Failure to End Quiescent Representation Disqualified New Firm as Opponent's Counsel

By Joan C. Rogers  

Where a lawyer retained by litigants for a limited purpose did not affirmatively end the representation before joining the law firm representing the clients' opponent, the litigants remained the lawyer's clients, thus requiring disqualification of his new firm, the Montana Supreme Court held Jan. 31 (Krutzfeldt Ranch LLC v. Pinnacle Bank, Mont., No. 11-0213, 1/31/12).

Speaking for the court, Justice Beth Baker explained that because the lawyer took no steps to declare an end to their attorney-client relationship, the litigants remained the lawyer's current clients and did not become ex-clients. Therefore, Baker said, the lawyer's new firm, which represents the opposing party, could not remedy the conflict through screening measures that might have worked in the former-client context.

In any event, she added, the firm's implementation of the screen one week after the lawyer's arrival was too late.

Move Through Merger

William and Julie Krutzfeldt sued Pinnacle Bank after the bank refused to continue disbursing funds under a loan designed to help them develop a subdivision. Donald L. Harris represented the Krutzfeldts in the litigation, and Jeffrey J. Oven of the Crowley Fleck law firm represented the bank.

In June 2010, while the litigation was pending, Harris retained attorney Lance Hoskins of Brekke & Hoskins to advise him and the Krutzfeldts about liability, settlement, and tax ramifications. At a meeting in July to discuss the case and Hoskins's initial tax research, Harris told him that the trial date was set for Feb. 28, 2011, and that a settlement conference would take place in late 2010 or early 2011. A couple of days later, Hoskins sent Harris an engagement letter along with a bill.

On Jan. 5, 2011, Harris received a “Dear Client” letter from Brekke & Hoskins announcing that the two partners had joined the Crowley firm on Jan. 1. Harris called Crowley right away to inform Oven of the conflict. On Jan. 7 at 3:16 p.m., he sent Oven an e-mail requesting that Crowley withdraw as counsel for Pinnacle Bank.

Crowley responded that same day, saying that it had established a screen to prevent Hoskins and his former partner from having any involvement in the Krutzfeldt case. The letter enclosed an e-mail that Crowley sent out to its personnel at 4:23 p.m. informing them about the screen.

The conflict dispute reached the supreme court after the trial court rejected the plaintiffs' motion to disqualify the Crowley firm. In an opinion citing decisions from around the nation, along with secondary sources on the law of lawyering, the court concluded that the Crowley Fleck firm may not continue as counsel for Pinnacle Bank in the Krutzfeldts' lawsuit.

Still Current Clients

Applying the Montana Rules of Professional Conduct, the court rejected the firm's argument that Hoskins's clients necessarily became former clients when he moved to Crowley.

“The attorney-client relationship is not automatically terminated when a lawyer joins another firm,” Baker wrote. Attorneys cannot avoid the automatic disqualification rule applicable to concurrent conflicts by unilaterally converting a present client into a former client before the hearing on a motion for disqualification, she pointed out.

The court found that the Krutzfeldts remained Hoskins's current clients under Rule 1.7 at the time he joined the Crowley firm. Even if grounds for withdrawal existed under the engagement letter Hoskins sent to the Krutzfeldts, Baker said, Hoskins did not actually withdraw before accepting his new position. Hoskins never told the Krutzfeldts that his work for them had ended, never terminated his representation of them, and never advised them that he was planning to join Crowley, the court noted.

Baker also emphasized that both the engagement letter and the “Dear Client” letter contemplated prospective legal services, and the fee statement from Hoskins did not indicate that it was a final bill. It was reasonable for the Krutzfeldts to believe that the attorney-client relationship still existed, the court found.

Baker said it was unimportant that Hoskins played only a secondary role in the litigation before he joined Crowley. “His limited specific role in the case does not diminish his professional obligations to the Krutzfeldts,” she wrote.

The court pointed out that a lawyer's current-client conflict under Rule 1.7 is automatically imputed to his firm under Rule 1.10(a), whereas under Rule 1.10(c), a lawyer's former-client conflicts under Rule 1.9 from work at another firm are not imputed to a lawyer's new firm if the lawyer is timely screened and certain other conditions are met.

Because the Krutzfeldts were current clients rather than former clients when the law firms merged, Crowley could not use screening under Rule 1.10(c) to prevent the imputation of Hoskins's conflict of interest, Baker said.

Even if the Krutzfeldts had become Hoskins's former clients, she continued, the firm's screening measures were untimely and therefore inadequate because they were instituted only after the Krutzfeldts raised the conflict.

Prejudice From Conflict

As for whether the Crowley firm must discontinue representing the bank, the court found that the Krutzfeldts had made a sufficient showing of prejudice to warrant disqualification, especially considering that they filed their motion within days of discovering the conflict.

Baker noted that as a result of the conflict the Krutzfeldts had to get the trial date postponed so that they could retain new tax counsel, and they lost the money they had invested in Hoskins. More fundamentally, the court said, they lost their attorney's loyalty.

Allowing attorneys to switch sides in the middle of litigation threatens the public's trust in the legal profession, the court stated. If disqualification were not required in this situation, it said, clients would be left without meaningful recourse for protection against lawyers' noncompliance with conflicts rules. Disciplinary action is an inadequate remedy for a party that had no prior notice of the conflict and acted diligently, it added.

Pursuing New Affiliation

Sharing her thoughts on how lawyers should go about changing firms, Baker said that the professional conduct rules do not bar lawyers from pursuing new employment while they are currently serving clients. A lawyer may terminate representation when withdrawal can be accomplished without material adverse effect on the client's interests, she pointed out, citing Rule 1.16(b)(1).

Baker suggested that Hoskins could have delayed his move to Crowley until after trial in the Krutzfeldts' case, or he could have discussed with them his wishes to join the firm before the trial and taken appropriate steps to withdraw from the representation. In that event, she said, Crowley could have implemented a proper screen to protect their confidences.

A lawyer must promptly inform the client, Baker continued, when engaging in concrete discussions about future employment with an adversary's law firm. “‘Without effective client consent … the lawyer must terminate all further discussions concerning the employment, or withdraw from representing the client,'” she wrote, quoting the Restatement (Third) of the Law Governing Lawyers §125 cmt. d (2000).

“Unfortunately, neither protocol was followed in this case,” she observed.

Donald L. Harris of Harman, Warren & Harris in Billings, Mont., argued for the Krutzfeldts. Peter F. Habein of Crowley Fleck, Billings, argued for Pinnacle Bank.

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