Opinion 2005-7
(May 2005)

During the course of discovery in litigation, the inquirer has come to strongly suspect - based on the opinion of a forensic accounting expert - that the plaintiff in the matter (the opposing party) committed tax fraud and fraud on the bankruptcy court. The inquirer also feels that it is possible that opposing counsel either aided the fraud or knew of the fraud but did not reveal it.1 The inquirer has asked for the Committee’s guidance on two questions:

1.) Whether what has been learned in discovery with respect to the possible fraud must be “referred” to the bankruptcy court or to some other agency2; and

2.) Whether he/she is obligated to report this information to the Pennsylvania Disciplinary Board (“the Board”).

It is the Committee’s opinion that the Pennsylvania Rules of Professional Conduct (the “Rules”), do not require that the inquirer advise the bankruptcy court or some other agency of plaintiff’s putative fraud.

The inquirer’s obligation, if any, to disclose fraud on the part of the opposing party is governed by Rule 3.3(b):

(b) A lawyer who represents a client in an adjudicative proceeding and who knows that a person intends to engage, is engaging or has engaged in criminal or fraudulent conduct related to the proceeding shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal.

First, the inquirer needs to “know” that fraudulent conduct has been or will be committed. Rule 1.0 relating to” Terminology” defines “knows” as “…actual knowledge of the fact in question” and notes that: “[A] person’s knowledge may be inferred from circumstances.” Rule1.0 (f). Although the inquirer is in possession of an expert witness opinion that it is “likely” that fraud of some type has been committed, the Committee doubts that an opinion from a non-lawyer expert that fraud is “likely” rises to the level of “actual knowledge” that the Rule requires. This doubt is reinforced by the definition of “fraud” and of “fraudulent conduct” set forth in the Rules: “’Fraud’ or ‘fraudulent conduct’ denotes conduct that is fraudulent under the substantive or procedural law of the applicable jurisdiction and has a purpose to deceive.” Rule 1.0 (d). Comment [5] to Rule 1.0 stresses that negligent misrepresentation and/or failures to “apprise another of relevant information” do not constitute “fraud” or “fraudulent conduct” for purposes of the Rule.

Second, the “fraudulent conduct” at issue must be of a type “related to the proceeding.” Although “related to the proceeding” is not independently defined in the Rules, it appears likely that the intent of the Rule is to require disclosure of deceit in the course of the litigation in which the inquirer’s client is involved or that could alter the outcome of that litigation. Thus, where the subject of the litigation is the conduct in question and it is contemplated that the pleading and discovery process will reveal the underpinnings of that conduct – as appears to have been the case here – the Rule is much less likely to obtain and disclosure would not be required.

Additionally, Rule 3.3 (b) does not impose a duty to disclose to any authority other than “the tribunal.” In conjunction with the phrase “related to the proceeding”, the term “tribunal” clearly refers only to the “tribunal” in which the “adjudicative proceeding” – plaintiff’s claim against the inquirer’s client – is taking place. Thus, the Rule would not appear to impose an obligation to “refer’ the matter to some other body. There may, of course, be principles of substantive law or private undertakings that might require such a referral and the inquirer needs to be cognizant of these.

Finally, the Committee notes that disclosure is, in essence, a default option. Rule 3.3 (b) only requires a lawyer to take “reasonable remedial measures, including, if necessary, disclosure to the tribunal.” (Emphasis supplied) This requirement, too, is only triggered when the requisite degree of certainty is present.

The inquirer is also cautioned to assess the effect that any disclosure outside the normal course of the litigation might have on the client’s case. For example, such a disclosure might permit the opposing party a level of preparation not otherwise available. Moreover, an overt accusation of fraud might recharacterize plaintiff’s claim against the client to a point that the client’s right to defense and indemnification under an insurance policy could be compromised. Accordingly, under Rules of Professional Conduct 1.2 (“Scope of Representation and Allocation of Authority Between Client and Lawyer”) and 1.4 (“Communication”), the inquirer would do well to confer with the client before proceeding with any disclosure.

The Committee does not opine as to whether principles of substantive law other than the Rules of Professional Conduct might separately impose an obligation of disclosure on the inquirer.

As regards the inquirer’s obligation to report opposing counsel’s perceived complicity in plaintiff’s fraud to the Disciplinary Board of the Supreme Court of Pennsylvania, it is the Committee’s opinion that the inquirer is not obligated to make such a disclosure.

Rule 8.3 entitled “Reporting Professional Misconduct” is the principal Rule implicated by this aspect of the inquiry. It provides, in pertinent part:

(a) A lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority.

The term “substantial” denotes a material matter of clear and weighty importance. In the context of Rule 8.3, the Comments are helpful:

3.) If a lawyer were obligated to report every violation of the Rules, the failure to report any violation would itself be a professional offense….A measure of judgment is, therefore, required in complying with the provisions of this Rule. The duty to report involves only misconduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects. The term “substantial” refers to the seriousness of the possible offense and not the quantum of evidence of which the lawyer is aware.

However, in the present case, harking back to the above discussion concerning the definition of “knows” as requiring actual knowledge, any uncertainty as to whether there has been fraud, compounded with the inquirer’s assessment that it is only “possible” that opposing counsel either purposefully or negligently failed to report that fraud, relieves the inquirer of any obligation to inform the Disciplinary Board. Rule 8.3 (a), Comment [3]. See, also, Comment [2] to Rule 8.4 (on the issue of the kinds of illegal conduct considered to reflect adversely on the fitness to practice law.)

Notes

  1. The language used in the inquiry is “aided, was compliant or negligent in not reporting the fraud.”
  2. In responding to this inquiry, the Committee is lacking facts that might influence its analysis. For example, it is not clear whether the litigation that the inquirer is engaged in is pending in the bankruptcy court or another forum. Additionally, the exact nature of the claims being asserted against the inquirer’s client is not clear.