LIT COMMENTARY

LIT’s transcribed 4 briefs below from the Texas Supreme Court docket in this case, which is fairly active due to the topic, attorney immunity. First up is the response on the merits by NFTD, then Haynes and Boone’s final response and followed by 2 amicus briefs, one representative of each side e.g. whether transactional attorneys and law firms are immune from suit or not.

To say that the Texas Supreme Court has been erratic in their recent decision-making would be an understatement. From Chief Justice Hecht announcing at the Federalist Society in 2019 that Texas has always sought to protect homesteads, “is a debtor friendly state” and indeed wrote it into the Texas Constitution to protect HELOC loans to then just wipe that out in the Zepeda ruling (Equitable Subrogation) issued a year ago this April, is just one example. Of course, LIT knows why this all came about, after a certified question from the Federal Court of Appeals for the Fifth Circuit in Louisiana – but here we’re mainly focused on attorney immunity – although there’s a definite cross-over in politics and partisanship between the state’s highest court and the federal Fifth Circuit.

Returning to Texas rules re lawyer discipline, in relation to the decision in the case of Mark Cantu, there was some hope, only for the Texas Bar and BODA to completely discount the ruling in a bar complaint by the Burkes against rogue and repugnant attorney Mark D. Hopkins, of Hopkins Law, part of the Foreclosure Mill now renamed as BDF Law Group, aka Barrett Daffin Frappin et al. In effect they were repealing their own opinion. It was bizarre but they did stand down after this fact was firmly brought to their attention. The Texas Supreme Court and BODA stated that the complaint could be refiled.

The other 2 cases which stand out at the Texas Supreme Court for all the wrong reasons, is the dredgeful decision in case # 18-0486, 20th Dec., 2019 and the tampering with evidence case #18-0595, Feb. 21, 2020.

So we’re watchin’ this attorney immunity case to see if the State’s highest court will back up their own ‘Charlie’s Angels’ at 14th COA or still lean towards the Federalists in Louisiana once again.

No. 20-0066

In the Supreme Court of Texas

HAYNES AND BOONE, LLP AND
ARTHUR L. HOWARD,
Petitioners,

v.

NFTD, LLC F/K/A BERNARDO GROUP, LLC, BERNARDO HOLDINGS, LLC, PETER J. COOPER, AND JACQUELINE MILLER,
Respondents.

On Petition for Review from the Fourteenth Court of Appeals Court of Appeals No. 14-17-00999-CV

RESPONDENTS’ BRIEF ON THE MERITS

STATEMENT OF FACTS

This lawsuit arises out of a business transaction in which the lawyer- defendants—who were transactional lawyers—represented the seller. It is undisputed the Lawyers’ representation was not connected with actual or potential litigation; this was purely a business deal.

Having been pressed by his Haynes and Boone partner to collect serial unpaid invoices, attorney Arthur Howard was the architect of a fraudulent business scheme for the sale of his client’s “Bernardo” women’s footwear business that included a number of key design patents Howard knew were unenforceable.

Howard’s scheme produced the desired result – a sale of the company’s tainted assets from Howard’s client Bernardo 1 to Respondent Bernardo 2. That sale generated enough cash from the unsuspecting buyer, Bernardo 2, to pay off the nearly one-half million dollars of past-due legal fees that Bernardo1 had owed to Haynes and Boone (“H&B”). (see generally 2CR306).

OVERVIEW OF THE “BERNARDO” BUSINESS AND THE TWO ASSET SALES.

The Bernardo name covers an iconic brand of women’s footwear that was established in 1946 and featured in Vogue and Harper’s Bazaar. (2CR577).

Bernardo’s trendy sandals were worn by Jacqueline Kennedy Onassis and Twiggy. Bernardo 1 acquired the Bernardo name and business in 2001. (2CR445, 578).

The underlying claims revolve around two separate asset sales of the Bernardo business, first from Bernardo 1 to Bernardo 2, then from Bernardo 2 to Bernardo 3:

Asset sale no. 1: The first sale occurred in September 2011, wherein Bernardo 1 sold the Bernardo assets, including multiple design patents for Bernardo footwear, to Respondent Bernardo 2. The Petitioner Lawyers represented Bernardo 1 in this

Asset sale no. 2: The second sale occurred in February 2014, wherein Bernardo 2 participated in the sale of the Bernardo assets, including the same design patents, to Bernardo 3 (involved in the litigation but not this appeal).

(1CR284-305).²

Key to both asset sales were five design patents that should have protected several popular sandal designs from being knocked-off in the cutthroat fashion industry.

Nine months after asset sale no. 2, however, both Bernardo 3 and Bernardo 2 discovered that these five important and valuable sandal design patents were, in fact, totally unenforceable and worthless. (1CR5-11 at ¶¶9, and 24-25; 2SuppCR6-7).

Litigation ensued as explained below.

THE LAWYERS WITH MR. HOWARD IN THE LEAD BECOME BERNARDO 1’S COUNSEL IN 2009 (TWO YEARS BEFORE ASSET SALE NO. 1).

In 2002, when the founder of Bernardo 1 passed away, the founder’s son, Roy Smith, III (“Trae Smith”), began running the company, and did so until 2009. (2CR366-67 at pp. 7, 8 and 11). Effective August 6, 2009, however, Trae Smith was terminated from his chief executive position. (2CR416). The person who terminated Trae was Bernardo 1’s brand new lawyer, Petitioner Arthur Howard, and partner at

FROST BROWN TODD LLC

By: /s/ Kenneth R. Breitbeil                       

Kenneth R. Breitbeil
State Bar No. 02947690
E-mail: kbreitbeil@mcfall-law.com

Courtney B. Gahm-Oldham
State Bar No. 24074240
E-mail: coldham@mcfall-law.com

4400 Post Oak Parkway, Suite 2850
Houston, Texas 77027
(713) 590-9300 Telephone
(713) 590-9399 Facsimile

COUNSEL FOR RESPONDENTS NFTD, LLC F/K/A BERNARDO GROUP, LLC, BERNARDO HOLDINGS, LLC, AND PETER J. COOPER

No. 20-0066

In the Supreme Court of Texas

HAYNES AND BOONE, LLP AND
ARTHUR L. HOWARD,
Petitioners,

v.

NFTD, LLC F/K/A BERNARDO GROUP, LLC, BERNARDO HOLDINGS, LLC, PETER J. COOPER, AND JACQUELINE MILLER,
Respondents.

On Petition for Review from the Fourteenth Court of Appeals Court of Appeals No. 14-17-00999-CV

PETITIONERS’ REPLY BRIEF ON THE MERITS

ARGUMENT IN REPLY

Although it poses a question of first impression in this Court, this is not a case about first principles—it is a case about line drawing. The key legal principles were settled in Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477 (Tex. 2015). The question in this case is simply whether those principles apply to transactional law practice.

Respondents have failed to clash on several significant points. Importantly, Respondents have proven unable to grapple with our historical research into Poole. This case affords the Court a rare opportunity to resolve the confusion about Poole that has existed in the lower courts for several decades.

When Respondents do address our arguments, they proceed as if the Court were writing on a blank slate, ignoring the key principles settled by Cantey Hanger. Cantey Hanger adopted a broad interpretation of the attorney immunity doctrine, rejecting the more narrow approaches of other states and the Restatement. Similarly, Cantey Hanger synthesized earlier decisions and clarified the boundaries of the attorney immunity doctrine, so pre-Cantey Hanger decisions are no longer helpful. Respondents are relitigating issues this Court settled just a few years ago.

Respondents are fighting the last war. They have no valid way to draw a line between litigation and all other forms of law practice, so in an attempt to defend the decision below, they are forced to challenge the very foundations of Cantey Hanger. This Court should grant review and finish the work of Cantey Hanger.

Whether attorney immunity applies to transactional law practice warrants Supreme Court review.

Respondents agree that whether the attorney immunity doctrine applies to transactional law practice is “important to the jurisprudence of the state.” Br. at xi. This is the rare case in which both sides agree that review is warranted.

First, review is warranted because of the conflicts among the appellate courts. Tellingly, Respondents do not respond to the mischief caused by these conflicts. They call the statements from the other intermediate courts “stray dicta.” Br. at xi; accord id. at 43-44. But those courts have not characterized their rulings as “dicta,” and the trial courts in Austin, Dallas, and Beaumont are not at liberty to ignore them. Similarly, Respondents are quick to classify these decisions as occurring in the “litigation-like context” (whatever that means), Pet. Br. App. C at 16, but this Court will not find that gloss in the opinions of the Third, Fifth, or Ninth Court of Appeals.

The Fourteenth Court holds the attorney immunity doctrine does not apply outside the litigation context; the Third, Fifth, and Ninth Courts disagree with that position.

Resolving such splits among the lower courts is uniquely the province of this Court. Respondents attempt to deny the existence of a split by painting a picture of a widespread refusal to apply attorney immunity to transactional conduct. Br. at 36.

But that picture does not withstand scrutiny. Respondents seek to impose a rationale on the cited opinions that does not appear in the opinions themselves.

For example, Respondents make much of this Court’s use of the word “litigation” in discussing attorney immunity. See Br. at 27-28 (Youngkin and Bethel). And they note that the Fourteenth Court previously has done the same. Id. at 40-42 (Sheller v. Corral Tran Singh, LLP, 551 S.W.3d 357, 363 (Tex. App.—Houston [14th Dist.] 2018, pet. denied); U.S. Bank Nat’l Ass’n v. Sheena, 479 S.W.3d 475 (Tex. App.—Houston [14th Dist.] 2015, no pet.)).

But those cases involved conduct that occurred in litigation, so their references to “litigation immunity” cannot be read as a comment on the scope of attorney immunity outside the litigation context.

Similarly, the two cited post-Cantey Hanger decisions do not distinguish between litigation and transactional law practice; those cases involved other issues. See Stover v. ADM Milling Co., No. 05-17-00778-CV, 2018 WL 6818561, at *15 (Tex. App.—Dallas Dec. 28, 2018, pet. denied) (attorney was not acting as a lawyer for a client but “acting in his personal capacity by providing confidential information to his son”); Hunter v. Marshall, No. 01-16-00636-CV, 2018 WL 6684840 at *21 (Tex. App.—Houston [1st Dist.] Dec. 20, 2018, no pet.) (special appearance).

The other two cited cases do not discuss a litigation/transaction distinction— and in any event, they were both decided before Cantey Hanger. See Br. at 36 (citing JJJJ Walker, LLC v. Yollick, 447 S.W.3d 453 (Tex. App—Houston [14th Dist.] 2014, pet. denied); Likover v. Sunflower Terrace, 696 S.W.2d 468, 473 (Tex. App.— Houston [1st Dist.] 1985, no writ)). Those cases are obsolete now.

Second, Respondents do not dispute that Troice v. Greenberg Traurig, L.L.P., 921 F.3d 501 (5th Cir. 2019), held that immunity applies to transactional conduct— creating a square conflict between the federal courts and the state courts in Houston.

Unable to deny that conflict, Respondents argue that Troice might have been decided differently if their reading of Poole v. Houston & T.C. Ry. Co., 58 Tex. 134 (1882), had been preserved for appellate review. Br. at 45.

But that does not change the fact that Troice did, in fact, predict that immunity applies to transactional law practice.

Nor does it change the fact that the Fourteenth Court rejected Troice on the merits— not on the theory that it could be distinguished based on Poole. For these reasons, Respondents’ attempt to distinguish Troice is futile. Federal district courts in the Fifth Circuit are bound by Troice, while the decision below refused to follow Troice.

The square conflict between the two can be reconciled only by this Court.

Third, far from diminishing the importance of this conflict among the courts, Respondents’ resort to Poole as the controlling precedent confirms that guidance from this Court is sorely needed. Br. at 45. As the opening brief explained in detail, Poole has been misunderstood ever since the First Court’s 1985 decision in Likover, and this Court has never addressed the Likover gloss.

If Poole is the Rosetta Stone— an ancient artifact that somehow answers the lingering question about the scope of attorney immunity in transactional law practice—then this Court should decipher it. That jurisprudentially important task should not be left to the lower courts.

Respondents’ arguments for a litigation/transaction distinction cannot be reconciled with the principles of Cantey Hanger.

Most of Respondents’ arguments that attorney immunity should be limited to litigation conduct cannot be reconciled with this Court’s decision in Cantey Hanger. In particular:

Cantey Hanger settled that a broad immunity doctrine is necessary to promote zealous That bedrock principle applies equally to transactional law practice.

Cantey Hanger settled that this broad immunity is necessary to avoid the chilling effect created by the prospect of liability to non-clients. Behaving “ethically and competently” was no answer to that rationale in the litigation context, and the transactional context is no different.

Cantey Hanger settled that the proper remedy against a lawyer who is a bad actor is a public remedy, not a claim belonging to the adversary. Respondents’ desire for a private remedy against transactional lawyers belonging to the adversary is irreconcilable with that principle.

Petitioners recognize that the outcome in Cantey Hanger was not preordained; the Court might have reached a different conclusion. But it announced a rule of law based on these core principles, so they should be applied consistently.

The concern for protecting zealous representation applies equally to transactional law practice.

The Court already has concluded that a broad attorney immunity doctrine is justified to safeguard zealous representation. Cantey Hanger, 467 S.W.3d at 483. The question this case poses is whether that same bedrock principle applies to transactional law practice—which, no less than litigation, is characterized by parties acting in their own self-interest who need and deserve zealous representation.

Respondents implausibly argue that transactional work is free from conflict, charmingly suggesting “[t]he goal in a business deal is to enter into an arrangement that both parties find mutually desirable.” Br. at 18; see also id. at 55; Reid at 4. This naïve view is based on a fundamental misconception of a capitalist economy (as this Court well knows from its numerous decisions involving business disputes). In an arms-length business transaction, a “mutually desirable” bargain is rarely one in which the interests of the parties are aligned; ordinarily, it is an arrangement in which the interests of the parties are independent but the bargained-for exchange advances the interests of each party. At its core, capitalism is based on competition, based on the premise that the greatest social good arises from business transactions in which each party pursues its own economic self-interest. The fundamental flaw of Respondents’ argument was exposed long ago by the Father of Economics:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

ADAM SMITH, AN INQUIRY INTO THE NATURE & CAUSES OF THE WEALTH OF NATIONS (1776).

Because contracting parties in a capitalist system seek their own self-interest, any party to an arms-length transaction can come out on the “losing” side of a deal (or a failed deal). Given the inherently adversarial nature of arms-length bargains, Cantey Hanger’s rationale that broad attorney immunity is necessary to safeguard zealous representation applies equally to transactional practice.

Cantey Hanger itself anticipated the difficulty of drawing a meaningful line, pointing out that immunity is “not universally” limited to representation in litigation. 467 S.W.3d at 482 n.6. Respondents try to explain away these cases as involving “litigation-like” activities, Br. at 17, confidently asserting that “[f]or over a century, Texas courts have ably distinguished between litigation and non-litigation contexts for purposes of applying the attorney immunity doctrine.” Id. at xi, 17. However, Respondents cannot find a single authority that discusses “litigation-like” conduct; they are simply adding their own gloss to the decisions. See Br. at 39-40.

Furthermore, Respondents’ “test” for a “litigation-like context” is bankrupt. Transactional practice is often “highly adversarial and often emotional” (Factor #1). Transactions often create a “winner and a loser” (Factor #2). Transactional lawyers “often ha[ve] to make split-second decisions for the client” (Factor #4). Id. at 18. None of these “tests” justifies a distinction between litigation and transactional work. Little wonder that no Texas court has ever applied such a “test.”

Likewise, one amicus suggests that broad immunity is necessary to protect Texas lawyers from “dissatisfied participants” in the court system. Schuwerk at 32. Why would a “dissatisfied participant” in a commercial transaction be any different? This Court already has extended its immunity rule beyond adjudicative proceedings to settlement negotiations. See Youngkin v. Hines, 546 S.W.3d 675, 682 (Tex. 2018). It is hard to see how one form of legal negotiation is different from another.

At the end of the day, Respondents offer neither a meaningful distinction between litigation and non-litigation conduct nor a test for “litigation-like” conduct that will guide practicing attorneys and courts to understand when attorney immunity is appropriate. This is not a principled line; it is a Rorschach test.

Respondents claim to find support for their “litigation-like” test and their distinction between litigation and transactional representation in Erikson v. Renda, 590 S.W.3d 557 (Tex. 2019). Br. at 53; Schuwerk at 36. But Erikson involved a line that was drawn for very different reasons and in very different terms.

Erikson considered whether the tolling rule of Hughes v. Mahaney & Higgins, 821 S.W.2d 154 (Tex. 1991), is limited to allegations of malpractice in litigation. Because tolling is limited to claims of malpractice “in the prosecution or defense of a claim that results in litigation,” id. at 157, this Court reasoned that the tolling rule does not apply to purely transactional conduct. The tolling rule applies only when “the legal services providing the basis for the malpractice claim occurred directly in, and were integrally connected to, the prosecution or defense of a claim,” Erikson, 590 S.W.3d at 567, whereas “the mere rendition of legal advice does not constitute ‘the prosecution or defense of a claim.’” Id. Lower-court opinions referring to a “‘transactional work’ exclusion” were “merely a shorthand way of saying Hughes tolling is limited to malpractice ‘in the prosecution or defense of a claim’ whether occurring during litigation or not.” Id. at 568.

Unlike the narrow language of Hughes, this Court announced a broad rule in Cantey Hanger that extends immunity to all conduct in the scope of representation; nothing in that decision restricts immunity to conduct in the prosecution or defense of a claim. See Cantey Hanger, 467 S.W.3d at 483-84. And as we have explained, the rationale for immunity applies equally to litigation and transactional practice: just as a litigator should be free from the chilling threat of litigation by an adversary, a transactional attorney should not be forced to “balance his own potential exposure against his client’s best interest.” Id. at 483. Accordingly, the logic of Erikson supports the conclusion that the “scope of representation” test for attorney immunity applies equally to transactional representation.

Being a “competent and ethical lawyer” is no greater protection for transactional lawyers than for litigators.

Respondents deny that the threat of litigation has a chilling effect on lawyers. They promise that “

[c]ompetent and ethical transactional lawyers” can expect to fare “just fine” without immunity from adversaries. Br. at 18-19; see also Reid at 5. “All a transactional lawyer need[s] to do to avoid exposure to nonclients is to meet the ‘minimum standards of conduct below which no lawyer can fall without being subject to disciplinary action.’” Id. at 19.

The Court has heard variations on this theme many times, in many contexts. It has never been persuasive before; indeed, the very same argument could be made about litigators, but it did not succeed in Cantey Hanger. It is no better now.

The fatal flaw in this argument is that it ignores the threat of false positives, which is the whole reason for matter-of-law defenses such as attorney immunity: lawyers who risk liability to an adversary will be chilled from legitimate behavior (i.e., zealous representation) out of fear that a jury will find them liable incorrectly. Behaving as a “competent and ethical lawyer” will not protect a lawyer against a suit by a disgruntled adversary any more than competent and ethical judges are protected against retaliatory lawsuits by disgruntled litigants. The judicial immunity doctrine addresses this hazard. “While protecting the individual judge, this policy likewise serves to protect the public ‘whose interest it is that the judges should be at liberty to exercise their functions with independence, and without fear of consequences.’” Dallas County v. Halsey, 87 S.W.3d 552, 554 (Tex. 2002) (citation omitted). Attorney immunity serves the same important public policy.

Therefore, the reassurance that “competent and ethical” transactional lawyers have nothing to fear is cold comfort when deciding what is “competent and ethical” is left to a jury. The jury system has many virtues, but certainty and predictability are not among them. Matter-of-law rules (like immunity) exist to provide certainty and eliminate unpredictability, as this Court held just last year. See Energy Transfer Partners, L.P. v. Enter. Prods. Partners, L.P., 593 S.W.3d 732, 740 (Tex. 2020) (citation omitted) (rejecting the argument “that the key to avoiding an accidental partnership is to avoid the conduct that establishes a partnership under the statute”).

The Connecticut Supreme Court—in a case relied upon by the Reid amicus, Reid at 13-14—expounded on these principles:

[A]s both the English and American courts have stated numerous times, the privilege is not intended to protect counsel who may be motivated by a desire to gain an unfair advantage over their client’s adversary from subsequent prosecution for bad behavior but, rather, to encourage robust representation of clients and to protect the vast majority of attorneys who are innocent of wrongdoing from harassment in the form of retaliatory litigation by litigants dissatisfied with the outcome of a prior proceeding . . . . it is better to make the rule of law so large that an innocent counsel shall never be troubled, although by making it so large counsel are included who have been guilty of malice and misconduct . . . . The privilege thus encourages candor on the part of honest attorneys, who greatly outnumber those few attorneys who choose not to abide by the rules.

Simms v. Seaman, 69 A.3d 880, 902–04 (Conn. 2013) (citation omitted) (emphasis added). Immunity exists to protect the zealous behavior of “competent and ethical” lawyers who might otherwise be chilled by the threat of a retaliatory lawsuit.

This Court applied this prophylactic rationale to attorneys in Cantey Hanger, explaining that a broad immunity rule is necessary to “avoid the inevitable conflict that would arise if [the lawyer] were forced constantly to balance his own potential exposure against his client’s best interest.” Cantey Hanger, 467 S.W.3d at 483 (citation omitted). Confidence in the fact-finding process was not deemed sufficient protection for “competent and ethical” litigators, and there is no reason to reach a different conclusion for transactional lawyers.

Transactional attorneys, like litigators, are subject to adequate public and private remedies despite attorney immunity.

Respondents next argue that immunity cannot extend to transactional conduct because there are no “restraints to keep attorneys in line in the transactional context.” Br. at 25; id. at 54. Their self-interested amicus warns there is “practically nothing to hold attorneys accountable.” Reid at 4; id. at 12.¹ But the principal remedy for attorney misconduct “‘is public, not private.’” Cantey Hanger, 467 S.W.3d at 482 (citation omitted). That rationale applies equally to transactional lawyers. Moreover, there are better ways to hold misbehaving transactional lawyers accountable.

First, just as in Cantey Hanger, disciplinary proceedings are available if a transactional lawyer engages in misconduct. Respondents’ brief proves the point. They suggest that a transactional lawyer will be subject to liability only if he or she fails to comply with the Rules of Professional Conduct. Br. at 19; Reid at 8, 9. Yet, by definition, disciplinary proceedings offer a public remedy in those circumstances. If it is true that “all a transactional attorney need do to avoid exposure to nonclients” is to follow the disciplinary rules, Br. at 19, then there is no need for civil liability. Violation by transactional lawyers can be punished through disciplinary proceedings just as readily as violations by litigators. See Cantey Hanger, 467 S.W.3d at 482. Thus, Respondents’ argument flies in the face of Cantey Hanger.

To be sure, transactional lawyers are not subject to court-ordered sanctions. Br. at 54. But if the inability to levy monetary penalties against transactional lawyers is seen as a deficiency, that is a complaint about the Texas lawyer discipline process that should be addressed to this Court in its role as a regulator of the profession— not a reason for civil liability. Civil liability exists to compensate an injured party, where the law deems compensation appropriate. Sanctions exist to punish and deter, not primarily to compensate. Thus, the lack of a monetary remedy for a non-client is not meaningfully different between litigators and transactional lawyers.

Second, to the extent that a monetary remedy is an important consideration, Respondents fail to grapple with our answer: the adverse party can sue the client, and if the client so chooses, the client can assert a cross-action against the lawyer (which is precisely what has occurred in this case). See Pet. Br. at 43. In this manner, the transactional lawyer can be held financially accountable if the client concludes that conduct within the scope of representation was wrongful. If the client decides not to assert such a cross-claim and wishes to protect the attorney-client relationship, the client’s adversary should not be able to drive a wedge between lawyer and client by making predictable accusations of self-interest that could be lodged in any case. See, e.g., Br. at 6 (desire to be paid fees); id. at 8-9 (desire to solicit new business). Litigators want to be paid and to generate business too, but such financial incentives do not deprive them of immunity. Why should transactional lawyers be different?

The practical importance of leaving this decision in the hands of the client cannot be overstated. Not only does it allow the client to maintain control of the attorney-client relationship, but it also allows the lawyer to defend himself or herself. If an adversary sues the lawyer directly, the lawyer cannot use privileged documents to defend against the claim—even if they would exculpate the attorney and inculpate the client in the alleged wrongdoing. See Tex. R. Evid. 503(c)(1) (privilege may be asserted by the client). If the client brings a cross-claim against the lawyer, however, the privilege “does not apply.” Tex. R. Evid. 503(d)(3).

The real reason for Respondents’ desire to sue opposing counsel is exposed by the Reid amicus brief. It stresses the policy of compensating “victims of fraud,” Reid at 1, warning that fraudfeasors “often lack funds to satisfy” a judgment. Id. Respondents and their amicus want to transform transactional lawyers into insurers for their clients—but the search for a deep pocket is not a good reason to cast aside the substantial public policies served by the attorney immunity doctrine. After all, the same point about judgment-proof clients could be made in the litigation context, yet this Court has not hesitated to hold that attorneys are immune from liability— even from claims of fraud in settlement negotiations, which are no different from allegations of fraud in any other transaction. See, e.g., Youngkin, 546 S.W.3d at 682. At bottom, Respondents and their amici are really relitigating Cantey Hanger.

Finally, there is one difference between litigation and transactional practice that offers counterparties in arms-length transactions a much greater opportunity to hold opposing transactional lawyers accountable than litigators: contracting parties are free to bargain for the right to rely on representations made by opposing counsel, and for any assurances from counsel that they consider material to the transaction. That occurred in McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999), where one party negotiating a settlement agreement became concerned about its enforceability and “agreed to sign the agreement only if [the opposing] lawyers would affirm that the agreement did, in fact, comply with the [relevant] statute.” Id. at 789. When the agreement later proved to be unenforceable, the injured party sued the lawyers based on that misrepresentation and prevailed— precisely because that party had bargained for the right to rely on opposing counsel. See id. at 793-95 (discussing justifiable reliance).

The opportunity to bargain for such justifiable reliance on opposing counsel is much more prevalent in the transactional context than in routine litigation matters (or even in settlement negotiations). Thus, far from justifying a distinction between litigation and transactional conduct, the case for immunity may be even stronger in the transactional context. As in McCamish, parties to arms-length transactions are free to bargain for the right to rely on opposing counsel if they desire such protection. If they do not, the rule of Cantey Hanger should be controlling.

Reliance on the Cantey Hanger dissent is unconvincing

Throughout the brief, Respondents rely heavily on the Cantey Hanger dissent. Healthy respect for stare decisis should discourage the Court from treating the Cantey Hanger dissent as persuasive authority just five years later.

For example, in discussing the appropriate interpretation of Cantey Hanger, Respondents rely on the dissent (just as the court of appeals did). Br. at 23-25. Obviously, this Court discerns its holdings from majority opinions—not dissents.

Likewise, Respondents rely on the dissent for their assertion that public policy does not support attorney immunity in the transactional context. Id. at 54. The Court could have adopted that position in Cantey Hanger, but did not do so.

Next, Respondents ask the Court to reject the “scope-of-representation test” adopted in Cantey Hanger, which they say “cannot be the law.” Id. On the contrary, Cantey Hanger held immunity is “conclusively established” if an attorney proves “that its alleged conduct was within the scope of its legal representation” of a client. Cantey Hanger, 467 S.W.3d at 484.

Finally, Respondents argue that attorneys should not be treated differently than other professionals. But Cantey Hanger already determined that attorneys are subject to a different liability regime than “[p]rofessionals in many other fields [who] remain liable to such conduct.” Br. at 54; see also Reid at 7.

Cantey Hanger controls all these issues. We will not belabor them.

Respondents’ reliance on out-of-state authorities, the Restatement, Poole, and McCamish cannot save the court of appeals’ decision.

The authorities cited by Respondents and their amici cannot be reconciled with the principles adopted in Cantey Hanger.

Cantey Hanger already rejected the approach of other states

Respondents and their amici rely on out-of-state authorities, but this Court has already rejected the version of attorney immunity represented by those authorities. As the Cantey Hanger dissent noted, Texas has recognized a broader approach to attorney immunity than other states. See Cantey Hanger, 467 S.W.3d at 492 n.7 (Green, J. dissenting) (citing out-of-state authorities). Respondents’ quarrel is with the rule of Cantey Hanger—not with applying that rule to transactional practice.

Many of the out-of-state cases adopt a fraud exception to attorney immunity. See, e.g., Reid at 15-16. But Cantey Hanger rejected a categorical fraud exception. Cantey Hanger, 467 S.W.3d at 483. Reliance on this case law is an argument against Cantey Hanger itself—not against its application to transactional practice.

Several other out-of-state cases illustrate applications of attorney immunity in the litigation context but do not address the transactional context. See Reid at 13-15. For the same reasons Youngkin and Bethel do not answer the question presented by this case, those cases do not support the proposition that attorney immunity is limited to the litigation context. See p. 3, supra.

Several other out-of-state cases apply the defamation privilege for attorneys, which is an entirely different doctrine. See Cantey Hanger, 467 S.W.3d at 485 n.12. That line of authority is inapposite.

In the end, Respondents and their amici can cite only two out-of-state cases that actually limit the scope of the attorney immunity doctrine without relying on the so-called fraud exception this Court rejected in Cantey Hanger. In Kurker v. Hill, 689 N.E.2d 833 (Mass. App. Ct. 1998), the court stated that immunity does not cover “counselling and assisting . . . clients in business matters generally.” Id. at 839. However, that case involved “allegations that the attorneys represented individuals on both sides of the transaction and engaged in a conspiracy to undervalue the assets and freeze out the plaintiff,” id., which is a very different situation from this case. See pp. 22-25, infra (discussing McCamish). In Walls v. VRE Chicago Eleven, LLC, 344 F. Supp.3d 932 (N.D. Ill. 2018), meanwhile, the court openly recognized that Illinois’ attorney immunity rule is inconsistent with Cantey Hanger. Id. at 949.

In short, Respondents and their amici cannot justify a distinction between litigation and transactional conduct by relying on out-of-state cases that (a) do not even consider such a distinction and/or (b) depend on a so-called fraud exception. Cantey Hanger already rejected this approach. Respondents’ reliance on these cases illustrates that their position—and the court of appeals’ decision—is irreconcilable with the rationale of Cantey Hanger itself.

Cantey Hanger already rejected the Restatement approach

Similarly, Respondents and their amici ask this Court to turn back the clock and adopt the Restatement approach of “equat[ing] a lawyer’s conduct to that of a nonlawyer for liability purposes.” Br. at 20; see also id. at 56. But Cantey Hanger refused to adopt the Restatement approach—to the dismay of the dissenting justices, who argued that the majority’s approach was “inconsistent with the approach the Restatement adopted.” Cantey Hanger, 467 S.W.3d at 490 (Green, J. dissenting). Again, Respondents’ real grievance is with Cantey Hanger, not with the application of its rule to the transactional context.

The Schuwerk amicus brief lays bare the full consequences of this position, criticizing the Court’s refusal to make categorical exceptions for allegations of fraud (Cantey Hanger and Youngkin) and criminal conduct (Bethel). It does not advocate a distinction between litigation and transactional conduct, but a consistent rule that allows liability “[e]ven in a litigation setting.” Schuwerk at 11; see also id. at 14-15 (advocating exceptions for fraudulent and criminal acts “both in transactional setting and in litigation ones”); id. at 19, 25 (same). In place of the Cantey Hanger rule, Professor Schuwerk would prefer a “more complicated path of reasoning.” Id. at 21. Again, the Court crossed this bridge in Cantey Hanger. The only real contribution, therefore, is Professor Schuwerk’s confirmation that the attorney immunity doctrine should apply equally to litigators and transactional lawyers.

Poole is consistent with the “scope of representation” test.

As our principal brief explained in detail, Poole v. Houston & T.C. Ry. Co., 58 Tex. 134 (1882), stands only for the proposition that an attorney who participates as a principal in a fraudulent transaction is not immune from liability simply because he or she holds a law license; such conduct is “foreign to the duties of a lawyer” because it is not within the scope of representation. Poole has been misunderstood ever since Likover v. Sunflower Terrace, 696 S.W.2d 468, 473 (Tex. App.—Houston [1st Dist.] 1985, no writ), and that error should be corrected. See Pet. Br. at 22-30.

Respondents’ brief distorts our argument and ignores the historical record. Their view of Poole is historically incorrect and incompatible with Cantey Hanger. First, Respondents dismiss our argument as a matter of form, not substance. Br. at 26-28.

They are quite wrong. The distinction between an attorney acting as a principal in a transaction and an attorney acting on behalf of a client is substantive; indeed, it is the very essence of the “scope of representation” test. Every individual who carries a law license engages in some conduct in his or her capacity as a lawyer and other conduct in his or her personal capacity. A lawyer is generally immune from liability to non-clients for conduct in the former capacity, but not the latter. Our careful reading of Poole respects that substantive distinction.²

Petitioners satisfy the test for attorney immunity as a matter of law.

Finally, Respondents argue that the conduct at issue in this case does not satisfy the test announced by Cantey Hanger. That test looks beyond mere labels and artful pleading to “focus on the conduct at issue,” Youngkin, 546 S.W.3d at 682 (citing Cantey Hanger, 467 S.W.3d at 484), then asks whether the conduct at issue was within the scope of representation. Id. at 682-83. “The only facts required . . . are the type of conduct at issue and the existence of an attorney-client relationship at the time.” Id. at 683. Those facts are conclusively established here.

There is no dispute that the conduct in question occurred during the existence of Petitioners’ attorney-client relationship, and “the type of conduct at issue”— negotiating and drafting the APA—was all within the scope of their representation.

Hoping to avoid that conclusion, Respondents rely entirely on pejorative labels. They label the contract negotiations “misrepresentations,” Br. at 48-50, a slur that could be lodged by any disgruntled counterparty in a failed commercial transaction.

And they falsely claim Petitioners acted as a “broker,” Br. at 47, 48, even though the parties to the APA expressly agreed that there were no brokers in this transaction. 2CR623, 628; see also Pet. Br. at 5.

Finally, they paint Petitioners in a negative light by accusing them of “socializing at a pub” and “soliciting future representation.” Br. at 48-49. Importantly, however, this collateral conduct does not form the basis of their complaints about the invalidity of the Bernardo patents.

Furthermore, Respondents’ arguments demonstrate why labels cannot matter. Consider the logical implications of Respondents’ labels, which seek to avoid the attorney immunity doctrine based on insinuations of improper motives:

Why should the location of a negotiation matter? See at 48-49 (“at a pub”). Does immunity apply in the office but not in a restaurant?

Why should a lawyer with a financial incentive to close a deal for his client forfeit immunity? See at 48-49 (financial interest). Is immunity denied to litigators who work on contingency simply because their financial interests are aligned with their clients?

Why should a transactional attorney be required to disclose to an adverse party his or her bills, Br. at 4, “attorney-client privileged memorandum,” id. at 5, and internal communications to a law partner simply because a counterparty wants to discover the “motive” underlying the attorney’s conduct? at 6, 8. Is the attorney-client privilege less sacred in the transactional context than the litigation context?

Fortunately, these pejorative labels are immaterial. Respondents do not deny that negotiating and drafting a contract is part of a lawyer’s representation of a client in a transactional engagement. Because the type of conduct at issue is indisputably the kind of activity performed by a transactional lawyer and it was all authorized by the lawyers’ broad engagement agreement, it was within the scope of representation.

Respondents argue that certain tasks in these negotiations could have been performed by non-lawyers, but that fact is legally immaterial. Immunity applied to statements made during negotiations in Cantey Hanger and Youngkin even though those statements could have been made just as easily by non-lawyers. Pet. Br. at 48.

To the bitter end, Respondents remain at war with the rationale of Cantey Hanger.

CONCLUSION

The Court should grant review, then reverse the court of appeals’ judgment and reinstate the judgment of the trial court.

Respectfully submitted,

BECK REDDEN LLP

By: /s/ Russell S. Post                         

Russell S. Post
State Bar No. 00797258
rpost@beckredden.com

David J. Beck
State Bar No. 00000070
dbeck@beckredden.com

Alex B. Roberts
State Bar No. 24056216
aroberts@beckredden.com

Nicholas M. Bruno
State Bar No. 24097432
nbruno@beckredden.com

1221 McKinney, Suite 4500
Houston, TX 77010-2010
(713) 951-3700
(713) 951-3720 – Fax

ATTORNEYS FOR PETITIONERS, HAYNES AND BOONE, LLP AND ARTHUR L. HOWARD

AMICI IN FAVOR OF TRANSACTIONAL ATTORNEY IMMUNITY

NFTD at the Supreme Court of Texas

An opinion issued in December by the Houston Fourteenth District Court of Appeals tees up this open question for decision by the Supreme Court of Texas. In NFTD, LLC v. Haynes & Boone, LLP, No. 14-17-00999-CV, the attorney conduct in question had to do with alleged concealment and false representations made by attorneys who were involved in an asset purchase agreement.

The trial court had dismissed the claim against the attorneys after concluding that attorney immunity was applicable.

The plaintiffs appealed.

The court of appeals reversed the trial court’s judgment after concluding that attorney immunity does not apply.

The court of appeals took the Cantey Hanger majority at its word – that the court was not deciding whether attorney immunity applied to conduct occurring outside of litigation. The court rejected the idea that fidelity to the client was alone enough to impose immunity even outside of the litigation context. The court observed that a litigation context allows for other remedies to discipline an attorney that do not exist outside of the litigation context.

The court rejected holdings by federal courts that immunity applies, even in the non-litigation context.

The defendant attorneys in the NFTD case are in the process of seeking review of the court of appeals’ decision by the Supreme Court of Texas. Stay tuned for updates.

INTEREST OF AMICUS CURIAE

I am an attorney licensed to practice in the State of Texas, the United States District Courts for the Eastern, Northern, and Southern Districts of Texas, and the United States Court of Appeals for the Fifth Circuit.

My practice includes defending attorneys against professional liability claims. I have defended Texas attorneys directly and for professional liability insurers.

I have no pecuniary interest in the outcome of this litigation. My interest in this matter is professional because I have had the privilege to defend lawyers against claims made by third parties. Some of the cases cited by Petitioners, Respondents, and other Amici are cases in which I have defended the lawyer.¹ As a result, I have a particular interest in and understanding of the attorney immunity defense.

As required by Rule 11 of the Texas Rules of Appellate Procedure, I disclose that I am presenting this brief on my behalf, I have not been promised or received a fee for preparing this brief, and copies of this brief have been served on all parties.

SUMMARY OF ARGUMENT

This amicus brief is submitted to present an important issue not addressed in briefs by the parties and other Amici. As the record and the briefing reveal, the Petitioners’ client has made a claim against them resulting in a waiver of the attorney-client privilege under Texas Rule of Evidence 503(d)(3). However, not every suit by a third party against the lawyer- those suits to which the attorney immunity defense may apply- involves a client that has chosen to waive the attorney- client privilege. If a client has not waived the attorney-client privilege, the most important evidence for the lawyer’s defense will often be shielded by that privilege and deprive the lawyer of a full and fair defense because the Texas Rule of Evidence establishing the attorney-client privilege does not contain a waiver for circumstances where the lawyer is sued by a third party.

The problem with the decision of the Fourteenth Court of Appeals in this case, which is a problem that will continue if attorney immunity is not extended to transactional lawyers, is it creates a new class of vulnerable defendants by placing transactional lawyers in a position where their fiduciary duty to their client and the Texas Rules of Evidence prevent them from defending themselves fully. If attorney immunity is not extended to transactional lawyers, some lawyers will have to defend themselves against claims by third parties on an uneven playing field. This Court should avoid such a problem by extending attorney immunity to all lawyers when their actions are within the scope of representing a client and are not foreign to the duties of an attorney.

ARGUMENT

Drawing from firsthand experience, there are several common traits one can observe in cases when a transactional lawyer is sued, the allegations concern an underlying transaction on which the lawyer worked, and the plaintiff is the opposing party in the transaction. First, the lawyer’s client is often insolvent or lacks the resources to make the other party to the transaction, the plaintiff, whole. Second, the lawyer works for a solvent firm, has an errors and omissions policy, or both. As a result, the lawyer becomes a convenient defendant for a plaintiff who, having made a bad business deal, is looking for any defendant that can make it whole regardless of that defendant’s responsibility or the poor judgment of the plaintiff.

The Petitioners have pointed out that the rules and legal theories behind attorney immunity apply to transactional lawyers as well as trial lawyers. Petitioners have explained their conduct is in the course and scope of representing a client, and is not foreign to the duties of an attorney. Petitioners have further explained fraud is a basis for liability only when a lawyer takes an action foreign to the duties of an attorney, and the practice of law is not foreign to those duties.²

Still, failing to shield transactional lawyers from suits by third parties gives rise to another problem. The attorney-client privilege belongs not to the lawyer but the client.³ While the lawyer may claim the privilege for the client, that is because the rules of evidence entitle the lawyer to do so in the client’s place.⁴ What happens to the transactional lawyer if they have evidence that would clear them of liability to the disgruntled opposing party in the transaction, but that evidence is protected by the attorney-client privilege and the client refuses to waive it? Further, what if the plaintiff does not seek to develop evidence protected by the privilege because the plaintiff anticipates the privileged evidence will help the lawyer and harm the plaintiff’s case against the lawyer?⁵ Transactional lawyers, if not protected by attorney immunity, will find themselves in a position where a full and vigorous defense cannot be made because of their fiduciary duty to the client. Transactional lawyers will have to defend themselves with one or both hands tied behind their back. The law should not permit a cause of action against a defendant where the rules of evidence dictate an unfair playing field for that defendant.

A.  A Third Party is not the Client.

Texas Rule of Evidence 503 contains exceptions to the attorney-client privilege.⁶ Unfortunately, when the plaintiff is a third party to the attorney-client relationship the exceptions contained in Texas Rule of Evidence 503 are useless.

The exception contained in Texas Rule of Evidence 503(d)(5) is the joint client doctrine, which applies when an attorney simultaneously represents two or more clients on the same matter.⁷ “Where [an] attorney acts as counsel for two parties, communications made to the attorney for the purpose of facilitating the rendition of legal services to the clients are privileged, except in a controversy between the clients.”⁸ When the attorney immunity defense may apply to a claim, the circumstances will be mutually exclusive to the joint client doctrine. This Court has limited the defense to claims by non-clients.⁹

So, this exception, which is limited

to joint clients, would not permit a lawyer to testify about attorney-client privileged communications when the plaintiff is a third party to the attorney-client relationship. The exception most often available to lawyers who are sued for their work representing a client is Texas Rule of Evidence 503(d)(3), which is available when the communication is relevant to an issue of breach of duty by a lawyer to the client.¹⁰ When a lawyer is sued by the client, the lawyer is permitted to reveal privileged information so far as necessary to defend themselves.¹¹ Again, because this exception is limited to suits by clients, it is not available when the plaintiff is a third party.

Texas Rule of Evidence 503(d)(2) provides an exception for communications relevant to an issue between parties claiming through the same deceased client.¹² This exception can provide limited relief when the claim is brought by a third party. For example, the attorney in Barcelo v. Elliott could arguably rely on this exception since the plaintiffs were intended beneficiaries under a trust established by a decedent.¹³

However, 503(d)(3) will be limited primarily to probate proceedings. It would not have been available to the lawyer in Cantey Hanger, LLP v. Byrd, or to the many transactional lawyers involved in deals where the two sides are entities that may face bankruptcy, but not death.

In summary, these exceptions to the attorney-client privilege are of little use to most transactional lawyers who find themselves sued by a third party because of their work for a client. These exceptions are not a solution to not being able to rely on all the evidence that would assist in the transactional lawyer’s defense, which is a problem the undersigned counsel has faced.¹⁴

B. The Crime-Fraud Exception does not Help.

There is a crime-fraud exception to the attorney-client privilege.¹⁵ Still, that exception will not help the transactional lawyer in a suit brought by a third party to the attorney-client relationship. Lawyers are bound by their fiduciary duty to the client, which requires that they further their client’s best interests.¹⁶ In a circumstance where disclosing privileged information would aid the lawyer’s defense, but would not assist the client and may even harm the client, the lawyer’s duty is to the client first.¹⁷

The lawyer is not in a position where they can put their interest first by arguing for the waiver of the privilege. Further, not every allegation against the lawyer will involve a crime or fraud.¹⁸

Even when fraud is alleged, the crime-fraud exception applies only if a prima facie case is made of contemplated fraud.¹⁹ In making a fraud case to get around the attorney-client privilege, one must show a relationship between the communication for which the privilege is challenged and the prima facie proof offered.²⁰ That relationship must be established for each privileged communication.²¹ The exception also requires evidence establishing the fraud happened at or during the time the communication took place, and the communication must have been created as part of perpetrating the fraud.²²

Following these limitations, communications by a lawyer that may be helpful in defense against the claims of a third party would still be covered by the privilege because communications favorable to the lawyer, i.e., urging a client not to take actions that are potentially fraudulent, would not be part of perpetrating the fraud.²³

Such communications are not made to enable or aid the client in a fraud, which is what the law requires to circumvent the attorney-client privilege.²⁴ Thus, transactional lawyers, if they are sued by third parties, cannot rely on prudent advice they provided to the client in order to defend themselves.

C. This Court Should Not Place Transactional Lawyers on an Unfair Playing Field.

A lawyer is not going to be in a situation where he or she can assert an exception to the privilege in Texas Rule of Evidence 503 because it is helpful to the lawyer. Add to the lawyer’s dilemma that the communication could be detrimental to the client, thereby breaching the fiduciary duty.²⁵ If attorney immunity is not recognized as protecting transactional attorneys, then transactional attorneys will also find themselves unable to defend themselves fully because the same principles that support them being protected by attorney immunity-encouraging zealous representation to protect the client’s interest- will also prevent them from mounting a full defense.

The attorney immunity defense established by this Court effectively protects transactional lawyers from the dilemma of being subject to liability to third parties and not being able to defend oneself because of the attorney-client privilege by restricting potential liability to third parties. The attorney immunity defense only protects the lawyer when one is in the course and scope of representing a client and the conduct is not foreign to the duties of an attorney.²⁶ The requirements for the defense to apply are roughly the same requirements for the privilege to attach to a lawyer’s communications and work.

Communications outside the scope of client representation or foreign to the duties of an attorney are not protected by the attorney-client privilege.²⁷ If an attorney’s liability concerns communications made to take ownership of another’s property, there is no privilege because communications about taking another’s property would not be made to facilitate the rendition of professional legal services as required by the Texas Rules of Evidence for the privilege to attach.²⁸

Communications made as a stockholder or director of a corporation, which are not in the course and scope of representing the client, also would not be privileged

because those communications are not made to facilitate the rendition of professional legal services.²⁹

By preventing claims against lawyers when they are in the course and scope of representing a client, even transactional lawyers, this Court would protect lawyers from having to defend themselves without being able to truly defend themselves. This Court should clarify that the attorney immunity defense extends to transactional lawyers whose acts are taken in the course and scope of representing a client and whose conduct is not foreign to the duties of an attorney.

CONCLUSION

There is no need for a cause of action against transactional lawyers that the law will not permit against trial lawyers. The attorney immunity defense should apply to transactional work as well litigation, just like the rules and laws that dictate how the lawyer must behave. Until transactional lawyers are subject to a different set of disciplinary rules and duties to the client, they should not suffer the burden of different rules for liability to third parties. Leaving transactional lawyers in a position where they cannot present all the evidence in their defense would “defeat

the goal of hearing cases on their merits whenever possible, without advancing any corresponding policy considerations.”³⁰

For this reason, in addition to all those advanced by the Petitioners, this Court should reverse the decision of the court of appeals and recognize attorney immunity is available to all Texas lawyers who are sued by third parties based on work performed for a client.

Respectfully submitted,

By:             /s/ Richard G. Wilson     

Richard G. Wilson
KERR WILSON, P.C.
State Bar No. 00794867
16676 Northchase Drive, Suite 410
Houston, Texas 77060
(281) 260-6304 – Telephone
(281) 260-6467 – Telecopier
rwilson@tkalaw.com

Amicus Curiae

AMICI AGAINST TRANSACTIONAL ATTORNEY IMMUNITY

IDENTITY AND INTEREST OF AMICUS

Reid Collins & Tsai LLP (“Reid Collins”) is a law firm with offices in Austin and Dallas, Texas, among other places. Reid Collins represents individuals, organizations, and companies, as well as bankruptcy trustees, equity receivers, and offshore liquidators, in pursuing fraud, breach-of-fiduciary-duty, and related claims against wrongdoers.

In Reid Collins’ experience, fraud occurs in a variety of ways—from Ponzi schemes to fraudulent real estate transactions to the theft of intellectual property— but it almost always occurs outside of litigation. And, in the majority of cases, the primary wrongdoers receive assistance from others in perpetrating their schemes. Thus, to aid its clients in recovering their losses—which rarely are fully recouped from the principal wrongdoers—Reid Collins pursues all parties, including, where applicable, the law firms, responsible for its clients’ damages. In fact, Reid Collins has a national practice of pursuing both negligence and intentional tort claims against law firm defendants.

While other jurisdictions hear and decide claims by non-clients against attorneys on the merits, Texas could be the only jurisdiction to hold that attorneys are uniquely and absolutely immune from such suits, even in cases in which their level of scienter rises to actual knowledge, depending on the outcome of this case.

The Fourteenth Court of Appeals decision below brought clarity, and solace, to victims of fraud—like those Reid Collins represents—by recognizing their right to assert claims against attorneys who perpetrate a business, investment, or commercial fraud in the course of representing their clients.

Of course, until a person or entity falls victim to a fraudulent scheme, that person or entity would not know that it has an interest in the outcome of this case.

Reid Collins submits this amicus brief on behalf of those victims.

This Court’s ruling will either cement victims’ right to hold liable attorneys who commit fraud or, conversely, will leave those victims without recourse.

At bottom, it is bad policy to insulate lawyers from knowing and intentional behavior in the context of fraud.

No fees have been or will be paid for preparing this brief. Copies of this brief have been served on all parties.

ARGUMENT

Extending Attorney Immunity to Transactional Legal Work Harms Victims of Fraud

Petitioners’ brief, as well as the Consortium of Law Firms’ amicus brief, focuses exclusively on why individuals—who happen to be attorneys—that perpetrate or aid and abet a fraud should be shielded from liability. But neither brief discusses the real-world impact that such a rule would have on victims of fraud. Expanding attorney immunity to transactional legal work would leave countless victims of fraudulent transactions without recourse against fraudsters and their well- heeled enablers. More importantly, without sophisticated counsel to help them, many would-be fraudsters would simply be unable to carry out their schemes. Thus, it is good policy to hold transactional lawyers accountable.

Time and again, Reid Collins has represented victims of fraud under a familiar pattern. After inducing their victims into multimillion-dollar transactions, the fraudsters abscond with the proceeds. Even when the victim is successful in obtaining a judgment against the fraudsters, they often lack funds to satisfy it and are thus judgment proof. This happened in the Allen Stanford Ponzi-scheme case, as well as in numerous other cases across the country.

See, e.g., Chinacast Educ. Corp. v. Chan Tze Ngon, No. 10063-VCL, 2015 WL 2150665 (Del. Ch. May 7, 2015) (ordering entry of judgment for $366,958,436.30 against defendants who absconded); Highland Crusader Offshore Partners, L.P. v. Celtic Pharma Phinco B.V., No. 652056/2013 (N.Y. Sup. Ct. Oct. 12, 2020) (ordering entry of default judgment for $1,011,990,724.47 against defendants who lack funds and failed to appear after losing motion to dismiss); Fletcher Int’l, Ltd. v. Alphonse Fletcher, Jr., No. 651015/2014 (N.Y. Sup. Ct. Aug. 29, 2016) (entering judgment totaling $212,158,174.83 against defendants who claim to lack funds and, to date, have paid a receiver less than 0.5% of the amount owed).

Rarely do fraudsters act alone.

In Texas, co-conspirators who aid or assist in perpetrating a fraud are jointly and severally liable for the damages arising out of the fraud. Carroll v. Timmers Chevrolet, Inc., 592 S.W.2d 922, 925-26 (Tex. 1979). And Texas courts routinely impose joint and several liability on professionals, like accountants and auditors, who knowingly tender their services in furtherance of the fraud.

E.g., Spicer, Tr. for Estate of Brady v. Maxus Healthcare Partners, LLC, No. 02-17-00449-CV, 2020 WL 5834733, at *52 (Tex. App.—Fort Worth Oct. 1, 2020, no pet.) (trial court found accountant and client jointly and severally liable for fraud). Yet, Petitioners seek a carveout of this well-established rule to exempt from liability those attorneys who knowingly aid and abet clients in securing a fraudulent transaction. If adopted, this rule would work an injustice on certain victims of fraud. That is, a fraud victim unlucky enough to be defrauded by an attorney and that attorney’s judgment-proof client would be left without recourse against the attorney and, consequently, unable to be made whole.

Extending attorney immunity to transactional attorneys would work to deprive these victims of fraud of their only hope for recovery.

Immunity for transactional attorneys would also arm them with perverse incentives. At best, transactional attorneys might turn a blind eye to their clients’ wrongful behavior. At worst, transactional attorneys would actively engage in fraud to assist their clients to close a deal. This is particularly true either where an attorney’s fee is contingent on a successful transaction or where a client is unable to pay the attorney’s fees until the transaction closes—a common occurrence in M&A transactions where the seller lacks adequate liquidity.

Attorney immunity that covers transactional legal work would enable lawyers to engage in illegal business practices and profit from them. A law license should not, however, provide cover to commit fraud with impunity. Declining to extend attorney immunity to the transactional context will hold attorneys who commit fraud accountable and will protect victims of fraud.

The Policy Justifications Supporting Attorney Immunity Do Not Apply in the Transactional Context.

When attorneys are representing their clients in connection with a judicial proceeding, they should not be required to balance their clients’ best interests against their own potential liability to the opposing party for actions taken in connection with the representation. Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477, 483 (Tex.2015). Litigation, which is by its very nature adversarial, requires that clients have confidence in their counsel’s zealous representation. At the same time, litigation provides procedural safeguards and judicial oversight that protect against attorney overreach and misconduct.

The important policies underpinning the attorney immunity rule for litigation- related representations, however, do not apply to the transactional context where there is practically nothing to hold attorneys accountable other than tort liability. The strong policy rationale for holding every other intentional wrongdoer accountable for their knowing and substantial assistance of fraud should apply with equal, if not greater, force to transactional attorneys who have significant control over transactions and the regulatory and legal framework surrounding them.

First, zealous representation manifests differently in the transactional context. The parties in a business transaction are working toward a common goal. And while the parties to the transaction undoubtedly remain self-interested and want to secure the best deal possible, the parties are not “adverse” in the same way they are in litigation or quasi-litigation contexts. In a business transaction, there must be trust and cooperation. And when these qualities are lacking, the deal often falls through. Declining to extend attorney immunity to transactional legal work would foster integrity and honesty among attorneys representing clients in business transactions.

Second, the transactional context lacks remedies for defrauded parties that exist in the litigation or quasi-litigation context. Specifically, litigants defrauded by their adversaries’ counsel can seek and obtain redress in a number of ways—such as moving for sanctions, compensatory fines, or contempt—even if they are unable to file suit against counsel. Such recourse, however, is unavailable in the transactional context where there is no judge to oversee the conduct and no readily available forum to submit claims.

Theoretically, a victim could file a disciplinary action against the opposing lawyer, but, even then, the victim would not be compensated for the injury. In other words, a cause of action against transactional attorneys who defraud a non- client may be the only means of redress the victim has and is, therefore, a critical deterrent to malfeasance in the transactional context.

Third, declining to extend attorney immunity to transactional attorneys will neither open the floodgates to claims against transactional attorneys nor preclude those attorneys from upholding their fiduciary duties. That is because a party asserting a fraud claim against a transactional attorney must still allege and prove the rigorous elements of a common law fraud claim.

That is, a plaintiff must plead (and ultimately prove by clear and convincing evidence) that: (1) a material misrepresentation was made; (2) the representation was false; (3) when the representation was made the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation intending that the other party act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury.

Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998). This high pleading bar ensures that baseless fraud claims against transactional attorneys are dismissed even absent an attorney immunity defense. The Law Firm Consortium’s suggestion that transactional attorneys must be entitled to commit fraud in order to provide zealous representation would be troubling, if it were true.¹ And just as Texas courts routinely assess the merits of fraud claims against all types of parties, there is no reason to believe they cannot do so for claims against attorneys. Indeed, this Court has authorized—and has since reaffirmed—claims against attorneys for negligent misrepresentation.

See McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999) (holding that the cause of action of negligent misrepresentation applies to attorneys); Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 920 (Tex. 2010) (affirming McCamish). The Court reasoned in McCamish that holding attorneys liable for negligent misrepresentation would not “threaten lawyers with ‘almost unlimited liability,’” as petitioners had argued. 991 S.W.2d at 793–94.

Indeed, in the years since McCamish, there has been no indication that attorneys or the courts have been negatively impacted by the availability of a negligent misrepresentation claim against attorneys. The Court should again reject such arguments here.

Fourth, such a rule would create the bizarre outcome that lawyers alone would be exempt from liability to third parties for knowing and intentional wrongdoing. All other professionals that are involved in business transactions—e.g., accountants, auditors, financial consultants—are subject to liability for making false or misleading statements in the course of a business transaction, even when those statements are negligently made. See McCamish, 991 S.W.2d at 791 (recognizing that Restatement (Second) of Torts § 552, describing negligent misrepresentation, has been applied by Texas courts to professionals including auditors, brokers, accountants, surveyors, and title insurers). Indeed, owing a fiduciary duty to a client does not provide free rein to defraud third parties. There is no sound policy reason to make an exception for attorneys even for negligent misrepresentations, let alone purposeful misrepresentations. Cf. id. (“We perceive no reason why section 552 should not apply to attorneys.”).

There is simply no policy rationale for extending attorney immunity to the transactional context. To the contrary, policy considerations all counsel toward refusing to immunize transactional attorneys.

 Extending Attorney Immunity to the Transactional Context Will Encourage Violations of Texas’s Ethics Rules.

A law license confers a duty to behave ethically. See Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 560 (Tex. 2006) (noting that Texas lawyers are held “to the highest standards of ethical conduct”). And in Texas, attorneys are subject to the Texas Disciplinary Rules of Professional Conduct (the “Rules”). See TEX. DISCIPLINARY R. PROF’L CONDUCT 8.05. Petitioners cite to the Rules for the proposition that attorney immunity should be extended to transactional lawyers because they are required to “act with competence, commitment and dedication to the interest of the client and with zeal in advocacy upon the client’s behalf.” Pet. Br. at 32 (citing TEX. DISCIPLINARY R. PROF’L CONDUCT 1.01 cmt. 6).

Although Petitioners assert that the need for attorney immunity rests upon a “concern for undivided loyalty and zealous representation,” Pet. Br. at 31, they wholly ignore Texas law making plain that an attorney’s pursuit of a client’s “interests with undivided loyalty” must remain “within the confines of the Texas Disciplinary Rules of Professional Conduct.” Sheller v. Corral Tran Singh, LLP,

551 S.W.3d 357, 365 (Tex. App.—Houston [14th Dist.] 2018, pet. denied) (emphasis added). And the Rules are clear: attorneys are prohibited from defrauding third parties in the course of representing their clients. Extending attorney immunity to business transactions would have the effect of sanctioning transactional attorneys to flout their ethical duties.

Of course, Petitioners neglect to mention that the Rules demand that a lawyer balance his obligations to zealously represent his client with his obligations to be truthful to others. Most prominently, Rule 1.02(c) states that “A lawyer shall not assist or counsel a client to engage in conduct that the lawyer knows is criminal or fraudulent.” TEX. DISCIPLINARY R. PROF’L CONDUCT 1.02.

The comments explain, “a lawyer may not knowingly assist a client in criminal or fraudulent conduct.

There is a critical distinction between presenting an analysis of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity.” Id., cmt. 7. Moreover, an attorney likewise violates his ethical duties if he “further[s] the client’s unlawful purpose” or “continue[s] assisting a client in conduct that the lawyer originally supposes is legally proper but then discovers is criminal or fraudulent.” Id., cmt. 8.

The Rules further make plain that attorneys owe a professional duty to non- clients to refrain from engaging in fraud. Under Rule 4.01, an attorney shall not, in the course of representing a client, “(a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid making the lawyer a party to a criminal act or knowingly assisting a fraudulent act perpetrated by the client.” TEX. DISCIPLINARY 4 PROF’L CONDUCT 4.01. Put plainly, a “lawyer should never knowingly assist a client in the commission of a criminal act or a fraudulent act.” Id. cmt. 5 (emphasis added).

In addition, Rule 1.05 carves out a crime-fraud exception to a lawyer’s obligation to protect a client’s confidential information and describes the balancing of interests required of lawyers. Rule 1.05(c)(7) states that a lawyer may reveal confidential information “

[w]hen the lawyer has reason to believe it is necessary to do so in order to prevent the client from committing a criminal or fraudulent act.” TEX. DISCIPLINARY R. PROF’L CONDUCT 1.05(c)(7).

Knowing when to disclose confidential information when a client has a criminal or fraudulent purpose “involves balancing the interests of one group of potential victims against those of another.” Id. cmt. 9. “When the threatened injury is grave, the lawyer’s interest in preventing the harm may be more compelling than the interest in preserving confidentiality of information.” Id. cmt. 13.

Despite Petitioners’ insistence otherwise, the policy that lawyers zealously represent their clients does not exist in a vacuum. Lawyers must balance the interests of their clients with the interests of others when clients threaten to do grave, irreparable harm to others—the precise type of harm that may occur in a fraudulent business transaction. A lawyer is not permitted to assist in such a transaction in the name of zealous representation, even if the transaction would benefit her client greatly. Instead, a lawyer has an obligation to behave ethically to prevent such harm.

Adopting an attorney immunity doctrine as broad as that suggested by Petitioners would be entirely inconsistent with these rules and the policy that underlies them.

Further, granting blanket attorney immunity in all situations would swallow these disciplinary rules and undermine the policies they embody. While a violation of the Rules may subject an attorney to a disciplinary hearing, it “does not give rise to a private cause of action.” Blankinship v. Brown, 399 S.W.3d 303, 311 (Tex. App.—Dallas 2013, pet. denied) (citing TEX. DISCIPLINARY R. PROF’L CONDUCT preamble ¶ 15 (“These rules do not undertake to define standards of civil liability of lawyers for professional conduct. Violation of a rule does not give rise to a private cause of action nor does it create any presumption that a legal duty to a client has been breached.”)).

Thus, although a third party harmed by a lawyer’s crime or fraud could theoretically pursue disciplinary action against that attorney, in practice this avenue would rarely be pursued because a victim cannot recover damages or other recompense through a disciplinary action.

Armed with attorney immunity, transactional attorneys in Texas attorneys would be tempted to ignore their ethical obligations and, possibly, rake in enormous legal fees for assisting clients with fraud. In stark contrast, this Court’s refusal to extend attorney immunity to the transactional context would further the ethical practice of law in Texas.

Texas Would Be an Extreme Outlier if Attorney Immunity Is Extended Beyond Litigation.

Texas law has long recognized that although attorneys are generally not liable to non-clients when acting in the scope of their representation, attorneys may be liable for fraudulent and even negligent conduct outside of the litigation context.

See Poole v. Houston & T.C. Railway Co., 58 Tex. 134, 137–38 (1882) (holding that an attorney was liable for participating his client’s fraudulent business scheme);

Chu v. Hong, 249 S.W.3d 441, 446 (Tex. 2008) (“An attorney who personally steals goods or tells lies on a client’s behalf may be liable for conversion or fraud in some cases.”); McCamish, 991 S.W.2d at 792 (holding that an attorney can be liable to a non-client for negligent misrepresentation during settlement negotiations).

Extending attorney immunity as Petitioners request would be inconsistent with this law, abrogating over a century of jurisprudence. It would also make Texas an extreme outlier—the only U.S. jurisdiction to provide absolute attorney immunity to attorneys beyond the litigation context.

Most states have two forms of attorney immunity: (1) an absolute or near- absolute litigation privilege, restricted to the litigation setting, and (2) qualified immunity from third-party claims for conduct within the scope of representation of a client, derived from common law agency principles.

If this Court adopts the version of attorney immunity advocated by Petitioner, Texas would become the first and only state to conflate the two types of immunity without carving out a fraud exception.

Most states have adopted a version of absolute attorney immunity that applies only in the litigation setting.

See T. Leigh Anenson, Absolute Immunity from Civil Liability: Lessons for Litigation Lawyers, 31 Pepp. L. Rev. 915, 917 (2004) (“All but two states recognize absolute immunity for lawyers involved in litigation with very little variation from state to state.” (internal quotations omitted)).

Indeed, many states aptly call their parallel doctrine the “judicial proceedings privilege” or the “litigation privilege.”

See, e.g., Rubin v. Green, 847 P.2d 1044, 1046–47 (Cal. 1993) (“litigation privilege”);

Clark v. Druckman, 624 S.E.2d 864, 870 (W.Va. 2005) (“litigation privilege”);

Denhof v. Challa, 876 N.W.2d 266, 277 (Mich. 2015) (“judicial proceedings privilege”);

Moss v. Parr Waddoups Brown Gee & Loveless, 285 P.3d 1157, 1165–66 (Utah 2012) (“judicial proceedings privilege”).

Like the Supreme Court of Texas, other state supreme courts have held that the litigation privilege shields an attorney from liability even when the alleged conduct is fraudulent, tortious, or malicious.

See, e.g., Simms v. Seaman, 69 A.3d 880, 892 (Conn. 2013); Levin, Middlebrooks, Mabie, Thomas, Mayes & Mitchell, P.A. v. U.S. Fire Ins. Co., 639 So. 2d 606, 608 (Fla. 1994);

Dickinson Frozen Foods, Inc. v. J.R. Simplot Co., 434 P.3d 1275, 1285–88 (Idaho 2019), as amended (Apr. 22, 2019);

Sriberg v. Raymond, 345 N.E.2d 882, 884 (Mass. 1976);

Shimrak v. Garcia-Mendoza, 912 P.2d 822, 825 (Nev. 1996);

Loigman v. Twp. Comm. of Twp. of Middletown, 889 A.2d 426, 436 (N.J. 2006).

These states have made plain that the sweeping breadth of this privilege is justified in the litigation context by underscoring the power of the court to penalize attorneys for poor behavior through contempt and sanctions.

See, e.g., Simms, 69 A.3d at 902 (declining to adopt a fraud exception to the litigation privilege “given the attorney oath, court sanctions and the availability of other deterrents to attorney misconduct”);

Levin, 639 So. 2d at 608– 09 (Fla. 1994) (holding that there is no exception to an attorney’s absolute immunity in litigation for tortious behavior, and noting that other remedies for misconduct, including contempt and compensatory fines, are available);

cf. Cantey Hanger, 467 S.W.3d at 482 (“[O]ther mechanisms are in place to discourage and remedy such conduct, such as sanctions, contempt, and attorney disciplinary proceedings.”).

No state has extended absolute attorney immunity to transactions.

To the contrary, multiple courts, like the court of appeals below, have held that it does not so extend.

See Walls v. VRE Chicago Eleven, LLC, 344 F. Supp. 3d 932, 949 (N.D. Ill. 2018) (holding that absolute litigation privilege did not apply to law firm’s misrepresentations in a real estate transaction);

Kurker v. Hill, 689 N.E.2d 833, 839 (Mass. App. Ct. 1998) (ruling that the litigation privilege does not encompass an attorney’s conduct in advising clients or assisting them in business affairs);

see also LatAm Investments, LLC v. Holland & Knight, LLP, 88 So. 3d 240, 243 (Fla. Dist. Ct. App. 2011) (“The litigation privilege, by definition, is limited to actions taken during a judicial proceeding and which are related to the judicial proceeding.”);

People ex rel. Gallegos v. Pac. Lumber Co., 158 Cal. App. 4th 950, 958 (2008) (litigation privilege applies “in judicial or quasi-judicial proceedings”).

In addition to a litigation privilege, most states have separately recognized that an attorney is generally not liable to non-clients for malpractice or acts taken in the scope of the representation. This rule is derived from the common law principles of privity and agency.

This Court has already held that this type of immunity is not absolute.

McCamish, 991 S.W.2d at 791 (“[A]llowing a nonclient to bring a negligent misrepresentation cause of action against an attorney does not undermine the general rule that persons who are not in privity with an attorney cannot sue the attorney for legal malpractice.”).

Other states have also universally found that this privilege is qualified, not absolute, and attorneys can be liable for fraudulent or malicious acts.

See, e.g., Pecile v. Titan Capital Grp., LLC, 96 A.D.3d 543, 544, (N.Y. App. Div. 2012) (stating that attorneys are immune from liability from third parties for advising their clients “in the absence of fraud, collusion, malice or bad faith”);

Scholler v. Scholler, 462 N.E.2d 158, 163 (Ohio 1984) (stating rule that absent privity, an attorney is immune from liability to third persons arising from his performance as an attorney in good faith, unless “the attorney acts maliciously”);

Reynolds v. Schrock, 142 P.3d 1062, 1069 (Or. 2006) (holding that a lawyer acting within the scope of the lawyer-client relationship is protected by a qualified privilege excluding acts that would fall into the crime-fraud exception to lawyer-client privilege);

Adelman v. Rosenbaum, 3 A.2d 15, 18 (Pa. Super. Ct. 1938) (rejecting the defendant attorney’s invocation of privilege from suit because “an attorney is personally liable to a third party when he is guilty of fraud, collusion, or a malicious or tortious act”).

Extending absolute attorney immunity to the transactional context would be unprecedented, making Texas’s attorney immunity doctrine far broader than that of any other state. While a few other states have adopted a unified attorney immunity doctrine that applies to transactions, these states have all carved out fraudulent or malicious conduct from the rule’s protection, as discussed above.

Cantey Hanger foreclosed that option by rejecting a fraud exception to attorney immunity. 467 S.W.3d at 484.

If this Court does not clearly restrict such sweeping immunity to litigation, it would give attorneys freedom to commit crimes to further the interests of their clients—and themselves.

CONCLUSION AND PRAYER

There is no policy rationale for extending the attorney immunity rule to transactional and business frauds. As set forth above, there are meaningful differences between litigation and transactional fraud cases. Notably, if an attorney does engage in fraud in connection with a judicial proceeding, there are remedies available to the defrauded opposing party to rectify that misconduct in the context of the judicial proceeding itself. For this and a host of other reasons, the rationale of protecting attorneys from claims made by the opposing party in connection with judicial proceeding is well supported.

But, if a person is defrauded in a business deal, the only avenue she has to recoup her losses is to pursue litigation against those responsible. If one of those responsible parties is an attorney, that attorney should not be treated any differently from other co-conspirators or aiders and abettors. To hold otherwise would make Texas an extreme outlier as the only state that effectively gives attorneys carte blanche to assist their clients in fraudulent business or investment schemes.

For these reasons, Reid Collins respectfully requests that the Court affirm the judgment below.

Dated: November 30, 2020

/s/ William T. Reid, IV              

William T. Reid, IV
State Bar No. 00788817
wreid@reidcollins.com

Joshua J. Bruckerhoff
State Bar No. 24059504
jbruckerhoff@reidcollins.com

Keith Y. Cohan
State Bar No. 24096183
kcohan@reidcollins.com

Zachary C. Ewing
State Bar No. 24113650
zewing@reidcollins.com

Morgan M. Menchaca
State Bar No. 24103877
mmenchaca@reidcollins.com

REID COLLINS & TSAI LLP
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