A FINE LINE
When does giving legal advice become assisting a client with fraud?
By Sylvia E. Stevens
The principal obligation of a lawyer in representing a client is to pursue zealously the interests and objectives of the client within the bounds of the law. As stated in DR 7-101(A), a lawyer must not intentionally 'fail to seek the lawful objectives of the lawyer’s client through reasonably available means permitted by law and these disciplinary rules.' At the same time, the lawyer is responsible to the law and the rules governing the conduct of lawyers. It is no defense to a violation of a disciplinary rule that the lawyer acted on the client’s instructions. DR 1-102(C); MR 5.2(a). Although the lawyer-client relationship is grounded in part on principles of agency, a lawyer is nevertheless required to exercise independent judgment about the ethical limits of her conduct.
One place where the disciplinary rules limit the activities of a lawyer on behalf of a client is DR 7-102(A)(7), which instructs that a lawyer shall not 'counsel or assist the lawyer’s client in conduct that the lawyer knows to be illegal or fraudulent.'1 This prohibition against advising clients to engage in fraud or illegal conduct does not, however, preclude a lawyer from discussing the legal consequences of a proposed course of conduct or from assisting a client in a good faith determination of the validity, scope or meaning of the law.2
The rule that a lawyer can discuss, explain and predict the consequences of a proposed course of conduct, but cannot counsel or assist in the wrongful conduct, is akin to the prohibition against aiding and abetting a criminal actor. Not surprisingly, the rule is easier to state than to apply. When does providing information or advice become encouragement or facilitation? When will a lawyer’s warnings, intended to deter wrongful conduct, be regarded as tacit instructions on how to engage in it successfully? When does failure to withdraw constitute ratification or participation?
The comment to ABA Model Rule 1.2(d) is helpful. It states that a lawyer is not prohibited from giving an honest opinion about the actual consequences that are likely to result from a client’s conduct. Also, the fact that the client uses the lawyer’s advice to commit a crime or fraud does not make the lawyer a party to the conduct. 'There is a critical distinction between presenting an analysis of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity.' The comment also notes that determining the validity or interpretation of a statute or regulation may require a course of action involving disobedience of the statute or regulation or of the interpretation placed upon it by the government.
Counseling about fraud or illegal conduct means advising the client about the legality of contemplated activities with the intention of facilitating or encouraging the client’s action. Assisting means providing professional services, such as document preparation or negotiations, with the same intent. §94(2) Restatement 3d, The Law Governing Lawyers, Comment a. Lawyers routinely advise clients about activities on which the law is uncertain. A lawyer who does so with the intention of providing help on how to comply with the law does not act wrongfully even if the client uses the advice for the wrong purpose or if a court subsequently determines that the advice was incorrect. If the lawyer’s advice is wrong because of negligence, the lawyer may be liable to the client for the harm caused, but the lawyer will not be subject to professional discipline for counseling wrongful conduct.
For purposes of DR 7-102(A)(7), fraud refers to conduct that is actionable in Oregon in a tortious sense. In re Hockett, 303 Or 150, 157-158, 734 P2d 877 (1987) (fraud requires, among other things, 'a false representation to another with the intent that the other act upon the false representation to his or her damage'). ABA Model Rule 1.0 defines fraud as 'conduct that is fraudulent under the substantive or procedural law of the applicable jurisdiction and has a purpose to deceive.' Accordingly, fraud may include the failure to provide information without which a statement is materially false.
DR 7-102(A)(7) prohibits assisting with conduct the lawyer 'knows' is fraudulent. The Oregon Code has no definition of 'knows,' but ABA Rule 1.0 defines it as 'actual knowledge of the facts in question.' The ABA Standards for Imposing Lawyer Sanctions, which the Oregon Supreme Court consistently applies in deciding disciplinary cases, defines 'knowledge' as 'the conscious awareness of the nature or attendant circumstances of the conduct but without the conscious objective or purpose to accomplish a particular result.' While a lawyer has no general duty to investigate a client’s affairs, the lawyer must inquire further when it would be reasonable to do so. Clearly, a lawyer cannot ignore obvious warning signals about the client’s purpose in seeking the lawyer’s help. Actual knowledge of the client’s intent can be inferred from the circumstances, and a lawyer’s intentional facilitation can be inferred if it should have been apparent to the lawyer under the circumstances that the client would use the lawyer’s help to further wrongful conduct and the lawyer provided the help nonetheless. On the other hand, mere suspicion that the client might commit fraud is not enough to make it improper for the lawyer to offer assistance, including advice about the possible consequences of various courses of action.
The Oregon Supreme Court has discussed the application of DR 7-102(A)(7) in a number of cases. The seminal case is In re Hockett, supra, which is cited in every subsequent opinion. In Hockett, the lawyer assisted two couples with sham divorces to shield the husbands’ interest in marital assets from creditors. The transfers were subsequently set aside as fraudulent. The court expressly recognized that a lawyer must be able to advise and assist clients without fear of discipline if the lawyer is wrong in interpreting close questions of law. 'He or she must be given some latitude to be wrong.' 303 Or at 160. Upon the facts before it, the court held that neither the lawyer nor his clients had engaged in any fraud 'in a tortious sense,' because there was no false representation with the intent that it be acted upon. However, the court found a violation of DR 7-102(A)(7) because the lawyer knew the property transfers were forbidden by statute and therefor illegal. The lawyer was suspended for 63 days.
The lawyer’s conduct in In re Dinerman, 314 Or 308, 840 P2d 50 (1992), led to the opposite conclusion. The lawyer took out loans in his own name as an accommodation for his client, whose borrowing exceeded the bank’s lending limits. The court found there was no clear and convincing evidence that the lawyer knew he was helping his client violate banking laws. However, the court found that the lawyer knew the loans were fraudulent when he assisted his client in obtaining them. The lawyer was suspended for 63 days.
Another case in which the lawyer was found to have assisted his client with fraud is In re Benson, 317 Or 164, 854 P2d 466 (1993). There, the lawyer assisted his client in creating sham encumbrances on real property as a way to get advance warning of a possible criminal forfeiture action against the property. The lawyer argued that the transaction were not fraudulent because there was no intent to mislead. The court disagreed, finding clear evidence that the lawyer intended that the false nature of the mortgages go undetected and that they would be acted upon to give the desired notice. The lawyer was suspended for six months.
Not every incident of helping a client transfer assets will violate DR 7-102(A)(7), if the lawyer has no fraudulent intent. In In re Taylor, 319 Or 595, 878 P3d 1103(1994), the lawyer took a trust deed on the client’s unencumbered property to secure fees for anticipated criminal and civil charges arising out of an automobile accident that resulted in a death. Shortly thereafter, the lawyer helped the client cash out three installment contracts. The contract proceeds were delivered to the client, who lost the money gambling. Reiterating that DR 7-102(A)(7) prohibits only assisting a client with conduct that the lawyer knows to be fraudulent, the court found no violation of the rule. The court found that the trust deeds on client property were bona fide security for fees and not an attempt to put the assets out of the reach of the client’s creditors. The court also accepted the lawyer’s contention that the purpose of cashing out the contracts was to have funds available to offer a structured settlement. In the absence of fraudulent intent, the lawyer’s delivery of the cash to the client was not unethical and the lawyer was not responsible for the client’s subsequent dissipation of the cash. The lawyer was found not guilty of the charges.
Lawyers are not clairvoyant and the client’s wrongful intent will not be imputed to the lawyer. In re Claussen, 331 Or 252, 14 P3d 586 (2000). In that case, the lawyer’s client sought bankruptcy protection after the entry of an adverse judgment. One of her assets was an insurance policy purchased shortly before the bankruptcy filing. Upon motion by a creditor, the court indicated it would dismiss client’s bankruptcy on the ground that it was filed in bad faith. Before the court entered the order, the lawyer assisted the client in cashing in the policy without informing the insurance company of the status of the bankruptcy; the client subsequently absconded with the money. The court declined to find that the lawyer had assisted his client with fraud in violation of DR 7-102(A)(7), because there was not clear and convincing evidence of his wrongful intent. The court found equally plausible the bar’s contention that the lawyer was motivated to help his client keep the cash from her creditors and the lawyer’s argument that he was following his client’s legitimate demand for her money. The court noted that while the lawyer’s opinion may have turned out, in hindsight, to be incorrect, he had a good faith basis for helping the client secure the cash. The complaint was dismissed.
Recently, the court had an opportunity to address how a lawyer’s knowledge of the client’s fraud can be inferred from circumstances and the inadequacy of the 'willful blindness' defense. In In re Albrecht, 333 Or 520, 42 P3d 887 (2002), the lawyer was accused of knowingly assisting his clients with a money-laundering scheme in violation of federal law. The lawyer admitted to receiving and depositing money into his trust accounts over a period of time and then disbursing the money to the clients at their direction. The lawyer also admitted that the money came from the clients’ illegal drug activity, but denied having actual knowledge of that fact at the time he received and disbursed the funds. He also denied that he knew the trust account activities were designed to conceal the illegal source of the money. The lawyer claimed to be the unwitting dupe to his talented con-men clients.
The court found several facts that led to 'objectively reasonable inferences' that the lawyer understood the purpose of the trust-account transactions and the unlawful source of the funds. For instance, the lawyer knew that one of the clients had been involved in illegal drug activity in the past, all the deposits were in amounts less than $10,000, and many of the cashier’s checks given to the lawyer bore names that were obvious aliases. The court also noted that the lawyer handled these clients’ funds in a 'markedly different' manner than he did other client funds. Specifically, the court found that the lawyer’s careful deposits toward the end of the representations could only suggest that he had become concerned about criminal exposure.
As these cases indicate, the line between advising a client about questionable activities and knowingly assisting the client with fraud is not clear and bright. Every case must turn on its own facts. Lawyers can take comfort in the knowledge that they will not be subject to discipline merely because the client uses the lawyer’s well-intentioned advice to engage in wrongful conduct or because the lawyer’s good-faith advice about unsettled law turns out to be wrong. At the same time, we cannot turn a blind eye to the obvious and assume that by not questioning the client’s motives or intent we are insulated from all risk. The discipline rules allow room to be wrong, but not to encourage or facilitate wrong-doing.
ABOUT THE AUTHOR
Sylvia E. Stevens is assistant general counsel of the Oregon State Bar. Reach her at (503) 620-0222, ext. 359, or by e-mail at firstname.lastname@example.org.
1. See, also, ABA Model Rule 1.2(d).
2. This permission is explicit in ABA Model Rule 1.2(D) and the comment thereto. A similar permission may be inferred from DR 7-102(A) (2), which allows the assertion of a claim or defense unwarranted under existing law if it can be supported by 'good faith argument for an extension, modification or reversal of existing law. Also, DR 7-106(A) allows a lawyer to take appropriate steps 'in good faith to test the validity' of a standing rule or ruling of a tribunal.
© 2003 Sylvia E. Stevens