In 2023, the American Bar Association amended Model Rule 1.16 (Declining or Terminating Representation) to highlight the responsibility of attorneys to monitor for clients’ nefarious motives. Prior to the change, Model Rule 1.16 listed several scenarios where a lawyer would be prohibited from representing a client, stating, “a lawyer shall not represent a client, or where representation has commenced, shall withdraw from the representation of a client if” any of those factors are present. The factors enumerated were if “the representation will result in violation of the Rules of Professional Conduct or other law,” “if the lawyer’s physical or mental condition materially impairs the lawyer’s ability to represent the client,” or “the lawyer is discharged.” This provision did not specifically address clients who seek to use lawyers’ services to further a crime or fraud.
After the amendment in 2023, Model Rule 1.16(a) now states, “A lawyer shall inquire into and assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation.” In addition to the scenarios listed in the old Rule where an attorney could not represent a client, the new Rule explicitly prohibits representation where “the client or prospective client seeks to use or persists in using the lawyer’s services to commit a crime or fraud, despite the lawyer’s discussion . . . regarding the limitations on the lawyer assisting with the proposed conduct.”
As the official comments to the Rule explain, this Rule change “imposes an obligation on a lawyer to inquire into and assess the facts and circumstances of the representation before accepting it.” Rule 1.16 [comment 1].
Does this mean that you have to hire a private investigator any time you want to take on a new client? According to the official comments, no:
The required level of a lawyer’s inquiry and assessment will vary for each client or prospective client, depending on the nature of the risk posed by each situation. Factors to be considered in determining the level of risk may include: (i) the identity of the client, such as whether the client is a natural person or an entity and, if an entity, the beneficial owners of that entity, (ii) the lawyer’s experience and familiarity with the client, (iii) the nature of the requested legal services, (iv) the relevant jurisdictions involved in the representation (for example, whether a jurisdiction is considered at high risk for money laundering or terrorist financing), and (v) the identities of those depositing into or receiving funds from the lawyer’s client trust account, or any other accounts in which client funds are held.
Rule 1.16 [comment 2].
As of now, Maryland, Massachusetts, North Dakota, Oregon, and Wyoming have adopted the Model or similar amendments. Jurisdictions in which proposals are under consideration are: Alaska, Arizona, DC, New York, and Washington. Even if a state has not adopted this rule, a state make take the position, as the ABA did prior to the rule change, that the duty to proactively, not reactively, avoid contributing to clients’ crimes and frauds, is implicit in the duties of the existing rules. See ABA Formal Ethics Opinion 491 (2020). For example, the Colorado Bar Association published an opinion in 2021 cautioning that a lawyer who is willfully blind, in other words, who “(1) subjectively believes that there is a high probability that a fact exists; and (2) takes deliberate actions to avoid learning that fact,” would be deemed to have actual knowledge. Colorado Bar Association Formal Opinion 142 (2021) citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011).Accordingly, ignoring “obvious indicators of the client’s intent to use the lawyer to facilitate a criminal or fraudulent act” would probably be considered misconduct. See Colorado Bar Association Formal Opinion 142 (2021).
The Civil Liability Framework
Regardless of the applicable Rules of Professional Conduct, turning a blind eye to a client or potential client’s possible criminal intent can have disastrous consequences if the lawyer was deemed to have knowledge of the fraud, or even if the lawyer was negligent in detecting or responding to the fraud.
Unlike with disciplinary action, a violation of the Rules of Professional Conduct is neither per se grounds for civil liability, nor is it a required element. In disciplinary actions, lawyers are only guilty of misconduct if they participate in a client’s fraud with actual or constructive knowledge. Both malpractice and negligence standards, however, can find breaches where a defendant has not acted reasonably prudently, regardless of their state of mind.
In Greycas, Inc. v. Proud, 826 F.2d 1560 (7th Cir. 1987), an attorney was held liable for negligent misrepresentation for his involvement in a loan agreement. The attorney’s brother-in-law was the proprietor of a farm that had hit hard times. To secure a loan, the farm was required to produce an attorney’s letter stating that there were no prior liens on the machinery that served as security for the loan. The attorney took his brother-in-law at his word that there were no prior liens on the machinery; however, it later became clear that most of the machinery had been pledged to other lenders.
In Fifth Third Mortgage Company v. Ira Kaufman, 934 F.3d 585 (7th Cir. 2019), a lawyer was sued for aiding and abetting his client’s mortgage fraud scheme wherein a property owner obtained the proceeds of mortgage loans through false statements. The lawyer claimed that he did not know about the mortgage fraud scheme, and that it was not his job to review the veracity of certain buyers’ statements that turned out to be false; however, the primary perpetrator of the fraud testified that the attorney knew that “the buyers were part of the scheme” and two closing agents stated that they informed the lawyer about misrepresentations in the loan applications. Ultimately, the attorney was deemed to have had knowledge of the fraud and held responsible for aiding and abetting.
In Surefunding, LLC v. Goodwin Procter LLP, a receiver for an investment fund sued a law firm that drafted contracts for a client who used those contracts to facilitate a multi-million dollar Ponzi scheme, purportedly unknowingly. The complaint alleges that the lawyer “should have but failed to conduct adequate or even due diligence on” its fraudster client. The matter currently was voluntarily dismissed without prejudice. SureFunding, LLC v. Goodwin Procter LLP, No. 1:22‑cv‑10478 (D. Mass.).
Failing to conduct proper due diligence into the bona fides of your client could result in a conclusion that the lawyer knew about the client’s planned fraud, or that he negligently carried out the representation.
What’s the Upshot for Practitioners?
Although disciplinary rules are not the be-all-end-all for liability, the updated Model Rule and its comments provide helpful guidance for the standard of care to detect a client’s potential fraud. There are a number of markers that, alone or in concert, could constitute red flags for criminal activity. If the client is an unknown individual or an entity with dubious beneficial ownership, if the requested legal services seem dubious, if a jurisdiction at issue in the transaction is at high risk for money laundering or terrorist financing, or if non-client financiers or fund recipients’ identities are dubious or unknown, it may be time to dig deeper to ensure that you are not unwittingly participating in a crime or fraud.
