Foreseeing Eventual Misconduct

IMPORTANT NOTICE: This article is provided solely for research and archival purposes. MCLE self-study credit is no longer available. Even if you follow the instructions and submit payment you will not be granted MCLE self-study credit. Please note that low-cost MCLE is provided by the California Lawyers Association, pursuant to Business and Professions Code section 6056.

Some lawyer behavior inevitably leads to the age-old question: 'What were they thinking?'

By Ellen R. Peck
©2008. All rights reserved.

Peck

California Joan, sitting with some of her fellow ethicists around a table at their favorite San Francisco dim sum restaurant, discussed cases involving lawyer conduct demonstrating egregious foreseeable mistakes or misconduct for a future bar association presentation. "My favorite case is Chandler v. California State Bar (March 31, 2008 USDC N.D. Cal.) ___F.Supp.2d ____[2008 WL 901865] ('Slip copy')," Cali said.

"On May 1, 2007, Client obtained an arbitration award for about $8,600 against Lawyer pursuant to the California Mandatory Fee Arbitration Act ("MFAA"). On June 18, 2007, Lawyer sued Client in superior court seeking $9,500 in past due fees and neglecting to mention the arbitration award." (Slip copy, p. 1.)

Danny Dirtlaw interrupted, "Geez, the arbitration award becomes binding 30 days after the mailing of the notice of the arbitration award unless a party seeks a trial de novo within 30 days. (Bus. & Prof. C., §6203(b).) Lawyer missed the deadline by suing!"

"After Lawyer dropped his lawsuit and refused to pay the award," Cali continued, "at Client's request, the State Bar brought proceedings to enforce the arbitration award." (Ibid.)

Paul Pureheart interjected, "The State Bar is required to enforce the award by placing the attorney on involuntary inactive status until the award is paid." (Bus. & Prof. C., §6203(d)(1).)

"But before it can do that," added Diane Defender, "the attorney has a right to file a response in the State Bar Court; have a hearing; (State Bar Rls. Proc. 702-704); to appeal the hearing judge's ruling to the State Bar Court Review Department and thereafter can seek California Supreme Court review. (State Bar Rls. Proc.709, Cal. Rules Ct. 9.13(d))."

"While the enforcement action was pending," Cali continued, "Lawyer filed a federal district court action against the State Bar and its agents for violation of his statutory civil and constitutional rights, seeking to halt the State Bar enforcement action." (Slip copy, p. 2.)

"While the federal court case was pending, a State Bar Court hearing judge granted the State Bar's motion for enforcement of the arbitration award and ordered Lawyer to be placed on involuntary inactive status until he paid the arbitration award. Then, the District Court granted the State Bar's motion to dismiss the entire complaint."

"Let me guess . . .," Mark Marvelous said. "The district court abstained and dismissed Lawyer's action, which it must do when: (1) state proceedings are ongoing; (2) important state interests are involved; and (3) the plaintiff has an adequate opportunity to litigate federal claims in the state proceedings." (Slip copy, p. 3.)

"Yes!" responded Cali, "The Court found that all three factors were present: First, State Bar proceedings were ongoing when Lawyer filed the action." (Slip copy, p. 4.)

"But is abstention proper for an administrative court like the State Bar Court?" queried Richard Responsibility.

"Yes, the Ninth Circuit has held abstention applies to the judicial nature of State Bar disciplinary proceedings because the State Bar judge conducts a formal hearing and makes findings, the Review Department conducts a de novo review of those findings and the Supreme Court retains jurisdiction over the proceedings, including review of bar court findings. The district court found that the same procedure applies to the enforcement of attorney-client fee arbitration awards," Cali countered. "There is no principled distinction between State Bar disciplinary proceedings and State Bar proceedings to enforce a fee arbitration award against an attorney. Therefore, it met the second principle of abstention. Moreover, Lawyer has the opportunity to litigate any federal claims before the California Supreme Court, meeting the third prong of the abstention doctrine. Finally, Lawyer did not identify any 'extraordinary circumstances' that would justify not abstaining." (Ibid.)

"All of this could have been prevented," Cali remarked. "Lawyer lost his chance to present the merits of his fees claims to a court by not filing a timely request for de novo review, which also would have forestalled any State Bar enforcement action. And he paid a big price. He was suspended, subject to a money judgment, and he wasted time, money and energy suing his client in state court and bringing a federal court action against the State Bar. It was an action doomed to failure because of the abstention doctrine."

Danny Dirtlaw, who liked Myerchin v. Family Benefits Inc. (2008) 162 Cal. App. 4th 1527 ("Myerchin") better, told the tale:

"Lawyer represented Company in a legal action to collect a judgment owed to it. Joe, a non-lawyer, assisted Lawyer in the successful collection lawsuit from which Joe expected to receive $200,000 for his work. Through their work, Joe got to know Lawyer well; they became friends and surfing buddies. (Myerchin, p. 1531.)

"When Company collected its judgment, it refused to pay Joe his $200,000. Lawyer and Joe tried to negotiate a reduced payment for two months, but Joe wanted the whole enchilada. On Halloween 2005, Joe retained Counsel to assist him or to sue Company to enforce his claim. When Joe advised Lawyer that he had retained Counsel, Lawyer told Joe the settlement was non-negotiable. Joe sued Company. (Ibid.)

"On Nov. 23, 2005, a vacationing Lawyer telephoned Joe, who alleged that Lawyer said:

'Joe, . . . what the [expletive deleted] are you doing? I just got a call from [Company] that you filed a lawsuit against [it]. Game on. We will bury you. [Company] has a war chest and . . . doesn't want to pay you. I am trying to help you, and your attorney doesn't know what he is doing and is just ripping you off and will just run up a big bill. We will countersue you and you will end up owing us money. Your only chance to settle is to deal with me.' (Ibid.)

"On Dec. 9, 2005, Joe signed the settlement agreement without consulting Counsel. Lawyer had convinced him that Counsel would not act in his best interests. Joe spent the $70,000 cash he had obtained as a settlement, in addition to forgiveness of $70,000 in loans Company had made. (Myerchin, pp. 1530, 1531.)

"Joe did not tell Counsel he had settled. When Lawyer pressed Counsel to dismiss the action as Joe had agreed to do within 10 days of receiving settlement funds, Joe refused to dismiss the action or to refund the money he had received. Company cross-claimed for enforcement of the settlement. The trial court granted Company's summary judgment, holding that the settlement was a complete defense to Joe's claim. On appeal, in addition to his rescission claims, Joe contended that Lawyer's direct negotiation of the settlement agreement while knowing that Joe was represented by Counsel violated rule 2-100(A), California Rules of Professional Conduct ("CRPC"), and therefore nullified the settlement. (Myerchin, pp. 1529, 1531-1532.)

"CRPC 2-100(A) is intended 'to preserve the attorney-client relationship from an opposing attorney's intrusion and interference' similar to that which occurred here," noted Paul Pureheart. (Myerchin, p.1537.)

"Nevertheless," continued Danny, "the Court held that even if Lawyer contacting Joe while represented by Counsel violated CRPC 2-100, the mere fact of such improper contact would not render the agreement unenforceable." (Myerchin, p. 1539.)

"CRPC 2-100's policies must be balanced with other policies of settlement of disputes and enforcement of contracts freely entered into. (Id. at 1538.) The Court noted its obligation to exercise its discretion to identify an appropriate remedy for the improper effect upon a case but said it did not have the authority to impose a penalty since sanctions for the violation of CRPC 2-100 are within the purview of the State Bar, not of a court presiding over the affected case. (Ibid.)

"The Court also found that there was no evidence that Lawyer's unilateral contact with Joe after Joe was represented by Counsel would have rendered Joe 'unable to make a reasoned decision about the settlement.' (Ibid.)

"The Court also found that there was no evidence suggesting Lawyer's alleged wrongful act was sufficiently coercive (through undue influence or actual or constructive fraud) to induce Joe's consent to the settlement; that Joe's consent was induced by economic duress or that the settlement was unconscionable." (Myerchin, pp. 1539-1540.)

Company paid 'a substantial sum to buy its peace' and Joe's proposal to 'keep the money and maintain the war' was untenable. The Court dismissed Joe's defense of rescission in large part because Joe failed to plead rescission. He had never offered to restore payments and was unable to repay settlement funds. (Id. at pp. 1532-1537.)

"Narrow escape by Company and Lawyer. Had Plaintiff not spent the money and refused to dismiss the action, the alleged CRPC 2-100 violation may have affected the result," Diane Defender remarked.

Steve Smart recounted Wood v. Jamison (2008) 167 Cal.App.4th 156, 83 Cal.Rptr.3d 877 ("Wood"), which he said was the most egregious:

Mrs. Peterson had been married for 55 years and was the trustee of the Peterson Family Trust when the couple's only son died suddenly. After her son's death and her husband's move to an Alzheimer's facility, Mrs. Peterson, 78, met McComb, who pretended to be her nephew.

McComb convinced Peterson to obtain a $250,000 loan secured by her primary residence to invest in a nightclub joint venture. (Wood, p. 158.) Lawyer, who also represented McComb in the joint venture, performed legal services for Mrs. Peterson: He met with Mrs. Peterson and McComb to discuss financing of the nightclub; found Mrs. Peterson a lender; advised her about lenders; selected a lender; gathered and prepared documents necessary to close the loan; transmitted documents under cover of his letterhead; communicated with the lender and title company; reviewed loan documents, and attended the loan escrow closing with her. (Ibid.) Lender paid Lawyer a $4,000 referral fee (Mrs. Peterson's loan had an 18.41% APR interest rate.) All net loan proceeds were distributed directly to McComb. Thereafter, McComb repaid a loan from Lawyer of $10,000 from the loan proceeds. (Wood, p. 159.)

Even though he was aware that Mrs. Peterson was elderly and that her husband had been incapacitated by Alzheimers, Lawyer did not: (1) inform Mrs. Peterson that he was not acting as her attorney; (2) disclose the $4,000 referral fee or the $10,000 loan repayment; (3) provide Mrs. Peterson with conflict disclosures or waivers; (4) refer Mrs. Peterson to independent counsel; (5) advise Mrs. Peterson of the risks of the nightclub investment; (6) advise her that the loan terms were inappropriate for her; or (7) refer her to an accountant or financial adviser. (Wood, pp. 159, 163.)

Because she could not afford the payments, Mrs. Peterson defaulted on the first payment, and the lender commenced foreclosure proceedings. Mrs. Peterson died within two months of obtaining the loan. A successor Trustee filed an action against McComb, Lawyer and Lender. The foreclosure proceedings were stayed pending the outcome of the litigation, Lender and Trustee settled (Lender reconveyed the mortgage for about $118,000 in interest), McComb disappeared and Lawyer proceeded to a bench trial. The court ruled against Lawyer and awarded damages to Trustee of $122,322.23 (Trustee's payment of interest to Lender of $118,322.23 and the $4,000 referral fee) as well as statutory attorney fees (Welf. & Inst. C., §15657.5, §(a)). Lawyer appealed. (Ibid.)

The Court of Appeal affirmed the findings of legal malpractice, breach of fiduciary duty and financial elder abuse (Welf. & Inst. C., §15610.30). (Wood, pp. 158, 165.)

The Court held that the above-cited factors amply supported the existence of an attorney-client relationship between Lawyer and Mrs. Peterson. Additionally, Lawyer introduced himself to Trustee as his aunt's (Mrs. Peterson) lawyer in a business transaction. (Wood, p. 163.)

In this transactional malpractice case, Trustee proved that the client could have obtained a more favorable result (Viner v. Sweet (2004) 117 Cal.App.4th 1218, 1224, 12 Cal.Rptr.3d 533): (1) If Lawyer had properly advised Mrs. Peterson, more likely than not the loan transaction would not have occurred. (2) Lawyer's conduct forced Trustee to protect Mrs. Peterson's assets by defending the foreclosure proceedings. (Wood, p. 164.)

The Court also affirmed a finding of Lawyer's financial elder abuse and an award of costs and attorney fees, based upon Lawyer's undisclosed referral fee (since this finder's fee was paid through the loan proceeds) and his knowing, aiding and abetting McComb's abusive scheme to take the $250,000. (Wood, pp. 164-165.) The Court rejected Lawyer's argument that there was no evidence that he knowingly assisted McComb, responding:

"[Lawyer] knew what the loan proceeds would be used for. Any attorney would know it was an inappropriate use of Mrs. Peterson's funds.' (Wood, p. 165.)

Which do you think is the most egregious?

• Ellen R. Peck, a former State Bar Court judge, is a sole practitioner in Escondido and a co-author of The Rutter Group California Practice Guide: Professional Responsibility.

Certification

• This self-study activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of one hour of legal ethics.
  
  
• The State Bar of California certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education in legal ethics.

Self-Assessment Test

Indicate whether the following statements are true or false after reading the MCLE article. Use the answer form provided to send the test, along with a $25 processing fee, to the State Bar. If you do not receive your certificate within four to six weeks, call 415-538-2504.

1. If the parties do not specify that the award shall be binding, a fee arbitration award under the California Mandatory Fee Arbitration Act ("MFAA") can never be binding upon an attorney.
2. To prevent a non-binding fee arbitration award under the MFAA becoming binding, a party has 90 days to file a request for a trial de novo after the mailing of the notice of a fee arbitration award under the MFAA.
3. If an MFAA award against a lawyer has become binding and a lawyer has not paid the award, the State Bar is required to enforce the award by placing the attorney on involuntary inactive status until the refund has been paid.
4. Before a lawyer is placed upon involuntary inactive status, the attorney has a right to file a response in the State Bar Court and have a hearing.
5. A lawyer cannot have an administrative appeal of a hearing judge's ruling to the State Bar Court Review Department.
6. If a lawyer is unhappy with a State Bar hearing judge's ruling that she should be placed on involuntary inactive suspension for failure to pay a binding fee arbitration award under the MFAA, the lawyer must seek direct California Supreme Court review.
7. The federal court abstention doctrine requires a federal district court, absent extraordinary circumstances, to abstain from interference with ongoing state proceedings when: (1) state proceedings are ongoing; (2) important state interests are involved; and (3) the plaintiff has an adequate opportunity to litigate federal claims in the state proceedings.
8. The abstention doctrine only applies to judicial courts, not to the State Bar Court, which is an administrative court.
9. The abstention doctrine applies only to State Bar disciplinary proceedings and not to State Bar proceedings to enforce a fee arbitration award against an attorney.
10. Rule 2-100(A), California Rules of Professional Conduct ("CRPC") prohibits a lawyer representing one client from communicating directly or indirectly with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the permission of the other lawyer.
11. CRPC 2-100 is intended to preserve the attorney-client relationship from an opposing attorney's intrusion and interference.
12. Even if a lawyer contacts a represented opposing party without the permission of opposing counsel in violation of CRPC 2-100(A), the mere fact of such improper contact does not automatically render a settlement agreement arising from the improper contact unenforceable.
13. Other important public policies such as settlement of disputes and enforcement of contracts must give way to the more important policy of enforcing CRPC 2-100 in the trial courts of this state.
14. A superior court judge has the authority to penalize a lawyer for violation of CRPC 2-100.
15. Plaintiff enters into a settlement with Defendant for a recovery of funds in exchange for dismissal of a civil action within 10 days. Defen-dant pays all of the funds due and Plaintiff spends them. Thereafter, Plaintiff may not keep the money and continue the action against Defendant.
16. In transactional legal malpractice cases, the plaintiff must prove that, but for the malpractice of the lawyer, it is more likely than not the plaintiff would have obtained a more favorable result.
17. A lawyer is exempt from liability for financial abuse of elder clients.
18. Lawyer, who handled a loan transaction for an elder client and who received an undisclosed referral fee of $4,000 from the lender, may never be liable for financial elder abuse because the amount is nominal.
19. A lawyer does not engage in financial elder abuse by aiding and abetting a joint client to engage in financial elder abuse of another client.
20. In an action for financial abuse of an elder client, a finding that the lawyer engaged in financial abuse of an elder client may subject the lawyer to pay the costs and attorney fees of the elder's representative in that action.