BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 1997-10
(Inquiry No. )
Lawyer’s duties when representing the executor of an estate, or the estate, or both; disclosure of alleged fraud by the executor; withdrawal from continued representation.
The question of to whom an attorney for the executor of an estate owes a duty in the event of the executor’s fraud — whether to the executor, or to the estate, or to both — is a question of law which is beyond the jurisdiction of this Committee — but we may give advice based on alternative legal assumptions. If the attorney’s client is solely the executor, then any confidences and secrets learned during the course of the attorney-client relationship with the executor would be confidential and could not be divulged. If the attorney’s client is solely the estate, then the acts of the executor must be disclosed to the beneficiaries and to the tribunal. If the attorney represents both the executor and the estate, then the executor’s fraud must be disclosed to the beneficiaries or the tribunal. If continued representation of the executor or the estate or both would result in violation of a disciplinary rule, then the attorneys must seek to withdraw from the representation.
Inquiring attorneys state that during the “representation of the executor of an estate” it became necessary to sell the decedent’s home. At closing the executor received a check for the full purchase price. Upon reviewing the monthly bank statements to prepare the final accounting, inquiring attorneys discovered that the executor had deposited the proceeds of the sale into his personal bank account. The bank statements reveal there have been numerous withdrawals from the personal account and it is now almost completely depleted.
Upon realizing that executor had apparently converted funds of the estate, inquiring attorneys made numerous attempts to contact the executor and set up appointments to tell him of his obligation to restore the funds to the estate. The executor has either canceled the appointments or failed to show. Inquiring attorneys have been unable to contact the executor since he failed to show for the last appointment.
1. To whom do inquiring attorneys owe their fiduciary duty: the executor, the estate, or both?
2. Do inquiring attorneys have a right or obligation to inform the beneficiaries of the executor’s apparent misappropriation of funds?
1. The question as to whom the inquiring attorneys owe a fiduciary duty is question of law which is beyond the jurisdiction of this Committee.
2. If it is determined that inquiring attorneys’ client is only the executor, then any “confidences” or “secrets” of that client as defined by DR 4-101(A) may not be divulged to the beneficiaries, except those that may be disclosed when required by law or court order. If, on the other hand, the client is only the estate, then the attorneys must take appropriate measures to protect the estate, including disclosure of the apparent misappropriation of funds. In either situation, the attorneys may be required to withdraw.
Inquiry No. 1: Inquiring attorneys have stated to this Committee that they represent the executor of an estate, and have asked us whether their client is the executor himself, or the estate as a whole, or both. This is a question of law which is beyond the jurisdiction of this Committee to answer. However, we can advise inquiring attorneys that the answer is not clear. As one commentator has stated:
A majority of authorities addressing this issue conclude (more or less) that the personal representative is the client, although many also state that a duty — akin to a fiduciary duty — runs from the attorney directly to the beneficiaries of the fiduciary entity. Unfortunately, the imprecise manner in which courts and ethics opinions address this question — and the mixed signals they give by the inaccuracy of their analysis and description — leaves a great deal of confusion.
Jeffrey N. Pennell, Comment, Representations Involving Fiduciary Entities: Who is the Client?, 62 FORDHAM L. REV. 1319, 1321 (1994)
New York courts have held that beneficiaries are prohibited from bringing suit against the executor’s lawyer. See Kramer v. Belfi, 106 A.D.2d 615, 482 N.Y.S.2d 898 (2nd Dept. 1984). Other cases have held that intended beneficiaries cannot bring a case for legal malpractice against an attorney who drafted a will. See Spivey v. Pulley, 138 A.D. 2d 563, 526 N.Y.S. 2d 145 (2d Dept. 1988); Viscardi v. Lerner, 125 A.D.2d 662, 510 N.Y.S. 2d 183 (2d Dept. 1986). While it may seem that the client is the executor himself, New York courts have also held that “an attorney for a fiduciary has the same duty of undivided loyalty to the beneficiaries as the fiduciary himself.” Gibbs v. Breed, Abbott & Morgan, 170 Misc.2d 493, 649 N.Y.S.2d 974 (Sup. Ct. N.Y. Co. 1996), citing Matter of Clarke, 12 N.Y.2d 183, 237 N.Y.S.2d 694 (1962), and In Re Bond & Mortgage Guaranty C ., 303 N.Y. 423 (1952).
One New York court has embraced California’s hold in a that a court must balance several factors to determine whether liability extends to a third person not in privity with an attorney. Such factors include:
the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the decree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.
Baer v. Broder, 106 Misc.2d 929, 436 N.Y.S.2d 693 (Sup. Ct. Suffolk County 1981), citing Donald v. Garry, 19 Cal. App.3d 769, 97 Cal. Rptr. (1971).
Recently, Surrogate Preminger of New York County held that the trustee of a charitable trust could not assert the attorney-client privilege to withhold disclosure of communications between the trustee and his counsel bearing on the trustee’s decision to eliminate or reduce payments to certain charitable beneficiaries. Matter of Community Service Society, N.Y.L.J, Nov. 14, 1997, at 26. The Community Service opinion addresses whether or not a trustee’s fiduciary duty to the trust’s beneficiaries limits or abolishes the attorney-client privilege. In answering this question, the court cited Hoopes v. Carota, 142 A.D.2d 906, 531 N.Y.S.2d 407 (‘ )d Dept. 1988), aff’d, 74 N.Y.2d 716, 544 N.Y.S.2d 808 (1989), in which the trial court had required a trustee to testify regarding the legal advice he received from counsel in connection with the trust. Affirming, the Court of Appeals in Hoopes explained (with citations omitted):
[U]nder these circumstances, where a fiduciary relationship is present, some courts have held that the attorney-client privilege should not attach it all while other courts have held that the privilege attaches but that it may be set aside by a showing of good cause. We agree with the Appellate Division that “good cause” is present here. Therefore, the communications are not privileged in any event.
Some of the other factors inquiring attorneys may wish inquiring to take into account in deciding who their client is include: the context, nature, and history of their relationship with the executor and the beneficiaries; and whether the attorneys were paid by the estate’s funds or by the executor’s own personal funds.
Inquiry No. 2: In analyzing the second inquiry, it is important to note that the New York State Bar Association’s Committee on Professional Ethics addressed almost precisely the same inquiry in N.Y. State 649 (1993). The Committee there opined that the lawyer should disclose the executor’s past misconduct unless the information was protected as a confidence for secret — and that whether it was so protected was a question of law.
The State Bar’s Committee on Professional Ethics also responded to a similar inquiry in N.Y. State 168 (1970). That inquiry presented the same question we are now facing, except that there the executor had made full restitution to the estate upon the lawyer’s demand. The Committee opined that once the executor had made full restitution, the lawyer’s obligation to preserve the confidences and secrets of his client prevented the lawyer from disclosing the executor’s wrongdoing to the Surrogate.
Alternative Assumptions About Who Is the Client
Here we will address the ethical obligations of the inquiring attorneys based on alternative assumptions about whom they represent.
Representing only the executor. If the client of the inquiring attorneys is only the executor, the attorneys are confronted with the obligations stated in DR 7-102(B)(1):
A lawyer who receives information clearly establishing:
The client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon the client to rectify the same, and if the client refuses or is unable to do so, the lawyer shall reveal the fraud to the affected person or tribunal, except when the information is protected as a confidence or secret.
In the case at hand, the inquiring attorneys appear to have information “clearly establishing” that the executor has committed a fraud upon a person (the estate). See BANC 44- 87; BANC 94-21; Inquiring attorneys also appear to have satisfied their duty of promptly calling upon the client “to rectify the same, ” although their efforts have thus far been unsuccessful. The question as to whether inquiring attorneys must “reveal the fraud to the affected person or tribunal” depends on whether this information is a “confidence” or “secret” as declined by DR 4- 101(A), which states:
“Confidence” refers to information protected by the attorney-client privilege under applicable law, and “secret” refers to other information gained in the professional relationship that the client has requested to be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client.
It is apparent that the information of the misappropriation of the estate funds would qualify “embarrassing ” and “likely to be detrimental to the client.” BANC 94-21 Therefore, if the client of the inquiring attorneys is the executor alone, the attorneys do not have the right to inform the beneficiaries of this information.
Representing only the estate. If the client of the inquiring attorneys is not the executor, but is instead only the estate (a scenario we consider unlikely), then we would reach a different conclusion. Representation of the estate would be representation of a separate “entity, ” and EC- 1 8 provides guidance as to how an attorney should proceed upon learning that a person connected with the entity has violated a legal obligation to the entity:
A lawyer employed or retained by a corporation or similar entity owes allegiance to the entity and not to a . . . representative, or other person connected with the entity. . . . Occasionally, the lawyer may learn that an officer, employee or other person connected with the entity is engaged in action, refuses to act, or intends to act or to refrain from acting in a manner related to the representation that is a violation of a legal obligation to the entity, or a violation of law which reasonably might be imputed to the entity, and is likely to result in substantial injury to the entity. In such event, the lawyer should proceed as is reasonably necessary in the best interests of the entity.
See also BANC 97-4 (outlining the duties of an attorney for a corporate client).
In the inquiry at hand, if the inquiring attorneys represent only the estate, then they have the right to “Proceed as is reasonably necessary in the best interests of the entity” (per EC 5-18), and they thus have the right to take appropriate measures to protect the estate.
Representing both the executor and the estate. If the inquiring attorneys represent both the executor and the estate, then the attorneys likewise have the right to take appropriate measures to protect the estate. However, the attorneys may possess confidences were secrets of the executor that they may not disclose unless permitted by DR 4-101(C).
The Propriety of Withdrawing from the Representation
The inquiring attorneys are faced with a very difficult situation, and if they continue to represent the estate, it will be at their peril. If they disclose the fraud and a court holds that the executor alone is the client, they may have violated DR 4-101. On the other hand, if the estate alone is the client and the attorneys hold their peace, they will have run afoul of EC 5-18 and possibly DR 7-102(B)(2), which provides that a non-client’s fraud upon a tribunal must the reported. In addition, even if the client is solely the executor, DR 7-102(A)(7) prohibits the attorneys from counseling or assisting a client in illegal or fraudulent conduct. Thus, DR 7- 102(A)(7) would preclude the inquiring attorneys from continuing to represent the executor because the executor refuses to rectify the fraud.
Inquiring attorneys must also be mindful of DR 5-105(B) and (C), which prohibit continued representation of multiple clients with differing interests unless each client consents after full disclosure and it is obvious that the attorney can adequately represent the interests of each client. And they must be mindful of DR 7-101(A)(2), which prohibits an attorney from failing to “carry out a contract of employment entered into with a client that for professional services” unless the attorney has properly withdrawn.
Therefore, we believe that inquiring attorneys must withdraw from the employment. Under DR 2-110(B)(2), withdraw is mandatory if continuing the employment will result in a violation of a disciplinary rule. As discussed above, it seems clear that such as the case here.
Furthermore, a lawyer may withdraw under DR 2-110(C)(1)(b) and (g) if a client persists in a course of action involving the lawyer’s services which the lawyer reasonably believes to the criminal or fraudulent, or has used the lawyer’s services to perpetrate a crime or fraud. In addition, a lawyer may withdraw under DR 2-110(C)(2) if continued employment is likely to result in a violation of a disciplinary rule.
We do not know from the facts given by inquiring attorneys whether or not a proceeding is pending in Surrogate’s Court. If so, withdrawal will require an application to the court because DR 2-110(A) requires that a lawyer seek court permission to withdraw where the miles of the court so provide. In any event, even if court permission is not required, DR 2-110(A)(3) requires the inquiring attorneys to take steps to avoid prejudice to the client, such as giving notice of withdrawal and allowing the client time to secure new counsel.
In view of the confusion as to the identity of the client and the persons to whom counsel owe fiduciary duties, we believe that in this case, whether or not court approval for withdrawal is needed, the inquiring attorneys should withdraw on notice to both the executor and the beneficiaries, and the notice should advise them both to retain independent counsel promptly. If the beneficiaries are the inquiring attorneys’ clients, such advice to them is mandatory. If the beneficiaries are not the inquiring attorneys’ clients, then the advice to retain counsel is still permissible under DR 7-104(A)(2) even if their interests conflict with those of the executor. The inquiring attorneys should note the mandatory nature of the language of DR 7-102(B)(1): when information as to a fraud is not protected as a confidence or secret, it must be disclosed.
[Approved by the Executive Subcommittee on December 9, 1997; approved by the Full Committee on December 17, 1997.]