ firm were hit with a $950k malpractice verdict late last month for their alleged role in enabling an international child abduction.

The suit, Innes v. Marzano-Lesnevich, was brought by Roy Innes, whose four-year-old daughter, Victoria, was removed from the United States to Spain, the mother’s native country, in January 2005 without his knowledge or consent. A jury found that Madeline Marzano-Lesnevich and her firm, Lesnevich & Marzano-Lesnevich, allowed the girl’s mother to get hold of her passport, which had been entrusted to the firm to prevent the child’s removal to Spain. The jury awarded $700k to Innes and $250k to Victoria.

An October 8, 2004 parenting agreement forbade Innes or the mother, Maria Jose Carrascosa, from taking Victoria abroad without the other’s written permission. It also required Carrascosa to turn over Victoria’s passport to Carrascosa’s then-lawyer, Mitchell Liebowitz, so it could be held in trust. Carrascosa handed over the passport but weeks later fired Liebowitz and retained the Marzano-Lesnevich firm.

Carrascosa then secured Victoria’s passport and flew her to Spain in January of 2005. She returned to the U.S. without Victoria in 2006 and is currently in prison for her conviction in December 2009 on charges of interfering with custody and contempt of court. Victoria, now 11, is being raised by her mother’s parents in Valencia, Spain, and Innes claims he has seen her only twice since the illicit removal.

New Jersey case law does permit legal malpractice claims by nonclients. (Petrillo v. Bachenburg, 139 N.J. 472 (1995).) However, the defense claimed no one asked Marzano-Lesnevich to be the trustee of the passport and she never signed an agreement to that effect. She did not even know it was being held in trust. But the court found that by her silence she could become a trustee. According to Marzano-Lesnevich’s husband and partner, Walter Lesnevich (who represented his wife at trial), the verdict sets out "a new standard of responsibility by a matrimonial lawyer to her nonclient." He says "everybody feels very sorry for the father so they just threw out the book and changed the law up and down." A Spanish court decree gave custody to Carrascosa, and even diplomatic efforts have failed to end the impasse. Lesnevich plans to appeal.

(An article appearing in the May 17, 2011 edition of the New Jersey Law Journal, an ALM Publication, was used as the sole source for this post.)

In the case of Malaker v. Cincinnati Insurance Co., 2011 WL 1337095 (N.D. Ill. April 7, 2011), a federal judge decided the entire case on a motion to dismiss one count of the complaint. 

Mr. John Helfrich was an insured under a CGL (or Commercial or Comprehensive General Liability Insurance) policy issued by Cincinnati Insurance Company.  An incident took place in which Mr. Helfrich’s hand came into contact with a shirt and jacket worn at the time by Mr. Eric Malaker.  Mr. Helfrich admitted that, and Mr. Helfrich also admitted that he pushed Mr. Malaker.

Mr. Helfrich informed Cincinnati of this incident.   (It is not clear from the opinion how he informed Cincinnati, i.e., whether verbally or in writing, but it did not seem to matter to the judge in reaching her decision).  Cincinnati denied coverage in response to this pre-suit notice and in its “denial-of-coverage letter” asked Mr. Helfrich, should he be sued, to provide Cincinnati with notice “of the suit immediately” so that Cincinnati “may review the wording of the suit” for possible coverage.  Malaker, 2011 WL 1337095 at *1.

Thereafter, Malaker sued Helfrich.  Some two years later, Mr. Helfrich’s attorneys may have notified Cincinnati of the underlying lawsuit by Malaker against Helfrich, a fact which was in dispute.  Six years after the underlying lawsuit was filed, Mr. Malaker and Mr. Helfrich reached a settlement for $5.1 million.  The Circuit Court of Illinois entered what appears to be a consent judgment in the underlying case accordingly.  Mr. Helfrich paid $100,000.00 to Mr. Malaker and assigned all of his rights against Cincinnati to Malaker.

Malaker then filed a complaint against Cincinnati in which he alleged three claims in three counts:  Count One for alleged breach of contract, Count Two for alleged breach of fiduciary duty owed by Cincinnati to Helfrich, and Count Three for alleged bad faith under Section 115 of the Illinois Insurance Code.  In the decision in question, the federal court expressly considered Cincinnati’s motion to dismiss the claim for its alleged breach of fiduciary duty.  However, the Court also noted that the parties had filed motions for summary judgment by the time of this decision.  Id. at *2, *2 n.1.  The federal court’s disposition of the motion to dismiss also disposed of the motions for summary judgment in this case.

As the federal judge threaded her way through to a determination in considering a motion to dismiss that no fiduciary relationship existed on the face of the complaint, the Court made a series of interesting and potentially instructive rulings for duty-to-defend cases.

First, the Federal District Court held that a “breach-of-fiduciary-duty claim” is subject to the notice-pleading standards of Federal Rule of Civil Procedure 8, and not the requirements of pleading with particularity which are required for fraud claims under Rule 9(b).  Id. at *3.

Second, the Court agreed with Cincinnati that the mere existence of an “insurer-insured relationship does not in itself give rise to a fiduciary relationship under Illinois law.”  Id.  Under Illinois law there could be a fiduciary relationship triggered by a duty to defend, but in this particular case whether a duty to defend were triggered involved fact questions of timely vs. late notice which could not be determined at the pleading state, the federal judge wrote.  Id. at *5, *6-*7.  Therefore, the federal court determined, in effect, that it would not determine that factual issue but would instead determine the legal issue of whether, even assuming timely notice, there was a duty to defend Mr. Helfrich against the underlying complaint under Cincinnati's CGL policy.  See id. at *6.

The federal court held that there was never a legally enforceable fiduciary duty between Helfrich and Cincinnati in this matter, because under Illinois law Cincinnati never had a duty to defend him against Malaker’s underlying complaint.  In order to reach this legal conclusion, the federal court had to look behind the complaint at bar, which did not contain allegations which revealed what were the claims and allegations made by Mr. Malaker against Mr. Helfrich in the underlying lawsuit.  Therefore the federal court employed Federal Rule of Evidence 201(b) to examine the underlying state court complaint for the fact of those underlying claims and allegations and not to determine whether they were true or false.  Id. at *6-*7.  It is not clear from the federal court’s opinion in this case whether the underlying complaint was attached as an exhibit to the complaint at bar, or whether there was a request for judicial notice of the underlying complaint under Evidence Rule 201(b) in this case.  It would be a good practice to do both in an appropriate case, and to invite the court in any future case to determine the duty to defend based upon documents which are easily referenced in the record at bar.

There was a possibility that Illinois State Courts considering the question of whether there was a duty to defend the underlying case, would look to other pleadings in the underlying case in addition to looking at the underlying complaint.  The federal judge wrote that she also considered the complaint and other pleadings in the underlying case, although the opinion does not provide a list of all the other pleadings that she considered.  In any event, the result would be the same: the court held that there still would have been no duty by Cincinnati to defend Mr. Helfrich in the underlying Malaker lawsuit.  Id. at *8.  Defense practitioners may thus wish also to consider attaching all relevant underlying pleadings to the complaint, or to consider attaching them to a notice of filing with a request for judicial notice of them, in any appropriate duty-to-defend insurance coverage case.

The federal court was not done in this case, however.  The federal judge went on to consider the legal sufficiency of the counts for alleged breach of contract and for alleged bad faith under the Illinois Insurance Code.  There could be no breach of contract since Cincinnati did not have a duty to defend the underlying Malaker case, and there could not be any bad faith or “vexatious and unreasonable” conduct under the Illinois Insurance Code by Cincinnati denying a duty to defend where, the Court ruled, it did not have a duty to defend.

Since amendment of any count would be futile, dismissal of all claims in all counts in the federal court complaint was warranted.  Accordingly, all counts were held dismissed with prejudice, and the pending motions for summary judgment were held moot as a result.  Id. at *10.

The holdings of the Federal Court in this case came down to this concise summary:

In the present case, the operative Complaint fails to state a claim because its constituent allegations, coupled with relevant pleadings of which the Court takes judicial notice, reveal that Defendant properly denied coverage.

The continuing evolution of electronic-filing in federal and state courts has revolutionized case management in clerks’ offices throughout the country.  In order to account for that continuing evolution in Alabama specifically, the Alabama Supreme Court recently adopted amendments to several of the Alabama Rules of Civil Procedure, including Rule 58 governing the rendition and entry of orders and judgments in Alabama state courts. See Ala. R. Civ. P. 58 cmt. (2008).  Although the amendments to Rule 58, which went into effect less than a year ago, are seemingly inconsequential, lawyers practicing in Alabama who are unaware of the changes to the Rule could be susceptible to malpractice if they fail to timely appeal based on those changes.  Further, while lawyers practicing in Alabama should be particularly cognizant of the changes, lawyers practicing in other states should monitor their own state’s rules to ensure they become aware of any changes similar to those discussed below that might affect the time to take an appeal.

In general, and subject to certain exceptions, a party has six weeks from the day a judgment is entered to file its notice of appeal pursuant to Alabama Rule of Appellate Procedure 4.  Under old Alabama Rule of Civil Procedure 58, a judgment was not “entered” for purposes of taking an appeal unless and until it was entered into the State Judicial Information System (SJIS), which entry sometimes occurred days or even weeks after the judgment was rendered.  Now, however, a judge can render a judgment electronically “by executing and transmitting an electronic document to the electronic-filing system[,]” and a judgment rendered by doing so is “deemed ‘entered’ within the meaning of . . . the Rules of Appellate Procedure as of the date the order or judgment is electronically transmitted by the judge to the electronic-filing system.” Ala. R. Civ. P. 58(c) (emphasis added). 

Some Alabama judges may still choose to render judgments the “traditional” way by manually signing the judgment and then having their clerks enter the judgment into the SJIS.  Indeed, Rule 58 still provides for that method of rendering and entering judgments.  But, in light of the amendments to Rule 58, lawyers practicing before Alabama judges who frequently render orders or judgments electronically should be sure to appropriately calendar the deadline for filing a notice of appeal from the time they receive the electronic dismissal, rather than waiting to do so for the clerk’s entry of the judgment in the SJIS as they might have done in the past.  Failure to do so could be fatal to an appeal.  

Although DRI members more often than not have an adversarial relationship with class action counsel, on occasion they become our clients, for example, when they are sued for malpractice by individual members of the class that they represented. Two recent cases (one on each coast) discuss the scope of the duty owed by class counsel to absent class members, i.e., those class members who are not  named class representatives.

In Wyly v. Milberg Weiss Vershad & Shulman, 12 N.Y.3d 400 (2009) New York’s highest court concluded that unlike when a traditional attorney client relationship terminates, an absent class member does not enjoy a “presumption of access” to the class counsel’s file, including work product. In so concluding, the Court of Appeals discussed the fact that absent class members enjoy some of the indices of an attorney client relationship with class counsel, such as the right of privileged communication with class counsel and the prohibition against direct communication by adverse counsel. However other indices, such as the right to direct the course of litigation, testify at trial, participate in discovery or discharge counsel, are missing.  Accordingly, an absent class member needed to demonstrate both a substantial stake in the underlying litigation and a demonstrated legitimate need for the documents to permit him access to class counsel’s files for purpose of pressing either a malpractice claim against class counsel or an action to set aside the settlement of the class action. In that case, access to the file was denied.

In Martorana v. Marlin & Saltzman et. al, 2009 Cal. App. LEXIS 1076 (Ct. of Appeals, Second Appellate District, July 1, 2009) the California Court of Appeals also examined the peculiar species of attorney client relationship between class counsel and an absent class member who was asserting a malpractice claim against class counsel for its failure to individually notify him of the need to timely file a settlement claim or opt out.  Interestingly, the Court stated that there was no dispute that class counsel “owed a duty of care to all class members to represent them with such skill prudence and diligence as attorneys of ordinary skill and capacity commonly possess and exercise in the performance of their tasks.” The Court nevertheless concluded that the mass notification procedure provided for and approved by the court supervising the class action barred the malpractice claim, based on collateral estoppel and pubic policy, unless the absent class member could show that class counsel had breach some individual duty to the absent class member over and above what was owed to all members of the class.

Query –  Are there other types of multiple or joint representations that impact on the scope of the duty owed to the individual represented by counsel?

In these days of notorious rip offs and ponzi schemes by corporate insiders, more and more suits try to extend liability for the insiders’ acts to outside professionals, such as lawyers, accountants, auditors, etc., who provided limited services to those corporations. The claims stem from the well accepted principle that the professional is retained for the benefit of the corporation and not the corporate insider that hired him/her. Claims depend on the often fantastic factual assumption that, as a result of the limited services provided, the professional had to have known(or in some jurisdictions, should have known) of the fraudulent conduct by the corporate insider. Jurisdictions around the nation differ as to who may maintain those claims, be it a trustee or receiver standing in the shoes of the corporation itself, and/or investors, shareholders or creditors of the corporation who claim that they were harmed as a result of the fraud.