What Should a Transactional Lawyer Do Upon Discovery of Client Fraud in a Completed Deal?
The lawyer should consult with the client about the client's best interests in the matter, which likely involves an effort to disclose and rectify or mitigate the misrepresentation before it turns into fraud claims and litigation.
July 26, 2024 at 11:50 AM
6 minute read
Ethics
Dear Ethics Lawyer
This column, written by Mark Hinderks, of Stinson LLP, focuses on ethics questions. The discussion here is based on the ABA Model Rules of Professional Conduct, but the Model Rules are often adopted in different and amended versions, and interpreted in different ways in various places. Always check the rules and authorities applicable in your relevant jurisdiction—the result may be completely different.
Question: I am a corporate/real estate lawyer whose practice focuses on buying and selling large commercial and industrial properties. The agreements for these transactions are complex, heavily negotiated and typically contain a series of representations and warranties (or disclaimers) of the seller to the buyer about the condition of the property. Recently, while doing some due diligence in connection with one of these transactions for a large client, I discovered some misfiled emails relating to an earlier deal we had completed for them two years ago to sell a large industrial property. These emails indicate that at least some constituents of the client knew of a hidden and undisclosed material issue relating to the condition of that property prior to the sale, knowledge of which would make the client's representations in the sale agreement false at the time they were made. I had no knowledge of this at the time, the deal is long done, and the buyer has made no complaint. What do I do? Am I already at risk for having represented the client in this? Do I have any obligation to make a disclosure?
This appears to be a case of a completed misrepresentation. Model Rule 4.1(b) states that a lawyer shall not knowingly "fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6," but this does not address a completed fraud. Because you did not know the representation to be false when made, you have not engaged in unethical conduct.
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