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Ethics

: Legal Ethics Forum

Important new California case on non-clients suing transactional lawyers for fraud (and much, much more): Favila v. Katten Muchin

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Attached is a new case, Favila v. Katten Muchin, published by the Second District Court of Appeal. Although the facts are dense, it addresses a number of issues critical to professional liabilities of corporate lawyers, so it?s worth reading.

A non-client sued a law firm and one of its associates for fraud. The trial court sustained a demurrer, but the appellate court reversed in the process knocks down or limits the defenses offered by (1) section 1714.10 (a California statute meant to deter claims that lawyers conspired with their clients); (2) the Agent?s Immunity Rule (the common law version of the same doctrine); (3) the McDermott Will defense (i.e., that lawyers bound by privilege cannot be sued by non-clients), including an analysis of the crime-fraud exception; and (4) the statute of limitations.

The case also attempts to clarify the ownership of the privilege post-merger, and it applies a conspiracy rule against a biglaw associate even though the transaction was consummated after he left the firm. It covers a lot of ground.

The case involved an alleged squeeze-out of a tech company founder, who apparently sold his controlling interest and then died. The company quit-claimed its shares for $5,000 to a new company that was formed for the purpose of ultimately selling the enterprise. The founder?s estate claimed that the transaction was a fraud and that the complicity of the lawyers for the company (Katten) was established by a client-authored email that said, ?damn the torpedoes,? which might be understood as ?I know this sale is improper but do it and we?ll defend ourselves when the founder?s estate sues.? The appellate court found the allegations to be ?minimally adequate.?

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Full post as published by Legal Ethics Forum on September 08, 2010 (boomark / email).