MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2010-03
Does an attorney who signs an agreement to indemnify a client violate the Rules of Professional Conduct by “guaranteeing a result” or by improperly “owning a claim”?
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Your inquiry was considered by the Committee on Ethics of the Maryland State Bar Association and I have been assigned to respond on its behalf.
The Committee has reviewed your request for an opinion regarding the Indemnification requirements of a retainer agreement between yourself and a bank that seeks to hold you responsible for violations of the bank’s procedures and for violations of the Protecting Tenants at Foreclosure Act of 2009. You ask if the obligations created under the retainer agreement call for you to violate the Rules of Professional Conduct by guaranteeing a result or by causing you to assume ownership of a claim.
The Committee does not offer advice or opinions on substantive legal matters, only on the Rules of Professional Conduct (the “Rules”). For that reason, the Committee cannot fully answer your question. The indemnity provision (which follows) seems quite broad and may cause an attorney who signs it to assume substantial liability well beyond the value of the engagement as it indemnifies the Bank for matters outside the control of the attorney.
In consideration of your engagement for professional services, your firm shall defend (with counsel satisfactory to BANK), indemnify and hold harmless BANK and BANK affiliates and their respective, directors, officers, employees, successors and assigns, against and from all suits, claims, proceedings, actions, losses, liabilities, damages, interest, fines, penalties, judgments, settlements (as pre-approved in writing by BANK), costs and expenses (including reasonable fees, expenses and disbursements of attorneys, accountants and other experts and professionals, and costs, fees, and expenses of investigation) arising out of, in connection with, resulting from or based on allegations of, the performance or breach of any obligations under the Procedures, including without limitation, delays and errors in performance of the Procedures or compliance with the Act. (Bank’s name has been omitted.)
As we read this indemnification, the attorney is asked to indemnify the Bank against any loss associated with the “Procedures” which are defined to be those “procedures” or steps that the contract requires of various parties (including the attorney) performing services for the Bank under a new federal law entitled the Protecting Tenants At Foreclosure Act of 2009 (the “Act”). The Agreement purports to be the Bank’s response to the Act and authorizes the Bank to amend the Procedures from time to time.
The Committee believes that the Agreement goes too far in attempting to shift liability from the client to the lawyer and does so in such a way to violate principles that go to the very basis of the lawyer client relationship. Indeed, the Committee concludes that the Agreement places the lawyer in a position inconsistent with the principles found in the Rules of Professional Conduct that prohibit conflicts of interest and independence of judgment. For example, Comment 1 to Rule 1.7 says: “Loyalty and independence are essential elements in the lawyer’s relationship to the client.” Rule 1.8(e) states that “A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation … (subject to exceptions not here relevant).” Comment 10 to Rule 1.8 explains this prohibition saying that the policy behind precluding financial assistance is “because to do so would encourage clients to pursue lawsuits that might not otherwise be brought andbecause such assistance gives lawyers too great a stake in the litigation.” Rule 1.8(i) applies to prohibit an attorney from acquiring a proprietary interest in “a cause of action or the subject matter of litigation the lawyer is conducting for a client”.
The Committee does not believe that an attorney’s agreement to indemnify a client for his or her own professional negligence constitutes “ownership” of a claim in the context of the Rules or necessarily creates a conflict of interest between an attorney and client. However, we believe that the indemnity agreement raises a problem under Rules 1.8 to the extent that the attorney is asked to provide indemnity arising from conduct of others, including potentially conduct of the Bank itself, and that such indemnity raises concerns under Rule 1.7, as an attorney’s interest in avoiding personal liability or cost under the indemnification may affect the attorney’s independence of judgment to an extent that would be prohibited by the Rule. .When considered together with the overbroad indemnification, these Rules and the comments thereto lead the Committee to conclude that a lawyer may not enter this Agreement.
The Committee does not believe that such an indemnity agreement would violate Rule 7.1. The Rules impliedly address the concept of a “guaranteed result” in that part of the Rules that deal with advertising. An attorney cannot imply in the attorney’s advertising anything that might give the prospective client an unjustified expectation in the results the lawyer can achieve and an attorney cannot imply that the attorney can achieve results by means that violate the Rules or law. Rules, Rule 7.1. An agreement to indemnify a client does not fall within the concepts of “advertising” as regulated by Rule 7.1. Nevertheless, even if the Rules could be interpreted to extend Rule 7.1 to an indemnification agreement (which we do not now conclude), indemnifying a client against loss does not fall within this provision of the Rules as your agreement to indemnify the client cannot be seen as creating an unjustified expectation about the results you can achieve nor does it state or imply anything about the means by which you will achieve results.
For the reasons above, this opinion reflects the consensus of the Committee, with which some members disagree. While all members believe that an attorney would be ill-advised to sign the Agreement, some members have concluded that the Agreement does not violate the Rules of Professional Conduct but, instead, that signing such an agreement reflects a poor business decision by the attorney.
The Committee notes several issues that are beyond its purview. The Committee cannot, for example, opine as to whether or not this indemnification provision may violate Maryland public policy, whether it would constitute a contract of insurance, or whether-if a contract of insurance-it would comply with Maryland law governing such contracts. Finally, the Committee also notes that an attorney signing the Agreement should be aware of the potential consequences for his or her insurance coverage, as noted by the Law Society of British Columbia:
It appears that some institutional clients are asking lawyers to indemnify them for any losses arising out of breaches of the new privacy legislation. Lawyers are cautioned against entering into any such agreements. As the BC Lawyers Professional Liability Insurance Policy provides coverage for negligence, not contractual breaches, lawyers expose themselves to an uninsured risk in agreeing to indemnify any client.
The Law Society of British Columbia, Bencher’s Bulletin, 2004, No. 4: September-October.
The Committee hopes it has addressed your inquiry and thanks you for your interest. Our opinions are available on line at www.msba.org.
REFERENCES: Maryland Rules of Professional Conduct for Lawyers
Rules 1.7, 1.8 and 7.1
ASSIGNED TO: Charles W. Thompson, Jr., Esquire
DATE ASSIGNED: September 21, 2009
DATE DISTRIBUTED: September 21, 2009; September 29, 2009, October 28, 2009