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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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