This is the fourth of a series of blogs dealing with possible ethics and malpractice implications of Covid19 (see here, here, and here for the previous blogs). This pandemic is potentially triggering an increased exposure to ethics complaints and malpractice. Here we deal with financial instability during or after the pandemic as a trigger for disciple or malpractice.
The ethical obligations of confidentiality, competency, fitness to practice law, fees, supervision, and other are involved in dealing with the pandemic.
Financial instability caused by Covid19 crisis is a danger for lawyers under two perspectives: 1) their clients’ financial instability; 2) their own financial instability.
- Clients’ financial instability
Increased claims during “bad” times.
The ABA Program, Emerging Lawyer Risk Management and Professional Liability Coverage Issues (“ABA CLE”), pointed out how “poor economic times” translate into “increased scrutiny” for lawyers; put differently, malpractice is “counter-cyclical” (as the 2008 recession proved). Id. As Teresa Niederwimmer observes: ‘If history offers any indication, attorneys should … expect an increase in both the number and severity of professional liability claims if an economic crisis results from the current pandemic.”[i]
Even if the ABA CLE made the point that the “exposure may be greater for smaller firms/solo practitioners with fewer resources”, we believe that larger law firms (with higher insurance coverage) could be equally (if not more) targets of complaints.
Why should it be true that in dire times clients want to shift the blame? Lawyers are, in the end, a deep pocket (in most of the cases, because of their insurance coverage). “As deals and transactions falter or fail, involved law firms become the last and deepest pocket”. ABA CLE. With so many transactions suddenly disrupted, clients will more be likely to try to pass the cost on to the lawyers.
The ABA CLE referred to ABA studies to identify personal injury, real estate, family law, bankruptcy, and estate practice as the most critical areas for malpractice.[ii] In these times of economic turmoil with companies’ revenues shrinking, we believe that M&A will be another dangerous field to be in.
Financial pressure causing increased client claims.
Financial pressures may cause clients to point to the attorney as the source of their problems. Many times attorneys find themselves on the defensive following an economic downturn simply because clients have lost money and are seeking ways to recover their losses.[iii]
Consider the example of an M&A transaction in which the lawyer represents the buyer. The agreement was entered into before the crisis developed. Suppose the buyer now wants to get out from the deal because the target is no longer attractive due to losses flowing from Covid19. The buyer asks its lawyer to review the merger agreement for possible grounds for avoiding the agreement. The lawyer might examine whether the agreement contains a condition based on revenues of the target; whether a force majeure clause exists, and if it does whether changing of economic circumstances as a result of a virus is included as a force majeure; or whether the agreement contains a MAE (market change event) clause and whether this clause could be read as to include the economic effects of the pandemic.[iv] The lawyer could and should analyze the traditional common law remedies of impracticability, economic hardship and frustration of purpose[v]. Negotiation with the target to find a “fair” adjustment of the agreement is one possible approach; if the buyer is unwilling to go that route, then buyer might want to seek a declaratory judgment that the contract is not enforceable or defend an action by the seller for breach of contract. A lawyer’s failure to counsel the client about possible judicial relief in light of COVID-19 is suggested by the ABA CLE as a possible source of liability. At some point the buyer might consider an action against the lawyer for malpractice. Even if the client did not assert such a claim, the lawyer might have an obligation to inform the client of his “drafting mistakes.” See ABA Formal Op. #481A (duty to inform a current or former client of the lawyer’s material error).
If the lawyer’s representation of the client started during the pandemic, competence requires lawyer to suggest to his clients all suitable contractual protections (e.g. conditions related to the pandemic like the lockdown, force majeure clauses including economic downturns, MAE clauses etc.); whether the other side would accept such provisions is unclear and depends heavily on the relative bargaining power of the parties, but a competent lawyer must suggest and advise his client of the options.[vi]
COVID-19 has produced various governmental responses to alleviate the financial hardship suffered by individuals and businesses. Lawyers need to keep abreast of these developments, and the failure to advise clients of governmental programs for which the client may be eligible is a possible ground for malpractice liability. For example, even failing to advise clients (small businesses) about the Paycheck Protection Program (PPP) and other benefits from Coronavirus Aid, Relief, and Economy Security Act (CARES Act) [vii] may be a ground for malpractice (although perhaps the program is so well known that the clients’ lack of knowledge could be seen as contributory negligence).
Lawyer risk to be sued also by the other side:
As Niederwimmer suggests:
A common scenario involves allegations of client fraud stemming from client activities that may or may not be grounded in attorney advice. The client’s actions can taint the attorney, who may be perceived as providing negligent or even unethical advice, or failing to advise against certain actions. If the client becomes insolvent, these claims will come from the bankruptcy trustee or a receiver. Ensuring the scope of the representation is clearly defined, and documenting the nature of the advice given to clients can go a long way if a client seeks to place blame at the feet of its attorney.[viii]
Niederwimmer gives two other examples: “fraud-based claims … in the form of investor lawsuits” in which the lawyer would be the “aider and abettor” and trust work in which the lawyer is the drafter of the trust documents and the trustee and the trust.[ix]
Lawyers should think carefully about these possible grounds for malpractice or disciplinary liability: the practice of law during economic crisis is a high-risk activity.
Nonpayment of fees.
Clients pose another financial risk – nonpayment of fees. With so many companies facing a decline in revenues law firms are likely to face problems of nonpayment or slow payment.
With regard to new engagements, many law firms that may have been resistant to asking for retainers from large business clients, should reconsider that practice. The engagement should provide that payment of the retainer is a condition to the effectiveness of the agreement and the firm will not commence work until the retainer is paid. To protect against exhaustion of the retainer, the engagement should provide that the retainer will be held in trust (in jurisdictions where this is required; neither New York nor DC has such a requirement although DC requires specific disclosures to put the retainer in the operating account), until the completion of the services and will be applied to the last invoice, with any remainder paid to the client. As a result, the firm will hold the retainer until the conclusion of the matter as security against nonpayment. If the firm faces objections from the client about the retainer, the firm could consider a reduced hourly rate in exchange for the client’s agreement to the retainer. Engagement agreements should perhaps also include an interest rate for nonpayment of fees within a specific period.
While nonpayment of fees is recognized by the Rules of Professional Conduct as a basis for withdrawal, the engagement could and should make that obligation specific and set the time period within which the firm will withdraw or seek to withdraw if the matter is pending before a tribunal. The engagement should provide that it is a condition of the firm’s obligation to deliver work product that the client be current with outstanding fees; the agreement should also provide that the firm has a lien on any product that it has produced until the fees for that work have been paid.
For existing clients who are in arrears, the firm could use the client’s nonpayment of fees as a basis for renegotiating the fee agreement with provisions like the ones suggested above for new clients. Be careful, however, because fee agreement negotiation is subject to fiduciary standards. In addition, another strategy for the firm is to refuse to deliver major work product until outstanding invoices are current.
Collecting unpaid fees from clients is never easy for lawyers; among other reasons it is questionable whether lawyers can use collection agencies without violation of confidentiality obligation so the collection must mostly be done inhouse. If suit is brought, the firm could expect a counterclaim for malpractice as the ABA CLE noted.[x] In addition, collection from cash-strapped clients is likely futile, and there will be many cash-strapped clients before the crisis is over. Lawyers should also consider the not unlikely risk that some of their clients could bankrupt as a consequence of the financial crisis (as has already occurred with several big companies like JC Penney, Neiman Marcus, J. Crew, etc.).
The bottom line is that fee payments are much riskier as the result of the crisis: Lawyers should take precautions by including provisions in new engagements, renegotiating existing engagement if ethically permissible, seeking retainers, billing often, and making sure fees are current before doing any work.
2.Lawyer’s financial instability
Taking on too many cases, cases you would not have accepted in normal times and “dabbling”
Financial pressure on lawyers caused by the Covid19 crisis might be a powerful trigger for discipline or malpractice. Because of financial need lawyers could be tempted to take on more cases than they should. Absent an efficient organization allowing a law firm to work smoothly even in the disruption caused by the crisis (see our previous blogs on lawyers and the crisis, here, here, and here), lawyers should actually consider accepting fewer cases (not more) for a variety of reasons: Efficiency in handling cases, working together as a team, and supervision of associates and contractors may suffer. Court availability may be substantially reduced.[xi] Data security and privacy protections resulting from remote working may be more difficult. New skills must be learned to avoid possible ineffective “remote advocacy” in oral arguments, depositions, mediations, and other presentations. All of these issues point towards reducing the workload.
If a lawyer is concerned that business may dry up (as has happened to many lawyers now that the clients’ attention is more focusing on keeping their head above the water than on fine legal issues), he/she might be tempted to accept cases she would not have accepted in normal times (e.g,, when the client is financially marginal) and of dabbling.
Accepting cases that you would not have accepted but for financial pression is not a good idea. The reasons for refusing these cases still exist but they have been amplified by the crisis.
Dabbling (i.e., accepting cases outside of one’s area/s) is also generally a bad idea:
Many lawyers begin to dabble when business slows down or dries up in an area they have become familiar with. That was common during the last economic downturn. It’s hard to measure the impact of dabbling on the incidence of malpractice complaints, but it seems to be responsible in a measurable way for disciplinary complaints against lawyers who do not prepare themselves adequately to face the challenge of doing a new kind of work.[xii]
If the lawyer performs incompletely, he violates the duty of competence, which could result in discipline, malpractice liability, or loss of fees:
[F]ees are frequently found to be unreasonable when the lawyer does not perform competent work, or neglects a matter, but nevertheless seeks to be paid the full fee for which he or she has contracted. See, e.g., Attorney Grievance Comm’n of Maryland v. Garrett, 427 Md. 209, 224, 46 A.3d 1169, 1178 (2012); Rose v. Kentucky Bar Ass’n, 425 S.W.3d 889, 891 (Ky. 2014).[xiii]
However, dabbling is a bad idea even if lawyer makes himself competent because it is inefficient: A lawyer cannot charge his client to become competent[xiv] so the time involved in dabbling would be wasted unless the lawyer intends the area to become a part of the lawyer’s practice.
Lawyer’s mobility and firms’ winding up
The Covid19 crisis can also trigger lawyer mobility, which can in some cases become a “death spiral” leading to the firm winding up. The ABA CLE pointed out that an “[e]stimated 5 million small businesses will not survive, including small law firms”. Considering the size of entities that are filing for bankruptcy right now (J Crew, Neiman Marcus, etc.) we believe that also some big firms (especially those that have stretched themselves too thin) could also be at risk. In fact, some large firms were victims of the 2008 financial crisis. Large or small – the ethical issues for failing firms are essentially the same, even if the magnitude of the problems is certainly different.
Some years ago’ one of us wrote a two-part article[xv] and a series of blogs[xvi] on lateral movement and law firm breakups. Many of the issues discussed in those article and blogs are relevant during/after the crisis. For example, confidentiality issues, [xvii] fiduciary duties to the old firm,[xviii] conflict of interest;[xix] notice to clients,[xx] etc.
The ABA CLE also pointed to possible coverage risks caused by insurance gap (and we want to mention that lawyers should consider purchasing a tail for their old policy) and “risks associated with failure to comply with applicable law in transitioning or winding up a law firm.
For more information, Nathan M. Crystal & Francesca Giannoni- Crystal.
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[i] Teresa Niederwimmer, What a pandemic can mean to your law practice, South Carolina Lawyers Weekly, May 11, 2020.
[ii] See ABA study suggests legal malpractice insurers are settling sooner, available at
[iii] Teresa Niederwimmer, What a pandemic can mean to your law, cited above.
[iv] See our blog: Nathan Crystal & Francesca Giannoni-Crystal, Contractual Enforceability During the Coronavirus Crisis
[v] Id.
[vi] Id.
[vii] The CARES Act Provides Assistance to Small Businesses https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
[viii] Id.
If real estate markets or the stock market tank, the value of many trusts decline as well. When trust assets shrink, family squabbles can draw in the attorney. This is particularly problematic when the attorney has done work for the trustee or serves as a trustee. The decline in the trust’s value may be blamed, in part, on the attorney. Id.
[x] Teresa Niederwimmer, What a pandemic can mean to your law, cited above.
[xi] See for example, the recent case of divorce of Mary-Kate Olsen and Olivier Sarkozy. Olsen’s attorney filed for divorce but the urgency filing was denied by the court. See more here https://www.cnn.com/2020/05/15/entertainment/mary-kate-olsen-divorce-denied-olivier-sarkozy-trnd/index.html
“Only essential/emergency matters are allowed to be filed,” said Lucian Chalfen of the New York Supreme Court. “The original filing was rejected by the New York County (Manhattan) clerk because they did not follow the essential matter procedure. They refiled under the essential matter procedure, and the matter was referred to an ex parte State Supreme Court Judge. He just decided that it is not essential, so they can’t file anything at this point.” Id.
[xii] Karen Rubin, Dabbling in other practice areas can bring disciplinary, malpractice woes to lawyers, available at https://www.thelawforlawyerstoday.com/2016/01/dabbling-in-other-practice-areas-can-bring-disciplinary-woes-to-lawyers/
[xiii] John C. Martin, The Ethics of Attorney’s Fees: The Rules for Charging and Collecting Payment , available at https://www.sfgh.com/siteFiles/News/Ethics%20of%20Attorneys%20Fees.pdf
[xiv]
Though a lawyer may work on legal matters unrelated to his or her usual practice, they may not charge the client for extra time studying to become competent in that area of the law., available at https://law.jrank.org/pages/9482/Professional-Responsibility-Areas-Professional-Responsibility.html
[xv] Nathan M. Crystal, So You Are Thinking About Moving – A Primer on Ethical Obligations of Departing Lawyers and Their Firms, Part One, South Carolina Lawyer 10 (March 2013); Nathan M. Crystal, So You Are Thinking About Moving – A Primer on Ethical Obligations of Departing Lawyers and Their Firms, Part Two, South Carolina Lawyer 11 (May 2013) .
[xvi] See Nathan M. Crystal, Confidentiality issues in lateral movement and firm’s breakup; Nathan M. Crystal, Lateral movements and conflicts of interest; Nathan M. Crystal, Lateral movements: When should departing lawyers inform their firms of their plans to leave; Nathan M. Crystal, Lateral movements – providing notice to clients
[xvii] If a lawyer is joining a new firm (either in a straight departure or as a result of a law firm breakup), may the lawyer reveal information to the new firm to do a conflicts check without violating the lawyer’s duty of confidentiality? See Confidentiality issues in lateral movement and firm’s breakup
[xviii] Lateral movements: When should departing lawyers inform their firms of their plans to leave? See Nathan M. Crystal, Lateral movements: When should departing lawyers inform their firms of their plans to leave;
Lawyers have fiduciary obligations to their firms. A fiduciary has a duty to disclose material information to the principal. However, lawyers may engage in preliminary negotiations with prospective new firms and may make plans to open their own practice without disclosing such activities to their current firm … As a general matter, in my opinion lawyers need not disclose their intention to move until arrangements with the new firm are final. After all, the deal may fall through for many reasons.
When lawyers decide to leave a firm and open their own office, conflict of interest issues should not arise because the new firm will not have existing clients. On the other hand, three types of conflicts can arise when lawyers join an existing firm.
First, the lawyer’s old firm may represent a client that is directly adverse to a client of the new firm, either in a litigation or a transactional matter….
Second, a conflict does arise if the moving lawyer was substantially involved in the representation of the client of the old firm or otherwise acquired confidential information about that client. …
Third, a conflict may arise when a client that a moving lawyer plans to bring to the new firm has a conflict with an existing client of the new firm. Nathan M. Crystal, Lateral movement and conflicts of interests
See the blog form an analysis of possible solution.
[xx] If a lawyer is changing firms, how should the lawyer and the old firm handle notification to existing clients of the lawyer’s departure? See Nathan M. Crystal, Lateral movements – providing notice to clients.