Crime-Fraud Exception Didn't Defeat Privilege For Firm's Internal Probe of Partner's Theft

By Joan C. Rogers  

The Maine Supreme Judicial Court Dec. 8 upheld a finding that the crime-fraud exception did not defeat the attorney-client privilege for a law firm's internal investigation of a partner's theft (Bd. of Overseers of the Bar v. Warren, Me., No. Cum-11-32, 12/8/11, further proceedings in 25 Law. Man. Prof. Conduct 610).

The court's opinion, written by Justice Ellen A. Gorman, also addresses disciplinary charges that bar counsel filed against members of the firm's executive committee after the partner's misconduct came to light. Applying a “wholly subjective” test, the court held that the six members of the committee did not violate the rule on reporting another attorney's misconduct even though they did not notify the bar of a colleague's misbehavior.

The court concluded, however, that under an objective standard, the committee members violated the rule requiring partners to use efforts to put measures in place to ensure that all firm lawyers comply with ethics rules. The firm had no policies or practices that called for its leadership to consider reporting a self-destructing partner, and the executive committee allowed the miscreant partner to continue practicing without adopting appropriate measures to supervise his conduct, the court explained.

Internal Probe

John Duncan practiced with the Verrill Dana law firm for nearly three decades before his secretary discovered discrepancies in a client's account.

After learning of the problem in June 2007, the firm's managing partner, David E. Warren, confronted Duncan and alerted the firm's executive committee. Duncan repaid the partnership $77,500 and offered to resign, but the committee deferred action on that offer and decided that Warren should notify the head of the firm's private clients group so that practices could be implemented to prevent similar problems in the future.

With the executive committee's acquiescence, Warren put off that step for several months out of concern that the extra attention might drive an already fragile Duncan “over the edge.” When the head of the private clients group was finally informed of the problem in early October, he reviewed more of Duncan's client accounts and discovered additional problems.

The firm's in-house general counsel, Gene Libby, learned of Duncan's misconduct problem when he received notice that Duncan's secretary was pursuing an employment action against the firm. Libby launched an investigation and retained outside counsel.

An independent audit revealed that Duncan had also billed clients for work he had not performed and taken money from those clients' accounts to “pay” himself. At that point, the firm immediately fired Duncan and notified the Maine board of bar overseers, along with federal and state prosecutors. Duncan was permanently disbarred in 2008 for misappropriating some $300,000 from the firm and its clients by diverting payments to himself personally.

Crime-Fraud Exception Inapplicable

Meanwhile, Libby resigned from the firm and notified bar counsel that he had learned what he believed to be unprivileged knowledge of lawyer misconduct during the investigation.

Bar counsel issued a subpoena to Libby for his testimony and production of documents concerning the misconduct. Verrill Dana filed a motion to quash. A single justice of Maine's high court reviewed the disputed documents in camera and concluded that they came within the crime-fraud exception to the privilege.

In an initial appeal on the privilege issue, the full court reversed and remanded, holding that to defeat the firm's privilege claim bar counsel must prove by a preponderance of the evidence that the firm as client was planning or engaging in criminal or fraudulent activity when the attorney-client communications took place, and that the firm intended to use the communications to facilitate or conceal the criminal or fraudulent activity. See 25 Law. Man. Prof. Conduct 610.

On remand, the single justice granted Verrill Dana's motion to quash bar counsel's subpoena, finding that Libby and the firm had a lawyer-client relationship, that the firm had met the requirements for invoking the lawyer-client privilege, and that the crime-fraud exception did not apply.

In this second look at the privilege issue, the full court upheld the order granting the motion to quash. The crime-fraud exception did not apply, Gorman said, because the single justice determined that the firm was not planning or engaged in any fraudulent activity at the time it enlisted Libby's help in the matter, and that the firm did not intend to facilitate or conceal any fraudulent or criminal conduct in the communications with Libby.

No Violation of Reporting Rule

Reviewing findings in the disciplinary case that bar counsel filed against Warren and five other partners acting as Verrill Dana's executive committee, the court agreed with a single justice that the lawyers' four-month delay in reporting Duncan's misconduct to authorities did not violate the predecessor rule to Maine Rule of Professional Conduct 8.3.

After the conduct at issue in this case, the state's former Code of Professional Responsibility was replaced by the Maine Rules of Professional Conduct, but the former standards invoked against the lawyers are the same in substance as the current rules, according to the court.

The court explained that when a lawyer knows of a rule violation by a colleague, the lawyer must determine two things in deciding whether she has an obligation to report the misconduct under Rule 8.3: (1) whether the other lawyer's conduct relates to his honesty, trustworthiness, or fitness to practice law; and (2) whether the conduct is sufficiently serious to raise a “substantial question” about at least one of these three traits.

Whether an attorney has a “substantial question” about a colleague's honesty, trustworthiness, or fitness to practice is a “wholly subjective” test that requires a determination of what the attorney's actual belief was at the time, Gorman said.

Applying these principles, the court observed that for many lawyers the initial discovery of Duncan's misbehavior certainly would have raised a substantial question. However, the six respondents in this case each testified that it never occurred to them that Duncan's mishandling of funds gave rise to a reporting obligation under the rule. Moreover, they admitted that they never discussed whether they should review the bar rules or consult the firm's counsel.

This testimony, the court said, supports the single justice's finding that the six lawyers did not subjectively believe that Duncan's acts raised a substantial question about his honesty, trustworthiness, or fitness as a lawyer. They reported Duncan as soon as they realized their trust was misplaced, the court pointed out.

Commenting on certain arguments made by the parties in this case, the court declared that the duty to report does not depend on the identity of the victim (client or firm itself) or whether the acts were criminal in nature. A lawyer may have a duty to report misconduct under Rule 8.3 even if the victim is a colleague rather than a client, and even if the lawyer is not criminally liable, the court made clear.

Violation of Supervisory Duty

The court decided, however, that the lawyers violated the predecessor rule to Rule 5.1(a), which requires partners in a law firm “to make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform” to ethics rules.

Rule 5.1(a) requires law firm partners to make efforts to enact procedures that will deter unethical behavior, such as professional ethics education, policies or procedures for addressing ethical concerns, and an “ethical atmosphere,” Gorman said.

Firms should have policies and procedures designed to avoid conflicts of interest, ensure that deadlines are met, account for client funds, and provide supervision and support to inexperienced lawyers, the court said, adding that compliance with Rule 5.1(a) is judged by an objective standard of reasonableness.

The court acknowledged that the members of the executive committee were caught off guard by Duncan's conduct and treated him with compassion. Nevertheless, it concluded that “when a firm's practices and policies do not require the firm's leadership to at least consider whether it has an ethical obligation to report a colleague in the circumstances presented by this case, we are compelled to find, as a matter of law, that the firm failed to have in effect” measures giving reasonable assurance of lawyers' compliance with ethics rules.

Informal supervision does not suffice under Rule 5.1(a) when an attorney is suffering from a serious emotional impairment, the court said. Warren permitted Duncan to continue practicing law for more than three months without putting any additional measures in effect to ensure Duncan's compliance with ethics rules, and the firm's ethics committee went along with that approach, the court said. It concluded that as a matter of law the partners who were acting as the firm's executive committee violated the supervision rule.

The court noted that under another rule—the predecessor to current Rule 5.1(c)(2)—partners and supervising attorneys have a duty to prevent or rectify the harm caused by a rule violation if any of them learn of the harm at a point when there is still an opportunity to take corrective action.

The record supported the single justice's finding, the court said, that after the six lawyers in this case discovered Duncan's misconduct, there were no consequences from the delay in reporting that could have been avoided or mitigated.

The court remanded for entry of judgment and an appropriate sanction to be imposed.

Dissent: No Violation Proved

In a concurring and dissenting opinion, Justice Joseph M. Jabar disagreed with the majority's holding that the members of the executive committee violated their obligation to adopt measures needed to ensure ethical behavior by all lawyers in the firm.

Jabar pointed out that the respondents presented an ethics expert who testified that Verrill Dana's policies and practices were no different from those in place at his own firm and at other law firms around the state. Bar counsel did not controvert that opinion and did not present any other evidence establishing that the firm did not have proper policies and procedures, he contended.

Bar Counsel J. Scott Davis, Augusta, Me., argued for the Maine Board of Overseers of the Bar. Peter J. Rubin of Bernstein Shur in Portland, Me., argued for the respondents.

Full text at .  

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

Copyright 2011, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.