Risk Management Tip: Understanding Duties to Third Parties, Part 2

By Jennifer Becker, Long & Levit

An attorney’s primary duty to a client is tempered by the overriding duty in all settings to be truthful.
In the transactional setting there is no protection for attorneys from claims by non-clients when an attorney engages in affirmatively deceitful conduct. In Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282 (rev. den. 10/27/04) buyer’s attorneys withheld a disclosure about their client’s financing which would have revealed its precarious financial condition. In addition, the attorneys provided the seller’s counsel with a “sanitized” disclosure, and prepared a misleading consent form which the seller signed. Shortly before the closing the attorneys filed a public document which revealed the client’s financial condition; the seller did not see the document and learned of the true condition of the client long after the closing.

In Vega the attorneys did not merely express a non-actionable opinion about their client’s financing, they actively concealed facts by providing a sanitized version of the disclosure. Active concealment or suppression of facts by a non-fiduciary is the equivalent of a false representation, which is actual fraud. Limitations on an attorney’s professional duty of care to non-clients do not apply to liability for fraud. Id. at 292.

The public filing did not absolve the attorneys’ concealment. The fact that this information exists somewhere in the public domain is not conclusive. The sanitized disclosure raised questions about whether the attorneys intentionally concealed information to induce Vega to believe the transaction was standard. Id. at 295.

Favila v. Katten, Muchin, Rosenman, LLP (2010) 188 Cal.App.4th 189 again applied the fraud exception in a transactional setting. In Favila a law firm represented a corporation when the founding shareholder sold 80% of his stock to the corporation, a transaction never consummated. After the founding shareholder died, the law firm assisted the corporation’s minority shareholder sell the assets of the corporation to his new corporation. The estate of the founding shareholder alleged the attorneys conspired with the majority shareholder to defraud the estate by making false statements that the shareholders had agreed to the sale. The case could move forward because the attorney had affirmatively made a false statement in the transaction. Id. at 211-12.

To manage risk, attorneys should carefully observe the line between making affirmative representations, and passing forward information supplied by a client. The lure of helping a client or becoming a “deal closer” should not eclipse the duty to be truthful. Careless attorneys may take the fall for a client’s fraud.

About the Author
Jennifer Becker is certified by the State Bar of California, Board of Legal Specialization in Legal Malpractice, and is Chair of BASF’s Legal Malpractice Section.  She is a partner at Long & Levit, and the Editor-in-Chief of Long & Levit’s Lawyers and Judge’s Blog, www.longlevit.com/blog/, which is searchable by topic and case name.