Bar News - October 18, 2017
Ethics Corner: A Question on Potential Conflicts Involving Prospective Clients
Dear Ethics Committee:
A real estate broker has contacted me to represent him before the Real Estate Commission and in a Superior Court action. Both actions are based on a complaint from a homeowner whom the broker assisted with a sale of a home. The homeowner alleges that the broker intentionally undervalued her home to get a quick sale (and thus an easy commission). She asserts claims of fraud, misrepresentation and professional misconduct.
After I filed my appearances, I was chatting about the case with one of my partners over lunch. Upon hearing the name of the parties, she told me that she had talked with the homeowner about six months ago when the homeowner came in for possible assistance with some permitting for a new septic and for a variance. My partner and the homeowner discussed this on two occasions so my partner could understand the dimensions of the problem. Once my partner learned the scope of the proposed projects she went to the Registry to see which abutters might be affected. My partner soon realized that one of the abutters was a large client of our firm, and she then did no further work for the homeowner.
I was troubled by this information after I had checked our conflict system and found no record of this contact. My partner told me that the homeowner’s name was not entered into the firm’s system since the homeowner was never a client. Though my partner is sure the homeowner was told that the firm would not be handling the case, there was no written record of any such communication. I think I may have a conflict; my partner thinks I am wrong. Can I continue to represent the broker?
Thanks for your help.
We will assume, for purposes of this answer, that your partner made clear to the homeowner that she was not accepting the case. If this was not done and there remains legitimate confusion on the homeowner’s part regarding the representation, the homeowner might be able to claim that she believed the firm accepted the case and that she is a current client of the firm. You then may have more significant problems than a potential conflict of interest, such as being liable for inaction due to a lapsed statutes of limitations.
In order to avoid situations like this, the Committee recommends, as risk management advice for future cases, that your firm ensure it either has a physical or an email address at which to contact the potential client and that you send a clear and simple declination letter to the prospective client. In most cases, the letter or email should not offer any legal advice, but should state that you are unable to accept the matter, and encourage the person to seek other counsel immediately since there could be filing deadlines or statutes of limitation running on any potential claims.
Assuming the homeowner was informed that your partner was not accepting the case, the homeowner would likely be deemed a prospective client under the ethics rules because the homeowner appears to have provided “information to a lawyer regarding the possibility of forming a client-lawyer relationship with respect to a [particular] matter” and did not fall within any of the exceptions to the rule. See NH Rules of Professional Conduct (NHRPC), Rule 1.18(a). Under that rule, you and your partner owe the homeowner only a duty of confidentiality but not the full loyalty duties a lawyer owes to a current client. The rule on prospective clients allows a good deal of flexibility in subsequent representation of parties opposing the prospective client. However, you must evaluate a number of issues before reaching a conclusion on whether you can do that in this matter.
Since the homeowner is a prospective client of your firm, you need to first determine whether your partner, herself, would be able to represent the real estate broker in light of her former conversations with the homeowner. If your partner’s work was substantially related to the current client matter and the information that was actually “received and reviewed” and could be substantially harmful in the new matter, your partner would be disqualified under the Rule 1.18. Even though the broker has not sought her representation personally, the rest of the firm could be disqualified as well.
Here, your firm will need to do a bit more factual investigation. Since you will not want to be exposed to any additional information the homeowner provided to your partner, you should have a third lawyer in your firm do this investigation. The investigator will have to determine if the information your partner likely would have received during the consultation with the prospective client-homeowner would be relevant and useful in the defense case for the broker. Note that this test does not look at what your partner actually learned from the homeowner. Rather, as in the assessment of potential conflicts involving former client cases, the rule uses a broader test to avoid requiring a client actually to disclose confidences in order to protect them; rather a lawyer’s possession of confidential information may be based merely on the nature of the services provided. See NHRPC 1.9, cmt. 3.
Interestingly, the second part of section (c) of Rule 1.18 conversely focuses on the actual information that was received and reviewed by your partner and asks whether this could be potentially harmful information in terms of the claim that the broker undervalued the house. This will turn on a number of factors, such as whether the septic or other problems were well known at the time of the new case.
Assuming for purposes of your question that your firm concludes that your partner would be disqualified, the question becomes whether you, nonetheless, can continue in the defense of the broker. Unlike the general conflict rules on former and current clients, which impute conflicts to the whole firm (with the limited exception of conflicts caused by lateral hires, see NHRPC 1.10), Rule 1.18(d) allows a firm to continue in the matter, even without client consent, if:
- The initial lawyer (here your partner) took reasonable steps during conversations with the homeowner to receive and review only that information reasonably necessary to determine whether to accept the case. NHRPC 1.18(d)(2);
- The firm took steps to screen your partner in a timely fashion. NHRPC 1.18(d)(2)(a);
- The firm insures that no part of the fee from the new matter will be apportioned to your partner. Id.; and
- The firm provides written notice to the prospective client. NHRPC 1.18(d)(2)(b).
Additionally, representation can proceed if both the current client (broker) and prospective client (homeowner), give informed consent in writing. NHRPC 1.18(d)(1) and 1.0(e) (defining “informed consent”). While this may be feasible in certain non-adversarial representations, it is unlikely the current client and prospective client will agree in this case.
Of course, in this case there also are factual issues you will need to consider to decide if you can use the Rule 1.18(d)(2) exceptions to allow the representation. For example, did your partner reasonably limit the interview process in accord with the rule? We know that this can be a difficult line to draw in practice. Also, is your firm organized in a manner that will allow you to set up a legitimate screen? For example, do you have adequate procedures, resources, and space to limit access of the partner to your files or the firm’s electronic systems, and can you keep support staff from passing information back and forth? See e.g., U.S. Filter Corp. v. Ionics (D. Mass., 1999)(casting doubt on small firm screening). This requirement, combined with the need to have a third lawyer to do the initial fact finding, makes Rule 1.18 less useful for smaller firms.
Providing written notice to the client should not be an issue. Also, satisfying the fee provision is likely not as daunting as it may sound. The ABA Comment 7 to Model Rule 1.18 notes that this requirement “does not prohibit the screened lawyer from receiving a salary or partnership share established by prior independent agreement,” but bars payment of “compensation directly related to the matter in which the lawyer is disqualified.”
The Ethics Committee provides general guidance on the New Hampshire Rules of Professional Conduct and publishes brief commentaries in the New Hampshire Bar News. New Hampshire lawyers may contact the Committee for confidential and informal guidance on their own prospective conduct or to suggest topics for “Ethics Corner” commentaries by emailing Robin E. Knippers.