October 2018

Recent Decision Highlights The Consequences Of An Attorney’s Intentional Concealment Of Material Information From Client

By Andrew A. Servais

Wingert Grebing Brubaker & Juskie LLP

As an internationally ranked high school swimmer, Dagny Knutson received multiple five-year scholarships to several universities which did not include performance markers. In her senior year, she committed to Auburn University because one of its coaches was considered an expert in the individual medley, Knutson’s preferred event.

In March 2010, Mark Schubert, USA Swimming's head coach, told Knutson that Auburn’s individual medley coach was leaving the school. Schubert advised Knutson to swim professionally, rather than at Auburn or another university. He orally promised her support to train at a “Center for Excellence” formed by USA Swimming in Fullerton, California, including room, board, tuition, and a stipend until she earned her college degree. Knutson moved to Fullerton.

According to Knutson, Schubert’s oral offer did not include any performance markers, was not subject to Schubert's evaluation, and was to last through 2016, after the Rio de Janeiro Olympic Games. At Schubert’s suggestion, Knutson retained Evan Morgenstein to be her sports agent. She turned professional, accepted prize money, and signed an endorsement agreement.

A few months after Knutson moved to Fullerton, USA Swimming terminated Schubert, who assured Knutson that USA Swimming would keep the promises he had made to her. However, Knutson became concerned after she did not receive any money from USA Swimming.

Upon Morganstein’s recommendation, Knutson retained attorney Richard Foster in an attempt to get USA Swimming to honor the oral agreement made by Schubert. Foster did not disclose to Knutson his extensive ties to USA Swimming and the aquatics industry, including his prior representation of Schubert. Foster declined to represent Schubert upon his termination by USA Swimming, fearing that to do so might compromise his relationship with USA Swimming or within the industry. Foster told Schubert he would have a conflict of interest in suing USA Swimming.

Knutson testified Foster never told her of his prior representation of Schubert, or that he declined to represent Schubert against USA Swimming because he felt that doing so gave rise to a conflict of interest. Foster testified he told both Knutson and Morgenstein that if Knutson could not settle her dispute with USA Swimming, Foster would help her find another attorney to bring a lawsuit on her behalf.

Regardless, on Knutson’s behalf, Foster contacted Chuck Wielgus, USA Swimming’s Executive Director, and asked if USA Swimming intended to honor Schubert’s oral agreement with Knutson. Wielgus sent Foster an e-mail on the same day, stating, “Let’s not let this escalate.” Foster responded, “I don’t want this to escalate either.”  Foster and Wielgus then exchanged numerous e-mails. Foster told Wielgus that Foster would not pursue litigation because Foster did not want to impair his relationships with USA Swimming.  Foster also disclosed the Knutson was in desperate need of money.

Foster continued negotiations with various representatives of USA Swimming, disclosing only limited information to Knutson. In November of 2010, Wielgus sent Foster an email he labeled “STRICTLY CONFIDENTIAL—PLEASE JUST KEEP BETWEEN YOU AND ME,” in which he identified questions and issues Wielgus had raised with other USA Swimming officials. Foster forwarded the email to Morganstein, but did not disclose the contents of the email to his client, Knutson. Foster did respond to Wielgus, disclosing “… I won’t however get involved with litigation against USA Swimming. I have too many friends in your organization, including you.”

Foster negotiated with USA Swimming on behalf of Knutson over a period of several months. Key terms including financial and other support for Knutson based upon continued high levels of performance. Knutson opposed the inclusion of a performance marker in any contemplated resolution, noting in an email that it “isn’t good because it adds pressure for me to do something for USA Swimming when all they’ve done is negatively affected my career.” Foster then forwarded this attorney-client privileged document to USA Swimming.

In April of 2011, Knutson and USA Swimming reached deal. In included performance markers. In response to receiving the written settlement agreement from Foster, Knutson replied: “Some of it was hard for me to understand because of the wording.” In fact, Foster never discussed the final settlement agreement with Knutson, replying by email: “… this is a good deal. Sign the agreement, fax the signature page to me and mail the original.”

After signing the agreement, Knutson moved from California to Florida to train and swim under another Olympic coach, but swimming was not the same for her. In early 2012, Knutson stopped swimming to enter a treatment program for an eating disorder, and in June of 2012 USA Swimming stopped making payments to Knutson under the terms of the parties’ agreement.

In late 2013, Knutson attempted to regain her NCAA eligibility. To do so, she had to provide the NCAA with a copy of her agency agreement with Morgenstein. After Morgenstein did not respond to Knutson’s requests for a copy of the agency agreement, she hired Foster to communicate with Morganstein. Foster told Knutson that Morgenstein could not find the agreement and had requested a “statement not holding him liable for [Knutson] turning pro,” in exchange for confirmation of the agency agreement. Knutson trusted Foster, and thought she had to provide the release in order to get the information needed to regain her NCAA eligibility. Knutson gave the release but received no consideration from Morgenstein.    

At trial, the evidence established that Foster concealed the following: his relationship with USA Swimming and its officials; the conflict of interest arising from this relationship; Foster’s refusal to sue USA Swimming; his refusal to publicize the dispute; Knutson’s possible claim against Schubert; confidential information that USA Swimming provided to Foster; confidential information that Foster provided to USA Swimming; his failure to research the issue of performance markers; his withholding of e-mails revealing his conflicts of interest when Knutson requested her file; and Knutson’s potential eligibility for financial support from other athletic organizations. A jury found Foster liable for fraud and awarded Knutson more than $600,000 in damages, but denied her punitive damages, despite a finding that Knutson proved by clear and convincing evidence that Foster engaged in wrongful conduct towards Knutson with malice, oppression or fraud.

The trial court granted Foster’s motion for new trial on the ground Knutson failed to adduce evidence of causation and that the jury’s award of damages was excessive. Both sides appealed.

When ruling on the appeal, the appellate court stated “[t]he evidence established Foster breached his duty of loyalty by engaging in the following intentional acts, among others:

  • failing to provide written disclosures to Knutson of his relationships with USA Swimming;
  • failing to ensure Knutson understood the terms of the settlement with USA Swimming;
  • failing to employ all negotiation strategies beneficial to Knutson (such as threatening to go public with the dispute);
  • failing to disclose all communications he received from USA Swimming personnel;
  • failing to obtain any consideration for Knutson while encouraging her to sign a release of claims against Morgenstein; and
  • telling Morgenstein that Knutson's claims against him would be “weak.”

(Knutson v. Foster (2018) 25 Cal.App.5th 1075, 1092-1093, 236 Cal.Rptr.3d 473, 487.) 

The appellate court noted, “[b]ecause legal malpractice involves negligent conduct on the part of an attorney, causation for legal malpractice is analyzed differently than causation for the intentional torts of fraudulent concealment and intentional breach of fiduciary duty, of which Foster was accused.”  (Knutson v. Foster, supra, 25 Cal.App.5th at 1091, 236 Cal.Rptr.3d 473, 484 citing Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 180.)  Thus, the appellate court held that “claims of fraudulent concealment and intentional breach of fiduciary duty by a client against his or her attorney are subject to the substantial factor causation standard, not the ‘but for’ or ‘trial within a trial’ causation standard employed in cases of legal malpractice based on negligence.

The fact that an attorney-client relationship existed between the plaintiff and the defendant does not change the method by which the plaintiff must establish causation in cases of intentional torts.” (Knutson v. Foster, supra, 25 Cal. App. 5th at 1092-1093, 236 Cal. Rptr. 3d 473, 485–486 citing Rest.3d Law Governing Lawyers, § 49, com. e, pp. 350 [“The authors of the Restatement Third of the Law Governing Lawyers recognized that causation for intentional breach of fiduciary duty might be treated differently from negligent breach: “Under generally applicable fiduciary law, a claim of intentional breach might render applicable different defenses and causation and damages rules than would otherwise control.”])  

The appellate court therefore found the economic damages should have been upheld because a “substantial factor in Knutson's decision to enter into the settlement agreement was Foster's fraudulent concealment of the foregoing facts. The settlement agreement contained unattainable performance markers that led to the loss of financial support from USA Swimming and to feelings of despair, loss, and unhappiness. She suffered both economic and noneconomic damages as a consequence.

Knutson’s economic damages were her lost tuition and support benefits. Knutson’s noneconomic damages were the emotional distress and pain and suffering she experienced due to the performance markers in the deal with USA Swimming …. There was enough evidence to find that Foster’s fraud was a substantial factor in causing Knutson’s damages.” (Id. at p. 486.)

The appellate court not only directed the court clerk to forward a copy of the opinion to the California State Bar pursuant to Business & Professions Code section 6086.8, subdivision (a), which  requires reporting where an attorney “is liable for any damages resulting in a judgment against the attorney in any civil action for fraud, misrepresentation, breach of fiduciary duty, or gross negligence committed in a professional capacity,” but also pursuant to California Code of Judicial Ethics canon 3D(2), which provides that “Whenever a judge has personal knowledge, or concludes in a judicial decision, that a lawyer has committed misconduct or has violated any provision of the Rules of Professional Conduct, the judge shall take appropriate corrective action, which may include reporting the violation to the appropriate authority.”  

Although the facts here are extreme, it should be noted that the situation could have easily been avoided had the attorney simply abided by the core principal of the attorney client relationship: the attorney is to act in the client’s best interests at all times. It is hard to fathom how the conduct of Foster served the interests of Knutson at any point during the representation.