Fraud and Misrepresentation Claims Against Lawyers
50 Pages Posted: 7 Feb 2016
Date Written: February 5, 2016
When lawyers allegedly err in the course of clients’ representations, or, worse, allegedly engage in deliberate misconduct of some sort, aggrieved clients may sue for professional negligence, commonly described as legal malpractice, or for breach of fiduciary duty. A lawyer who treats a client dishonestly may face liability on one of these theories. Lawyers’ alleged dishonesty in their practices exposes them to potential liability to third-parties as well. For example, if a lawyer knowingly and substantially assists or encourages a client’s wrongdoing, those who are harmed by the client’s misconduct may sue the lawyer in tort for allegedly aiding and abetting the client’s misdeeds. Yet, while the consequences of lawyers’ alleged dishonesty should be apparent, lawyers seldom think themselves to be at risk for liability based on fraud or misrepresentation arising out of clients’ representations. This perspective probably traces at least in part to common notions of litigation practice, where parties generally cannot base fraud claims on opposing lawyers’ misrepresentations. Any comfort lawyers derive from this impression, however, overlooks three key points. First, lawyers may be sued for fraud or negligent misrepresentation by adversaries in litigation in some instances, as where, for example, they knowingly misrepresent material facts in negotiations. Second, transactional practice is such that business lawyers are natural targets of fraud and misrepresentation claims by third-parties based on false statements and failures to disclose information. Third, clients may sue their own lawyers for alleged fraud and negligent misrepresentation in appropriate cases. In fact, fraud and misrepresentation are common theories of liability in suits against lawyers by both clients and third-parties. These claims pose an array of challenges for the targeted lawyers. Fraud claims may support punitive damage awards in cases where such damages would not otherwise be recoverable, or open the door to discovery that a court might refuse if only the lawyer’s professional negligence was in dispute. Because the presence of fraud normally is a question of fact, well-pleaded fraud claims are difficult for defendants to defeat at the motion to dismiss stage. Similarly, a claim for negligent misrepresentation is ordinarily one for a jury, unless the undisputed facts are so clear as to permit only one conclusion, thus devaluing a motion to dismiss as a defense tactic in many cases. Again because fraud and negligent misrepresentation claims are fact-intensive, a plaintiff may be able to avoid summary judgment and, by thus forcing the defendant to weigh the risk of trial, achieve a favorable settlement. Fraud and misrepresentation claims are particularly valuable to plaintiffs who cannot establish the existence of an attorney-client relationship with a lawyer-defendant because they avoid the general requirement of privity for liability based on professional negligence. This Article examines lawyers’ and law firms’ potential civil liability for fraud and negligent misrepresentation. Part II provides an overview of the common law causes of action available to potential plaintiffs. After exploring these causes of action, it examines the role that rules of professional conduct play in establishing a standard of care or conduct, or the reasonableness of a plaintiff’s reliance on a lawyer’s misrepresentations. Part III discusses four illustrative negligent misrepresentation and fraud cases against lawyers, two arising out of litigation matters and two arising out of lawyers’ transactional practices. Finally, Part IV offers lawyers some practical advice on avoiding potential liability for fraud and negligent misrepresentations.
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