Lawyers Lying in Negotiations

Posted in: Law Practice

How do we know if a lawyer is lying? The answer to that old joke is, “When you see his lips move.” The more nuanced question is: When may the lawyer lie during negotiations and when does the law forbid that? The answer to that question is no joke. Let us turn to the cases and the ethics rules.

The American Bar Association has an ethics rule governing lies during negotiations. The ABA, of course does not directly regulate lawyers. Only the courts do that. However, the ABA does draft a series of Model Rules, which the ABA lobbies state courts to adopt as rules of court. The ABA has been very successful in those efforts, and the only state not to adopt the ABA Rules is California. Yet, even there, the ABA Model Rules influence the law, because California state courts routinely cite the ABA Rules in their opinions.

It surprises many people—including some lawyers—that the ABA Model Rule prohibits (or, more precisely, limits) lawyers in lying to the opposing party in the course of negotiations. Rule 4.1 states that while representing a client, the “lawyer shall not knowingly” do two things: first, the lawyer may not knowingly make a “false statement of material fact or law to a third person”; second, the lawyer may not “fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6 [the rule that protects attorney-client confidences].”

The ABA does not ban all lies—that would be too easy. Instead, it tucks away, in a comment to the Rule (comment 2), the caveat: “Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.”

So, even though a client has authorized a $1,000 settlement figure, a lawyer may say the client does not wish to settle for more than $500. That is “puffing.” However, it would be an impermissible lie if the lawyer says is that the client does not have any insurance to cover the tort, if the lawyer knows that the client has insurance. That may be splitting hairs, but that’s what lawyers often do—split hairs.

A review of the case law shows that many lawyers act as if the restrictions of Rule 4.1 do not exist. Here’s one relatively recent case, Office of Disciplinary Counsel v. DiAngelus, 907 A.2d 452 (Pa. 2006). During the course of plea bargaining a relatively serious motor vehicle violation down to a lesser one, the lawyer (DiAngelus) told the prosecutor that the arresting officer had agreed to a reduction of the charges. Later, however, the arresting officer denied that he made such a statement. Moreover, the officer could prove he had been elsewhere when DiAngelus said the conversation occurred. The court held that the lawyer engaged in a material and knowing misrepresentation, thus violating Rule 4.1 and also Rule 8.4(c) (which prohibits dishonesty). The Court suspended DiAngelus for five years.

In Fire Insurance Exchange v. Bell by Bell, 643 N.E.2d 310 (Ind. 1994), the plaintiff was burned in a fire at his grandfather’s home. The homeowner’s insurer retained one of the state’s most prominent law firms. The insurer offered to pay the policy limit, which the law firm represented to be $100,000. The injuries would justify a higher verdict against the plaintiff’s grandfather, but the plaintiff’s lawyer recommended taking the settlement because that was the policy limit and the insurance payment was the only money the plaintiff was likely to collect. It turns out that the representation by the insurer’s lawyer was false, and the defense lawyer knew it. The policy limit was in fact $300,000, not $100,000. The plaintiff sued the opposing lawyer for fraudulent misrepresentation of the insurance policy limit.

As the court explained, “The principal issue in this case is whether, and to what extent, a party who is represented by counsel has the right to rely on a representation by opposing counsel during settlement negotiations.” The insurance company and its lawyer lost. The court held that the victim’s lawyer had right to rely on allegedly fraudulent representations of the liability insurer’s lawyer and the law firm during settlement negotiations. Even though the victim’s lawyer had means to ascertain relevant facts, the law should not require the lawyer to verify the other lawyer’s representations:

We decline to require attorneys to burden unnecessarily the courts and litigation process with discovery to verify the truthfulness of material representations made by opposing counsel. The reliability of lawyers’ representations is an integral component of the fair and efficient administration of justice. The law should promote lawyers’ care in making statements that are accurate and trustworthy and should foster the reliance upon such statements by others.

The Court added that “Bell’s attorney’s right to rely upon any material misrepresentations that may have been made by opposing counsel is established as a matter of law.”

Bell is hardly an orphan in the law. In Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 131 Cal. Rptr. 2d 777 (Cal. Ct. App. 2003), the court held that there was a cause of action for fraud because of the false assertion that a claim was not covered by insurance. Ditto for Siegel v. Williams, 818 N.E.2d 510 (Ind. Ct. App. 2004). That case involved the settlement of a malpractice case against a lawyer. The court held that there was a cause of action for fraud because of the lawyer’s false assertion that paying more than $25,000 would force the lawyer into bankruptcy.

Then there is, Slotkin v. Citizens Casualty Co. of New York, 614 F.2d 301 (2d Cir. 1979), cert. denied, 449 U.S. 981, 101 S. Ct. 395, 66 L. Ed. 2d 243 (1980). The court upheld the entry of a fraud judgment against the lawyer in favor of the defrauded claimant. The evidence showed the defense lawyer’s reckless disregard of truth or falsity of his statement that “to the best of [the lawyer’s] knowledge,” there was $200,000 in insurance. In fact, documents in that lawyer’s possession showed that there was $1 million in coverage.

Lawyers, in general, may not lie to their opponents in negotiations. However, they do not have an obligation to volunteer adverse facts; they simply must not lie. There is one exception to the duty not to volunteer adverse facts. The leading case is Virzi v. Grand Trunk Warehouse & Cold Storage Co., 571 F. Supp. 507 (E.D. Mich. 1983). The plaintiff in a personal injury case died from causes unrelated to the lawsuit prior to a pretrial conference and settlement negotiation. All during settlement negotiations, the plaintiff’s lawyer did not inform either the opposing lawyer or the court of the plaintiff’s death. Defendant’s lawyer never specifically asked the plaintiff’s lawyer whether the plaintiff was still alive and available for trial. The opposing lawyer did not lie, but he did fail to volunteer an important fact: his client’s death. When the probate court appointed a personal representative to administer the plaintiff’s estate, the plaintiff’s lawyer did not move to substitute parties. When the defendant later learned what had happened, it moved to set aside the settlement. The court agreed with the defendant. The lawyer’s duty of zealous representation

does not justify a withholding of essential information, such as the death of the client, when the settlement of the case is based largely upon the defense attorney’s assessment of the impact the plaintiff would make upon a jury because of his appearance at depositions. Plaintiff’s attorney clearly had a duty to disclose the death of his client both to the Court and to opposing counsel prior to negotiating the final agreement.

Quite a lot of other cases agree. The theory is not simply that the adverse lawyer would like to know that your client died. If that were the test, lawyers would have to volunteer a lot of adverse information.

There is a logical stopping point. The client’s death is special because death automatically terminates the agency relationship. The lawyer for “Client” now represents the “Estate of Client.” ABA Formal Opinion 95-397 (1995) advises that a lawyer “must inform her adversary of the death of her client in the first communication with the adversary after she has learned of that fact.” It will not be enough to say, “He’s out of pain,” or “He is resting.” The lawyer has to volunteer the truth.

That should be a simple matter, but the cases that cite Virzi indicate that not every lawyer has gotten the memo.