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NEW JERSEY LAWYER

PROFESSIONAL LIABILITY
The Lawyers Source

www.njlnews.com July 7, 2008

Civil liability?

Failing to report misconduct

By Teresa M. Cinnamond On April 23, 2008, the Appellate Division issued a decision that should raise concern about potential malpractice claims against attorneys who accept assignments from other attorneys, as well as attorneys who perform work involving estates where another attorney serves as estate executor. In Estate of Spencer v. Gavin, 400 N.J.Super. 220 (App. Div. 2008), the Appellate Division reversed summary judgment granted to Woodbridge attorney Dean Averna. His firm rented space in a building owned by attorney Daniel Gavin, who served as executor and administrator of the estates of a mother and her two daughters (estates). Gavin misappropriated approximately $400,000 from the estates. Within months, Gavin died of cancer. The question before the court: Was Averna who did not participate in the thievery liable to the estates because he failed to report Gavins malfeasance? The trial court dismissed the complaint against him, reasoning (1) the injury to the estates was caused by Gavin and his wife, not the fellow attorney; and (2) while the Averna may have had a moral responsibility to report Gavins wrongdoing to the authorities, that obligation did not translate to liability for Gavins criminal acts. Reversing the trial court, the Appellate Division held that a duty to report a fellow practitioners criminal acts is mandated by principles of legal ethics, tort law, and public policy, so long as the attorney is shown to have had actual knowledge of the other lawyers wrongdoing. The Appellate Division found the trial court failed to recognize this duty as a matter of law and remanded the case to the trial court for an adjudication of the attorneys potential liability to the financially depleted estates. If it is proved the attorney knew of but failed to report the misappropriation of estate funds, a jury will decide whether his nonfeasance proximately caused injury to the estates. and defendants who are found liable in negligence). Averna had done some limited legal work for the estates. At Gavins request, he had prepared documents to create a charitable foundation for which he was paid $2,500, and drafted a contract on behalf of the foundation for repairs at a church, for which he was paid $350. The courts conclusion that the attorney owed a duty to report Gavins misdeeds, assuming he actually knew of them, is buttressed by two significant factors, one circumstantial and the other legal.

Nature of relationship
The first factor grows out of [the attorneys] close and regular working relationship with Gavin: Averna had worked in Gavins building for three years, accepted referrals from Gavin of 10 to 15 cases, shared fees with Gavin on those cases and inherited Gavins former paralegal and his former personal office [in the building]. The court considered but was not persuaded by the fact that Gavin and Averna were not law partners, nor was there a de facto partnership since there was no evidence of joint control over a common business, commingling of revenues or disbursements or the sharing of overall profits. The court noted that while other lawyers perceived that Gavin was grooming [the attorney] to take over his practice, a different attorney took over the practice after Gavins death. The court also considered that a letter may have been sent by the attorney to his malpractice insurer stating Gavin was to become of counsel to his firm and that the name of the firm was to change. However this change never occurred.

This latter proof would seem relatively simple, given the courts acknowledgement Gavin pilfered $400,000. See also, Blazovic v. Andrich, 124 N.J. 90 (1991); Grubbs v. Knoll, 376 N.J. Super. 420 (App. Div. 2005) (permitting a finding of proximate cause where fault may be apportioned between intentional tortfeasors

Reprinted with the permission of New Jersey Lawyer July 7, 2008

The rules
The second factor cited by the court supporting its decision is RPC 8.3(a): A lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyers honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority. According to the Appellate Division, if the requisite knowledge existed, [the attorney] would have had a professional obligation, owed not only to his clients but to the public at large, to bring Gavins thefts to light.

RPC and professional negligence relationship

Traditionally, New Jersey courts have recognized that a lawyers violation of a rule of professional conduct does not, standing alone, establish professional negligence. See Baxt v. Liola, 155 N.J. 190, 276 (1998); Albright v. Burns, 206 N.J. Super. 625 (1986) (a lawyers failure to meet an ethical obligation may be considered evidence of malpractice but does not establish negligence per se); Sommers v. McKinney, 287 N.J. Super. 1, 13 (App. Div. 1996). Arguably, nothing more than the violation of RPC 8.3(a) need be shown to prove the breach of the attorneys duty of care. Estate of Spencer stresses that potential liability based on a failure to report misconduct is only imposed if the attorney actually knew of the misconduct. But, based on the plain language of the rule, such knowledge already is an element of a RPC 8.3(a) violation. Thus, Spencer arguably broadens the traditional rule that violation of a RPC does not establish negligence per se. Moreover, historically, lawyers who failed to report a colleagues wrongdoing have been disciplined only where there was a much closer working relationship between the two attorneys and the attorney who failed to report was directly involved in the wrongdoing. See In re Gold, 115 N.J. 239 (1989) (an attorneys knowledge and failure to report a fellow attorneys merger of a firm trust fund and business account as well as numerous and frequent overdrafts was sufficient to warrant a five-year suspension); see also In re Pavilonis, 98 N.J. 36 (1984) (rejecting the notion that an attorney who took the Pennsylvania Bar examination by representing to be his wife violated the disciplinary rule addressing an attorneys duty to report).

to the imposition of civil liability, and they should carefully choose attorneys from whom to accept assignments particularly those for a common client. While limited retainer agreements specifying obligations to a client can also be useful, particularly where it is unclear which entities or individuals are your client(s), such agreements arguably are of little or no help where the issue is a violation of RPC 8.3(a), which does not pertain directly to the nature and scope of legal services to be rendered.

Insurance?
Another issue is whether professional liability insurance policies will afford coverage for an attorneys failure to report misconduct under RPC 8.3(a). Professional liability policies cover an attorneys liability for rendering or failing to render legal services. It may be argued that Avernas failure to report the misappropriation of estate assets did not arise from the work he performed for the foundation. In addition, an insurer may assert a lawyers decision not to report misconduct was intentional. Intentional acts are typically excluded from malpractice policy coverage. See e.g., Greenberg & Covitz v. Natl. Union Fire Ins. Co. of Pittsburgh, Pa., 312 N.J. Super. 251 (App. Div. 1998) (upholding the enforcement, albeit under different circumstances, of a policy exclusion for dishonest, intentional, fraudulent or malicious acts). The imposition of a duty of care on the part of the attorney is not synonymous with a finding that coverage exists under that attorneys professional liability policy should a coverage dispute arise. An appeal has been filed by Avernas defense counsel.

Duty of attorneys to clients and non-clients

While Estate of Spencer found the existence of an attorney-client relationship between the attorney and one of the estates, the court did not find any attorney-client relationship between the attorney and the other two estates. Nonetheless, the court held Averna owed a duty to all three. As an initial matter, the court rejected the argument the attorneys client was the estates executor rather than the estate itself. Cf. Barner v. Sheldon, 292 N.J. Super. 258 (Law Div. 1995)(holding the client is the executor of the estate and not the estate itself when the attorney is retained by an executor to perform specific tasks in connection with the estate); Estate of Albanese v. Lolio, 393 N.J. Super. 355 (App. Div. 2007)(holding that an attorney breached a duty of care to the executrix of an estate by failing to define the scope of his representation but that the attorney did not owe a duty of care to the estates beneficiaries). In finding that a duty of care was owed to the non-client estates, the court arguably looked beyond traditional common law limiting the circumstances under which an attorney owes a duty of care to a non-client. See Petrillo v. Bachenberg, 139 N.J. 472 (1992)(holding an attorney breached a duty to a non-client where the attorney negligently prepared percolation reports relied on by the non-client property buyer); see also Stewart v. Sbarro, 142 N.J. Super. 581 (1976) (holding an attorney breached a duty to a non-client where the attorney failed to communicate, within a reasonable time, his failure to obtain the agreed upon signatures of his client indemnifying the non-client against loss of liability for existing corporate debt). These cases require reliance by the non-client on the words or conduct of the attorney before liability will be allowed. In Estate of Spencer, a duty of care has been imposed absent similar evidence of reliance. The court reasoned that the Spencer estates all implicitly relied upon Averna to be faithful to their best interests, and to not turn a blind eye if he learned that the executor was plundering estate funds.

Plenty of remaining questions

Spencer calls into question the scope and breadth of an attorneys duty of care to report misconduct and the civil liability that may result. For example, where an attorney who regularly refers cases to you overbills a client, practices law while under the influence of alcohol, or informs you he is avoiding calls from a client, is there potential civil liability if you fail to report? Where assignments are received from another attorney serving as an executor of an estate, is any and all misconduct on the part of that executor a valid basis for imposing civil liability if the attorney becomes aware of misconduct and fails to report? And will the New Jersey courts enforce a duty of care owed only to the public so that deviations from the RPC become sufficient grounds, in and of themselves, for the imposition of civil liability? Spencer tells practitioners their failure to report misconduct under RPC 8.3(a) can lead

Teresa M. Cinnamond is a senior associate at Carroll, McNulty & Kull in Basking Ridge. She focuses on professional and general liability defense litigation and insurance coverage litigation. Reach her at (908) 848-6300. Associate Enitan O. Otunla assisted in research for the article.

Reprinted with the permission of New Jersey Lawyer July 7, 2008