Corporate Counsel May Be Liable to Client for Submitting Written Instead of Oral Report

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By Samson Habte  

Nov. 4 --An oncologist and his closely held cancer clinics stated valid malpractice claims against the companies' outside attorneys for preparing a damaging internal memo at the request of the clinics' in-house counsel whose ouster was imminent and who allegedly used the document to “blackmail” the companies, the Texas Court of Appeals, 14th District, held Oct. 31 (D'Andrea v. Epstein, Becker, Green, Wickliff & Hall, P.C., 2013 BL 302369, Tex. App. 14th Dist., No. 14-12-00494-CV, 10/31/13).

The decision reinstates a lawsuit that Dr. Mark A. D'Andrea and Gulf Coast Cancer & Diagnostic Center of Southeast Inc., as well as affiliated entities, filed against a law firm that represented them separately, in unrelated matters, over the years.

Writing for the court, Justice J. Brett Busby said the plaintiffs plausibly alleged the law firm knew that Gulf Coast's in-house counsel was about to be fired and “was assembling evidence to use against” the company when he asked the firm to draft a memo containing “largely unsubstantiated allegations” of internal fraud.

“A reasonable jury could conclude that the firm's knowledge of these facts at the time it sent the memo to [the general counsel] made it foreseeable that [the general counsel] would use the memo against Gulf Coast, the firm's client,” Busby wrote.

D'Andrea has a cause of action personally, the court added, in alleging that the firm acted disloyally by submitting a report critical of his corporate actions even though he remained a client of the firm in a separate matter.

Accordingly, the panel reversed a trial court order that dismissed the plaintiffs' claims for negligence, breach of fiduciary duty and fraud.

Damaging Memo

According to the opinion, D'Andrea is the self-described “de facto owner” of Gulf Coast, a group of affiliated oncology clinics. The defendants, attorney Stephen R. Cochell and the law firm Epstein, Becker, Green, Wickliff & Hall, represented D'Andrea and Gulf Coast in various matters.

The defendants were also advising Gulf Coast's in-house general counsel, Kirk A. Kennedy, who had indicated his position with the company was shaky and wanted a referral to a plaintiffs' employment lawyer. Soon thereafter, Kennedy asked Epstein Becker to prepare a memorandum on possible corporate misconduct. The firm's report “contained serious allegations against D'Andrea,” the court stated.

The memo's stated purpose was to “to apprise [Gulf Coast's] President and Board … as to Gulf Coast's potential … exposure … arising from Dr. D'Andrea's alleged misconduct.” Discussing the circumstances surrounding the memo's preparation, the court stated:

Kennedy's largely unsubstantiated allegations against D'Andrea provided the factual basis for the opinions in the memo; the firm performed no independent investigation. As work on the memo progressed, the firm received indications that Gulf Coast would soon fire Kennedy or may have fired him already. The firm also received indications that Kennedy would use the memo in litigation against Gulf Coast. For example, Kennedy specifically asked that the firm's memo inform Gulf Coast's president about a statute making it illegal to fire whistleblowers.  

 

“Notwithstanding the indications that Kennedy was adverse to its actual client, Gulf Coast, the firm emailed the memo to Kennedy,” the court said.

According to the opinion, “Kennedy's possession of the memo ultimately caused D'Andrea and Gulf Coast considerable expense and frustration,” as the ousted in-house counsel would later allege that “he was fired because he obtained an outside opinion of wrongdoing.”

The plaintiffs countered that Kennedy “tried to use the memo to blackmail Gulf Coast into paying money that was not owed.” They also asserted that the document “all but destroyed” D'Andrea's practice.

Questions of Fact

Gulf Coast and D'Andrea sued Cochell and Epstein Becker for negligence, breach of fiduciary duty and fraud. A trial court dismissed all of those claims on summary judgment.

It held that D'Andrea lacked standing because the law firm represented Gulf Coast, not him personally, in preparing the memo, and because the firm's representation of D'Andrea in an unrelated bankruptcy case did not give rise to a duty in connection with the memo.

The trial court also granted summary judgment against Gulf Coast. Even if the firm's preparation of the memo was negligent, it held, Kennedy's “unforeseeable use of the memo” broke the chain of causation between that negligence and the harm to Gulf Coast.

The appeals court reversed. Both D'Andrea and Gulf Coast had standing, it held, and the defendants' liability in either instance will hinge on questions of fact that should be tried before a jury.

Question of Law, Not Ethics

The panel rejected the conclusion that the defendants owed D'Andrea no duty because he was not a client as to the memo and thus lacked standing to assert the rights of Gulf Coast.

“It is undisputed that the firm represented D'Andrea in unrelated bankruptcy litigation at the time it produced the memo,” Busby noted. Accordingly, he said, the firm owed him duties as a current client, including fiduciary duties of loyalty and good faith.

The relevant question is the scope of the firm's duties to D'Andrea and “whether the firm breached them by preparing the memo or engaging in other allegedly actionable conduct,” Busby explained.

The panel noted that the summary judgment ruling may have been based on a different ground: that Texas Disciplinary Rule of Professional Conduct 1.06, which governs conflicts of interest, did not prohibit the firm “from representing D'Andrea in the bankruptcy litigation while also preparing the memo,” and that compliance with the ethics standard relieved the firm of civil liability.

That holding would also be erroneous, Busby said. “The flaw in the firm's argument is that a violation of the disciplinary rules is not necessary and may not be sufficient to establish civil liability for attorneys,” he explained. Moreover, D'Andrea's expert testified that preparing a memo that “required the firm to attack directly the integrity of its current client” would clearly be inconsistent with the duty of loyalty, the court said.

Paper Trail

The panel also disagreed with the trial judge's finding that, “even if the firm's preparation of the memo was negligent, Kennedy's unforeseeable use of the memo broke the chain of proximate causation between this negligence and the harm to Gulf Coast.”

“First, there was evidence that a reasonably prudent attorney would carefully consider not opining in writing upon allegations like Kennedy's because the writing could later be used against the attorney's client. Second, Kennedy's own actions raise a fact issue regarding whether his use of the memo against Gulf Coast was foreseeable,” the court stated.

On the first issue, the court said that Gulf Coast introduced sufficient evidence to support its argument that “preparing a written investigation report can breach the standard of care because it is foreseeable the document will become public.”

That evidence included advice in the American College of Trial Lawyers' Recommended Practices for Companies and Their Counsel in Conducting Internal Investigations 11 (2008), which warns that written reports of internal investigations “typically [have] limited utility and [carry] great risk.” Accordingly, that source says, the “goal at the outset of an internal investigation should be frequent updating by oral reporting,” and “[c]areful consideration should be given to the extent to which written reports should be rendered, if at all.”


“[T]he standard of care requires lawyers to consider carefully whether to opine in writing during internal investigations because written opinions have the potential to harm clients.”

 

Justice J. Brett Busby

This evidence and other expert testimony suggest that “the standard of care requires lawyers to consider carefully whether to opine in writing during internal investigations because written opinions have the potential to harm clients,” the court concluded.

The factual basis for the foreseeability defense is also suspect, Busby added. The firm, he explained, “received indications that Kennedy was considering litigation against Gulf Coast, raising a fact issue regarding whether Kennedy's betrayal of Gulf Coast was foreseeable.”

“[W]hen the firm sent a copy of the memo to Kennedy,” Busby explained, “it knew that: Kennedy was about to be fired or perhaps already had been fired; litigation over his firing was possible; Kennedy had recruited a recently-fired employee to help investigate Gulf Coast; and Kennedy wanted Gulf Coast on notice that it was a violation of the law to fire him for reporting the allegations in the memo.”

“A reasonable jury could conclude that the firm's knowledge of these facts at the time it sent the memo to Kennedy made it foreseeable that Kennedy would use the memo against Gulf Coast, the firm's client,” the court concluded.

Eugene B. Wilshire of Wilshire & Scott P.C., Houston, argued for the plaintiffs. N. Terry Adams Jr. of Beirne Maynard & Parsons LLP, Houston, argued for the defendants.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com


Full text at http://www.bloomberglaw.com/public/document/MARK_A_DANDREA_MD_GULF_COAST_CANCER__DIAGNOSTIC_CENTER_OF_SOUTHEA.

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