Legal Ethics Corner
Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

 
Obtaining Full Releases and Civil Code Section 1542 Waivers in the Face of a Fee Dispute: Not as Straightforward as it Seems
           
The thought is certainly logical enough: “If I am going to cut this client (or ex-client) a break on outstanding legal fees, s/he is going to sign a full release in my favor with a Civil Code section 1542 waiver (i.e., release of unsuspected claims in addition to known claims). I am not going to reduce fees only to face a malpractice claim down the road.” The above seems simple enough, but as with many issues of legal ethics, it is not.
 
In its latest formal ethics opinion (No. 2009-178), the State Bar’s Standing Committee on Professional Responsibility and Conduct (COPRAC) posits three hypothetical situations, all involving a fee dispute between attorney and client:
 
  1. Attorney A represents Client 1, and despite the dispute, both want the representation to continue. Neither is aware of any basis for a possible malpractice claim, but Attorney A nonetheless feels it wise to obtain a full release and 1542 waiver for services rendered to date and the settlement agreement includes such terms. Later, Client 1 ends up filing a malpractice claim covered by the settlement agreement, and Attorney A relies upon the full release and 1542 waiver in defending against the same. 
     
  2. Attorney B believes she has committed malpractice in her representation of Client 2. As the representation winds down, B demands payment of outstanding fees. She never discloses the facts of the potential malpractice claim. While in mediation of the fee dispute, at which Client 2 does not have independent counsel, they enter into a full release with a 1542 waiver which also releases the malpractice claim unknown to Client 2.
     
  3. Attorney C’s representation of Client 3 has concluded. C demands payment of outstanding fees, Client 3 refuses to pay, and contends C has committed malpractice. Client 3 hires Attorney D to represent her in the fee and malpractice dispute with Attorney C. While represented by Attorney D, Client 3 and Attorney C resolve their disputes via a settlement agreement that includes a full release and 1542 waiver.
 
As the enforceability of any such settlement is a matter of contract law that will depend on various factors, COPRAC does not address that legal issue; it only addresses the ethical obligations of a lawyer entering into an agreement with a full release and 1542 waiver. In factual circumstances like the above, the attorney must be mindful of four issues: 1) Is there a conflict of interest? 2)  How must the attorney proceed in order to fulfill his/her fiduciary duties? 3) What disclosures must the attorney make to the client (including disclosure of the facts giving rise to the malpractice claim and full disclosure/explanation of the terms of the proposed settlement)? and 4) Should the attorney withdraw from representation?          
           
In answering these various questions with respect to the above three factual scenarios, COPRAC invokes a number of general rules:
  1. A fee dispute, by itself, does not require the lawyer to withdraw although withdrawal is permissive under Rule of Professional Conduct 3-700. However, prior to commencing a suit for collection of fees, the attorney should withdraw from all matters on which s/he represents the client.
     
  2. A fee dispute, by itself, does not create a conflict of interest. However, where the fee dispute involves a potential malpractice claim which the lawyer intends, or in effect, is released by the settlement agreement, Rule 3-400(B) applies. This rule provides that an attorney shall not settle a claim or potential claim for malpractice unless the client is informed in writing that s/he may seek the advice of independent counsel regarding the settlement, and the client is given a reasonable opportunity to seek that advice.  Also, such a settlement involves a conflict of interest in that the attorney has a financial/professional interest in the representation, i.e., the desire to avoid a malpractice claim. Consequently, if the attorney intends to accept or continue representation of the client, as with any conflict, s/he must provide written disclosure of the same (i.e., disclosure of all relevant circumstances and of the actual and reasonably foreseeable adverse consequences). (Rule 3-310(B).)
     
  3. Regardless of whether the fee dispute involves the release of a potential or actual malpractice claim, the attorney should advice the client that s/he cannot represent the client with respect to the fee dispute itself.
  4. Because of an attorney’s obligation to keep a client informed of “significant developments” (Bus. & Prof. Code § 6068(m); Rule 3-500), where the lawyer believes s/he has committed malpractice, s/he must promptly communicate to the client the factual information pertaining to the malpractice claim. 
 
And the result?
          
In Fact Pattern 1 above, where Attorney A and Client 1 have an ongoing attorney-client relationship and Client 1 has no independent counsel, Attorney A must advise Client 1 that s/he does not represent Client 1 in the fee dispute, must advise Client 1 in writing that s/he may seek the advice of independent counsel regarding the general release and 1542 waiver, and must give Client 1 an opportunity to do so.  (Rule 3-400(B).)  Once Client 1 files a lawsuit for malpractice, absent informed written consent, Attorney A should withdraw from representation in the ongoing, underlying matter.
 
In Fact Pattern 2, AttorneyB has an interest in obtaining an enforceable release of the malpractice claim. Consequently, because Client 2’s interest is adverse to that of Attorney B, Attorney B should consider whether it is appropriate to withdraw from the representation. (Also, because the settlement includes a general release and 1542 waiver procured without appropriate disclosures to the client, addressed below, Attorney B is subject to a rebuttable presumption that s/he breached fiduciary duties owed to Client 2.) Attorney B is obliged to fully disclose the facts pertaining to the potential malpractice claim (Rule 3-500; cf. rule 3-310(A)-(B)) and must also advice Client 2 in writing that s/he may seek the advice of independent counsel regarding the settlement and must be given a meaningful opportunity to do so. Because this settlement was reached in mediation, the parties may have to convene the same to allow Client 2 the meaningful opportunity to consult independent counsel.
 
Lastly, in Fact Pattern 3, because Client 3 is no longer Attorney C’s client (the representation is concluded), and because Client 3 has independent counsel (Attorney D) to advise on the fee dispute and the contended malpractice claim, Attorney C does not have an obligation to keep Client 3 informed of significant developments and, logically, does not have an obligation to advise Client 3 of the right to seek independent counsel. 
 
As one can conclude from the above, ethically resolving a fee dispute that includes a full release and Civil Code section 1542 waiver for malpractice claims is a rather complicated animal (and even without such terms, certain disclosures apply). Careful reading of COPRAC Formal Opinion No. 2009-178 along with detailed consideration of the circumstances of the particular fee dispute are indispensable. 
 
--Luis E. Ventura
 
**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**