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                                         138 N.J.L.J. 590
                                        October 10, 1994

                                        3 N.J.L. 2015
                                        October 17, 1994

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

Appointed by the Supreme Court of New Jersey

OPINION 677

Confidential Communications: Disclosure of
Information Concerning a Client's Act that the
Lawyer Reasonably Believes is Likely to
Perpetrate a Fraud Upon a Tribunal

    This inquiry presents thorny questions implicating the extent of an attorney's duty under RPC 1.6, Confidentiality of Information, to protect as confidential, communications received from a client, or to disclose that information to the proper authority. The relevant provisions of RPC 1.6 are as follows:

        (a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b) and (c).
        (b) A lawyer shall reveal such information to the proper authorities, as soon as, and to the extent the lawyer reasonably believes necessary, to prevent the client
    * * *
        (2) from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to perpetrate a fraud upon a tribunal.
        (c) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary:
        (1) to rectify the consequences of a client's criminal, illegal or fraudulent act in the furtherance of which the lawyer's services had been used;
    * * *
        (d) Reasonable belief for purposes of RPC 1.6 is the belief or conclusion of a reasonable lawyer that is based upon information that has some foundation in fact and constitutes prima facie evidence of the matters referred to in subsections (b) or (c).



    The factual predicate upon which the inquiry to this Committee is based involves the representation by a law firm ("firm") of a client ("client") whose business is subject to supervision and regulation by a department of the State of New Jersey ("department"). The department's investigation of the client was initiated by a "letter of inquiry" addressed to the client which sought information regarding the client's business practices involving the staffing of the client's branch offices within the State of New Jersey. During the course of its investigation, the department also requested information from the client relating to financial arrangements between the client and another entity ("lessor") from whom the client leased premises for use in its business.
    According to the inquiry submitted by the firm, the purpose of the department's subsequent request, as understood by both the client and the firm, was to ascertain whether the client compensated the lessor based upon a percentage of the revenues earned by the client from business conducted in the leased premises. The firm further advised this Committee that the basis for the department's inquiry relating to how the client compensated lessor was based upon the department's interpretation of a provision of the New Jersey Administrative Code which prohibited such compensation arrangements. Moreover, the firm's inquiry opines that it has "substantial doubt" as to whether the department's interpretation of this particular provision of the New Jersey Administrative Code would be upheld if challenged in a judicial proceeding.
    In response to the department's investigative request relating to the client's financial arrangements with lessor, the client advised the department that the lessor was compensated on a flat fee basis, and the lessor's compensation was not based upon a percentage of revenues earned by the client from its business conducted in the leased premises. At the time it was made, the firm believed the client's response to the department to be true and accurate. Based upon the client's response to the department's inquiry, the department's investigation of the client was resolved by the entry of a consent order that addressed certain business practices of the client, other than its financial arrangements with the lessor.
    Following the entry of the consent order, the firm discovered that at the time of the department's investigative request to the client, the client was compensating an affiliate of the lessor for the use of the affiliate's premises outside the State of New Jersey in accordance with a formula that included as one component, revenues earned by the client from the use of the lessor's premises in the State of New Jersey. The firm discovered this information during the course of its representation of the client in connection with another investigation,See footnote 1 1 of the client's business activities in another state. Upon discovering the client's financial arrangements with the affiliate of the lessor, the firm recommended to the client that it inform the department of this financial arrangement, but the client refused to do so, and terminated its relationship with the firm.See footnote 2 2
    The threshold issue for determination by this Committee in responding to the firm's inquiry is to determine whether the department is a "tribunal" within the meaning of RPC 1.6(b)(2). With respect to this issue, the firm's inquiry indicates that the department, although exercising "investigative and enforcement powers delegated to it by applicable law, ... conducted no formal hearings, and all information sought by the department was provided by the client through an exchange of correspondence, and an informal meeting with the department's staff." Assuming for purposes of our analysis that the department was acting "informally," we conclude nonetheless that the department was, in fact, a "tribunal" within the meaning of RPC 1.6(b)(2).
    The broad remedial purpose of the Rules of Professional Conduct adopted by the New Jersey Supreme Court to protect the public, and to guide attorneys in their conduct, should not turn on what Justice Cardozo described as the "tyranny of labels." Snyder v. Commonwealth of Massachusetts, 291 U.S. 97, 114 (1934). Indeed, in the case of In re Solid Waste Utility Customer List, 106 N.J. 508 (1987), the New Jersey Supreme Court analyzed the protean nature of administrative agencies:
        As an alternative to acting formally through rulemaking or adjudication, administrative agencies may act informally. (citations omitted). Although not discussed in judicial decisions or legal literature as often as formal action, informal action constitutes the bulk of the activity of most administrative agencies. 1 K. Davis, Administrative Law Treatise, § 1.4 at 14 (2d Ed. 1978); see also Shapiro, The Choice of Rulemaking or Adjudication in the Development of Administrative Policy, 78 Harvard Law Review 921, 924 (1965) (informal action is indispensable, widespread and perhaps abused). The various kinds of action can overlap, and the line between agency rulemaking and adjudication, on the one hand, and informal action, on the other, can become blurred. Part of the problem is the difficulty of defining "informal action."

        A negative definition of "informal action" is that it is statutorily authorized agency action that is neither adjudication nor rulemaking. (citation omitted). More specifically, Professor Davis defines "informal action" as "any action (or determination in favor of inaction) that is taken without a trial-type hearing." Id. Denotatively defined, informal agency action includes investigating, publicizing, planning, and supervising a regulated industry.

106 N.J. at 518-519.
    In this case, it is clear that the department decided not to act with respect to a particular regulation, that is, it entered a
consent order based upon the client's responses to its requests for investigation which did not address the client's financial arrangements with the lessor and its affiliate. Indeed, the inquiring firm assumes that had the information relating to the client's financial arrangements with the affiliate of the lessor been disclosed to the department, the department would have reached a different conclusion. While the department's investigative process in this case might well be fairly characterized as "informal," the consent order entered by the department concluding its investigation was certainly "formal" in the sense that it represented the termination of an "informal" investigatory process. Indeed, had the consent order been violated, there is no doubt that the department could have sought penalties for its violation, and attempted to enforce it through traditional judicial or agency proceedings. Therefore, since the department's investigation resulted in the entry of an enforceable consent order by the department, it was clearly acting in the traditional adjudicatory role of a tribunal.
    Having concluded that the department is a "tribunal" within the meaning of RPC 1.6(b)(2), we turn to the more difficult question of to what extent, if any, the firm was obligated to disclose the information it received regarding the client's business practices with the affiliate of the lessor to the department. Our analysis of this issue must be illuminated by the following facts set forth in the firm's inquiry to this Committee:

    1.    The firm believed that the additional information it discovered relating to the client's financial arrangements with the lessor's affiliate was relevant to the investigation conducted by the department.
    2.    The firm believed that if the client's financial arrangements with the lessor's affiliate had been disclosed to the department, the department may well have concluded that such an arrangement violated the applicable provision of the New Jersey Administrative Code and the department might have sought additional relief regarding this financial arrangement as part of the consent order.
    3.    The firm believed that the department's interpretation of the regulation in question was incorrect and would not withstand scrutiny if challenged in a subsequent judicial proceeding.
    4.    Despite the firm's recommendation to the client that it disclose this information to the department, the client declined to do so.
    5.    The client informed the firm that if it elected to disclose this information to the department on its own, the client believed that such a disclosure would violate the attorney-client privilege and the employment agreement between the firm and the client.
    6.    The client's failure to disclose this information to the department constitutes an ongoing fraud.
    7.    The client terminated the firm's services.

    Although RPC 1.6 is a rule of confidentiality which has its roots in the attorney-client privilege, "... an ancient concept 'firmly imbedded in our common law,'" In re Richardson, 31 N.J. 391, 396 (1960), Report of the New Jersey Supreme Court Committee on the Model Rules of Professional Conduct, June 24, 1983, at 10, (hereafter "Debevoise Committee"), the version of RPC 1.6 ultimately adopted by the New Jersey Supreme Court represents a significant departure from the traditional attorney-client privilege. As the Debevoise Committee noted, in weighing the competing values of "full disclosure" as compared to "confidentiality," it believed that the principle of "full disclosure" represented the dominant rule of public policy which was reflected in prior decisions of the New Jersey Supreme Court.
    The Debevoise Committee's Report to the New Jersey Supreme Court clearly articulates its view that under appropriate circumstances, full disclosure was required by public policy. As it noted in its report:
        The concerns of trial attorneys in evaluating information given to them by clients are a natural outgrowth of the broadening responsibilities imposed upon them by the rule under discussion. [RPC 1.6]. Nonetheless, the Committee believes that Model Rule 1.6(b)(1) should be adopted as proposed in the "Final Draft," with one change as discussed below. In past decades, the New Jersey Supreme Court has stated that, in the balancing act needed to resolve the conflicting principles of full disclosure versus confidentiality, the public policy demands that full disclosure is the more fundamental principle. In re Kozlov, 79 N.J. 232, 241-42 (1979); In re Richardson, supra, 31 N.J. at 296-97. The Committee further believes that any step less than acceptance by the Bar of proposed Rule 1.6 will diminish the public's esteem for the legal profession.

        ...

        Lawyers cannot be permitted to be the instruments of their clients' criminal and/or fraudulent activities. If the price is a lessening of clients' willingness to make full disclosure to their lawyers, so be it. It is the considered judgement of the Committee that the ACTL [American College of Trial Lawyers] proposal and the ABA House of Delegates amendments to this rule cannot be accepted. Even if the disciplinary rules were to permit lawyers to represent clients who were committing criminal and fraudulent acts without the attorney disclosing those acts so as to prevent their consummation, it would be illusory to think that the lawyers would be shielded from civil and criminal liability as participants in the crimes and frauds.

Debevoise Committee Report at 10.

    Model Rule of Professional Conduct 1.6, which was adopted by the American Bar Association in August, 1983, has served as the paradigm for the vast majority of states throughout the United States which have adopted Rules of Confidentiality. It provides:

        (a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraph (b).
        (b) A layer may reveal such information to the extent the lawyer reasonably believes necessary:
        (1) to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm; or
        (2) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client.


    Among those states which have adopted the Model Rule in some form, only New Jersey and Pennsylvania require disclosure of confidential information to prevent a client from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm or substantial injury to the financial interest or property of another and to prevent the client from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to perpetrate a fraud upon a tribunal.
    Indeed, Pennsylvania has already confronted an issue similar to the one presented by this inquiry. In Opinion No. 91-98 (1991), the Pennsylvania Bar Association's Committee on Legal Ethics and Professional Responsibility held that a lawyer who assisted a client in obtaining social security disability benefits and subsequently learned that the client submitted false information regarding her earnings on her benefits application must advise the Administrative Law Judge of the deception if the client refuses to rectify the matter. RPC 1.6(c)(2); RPC 3.3(a)(2)See footnote 3 3
    In adopting its version of RPC 1.6(b)(2), the New Jersey Supreme Court charted a difficult course for New Jersey attorneys to follow. The facts presented by this inquiry are not unique. Attorneys are frequently confronted by difficult and recalcitrant clients who wish to achieve a particular result, and resist disclosure of relevant and potentially damaging evidence to a tribunal. An attorney who elects to discharge his or her duty under RPC 1.6(b)(2) may, as occurred in this case, risk the loss of a client. The balance, however, has been struck by the New Jersey Supreme Court in favor of disclosure in cases of this nature. The duty imposed is difficult, but, based upon the facts of this case, disclosure is mandated.
    Our Committee has not reached this conclusion easily. Indeed, we have considered whether RPC 1.6(c)(1) should govern this inquiry. RPC 1.6(c)(1) provides:
        (c) a lawyer may reveal such information to the extent the lawyer reasonably believes necessary:
        (1) to rectify the consequences of a client's criminal,     illegal or fraudulent act in the furtherance of which the lawyer's services had been used. (emphasis added).
    Because we have concluded that the department is a "tribunal" within the meaning of RPC 1.6(b)(2), RPC 1.6(c)(1) does not apply in the context of this inquiry. We have also carefully examined whether the inquiring firm had a "reasonable belief" sufficient to trigger disclosure. RPC 1.6(d) defines "reasonable belief" for purposes of RPC 1.6 to be:
        ... the belief or conclusion of a reasonable lawyer that is based upon information that has some foundation in fact and constitutes prima facie evidence of the matters referred to in subsections (b) or (c).

    Under the facts of this inquiry, the inquiring firm clearly had such a "reasonable belief."
    Each interpretation or application of RPC 1.6(b)(2) involves a fact-sensitive, and, indeed, a soul-searching examination of the unique facts of a particular case. As we have noted earlier, the client's failure to disclose this information to the department represents an on-going fraud upon a tribunal. Thus, in interpreting RPC 1.6(b)(2), practicing attorneys should continue to remember that this rule represents a general rule of confidentiality to which disclosure is an exception which must be made only in the limited circumstance set forth in the rule.
    For the reasons set forth above, we conclude that under the facts presented by this inquiry, the department was a "tribunal" within the meaning of RPC 1.6(b)(2) and that RPC 1.6(b)(2) requires the inquiring firm to disclose the relevant information it discovered during the course of its representation of the client to the department.

* * *


Footnote: 1 1

The firm believed at the time of its inquiry to this Committee that this investigation was still pending.

Footnote: 2 2
In a redacted copy of a letter sent by the client to the firm which was supplied to this Committee, the client advised the firm that it could seek advice from this Committee, but instructed the firm to inform this Committee that any such inquiry was being made after the client had terminated its services with the firm. Moreover, the client's letter further advised the firm that if it elected to pursue the issue presented by this inquiry with the department on its own, in the client's view, the firm would be doing so in violation of the attorney-client privilege and the firm's employment agreement with the client.

Footnote: 3 3
RPC 3.3(a)(2) provides that:

    (a) A lawyer shall not knowingly:
***
    (2) fail to disclose a material fact to a tribunal when disclosure is necessary to avoid assisting an illegal, criminal or fraudulent act by the client.
    


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