Ethics Hotline & Opinions

Ethics Docket No. 1990-41

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 1990-41

Misrepresentations by client in business transaction

 

You indicate that Mr. X wishes to sell to Mr. Y a corporation controlled by Mr. X. Mr. Y will provide a promissory note from the corporation owned by Mr. Y and Mr. Y will personally guarantee payment of the note. You additionally indicate that Mr. Y is substantially misrepresenting his financial statement "to the point that the guaranty will be illusory" and that the Law Firm representing Mr. Y has actual knowledge of the misstatements being made by Mr. Y. You desire to know what obligation the Law Firm has relative to the misrepresentations being made by Mr. Y with the knowledge of the Law Firm. You also indicate that part of the transactions involved conduct prior to January 1, 1987.

Rule 4.1 of the Rules of Professional Conduct states, in part: "(a) In the course of representing a client, lawyer shall not knowingly (1) make a false statement of material fact to a third person; or (2) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client. (b) The duties stated in this Rule apply even if compliance requires disclosure of information otherwise protected by Rule 1.6." Thus, it is clear under the current rules of professional conduct that the attorney would be obligated to disclose to Seller's counsel the material facts underlying its client's fraud.

DR7-102 of the Code of Professional Responsibility previously in effect dictated that a lawyer shall not: "Counsel or assist his client in conduct that the lawyer knows to be illegal or fraudulent." DR7-102 (B) stated that "A lawyer who received information clearly establishing that (1) his client has, in the course of the representation, perpetuated 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 review the fraud to the effected person or tribunal." It would, therefore, appear that under the Code of Professional Responsibility, the lawyer would have an obligation to have his client rectify the situation immediately. If the client refused to do so, the lawyer would clearly have an obligation to reveal the fraud to the Seller's attorney.

 

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