DIFFICULT MORAL QUESTIONS

Question 188: Must a lawyer make restitution of a contingency fee paid by a lying client?

I am a lawyer who accepted a case on a contingent-fee basis—an arrangement by which a client pays no fee if he or she loses but pays a portion of the proceeds if he or she wins. The lawsuit was for an uninsured loss of personal property alleged to have occurred in a fire. My client was a woman who had been living in a carriage-house apartment that burned down due to the negligence of the owner, who lived nearby in the main house. There was no argument about his duty to reimburse my client for the property she lost; the issue was what her losses were.

She is a professional writer employed by a trade journal. In her spare time she had been working on a book, which she had almost finished. She said she had kept all her research materials and drafts in her apartment, and only backups of her computer disks at work. But her office at work had been burglarized shortly before the fire, and, she said, the backups were taken along with the computer and a good deal else. Working with her, I made the case that her loss was over fifty thousand dollars, negotiated a settlement for that amount, and last month received one-third of it as my fee—a good return for the twenty or so hours I devoted to the matter.

Today, however, by sheer coincidence a young man from Australia—a journalist spending a sabbatical here—asked me to draw up a contract with my former client to purchase all rights to her manuscript. This plainly is the book she had been working on. She gave it to him to look over two days after the fire, saying her employer was putting unreasonable obstacles in the way of her plan to publish it in the United States. Evidently, she had another copy or a set of backups, and her real loss in the fire was minimal. I declined to draw up the contract, on the ground that the other party to it had recently been my client.

Of course, when negotiating the settlement, I did not know my client’s claim was fraudulent, but perhaps I should have realized that something was amiss. When she first came in, the story she told sounded a bit like fiction, because it was complete and entirely coherent, whereas truthful stories, particularly those of people who have suffered an unexpected loss, generally must be elicited bit by bit and are rarely entirely consistent on first telling. But she was a convincing liar—though, I must admit, her attractiveness and the prospect of the contingency fee probably dulled my usual skepticism.

Having been used as a tool of her fraud, I am trying to figure out my present moral obligations. Should I inform the party with whom I negotiated the settlement of the evidence of the fraud? If I do that, he surely will seek restitution, but, since she spends freely, I doubt he will get much back. Since I worked on the case in good faith, I do not believe he has any legal right to the fee she paid me. But what is my moral responsibility? Should I give part or all of it back to him?

Analysis:

The questioner first should tell the former client what he or she has learned and urge her to make just restitution. If she refuses, the problem stands as presented, and calls for applying the norms regarding confidentiality and restitution. Morally, the defrauded party should, in my judgment, be informed unless that would put the questioner at an unfair risk. If the former client makes full restitution, including the amount she paid as fee, the questioner may keep it. If not, he or she should, in my judgment, return at least part of the fee to the defrauded party. The amount to be returned can be determined only by applying the Golden Rule to all the relevant facts.

The reply could be along the following lines:

I assume that you have no legal duty to report your former client’s fraud to the police. On that assumption, it seems to me that, before doing anything else, you should inform her of what you have learned and urge her to make restitution to the party she defrauded. In making the case for restitution, you probably should call to her attention the disciplinary rule of legal ethics, which I shall quote below, apparently requiring you to pass on the information you have received to the party she defrauded. Although she may not now have any of the money she received from the settlement, she could pay something each month and for this purpose also use the proceeds from her book. If she undertakes to make full restitution and you can verify that she is doing so, your problem is solved. But if your exhortation does not move her and you find no way to compel her to make restitution, you will be left with the problem as stated. The following is my response to it.

Setting to one side, for the moment, the canons and rules of professional ethics, I think you have a clear duty to inform the party with whom you negotiated the settlement that your client defrauded him. He has been wronged, and the information you easily could provide would help him obtain at least part of the restitution he deserves. Since your client used your honest efforts as an instrument of her wrongdoing, you have no moral duty to shield her by keeping secret the evidence of her fraud. Of course, it is important that lawyers usually guard their clients’ confidences, so that people who need legal help will not be afraid to obtain it and will communicate freely with their lawyers about their problems, including any possible violations of law. But it would not undermine the public’s necessary trust in lawyers to exclude from confidentiality evidence, such as you received, of a client’s fraud obtained from independent sources after a case is over.

Still, some provisions of your profession’s ethics seem to require you to keep secret the evidence you accidentally acquired. The American Bar Association’s rule forbids a lawyer to reveal information relating to the representation of a client without his or her consent unless the lawyer reasonably believes that revealing it is necessary either (1) to prevent the client from committing a crime likely to result in someone’s death or serious bodily harm, or (2) to protect the lawyer’s own legitimate interests.⁴¹⁶ The explanatory comment on this rule makes it clear that it applies to all information relating to the representation of a client, regardless of how and when the lawyer acquires it. Now, while your client did something seriously immoral and unlawful, her crime did not involve killing or bodily injury and is past rather than prospective; and, while your work was instrumental to her wrongdoing, your legitimate interests do not at this time require you to reveal the evidence of her fraud. I say “at this time,” because the situation could change—for example, if you eventually were charged with conspiring in her wrongful behavior.

At the same time, other provisions of professional ethics seem to require you to reveal your former client’s fraud to the defrauded party. The ABA’s Model Code states: “A lawyer who receives information clearly establishing that (1) His client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal, except when the information is protected as a privileged communication.”⁴¹⁷ Since you learned of the fraud from a third party, you did not get the information from a privileged communication, and so, it seems, you ought to pass it on.

I do not know what rule would be considered applicable in this situation in the jurisdiction where your legal work unwittingly assisted this fraud. If the latter, you plainly should tell the defrauded party what you have learned unless your former client sets about to make restitution. If that would be considered a violation of the former rule, I think that in this application that confidentiality rule lacks moral force. And if you can safely circumvent it—for example, by communicating the evidence anonymously—it seems to me you should. If you cannot circumvent it, you might consider openly violating it.

In considering violating it, you also can rightly take into account the risk of harm to yourself. Having been innocently involved in the fraud, you need accept that risk only if the Golden Rule requires it—for example, if the risk to you is not great and you have a solid hope of significantly benefiting the defrauded party. But there is no such hope if you have good reason to doubt he will get much back, and in that case you need not accept the risk and can rightly keep the secret.

What, then, should you do about the contingency fee? It seems to me that, having earned it honestly, you may keep it if the client makes full restitution, including the amount you received as your fee, to the party she defrauded. But what if the defrauded party will not get full restitution unless you give him at least part of what you received? Put yourself in his place, and I think you will see that he is entitled to at least part of what you received as a result of the settlement.

The appropriate way for you to make any required restitution will depend on whether or not you can tell the defrauded party what you have learned. If you do tell him, you can offer at the same time to return at least part of your fee and try to reach a mutually satisfactory agreement on how much. But if you keep your client’s secret, you must decide unilaterally how much you owe the defrauded party and choose a trustworthy intermediary to deliver the appropriate payment without revealing who is making it and why, except that it is “conscience money.”

How much should you pay back? I cannot give you an exact answer; you must consider everything and apply the Golden Rule. That means considering, among other things, the possibility that, had you taken more care, the client might not have succeeded in her fraud, a possibility to which you allude by saying you perhaps “should have realized that something was amiss.” Again, take into account that you received a substantial fee for relatively little work on a case that, but for the client’s fraud, would have yielded a much smaller settlement and fee. If you paid tax on the income and will be unable to recover it, you may take that into account. Finally, if you are better off than the victim of the fraud, I think you should settle any doubts about what you owe him in his favor rather than yours.

416. See American Bar Association, Model Rules of Professional Conduct (1993), Rule 1.6, “Confidentiality of Information”.

417. American Bar Association, Model Code of Professional Responsibility, (1986), DR 7–102 (B).