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NEWJERSEY LAWYERPROFESSIONAL LIABILITY The Lawyers Source July 7, 2008

www.njlnews.com

By Teresa M. CinnamondOn April 23, 2008, the AppellateDivision issued a decision that shouldraise concern about potential malpractice

claims against attorneys who acceptassignments from other attorneys, as wellas attorneys who perform work involvingestates where another attorney serves asestate executor.In Estate of Spencer v. Gavin, 400

N.J.Super. 220 (App. Div. 2008), theAppellate Division reversed sum-mary judgment granted toWoodbridge attorney Dean Averna.His firm rented space in a buildingowned by attorney Daniel Gavin,who served as executor and admin-istrator of the estates of a motherand her two daughters (estates).

Gavin misappropriated approxi-mately $400,000 from the estates.Within months, Gavin died of can-cer.

The question before the court:Was Averna who did not partici-pate in the thievery liable to theestates because he failed to reportGavins malfeasance? The trial courtdismissed the complaint againsthim, reasoning (1) the injury to theestates was caused by Gavin and hiswife, not the fellow attorney; and(2) while the Averna may have had a

moral responsibility to reportGavins wrongdoing to the authori-ties, that obligation did not translateto liability for Gavins criminal acts.

Reversing the trial court, theAppellate Division held that a duty to report afellow practitioners criminal acts is mandatedby principles of legal ethics, tort law,and pub-lic policy, so long as the attorney is shown tohave had actual knowledge of the otherlawyers wrongdoing.The Appellate Divisionfound the trial court failed to recognize this

duty as a matter of lawand remanded thecase to the trial court for an adjudication ofthe attorneys potential liability to the finan-cially depleted estates.

If it is proved the attorney knew of butfailed to report the misappropriation of estatefunds, a jury will decide whether his nonfea-sance proximately caused injury to the estates.

This latter proof would seem relatively simple,given the courts acknowledgement Gavin pil-fered $400,000. See also, Blazovic v. Andrich,124 N.J. 90 (1991); Grubbs v. Knoll, 376 N.J.Super. 420 (App. Div.2005) (permitting afinding of proximate cause where fault may beapportioned between intentional tortfeasors

and defendants who are found liable in negli-gence).

Averna had done some limited legal workfor the estates. At Gavins request, he had pre-

pared documents to create a charitable foun-dation for which he was paid $2,500, anddrafted a contract on behalf of the foundationfor repairs at a church, for which he was paid

$350. The courts conclusion that theattorney owed a duty to report Gavinsmisdeeds, assuming he actually knew ofthem,is buttressed by two significantfactors, one circumstantial and theother legal.

Nature ofrelationship

The first factor grows out of [the

attorneys] close and regular workingrelationship with Gavin: Averna hadworked in Gavins building for three

years, accepted referrals from Gavin of10 to 15 cases, shared fees with Gavinon those cases and inherited Gavinsformer paralegal and his former per-sonal office [in the building]. Thecourt considered but was not per-suaded by the fact that Gavin andAverna were not law partners, nor wasthere a de facto partnership sincethere was no evidence of joint controlover a common business, commin-

gling of revenues or disbursements orthe sharing of overall profits. Thecourt noted that while other lawyersperceived that Gavin was grooming[the attorney] to take over his prac-

tice, a different attorney took over the prac-tice after Gavins death. The court alsoconsidered that a letter may have been sentby the attorney to his malpractice insurerstating Gavin was to become of counsel tohis firm and that the name of the firm was tochange. However this change never occurred.

Reprinted with the permission ofNew Jersey Lawyer July 7, 2008

Civil liability?

Failing to report misconduct

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Reprinted with the permission ofNew Jersey Lawyer July 7, 2008

The rulesThe second factor cited by the court sup-

porting its decision is RPC 8.3(a): A lawyerwho knows that another lawyer has commit-ted a violation of the Rules of ProfessionalConduct that raises a substantial question asto that lawyers honesty, trustworthiness or fit-ness as a lawyer in other respects, shall informthe appropriate professional authority.According to the Appellate Division, if the req-

uisite knowledge existed, [the attorney]would have had a professional obligation,owed not only to his clients but to the publicat large, to bring Gavins thefts to light.

Duty of attorneys toclients and non-clients

While Estate of Spencerfound the existenceof an attorney-client relationship between theattorney and one of the estates, the court didnot find any attorney-client relationshipbetween the attorney and the other two estates.Nonetheless, the court held Averna owed a

duty to all three. As an initial matter, the courtrejected the argument the attorneys clientwas the estates executor rather than the estateitself. Cf. Barner v. Sheldon, 292 N.J. Super. 258(Law Div.1995)(holding the client is theexecutor of the estate and not the estate itselfwhen the attorney is retained by an executor toperform specific tasks in connection with theestate); Estate of Albanese v. Lolio, 393 N.J.Super. 355 (App. Div. 2007)(holding that anattorney breached a duty of care to theexecutrix of an estate by failing to define thescope of his representation but that the attor-ney did not owe a duty of care to the estatesbeneficiaries).

In finding that a duty of care was owed tothe non-client estates, the court arguablylooked beyond traditional common law limit-ing the circumstances under which an attorneyowes a duty of care to a non-client. See Petrillov. Bachenberg, 139 N.J. 472 (1992)(holding anattorney breached a duty to a non-client wherethe attorney negligently prepared percolationreports relied on by the non-client propertybuyer); see also Stewart v. Sbarro, 142 N.J.Super. 581 (1976) (holding an attorneybreached a duty to a non-client where theattorney failed to communicate, within a rea-sonable time, his failure to obtain the agreed

upon signatures of his client indemnifying thenon-client against loss of liability for existingcorporate debt). These cases require reliance bythe non-client on the words or conduct of theattorney before liability will be allowed. InEstate of Spencer, a duty of care has beenimposed absent similar evidence of reliance.The court reasoned that the Spencer estates allimplicitly relied upon Averna to be faithful totheir best interests, and to not turn a blind eyeif he learned that the executor was plunderingestate funds.

RPC and professionalnegligence relationship

Traditionally,New Jersey courts have recog-nized that a lawyers violation of a rule of profes-sional conduct does not, standing alone, establishprofessional negligence.See Baxt v. Liola, 155 N.J.190, 276 (1998); Albright v. Burns, 206 N.J.Super.625 (1986) (a lawyers failure to meet an ethicalobligation may be considered evidence of mal-

practice but does not establish negligenceper se);Sommers v.McKinney, 287 N.J. Super.1, 13 (App.Div. 1996).

Arguably, nothing more than the violationof RPC 8.3(a) need be shown to prove thebreach of the attorneys duty of care. Estate ofSpencerstresses that potential liability based ona failure to report misconduct is only imposedif the attorney actually knew of the miscon-duct. But, based on the plain language of therule, such knowledge already is an element of aRPC 8.3(a) violation. Thus, Spencerarguablybroadens the traditional rule that violation of aRPC does not establish negligenceper se.Moreover, historically, lawyers who failed toreport a colleagues wrongdoing have been dis-ciplined only where there was a much closerworking relationship between the two attorneysand the attorney who failed to report wasdirectly involved in the wrongdoing. See In reGold, 115 N.J.239 (1989) (an attorneys knowl-edge and failure to report a fellow attorneysmerger of a firm trust fund and businessaccount as well as numerous and frequent over-drafts was sufficient to warrant a five-year sus-pension); see also In re Pavilonis, 98 N.J. 36(1984) (rejecting the notion that an attorneywho took the Pennsylvania Bar examination byrepresenting to be his wife violated the discipli-

nary rule addressing an attorneys duty toreport).

Plenty of remainingquestions

Spencercalls into question the scope andbreadth of an attorneys duty of care to reportmisconduct and the civil liability that mayresult. For example, where an attorney who reg-ularly refers cases to you overbills a client, prac-tices law while under the influence of alcohol,or informs you he is avoiding calls from aclient, is there potential civil liability if you failto report? Where assignments are received fromanother attorney serving as an executor of anestate, is any and all misconduct on the part ofthat executor a valid basis for imposing civil lia-bility if the attorney becomes aware of miscon-duct and fails to report? And will the NewJersey courts enforce a duty of care owed onlyto the public so that deviations from the RPCbecome sufficient grounds, in and of them-selves, for the imposition of civil liability?

Spencertells practitioners their failure toreport misconduct under RPC 8.3(a) can lead

to the imposition of civil liability, and theyshould carefully choose attorneys from whomto accept assignments particularly those fora common client.While limited retainer agree-ments specifying obligations to a client can alsobe useful, particularly where it is unclear whichentities or individuals are your client(s), suchagreements arguably are of little or no helpwhere the issue is a violation of RPC 8.3(a),which does not pertain directly to the natureand scope of legal services to be rendered.

Insurance?Another issue is whether professional liabil-

ity insurance policies will afford coverage for anattorneys failure to report misconduct underRPC 8.3(a). Professional liability policies coveran attorneys liability for rendering or failing torender legal services. It may be argued thatAvernas failure to report the misappropriationof estate assets did not arise from the work heperformed for the foundation. In addition, aninsurer may assert a lawyers decision not toreport misconduct was intentional.Intentional acts are typically excluded from

malpractice policy coverage. See e.g., Greenberg& Covitz v. Natl. Union Fire Ins. Co. ofPittsburgh, Pa., 312 N.J. Super.251 (App. Div.1998) (upholding the enforcement, albeit underdifferent circumstances, of a policy exclusionfor dishonest, intentional, fraudulent or mali-cious acts). The imposition of a duty of care onthe part of the attorney is not synonymous witha finding that coverage exists under that attor-neys professional liability policy should a cov-erage dispute arise.

An appeal has been filed by Avernas defense

counsel.

Teresa M. Cinnamond is a seniorassociate at Carroll, McNulty & Kullin Basking Ridge. She focuses on

professional and general liabilitydefense litigation and insurance cov-erage litigation. Reach her at (908)848-6300.

Associate Enitan O. Otunla assistedin research for the article.