CI-515

May 14, 1980

SYLLABUS

    A lawyer who in the course of representation of a client, receives information clearly establishing that the client has perpetrated a fraud, by submitting a false claim to an insurance carrier, must, under DR 7-102(B)(1), promptly call upon his or her client to disclose the truth of the matter to the affected party, and if the client refuses or is unable to do so, the attorney must reveal the fraud to the carrier.

    If the lawyer is not convinced that the information he or she possesses clearly establishes that the client has perpetrated a fraud, the rule of preservation of client confidence and secrets promulgated in DR 4-101(A) and (B), requires that the lawyer make no disclosure. However, if the lawyer concludes that the client has not yet perpetrated a fraud, and the receipt of the insurance proceeds is fundamental to commission of the fraud, the attorney has the option under DR 4-101(C)(3) to reveal the information to the carrier, or remain silent.

    References: DR 4-101(C)(3) and DR 7-102(B)(1).

TEXT

A former client of yours leased a building in which it operated a restaurant. The restaurant was unprofitable, and, in the midst of various plans for renovation, was greatly damaged as a result of a fire. Your firm, thereafter, represented the client in attempting to secure payment under the client's casualty insurance policy.

The insurance company investigator found evidence of arson. When confronted by your office with that information, the two principals in the corporation vehemently denied any responsibility for the fire and professed to have absolutely no knowledge as to its origin. Both principals were asked to submit to lie detector testing in order to verify their denials and as a precondition to your representation. Both principals passed the test with respect to their setting the fire and as a result, you agreed to continue to represent them.

After extensive negotiations, the matter appeared to be settled for a substantial sum. At your offices, however, one of the two principals (you believe inadvertently) informed an attorney in your office that they had been responsible for the setting of the fire.

The principals of the former client now deny having made any admission with regard to responsibility for the fire and claim a "misunderstanding." You do not believe there could be any mistake as to the admission of culpability in the setting of the fire. You request is to whether you must, under the apparent facts and recent denial, disclose the information to the insurance company.

Canon 4 of the Michigan Code of Professional Responsibility requires a lawyer to preserve the confidences and secrets of a client. Canon 4 and the disciplinary rules promulgated thereunder are reflective of the high fiduciary duty owed by a lawyer to his or client and also the firm support found in the law for the attorney-client privilege. This tenet is a cornerstone in the foundation of our jurisprudential system and only in rare instance will it give way to an overriding interest.

There is little doubt that the information you obtained is included within the scope of DR 4-101 that in part defines a secret and confidence. DR 4-101(B) states:

    "Except when permitted under DR 4-101(C), a lawyer shall not knowingly:

      "(1) Reveal a confidence or secret of his or hr client.

      "(2) Use a confidence or secret of his or her client to the disadvantage of the client.

      "(3) Use a confidence or secret of his or her client for the advantage of him or herself or of a third person, unless the client consents after full disclosure."

DR 4-101(C) lists four exceptions to the above disciplinary rule. Two of these exceptions are relevant to the question posed by your inquiry. The first, DR 4-101(C)(2) states:

    "A lawyer may reveal . . . Confidences or secrets when permitted under Disciplinary Rules or required by law or court order."

Under DR 4-101(C)(2), a lawyer is permitted reveal a confidence or secret where allowed by other disciplinary rules. DR 7-102(B)(1) is pertinent in this regard, in that it sets out such an instance where disclosure would be required. DR 7-102(B)(1) states:

    "A lawyer who receives information clearly establishing that:

      "(1) His or her client has, in the course of the representation, perpetrated a fraud upon a person, or tribunal shall promptly call upon his/her client to rectify the same, and if his or her client refuses or is unable to do so, the lawyer shall reveal the fraud to the affected person or tribunal." Emphasis added.

DR 7-102(B)(1) tells the lawyer what he or she must do when the lawyer determines that the client has, during the course of representation perpetrated a fraud upon a person or tribunal. This rule states that unless the client rectifies the fraud, the lawyer must reveal the fraud to the affected person or tribunal.

In analyzing DR 7-102(B)(1), it must be noted that the disclosure mandate set out therein is applicable only if two distinct elements are clearly established. First, the lawyer's client must have perpetrated a fraud. Second, the client must have perpetrated the fraud in the course of representation.

Except for the word "person" (defined in the Code of Professional Responsibility to include a corporation or any other legal entity), there are no definitional guidelines for the terms "fraud," "in the course of representation," and "clearly establishing."

The ABA interprets the word "fraud" in DR 7-102(B)(1) to mean "active fraud" which requires scienter or the intent to deceive.

Since the duty to disclose under DR 7-102(B)(1) arises only when the fraud has been perpetrated "in the course of the representation," one must necessarily determine when the fraud has been consummated. Assuming the crime of arson and the client's involvement in the commission of the crime, it would be fair to conclude that the insurance company is initially deceived by the client's attempt to obtain money on the basis of a false report. Because the carrier has not as yet made payment, and there remains the possibility the client may recant before disbursement of the proceeds, it is quite debatable whether or not a fraud has been or will be perpetrated on the carrier. One could logically conclude that since the transaction has not been consummated, no fraud has been perpetrated and, therefore, the mandatory disclosure requirement of DR 7-102(B)(1) is inapplicable to the case, leaving the attorney with the choice of discretionary disclosure under DR 4-101(C)(3).

Accepting the proposition that the fraud is accomplished, when the client submits a false claim to the carrier, with the help of the attorney, close scrutiny of the facts giving rise to the client'' fraud, are required because only when the lawyer receives information "clearly establishing" the client's fraud, does the attorney's duty to disclose come into existence. In other words, the attorney has no duty to disclose until he or she receives information clearly establishing the illegal or fraudulent conduct. If the attorney has legitimate doubts about the fraudulence or illegality of a client's conduct, the attorney's obligation is to resolve any such doubt in favor of the client and against disclosure. In this connection, it is important to distinguish between fraudulent and illegal activities already committed which must be divulged under DR 7-102(B)(1), if clearly established, and the client's intention to commit a future crime which may, but does not have to be, revealed under DR 4-101(C)(3).

The conflicting duties to reveal fraud and to preserve confidences and secrets of a client have existed side-by-side for a considerable time. The American Bar Association has weighted the scales of justice in favor of preserving the confidences of the client by amending DR 7-102(B)(1), to provide an exception to the duty to disclose in cases of "privileged communications." The ABA Code of Professional Responsibility states:

    "A lawyer who receives information clearly establishing that:

      "(1) The client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon the client to rectify the same, and if the client refuses or is unable to do so, the lawyer shall reveal the fraud to the affected person or tribunal, except when the information is protected as a privileged communication." Emphasis added.

The ABA version of the Code was considered in Michigan but the State Bar expressly declined to recommend the "privileged communication" exception to the Michigan Supreme Court. This intentional omission justifies the conclusion that, in Michigan, the lawyer has an affirmative duty to protect the administration of justice from subvertive clients who would wrongfully seek to obtain money - a duty which out-balances the lawyer's obligation to preserve the secrets and confidences of clients in extremely serious matters involving the commission of a crime.

In the final analysis, the question is whether or not you have received information "clearly establishing," that your client has, in the course of your representation, perpetrated a fraud by submitting a false statement to the insurance carrier.

You state that both principals originally passed a lie detector test, that they vehemently deny any connection with the arson, and take the position that the attorney in your office misunderstood them as to any alleged involvement. These factors raise significant doubt as to whether you have information "clearly establishing" that the client has perpetrated the fraud, and the doubt should be resolved in favor of non-disclosure. If, however, you conclude that receipt of the insurance proceeds is fundamental to commission of the fraud, you have the option under DR 4-101(C)(3) to reveal or remain silent.