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Lawyer Breached Duty, Must Forfeit Fees For Ignoring Conflicts Among Joint Clients

Wednesday, February 1, 2012

By Joan C. Rogers  

A lawyer breached his fiduciary duty to a client twice over by representing three parties with conflicting interests in the same matter, and was properly ordered to disgorge some of the fees that the client had paid him, the U.S. Court of Appeals for the District of Columbia Circuit decided Jan. 20 (So v. Suchanek, D.C. Cir., No. 10-7071, 1/20/12).

In an opinion by Judge A. Raymond Randolph, the court held the attorney violated the ethics rule on current-client conflicts—and thereby breached his fiduciary duty—by simultaneously representing multiple clients when an objective lawyer would not have concluded that the attorney could provide competent and diligent representation to each of them.

The court also determined that the attorney's breach of duty to the client regarding one co-client in particular was even more extensive than the district court found. On remand, Randolph said, the judge must order a greater amount of disgorgement of fees to remedy the lawyer's “rampant misconduct.”

Aftermath of Ponzi Scheme

The rulings came in a malpractice action filed by Kevin So, a Chinese businessman, against Leonard Suchanek, a former administrative law judge who represented So and others in litigation arising from an international Ponzi scheme.

So, who does not speak English, authorized Nancy Yan Lu to act as his agent in investment matters. Lu signed an investment agreement between So and Land Base LLC, a California entity operated by Boris Lopatin. Under this agreement, So transferred $30 million to an HSBC bank account in London, with the funds to be administered by a Land Base affiliate controlled by Michael Brown.

Although the investment initially appeared to be a success, the “profits” turned out to be fictitious, and HSBC learned that Brown had been running a pyramid scheme. So's $30 million investment disappeared. HSBC filed suit in London against So, Lu, Brown, and others seeking to absolve itself of any responsibility for the loss.

Staying the Course

Early in the litigation, Lopatin of Land Base referred Lu to Suchanek, and she hired him to assist in recovering So's funds.

Suchanek began representing both Lu and So in July 2006 even though he was already representing Land Base in connection with the HSBC lawsuit. While representing the three of them, Suchanek prepared a legal opinion concluding that Land Base's agreements with So and other investors did not facilitate an illegal scheme. Suchanek terminated his representation of Land Base in late August 2006.

So began to lose trust in Lu just a few months into the joint representation, and he shared these doubts with Suchanek. For example, So complained to Suchanek that Lu had attempted to fire a law firm representing them in London without his consent, and that Lu had lied to Suchanek about So's willingness to pay for her share of the legal fees.

Suchanek attempted to maintain the joint representation by corresponding separately and confidentially with So and Lu. Although he eventually urged So to drop Lu as an agent when So said that she had falsified a witness statement bearing his name, Suchanek continued to represent the two of them until Jan. 31, 2008, when he finally ended his representation of So.

So then sued Suchanek for malpractice and breach of fiduciary duty. After a bench trial, the district court concluded that Suchanek breached his fiduciary duty by representing conflicting interests during two distinct time periods. It ordered the lawyer to disgorge $400,000 of his fees, plus interest, which the court found was roughly equal to the sum Suchanek collected during the two periods in question.

On appeal, Suchanek sought to have the judgment reversed, while So sought disgorgement of the approximately $1 million in fees that Suchanek allegedly paid himself over the course of the representation from money So had wired him for litigation expenses.

Conflicted Representations

The court of appeals upheld the district court's finding that Suchanek violated District of Columbia Rule of Professional Conduct 1.7 by simultaneously representing So and Land Base in July and August of 2006. Quoting from a District of Columbia court decision, Randolph observed that under D.C. law “a violation of the Rules of Professional Conduct ‘can constitute a breach of the attorney's common law fiduciary duty to the client.'”

The court focused on Rule 1.7(b)(2), which directs that a lawyer must not represent a client if the representation of another client is likely to be adversely affected, except as permitted by paragraph (c). That exception applies if each affected client provides informed consent and if the lawyer reasonably believes that he can provide competent and diligent representation despite the conflict.

Although the Land Base agreement made certain warranties against loss to So's $30 million, Randolph said, Suchanek never advised So of any potential claims he might have against Land Base. The court also pointed out that while Suchanek was representing both Land Base and So, he prepared an opinion on behalf of Land Base that undercut any claims So might have had against Land Base.

Under these circumstances, the court found, Suchanek's representation of Land Base clearly compromised his representation of So in violation of Rule 1.7(b)(2). Because Suchanek could not have reasonably believed that he was capable of providing competent and diligent representation to both of these clients, it added, he breached his fiduciary duty to So.

The court also upheld the district court's finding that Suchanek's dual representation of Lu and So violated Rule 1.7 during the final five months in which he represented So. During that period, So told Suchanek that Lu was undermining him and exceeding her authority as his agent, and that she had falsified a witness statement bearing his name.

Those accusations raised an objective doubt that Suchanek could continue to “wholeheartedly and zealously” represent both of them as stated in Comment [7] to Rule 1.7, yet Suchanek continued the joint representation without making any effort to obtain So's informed consent, the court said.

Objective Doubts

The court decided, however, that Suchanek's fiduciary breach arising from his dual representation of So and Lu spanned a greater period of time than the final five months in which he represented So.

Although Suchanek claimed that he did not initially perceive a conflict between Lu and So, “we are not concerned with his subjective impressions,” the court said. It stated:

Under Rule 1.7, the question is whether there was “any reason to doubt [Suchanek's] ability to provide wholehearted and zealous representation” to both Lu and So. … This depends on whether an objective observer—with Suchanek's prior knowledge of Lopatin, Land Base, and the particulars of the fraudulent scheme—would have had a “reasonable doubt” of his ability to represent jointly a victim of the scheme and the person who got him involved in it in the first place.

This doubt-raising situation clearly existed at the outset and would have deepened as the representation progressed, the court said. It found that Suchanek was fully aware of So's accusations about Lu's conduct, and that any reasonable attorney would have been aware that a conflict existed between Lu and So.

But rather than addressing the conflict through the informed consent process specified in Rule 1.7, the court said, Suchanek attempted to assuage So's concerns by telling him that their communications were secret and would not be disclosed to Lu. Comment [16] to Rule 1.7 makes clear that joint representation will almost certainly be inadequate when such confidences are necessary, Randolph pointed out.

More Disgorgement, Please

The court found that the district court's error in assessing the extent of the conflict between Lu and So may have influenced the scope of its selected remedy because it grounded the amount of fee forfeiture on the amount Suchanek paid himself during the time periods in which it found that conflicts existed.

The appellate court therefore sent the case back to the district court to order a supplemental remedy. In fashioning this remedy, the court said, the judge should consider the full extent of Suchanek's conflicts, the need to deter attorney misconduct, the fundamental equitable principle that fiduciaries should not profit from their disloyalty, and the decreased value of the services provided to So.

The Restatement (Third) of the Law Governing Lawyers §37 cmt. e (2000) states that “Ordinarily, forfeiture extends to all fees for the matter for which the lawyer was retained,” the court noted.

David G. Tripp, Reston, Va., argued for So. Jason H. Ehrenberg of Bailey & Ehrenberg in Washington, D.C., argued for Suchanek.

For More Information

Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-8qppyk.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and BNA.

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