12 Steps in Overcoming Conflicts Denial

TEXAS LAWYERS' INSURANCE EXCHANGE

12 STEPS IN OVERCOMING CONFLICTS DENIAL

by Janis Reinken, TLIE Director of Risk Management

Facts are facts - conflicts in legal representation spell trouble with a capital "T" -- which rhymes with "B" and that stands for breach. The growing complexity of conflicts analysis and management has become so perplexing that many attorneys experience "conflict denial" when it comes to acknowledging and managing a particular situation or a conflicts administration system.

Take this short True / False quiz to see whether you may have a case of C/D ("Conflicts Denial"), or some early warning signs. See page 4 for the answers and point values. Caveat: the points are weighted for different questions.

1. The time and effort necessary to manage an effective conflicts system cannot properly be treated as a "billing center."¹

2. Proper conflicts screening may yield unwelcome answers leading to declining representation, or withdrawing during representation; either can lose significant revenue for the firm.²

3. Greater mobility of lawyers (and staff) between firms has increased the possibility of conflicts and frequency of vicarious disqualification dilemmas, making conflict analysis more difficult than it used to be.³

4. The larger the firm and the greater the number of cities in which a firm maintains offices, the more involved and complicated it becomes to manage and avoid conflicts of interest, even with proper consent.⁴

5. Although a conflict of interest alone is not a basis for a cause of action in legal malpractice, it can serve as evidence of negligence or breach of fiduciary duty claims.⁵

6. A client-claimant seeking fee forfeiture as a remedy for a breach of fiduciary duty must establish proof of actual damages to get to the jury.⁶

7. If the jury finds the breach of fiduciary duty evidence shows the existence of conflict-related attorney misconduct, and if the court then finds the misconduct was a "clear and serious breach of fiduciary duty," it may order a forfeiture of some or all of the disputed attorneys fees (paid or unpaid).⁷

8. If a conflict is not inherently unwaivable, clients' consent to an actual conflict is required in cases of materially adverse interests that are substantially related, but it need not necessarily be in writing.⁸

9. If a conflict is not inherently unwaivable, potential conflicts require written consent from each client when two or more are being concurrently represented, after disclosing that their consent to the multiple representation means waiving the attorney-client privilege.⁹

10. The most effective way to administer a conflicts checking system is for the firm administrator to circulate a form conflicts memo to each attorney for each new file opened, and be sure the attorneys check the "no-conflict" box and return the form promptly.¹⁰

How did you do? See the back page footnotes to calculate your score.¹¹

Do you find that the conflicts management dilemma has become so complex, you feel tempted to throw your hands in the air and exclaim, "What conflict? We never have any conflicts!" Don't despair: our next issue will contain our "twelve-step" conflicts recovery program - our informal suggestions for overcoming the tendency toward "conflicts denial" and improving the conflicts management approach used for your law practice.

¹ True (some truths are self-evident). On a related point, however, many conflicts checking systems have a shortcoming: one based primarily (or solely) on the firm's accounting and billing system potentially overlooks conflicts. For example, beware of conflicts that might arise from transactional matters (e.g. creating a corporate entity and billing the sole or majority shareholder individually), litigation (such as a suit involving a party identified by an assumed name entity but billing the entity as the client), or any matter involving multiple representation but in which only one party has been designated for billing purposes. There could be many other examples.

² True. Ignorance only appears to be bliss in such situations. See, e.g., Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.--Houston [14th] 1997, writ dism'd by agr) (unacknowledged conflicts, verdict exceeding $35 million); Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex. App.--Texarkana 1989, writ denied) (imputed representation arising from unacknowledged conflict); cf., Mecom v. Vinson & Elkins, unpublished, 2001 Tex. App. Lexis 3088, 2001 WL 493426 (Tex. App. - Houston [1st] 2001, review denied) (dual representation; waiver alleged).

³ True. Vicarious disqualification is surely a much stickier wicket than it used to be. Historically, Texas has not validated the "Chinese wall" approach after an attorney migrates to another firm, generally imposing vicarious disqualification. See, e.g., In re George, 28 S.W.3d 511, 525-26 (Tex. 2000) (dissent by Mr. Justice Brister, sitting by assignment); In re American Home Products Corp., 985 S.W.2d 68, 74 (Tex. 1998), Henderson v. Floyd, 891 S.W.2d 252, 253-54 (Tex. 1995); NCNB Texas Nat. Bank v. Coker, 765 S.W.2d 398, 400 (Tex. 1989); and cf., Phoenix Founders, Inc. v. Marshall, 887 S.W.2d 831, 834 (Tex. 1994) (a "non-tainted" firm was allowed to rebut the presumption that a newly-hired paralegal shared confidences with her new employers, by proving the existence of a "Chinese Wall" regarding the "tainted" paralegal's past and future work on the particular case.

⁴ True. When the office personnel in the firm's Houston office don't recognize the attorneys from the Dallas office (by sight or by name), what does that tell you? No doubt firms officing in multiple locations or having more than one office floor of attorneys run a greater risk of missing an important conflict red-flag. Distributing an "immediate reply" conflict memo on the attorney's desk (blue, yellow or pink, the color doesn't matter) is no assurance that today's "road warrior" lawyers will review the memo, let alone reply promptly.

⁵ True. Part 15 of the Preamble to the Texas Disciplinary Rules of Professional Conduct expressly negates that the Rules undertake to define standards of civil liability of lawyers in their professional conduct: "Violation of a rule does not give rise to a cause of action nor does it create any presumption that a legal duty to a client has been breached." TEX. GOV'T CODE ANN., tit. 2, subtit. G, App. A (Vernon's, 1998). However, evidence of a conflict of interest (or other alleged disciplinary rule violation) may be admissible, either as proof of the standard of care supporting a negligence claim, or proof of a breach of fiduciary duty claim, or both. See, e.g., Two Thirty Nine Joint Venture v. Joe, 60 S.W.3d 896, 905 (Tex. App. - Dallas, 2001, pet. filed 3-2-02) (relying on the Restatement (Third) of the Law Governing Lawyers, § 52(2) & cmt. (f) (2000)). Texas courts commonly decide disqualification issues by reference to the disciplinary rules, and under appropriate circumstances may assert the power to disqualify an attorney even without a violation of a specific disciplinary rule. In re Meador, 968 S.W.2d 346 (Tex. 1998); see also, National Medical Enterprises v. Godbey, 924 S.W.2d 123, 132 (Tex. 1996); Anderson Producing Inc. v. Koch Oil Co., 929 S.W.2d 416, 422 (Tex. 1996); Spears v. Fourth Court of Appeals, 797 S.W.2d 654, 656-57 (Tex. 1990); Ayres v. Canales, 790 S.W.2d 554, 555-58 (Tex. 1990); NCNB Texas National Bank v. Coker, 765 S.W.2d 398, 399 (Tex. 1989).

⁶ False. Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999) held that proof of actual damages was not required in order to seek fee forfeiture. Coupled with a credible allegation of an attorney's error or omission, a conflict issue may be exactly what gives the case "appeal" to plaintiff's counsel, and to a jury. The conflict + error/omission equation improves the claimant's chances of defeating a defendant's summary judgment motion and ultimately persuading a jury. Add a fee dispute to the mix, and the matter escalates. According to Arce, 997 S.W.2d at 241, a client should not have to pay for services necessary because of a lawyer's misconduct; this could become an issue in a motion to disqualify. Cf., In re George, supra at n.3, 28 S.W.3d at 525; (Mr. Justice Brister, dissenting).

⁷ True. Surprise! The jury may consider evidence of a conflict of interest as proof of a misconduct allegation, if a client is seeking a forfeiture of fees owed (or already paid). Only the court determines the outcome of the forfeiture issue (and the amount), Burrow v. Arce, id. at 245. Be that as it may, the client will assert that the harm has already been done if representation was undertaken without checking conflicts properly and/or obtaining proper consent to waive the conflict.

⁸ True. Where conflicts are concerned, bright lines unfortunately are more like chalk lines. According to Rules 1.06 and 1.09, consent to waive a conflict between parties with substantially related and materially adverse interests need not be in writing. Revision of the Rules is underway, and word has it that written consent likely will be required documentation for all conflict waivers. Rules 1.06 and 1.09 use the "substantially related / materially adverse" test to evaluate conflicting representation as between multiple clients in apparently different and current matters, as well as in connection with competing interests between present and former clients.

⁹ True. Whoa! Say you don't mean it: could that be true? Yes, Rule 1.07 (adopted in 1990) requires written consent from all parties with potentially conflicting interests when the lawyer is acting as an intermediary in concurrently representing two or more clients. Conflicts evaluation under Rule 1.07 relates to concurrent or multi-party representation, whether presently adverse or not. Whereas Rule 1.06 applies more clearly to conflicts between current clients not represented in the same pending matter, Rule 1.09 relates to conflicts between current and former clients. Some conflicts develop after the outset of representation, when the interests of separate clients become conflicting in related yet different matters due to some new development. See, e.g., Simpson v. James, 903 F.2d 372 (5th Cir. 1990 [Texas]) and Mecom v. Vinson & Elkins, supra, at n. 2. What begins as a non-adversarial Rule 1.07 conflict may become an adversarial 1.06 or 1.09 conflict - a hybrid situation -- evolving over an extended period of time, and manifesting in relation to concurrent as well as former / current client relationships. Under Rule 1.07, an attorney representing two or more parties concurrently becomes an intermediary between the clients if their interests potentially conflict. Each must give written consent, after disclosure that the parties being concurrently represented must agree to waive the attorney-client privilege.

¹⁰ False. If you're a fan of Groucho Marx and his brothers, one might understandably ask, "Why a duck?" Ducking the existence of a conflict by checking the "no-conflict" answer box is bound to backfire. Perhaps it was once common practice for a firm to begin representation with the understanding it would simply bite the bullet and withdraw, if a conflict should arise. That approach obviously carried adverse economic consequences, but after Arce, the consequences could be exponentially worse: the fees incurred up to the point of withdrawal (paid or unpaid) might be the subject of a fee forfeiture complaint. The potential disciplinary consequences remain in any event.

¹¹ For each answer, give yourself the following points:

1-4: Each T answer = 5 points; deduct 5 for each F answer.

5 and 8: Each T answer = 10 points: deduct 10 for each F answer.

6: Add 10 points for an F answer: deduct 10 for a T Answer.

7 and 9: Each T answer = 20 points; deduct 10 for each F answer.

10: Deduct 40 for a T answer, for F, add 10 points.

If you scored 100, go the head of the class: you are a conflicts "Expert."

If your score was over 50 and under 100, you are a conflicts "Realist:" Give yourself a pat on the back for the correct answers you did give; commit to reinforcing your conflicts management skills by engaging in "conflicts recovery" behavior on a consistent basis. See our next issue for our version of a "conflict denial" twelve-step recovery program.

If your score was under 50, you are a conflicts "Student" There is hope, since you realized the need to dedicate yourself to "conflicts recovery." Give yourself an E for Effort and resolve to re-educate yourself, and implement a plan to improve your conflicts management skills. See our next issue for our version of a "conflict denial" twelve-step recovery program.

If you skipped the test and went straight to the answers, you don't have to "go to jail:" go back and take the test - don't pass "go" or collect $200 - so don't ask.