Although DRI members more often than not have an adversarial relationship with class action counsel, on occasion they become our clients, for example, when they are sued for malpractice by individual members of the class that they represented. Two recent cases (one on each coast) discuss the scope of the duty owed by class counsel to absent class members, i.e., those class members who are not  named class representatives.

In Wyly v. Milberg Weiss Vershad & Shulman, 12 N.Y.3d 400 (2009) New York’s highest court concluded that unlike when a traditional attorney client relationship terminates, an absent class member does not enjoy a “presumption of access” to the class counsel’s file, including work product. In so concluding, the Court of Appeals discussed the fact that absent class members enjoy some of the indices of an attorney client relationship with class counsel, such as the right of privileged communication with class counsel and the prohibition against direct communication by adverse counsel. However other indices, such as the right to direct the course of litigation, testify at trial, participate in discovery or discharge counsel, are missing.  Accordingly, an absent class member needed to demonstrate both a substantial stake in the underlying litigation and a demonstrated legitimate need for the documents to permit him access to class counsel’s files for purpose of pressing either a malpractice claim against class counsel or an action to set aside the settlement of the class action. In that case, access to the file was denied.

In Martorana v. Marlin & Saltzman et. al, 2009 Cal. App. LEXIS 1076 (Ct. of Appeals, Second Appellate District, July 1, 2009) the California Court of Appeals also examined the peculiar species of attorney client relationship between class counsel and an absent class member who was asserting a malpractice claim against class counsel for its failure to individually notify him of the need to timely file a settlement claim or opt out.  Interestingly, the Court stated that there was no dispute that class counsel “owed a duty of care to all class members to represent them with such skill prudence and diligence as attorneys of ordinary skill and capacity commonly possess and exercise in the performance of their tasks.” The Court nevertheless concluded that the mass notification procedure provided for and approved by the court supervising the class action barred the malpractice claim, based on collateral estoppel and pubic policy, unless the absent class member could show that class counsel had breach some individual duty to the absent class member over and above what was owed to all members of the class.

Query –  Are there other types of multiple or joint representations that impact on the scope of the duty owed to the individual represented by counsel?

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Categories: Professional Liability

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In these days of notorious rip offs and ponzi schemes by corporate insiders, more and more suits try to extend liability for the insiders’ acts to outside professionals, such as lawyers, accountants, auditors, etc., who provided limited services to those corporations. The claims stem from the well accepted principle that the professional is retained for the benefit of the corporation and not the corporate insider that hired him/her. Claims depend on the often fantastic factual assumption that, as a result of the limited services provided, the professional had to have known(or in some jurisdictions, should have known) of the fraudulent conduct by the corporate insider. Jurisdictions around the nation differ as to who may maintain those claims, be it a trustee or receiver standing in the shoes of the corporation itself, and/or investors, shareholders or creditors of the corporation who claim that they were harmed as a result of the fraud. 

The Courts in the Second Circuit continue to refine whether and under what circumstances a bankruptcy receiver has standing to assert aiding and abetting fraud, conversion and/or breach of fiduciary duty type claims against lawyers who represented a corporation that ends up in bankruptcy as a result of the fraudulent conduct of the corporation’s insiders. In the most recent case, Cobalt Multifamily Investors LLC v. Shapiro, 2009 WL 2048539 (S.D.N.Y. July 15, 2009) Judge Kimba Wood concluded that the issue of whether the receiver, standing in the shoes of the corporation, could assert the claims required a fact intensive inquiry as to whether the corporate wrongdoers intended to abandon the interests of the corporation and whether innocent shareholders had the power to remove the managers if they had been advised of the wrongdoers fraudulent conduct. In so doing, Judge Wood concluded that it was irrelevant that the corporate wrongdoers may have actually benefitted the corporation’s interest so long as their intent was fraudulent. She also concluded that the undisputed day to day domination of the company by company insiders, all of whom participated in the fraud, did not negate the power of innocent shareholders to stop the fraud under the terms of that company’s corporate structure. 

Obvious risk management issues for the professional are presented by the decision as it appears to abandon more objective questions for inherently subjective issues. Query -- do outside professionals, retained for limited purposes, need to inquire beyond the scope of their retention, into matters such as the “intent” of insiders or the power of non-insiders to effect corporate governance, if they are to avoid an ex post facto determination by the Court that the professional’s failure to ferret out a subsequently discovered fraud and report it to an innocent actor is a basis for liability? 

Shari Claire Lewis
Member, Professional Liability Committee


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