Duty to Report Lawyer Misconduct – Duty to Supervise – Responsibilities of Members of Law Firm Management Committees
Article courtesy of Hinshaw & Culbertson, LLP – © 2012 – Used with permission
Risk Management Issues: At what point after discovering serious wrongdoing by a lawyer within a firm does the duty to report the attorney to disciplinary or other appropriate authorities arise? What other steps are advisable for the law firm to take when such wrongdoing is discovered? What is the proper scope of supervisory responsibility either to prevent or to respond to wrongdoing when discovered?
The Case: This decision from Maine’s highest court is the penultimate chapter in a long, sad and convoluted story involving a prominent Maine law fi rm. John Duncan joined Verrill Dana in 1978 and was a partner practicing in the firm’s private clients group, with the principal responsibilities to administer trust and estate matters and provide related legal services. In late 2006, one of the firm’s paralegals discovered a discrepancy in the account of one of Duncan’s clients. The check register that Duncan prepared for that client account reflected that a payment had been made to Verrill Dana, but the check had been made payable to Duncan. The paralegal brought the matter to the attention of Duncan’s secretary, who compared the bank statements to the check registers for the client’s account and identified a total of 14 such discrepancies dating back to 2003. In June 2007, Duncan’s secretary finally confided in another attorney at the firm, who promptly notified David Warren, the firm’s managing partner, and delivered the supporting documentation to him.
Warren reviewed the checks and the record, and in mid-June 2007 informed Kilbreth, the firm’s Chair. After a delay of two weeks, Warren confronted Duncan, who explained that the checks represented attorney fees he had earned for work on the account, but which should have been paid over to the firm in accordance with the partnership agreement. Duncan also stated that the client account was the only one from which he had written checks to himself, offered to write the firm a check to cover the funds, and offered to resign from the firm. Warren deferred action on Duncan’s offer to resign until speaking with Kilbreth and the executive committee, but asked and Duncan did repay $77,500 representing the fees that he had failed to turn over to the firm on that matter.
On July 9, 2007, Warren told the executive committee in its meeting about Duncan’s actions and his offer to resign, which offer the committee declined. They did not discuss making a report to the Board of Overseers of the Bar, nor did they discuss bringing Duncan’s conduct to the attention of Gene Libby, the firm’s in-house general counsel. Instead they directed Warren to notify Kurt Klebe, the head of the private clients group, for him to implement practices to prevent similar events from occurring in the future. But Warren delayed for months in notifying Klebe of Duncan’s actions, with the acquiescence of the executive committee, because of concern this might drive an already fragile Duncan “over the edge.”
On October 2, 2007, Warren finally told Klebe of Duncan’s misconduct. Klebe began an investigation and quickly discovered another account from which Duncan had written a check to himself, ostensibly for fees, which had not been turned over to the firm. As the investigation proceeded, additional similar problems were uncovered.
On October 10, 2007, Verrill Dana received a “preservation” letter advising that Duncan’s secretary was pursuing an employment lawsuit against the firm and asking that certain evidence be preserved. Only then did Libby learn that Duncan had been mishandling funds. Libby undertook an investigation and retained outside counsel to assist him.
On October 27, 2007, the executive committee voted to terminate Duncan effective December 31, 2007. Days later, an independent audit ordered by the firm revealed that Duncan had also billed clients for work he had not performed and taken money from those clients’ accounts to “pay” himself. At that point, the firm immediately terminated Duncan and notified the Board of Overseers of the Bar, the U.S. Attorney, and the Cumberland County District Attorney of Duncan’s thefts and other improprieties.
In September 2010, Bar Counsel filed an information alleging that Warren and the five members of the executive committee had violated Maine’s Code of Professional Conduct (Code) by failing to investigate, discover, and report Duncan’s misconduct, and failing to mitigate losses to clients and the firm resulting from Duncan’s misconduct. Following a three-day hearing before a single justice of the Supreme Judicial Court, Justice Donald G. Alexander found that the Board had failed to prove, by a preponderance of the evidence, that the six attorneys committed the violations charged in the information. He found that based on what the respondents knew or believed at the time, facts now known to be incomplete, the perceived aberrational misapplication of firm funds from one account did not require a report to the Board or the prosecutor. In other words, the one instance, compared to Duncan’s 30-year history, did not raise “a substantial question as to another lawyer’s honesty, trustworthiness, or fitness as a lawyer.” Justice Alexander also found that the management committee attorneys made reasonable efforts to assure that lawyers in the firm would adhere to the Code. On subsequent review by the whole Court, the four-month delay from discovery to report was found not unreasonable on these facts and was not disturbed. But the Court made other adverse determinations regarding the handling of the matter by the executive committee.
On the charge the management committee failed to timely report Duncan’s misconduct to the Bar, the Court cited the applicable Code provision, Maine Bar Rule 3.2(e)(1): “A lawyer possessing unprivileged knowledge of a violation of the Maine Bar Rules that raises a substantial question as to another lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects shall report such knowledge to the appropriate disciplinary or investigative authority.” The Court observed:
[a]ctual knowledge is required, but may be inferred from the circumstances when it is apparent that the lawyer must have known of the misconduct. 2 Geoffrey C. Hazard, Jr., W. William Hodes, & Peter R. Jarvis, The Law of Lawyering § 64.4 (3d ed. Supp. 2009). When a lawyer has actual knowledge that attorney must determine two things in deciding whether he or she has an obligation to report the misconduct: (1) whether the other lawyer’s conduct relates to his honesty, trustworthiness or fitness to practice law; and (2) whether the conduct is sufficiently serious to raise a ‘substantial question’ about at least one of these three traits. Whether an attorney has a ‘substantial question’ about these traits is a subjective test requiring a determination of what the attorney’s actual belief was at the time.
While other attorneys may have doubted Duncan, the Court noted “[e]ach of the six attorneys testified that it never even occurred to him or her that Duncan’s mishandling of funds gave rise to an obligation to report Duncan” under the Code. Accordingly the Court concluded it was bound to uphold the earlier finding that the six attorneys did not subjectively question Duncan’s honesty, trustworthiness or fitness to practice law. Notwithstanding this conclusion, the Court pointed out that the reporting of misconduct provision of the Code applies without regard to whether the alleged victim is a client or colleague. They observed that Duncan’s conduct, at least in diverting firm funds to himself in knowing violation of the partnership agreement, could raise the “substantial question” pursuant to the Code even if no client funds were ever implicated.
Addressing the charge that members of the management committee violated their duties of supervision because there were no procedures in place at the time to ensure compliance with ethics rules, and because they failed to take remedial measures to avoid or mitigate the consequences of Duncan’s behavior, the Court interpreted the Code to “[require] law firm partners to make efforts to enact procedures that will deter unethical behavior.” Reasonable measures may include professional ethics education, development of policies or procedures to address ethics concerns, and the creation of an ethical “atmosphere.” Firms should have in place procedures to avoid conflicts of interest, ensure deadlines are met, account for client funds, and provide supervision and support to inexperienced lawyers. The Court cited with approval the Restatement (Third) of Law Governing Lawyers § 11 (2):
A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure the other lawyer conforms to the Code of Professional Responsibility. (3) A lawyer shall be responsible for another lawyer’s violation of the Code of Professional Responsibility if: (i) the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or (ii) the lawyer is a partner in the law firm, in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.
Applying these principles, the Court could not “ignore that, when faced with the significant malfeasance of a self-destructing partner, none of the attorneys even recognized that the Maine Code . . . required them to contemplate reporting that partner’s conduct . . .
(W)hen a firm’s practices and policies do not require the firm’s leadership to at least consider whether it has an ethical obligation to report a colleague in the circumstances presented by this case, we are compelled to find that the firm failed to have in effect measures giving reasonable assurance” that lawyers in the firm conform to the Code. Accordingly, the Court held that the six attorneys, as the partners in the firm who were acting as the firm’s executive committee, and the only lawyers within the firm who knew of Duncan’s actions, violated their supervisory duties under the Code. The Court remanded the case for further hearings as to the appropriate discipline to be imposed.
On February 24, 2012, the Portland Press Herald reported that the judge who had heard the case on the remand was the same single justice of the Supreme Judicial Court, Justice Alexander, whose earlier decision was modified by the whole Court as described above, and that Justice Alexander had imposed no discipline, despite the request of the bar counsel that the respondents be issued a public reprimand.
Given the language in the decision of the whole Court that is directly critical of the failure of the management committee to recognize or act upon its duty to report Duncan’s wrongdoing promptly upon discovery, it is difficult to understand why the Court upheld the single justice’s decision not to find that failure actually constituted a violation of the reporting duty. As the Court noted, it should make no difference whether the victim of a lawyer’s dishonesty is a client or the firm itself. It is the dishonesty that is the triggering element, not the identity of the victim. It is likely, however, that the wording of the decision puts law firms on clear notice of the meaning and scope of the reporting duty.
It is also difficult to understand how, notwithstanding the decision of the whole Court, the matter could end with no disciplinary sanction. On the other hand, given that it took over four years before the matter was concluded, during which there were repeated and lengthy media reports about every aspect of the matter, it is inarguable that the firm and the individual lawyers on the management committee suffered significant and continuing reputational consequences, in addition to the cost and effort necessary to defend the case, and the stress on those involved, throughout that time.
It is also worth noting that one of the sadder elements of this story is the cumulative failure of the management committee either to inform or involve the firm’s general counsel from the outset in the investigation and handling of the matter as soon as the first inklings of Duncan’s wrongdoing came to light. Further, that failure in this instance ultimately resulted in the resignation of the general counsel, suggesting, at least, that when he was informed and involved, his advice was not heeded. The role of law firm general counsel is precisely to guide and advise the firm, and particularly its leaders, on the handling of problems great and small that arise within the firm from time to time.
Risk Management Solution: This case is ultimately about the management of reputational risk. As it evolved, the firm’s handling of the situation demonstrates a verity that all too often seems to elude many in corporate as well as law firm management roles: “It’s not the crime, it’s the cover up” that causes institutions—including a prestigious law firm—the greatest reputational damage. The fundamental lesson of this case is the value and importance of the position and role of law firm general counsel. With firm’s counsel involved from the outset (and his advice heeded), the firm could have moved in front of the problem, addressed and dealt with the issues that were identified, and made an appropriate public announcement, and there the matter would have rested. Instead, the mishandling led to a drumbeat of media reporting in Maine, every time there was a new development or another hearing, and new findings announced. The various ethical duties identified by the Supreme Judicial Court in this matter are universal. The development, implementation, training and oversight of appropriate policies that establish an environment of informed compliance with those duties are the pivotal responsibilities of law firm general counsel. If firms fail to establish a general counsel role, utilize and support that resource, they run the risk that will suffer a similar experience to that of Verrill Dana.
Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation, or circumstance. Contact legal counsel for specific advice.