Appellate Judges

Well Jimmy Choo. Texas Supreme Court to Decide on Transactional Attorney Immunity

Transactional lawyers counsel individuals and organizations on the legal issues generated by their business dealings.

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

2 The “Definitions of Parties to Simplify the Brief,” set out above at p. ix, identifies the litigants by their full names.

the time with co-Petitioner H&B. (2CR367-6 at pp. 11-14). Howard was a transactional lawyer, not a litigator. (2CR342 at pp. 14-15). On the same day he terminated Trae Smith, Howard prepared a corporate notice stating that Bernardo 1 under its new management (i.e., Trae’s mother) had engaged the Lawyers to “represent the Company and communicate concerning any and all business, financial and legal matters related to the Company.” (emphasis added). (2CR417; 2CR368 at pp. 14-16).

With this management change, Howard and H&B replaced Bernardo 1’s long-standing corporate counsel, James Hansen. (2CR373-74 at pp. 65-66).

Trae Smith’s sudden termination and the replacement of long-time counsel Hansen created an information gap within Bernardo 1. (2CR354 at p. 89). Wilma Jean Smith, one of the new member managers (and Trae’s mother), had never been involved in the business before. (2CR372 at p. 59). The other member manager, Dennis Comeau, was the creative shoe designer who lived in New Mexico, but “he didn’t really run it.” (2CR375 at p. 71).

Lacking experience and faced with unfamiliar challenges, both Mrs. Smith and Comeau were in a crisis mode. (2CR373 at p. 64; 2CR375 at p. 71). Howard seized the moment. He and other lawyers at H&B billed nearly 200 hours to Bernardo 1 at rates as high as $600/hour in the first two months. (2CR418-26; 2CR427-37).

In the midst of these events, for no apparent reason given the modest size of the company, Howard designated H&B as “Special Investigative Counsel” to the new board of Bernardo 1, following from which he conducted an “internal investigation” and prepared a 132-page Investigative Report on H&B letterhead. (2CR438-569; 2CR368-69 at pp. 17-19).

LAWYERS LEARN THAT BERNARDO 1’S KEY PATENTS ARE UNENFORCEABLE (WHICH THEY LATER CONCEAL FROM BERNARDO 2).

When the Lawyers began representing Bernardo 1 in August 2009, they learned of a no-longer-pending malpractice lawsuit that Bernardo 1 had filed against its former Maryland I.P. lawyers. (2CR386-413; 2CR342-43 at pp. 17-18). Bernardo 1 alleged in its malpractice suit that it had to dismiss a patent infringement lawsuit against Olem Shoe Company when it learned realized that the application for the patent-in-suit was filed too late for the patents-in-suit and was thus unenforceable. (2CR393). In the lawsuit, Bernardo 1 stated that “all patents for all [Bernardo 1’s] products were worthless by not being timely filed.” 3   (Id.) (emphasis added).

The worthless/unenforceable design patents are referred to herein as the “Patents.” Howard became aware of the Maryland malpractice lawsuit from his paralegal on August 31, 2009. (2CR422 at 8/31/09 time entry). Mr. Howard billed a total of 4.30 hours that day. (Id.). On September 3, 2009, Howard billed time to “matters handled by prior counsel affecting IP, . . .”. (2CR428).

3 Bernardo 1’s malpractice lawsuit against the Maryland lawyers involved the following unenforceable design patents: D495,855 S1; D496,147 S1; D508,305 S1; D487,183 S1; and D489,517 S1.

On September 4, 2009, Bernardo 1’s outgoing lawyer, James Hansen, whom Howard and H&B had just replaced, sent an attorney-client privileged memorandum to Howard to bring him up to speed on all of Bernardo 1’s legal affairs. (2CR378- 85; 2CR347 at p. 38). In the section regarding cases handled by other attorneys, the memorandum included the following disclosures to Howard about the Patents:

OTHER ATTY

Olem Shoes—This was handled by Elton Dry, a patent atty as design infringement claim relating to Olem’s knock off of Client’s Miami sandal; a BIG seller. In discovery, Dry learned Client’s patent applic filing was tardy, and a bar to ehorcing [sic.] the Olem claim. Suit was quickly dismissed, in fed court, and Client pursued the patent attys.

 

OTHER ATTY

Rose, et al. — This Maryland based legal malpractice/negligence suit is handled by attys there suing the patent attys on the Miami Sandal late filing of Clients. I gave a depo in support of Client, but I am not sure if the suit is pending/closed/settled … or of the result. Please check with Trae, on such (emphasis added). (2CR384). Howard’s time records show that on September 10, 11 and 14, 2009, he reviewed and analyzed the memorandum from Mr. Hanson, and matters related thereto, and billed a total of 9.40 hours. (2CR428).

Bernardo 1’s shoe designer and co-owner of the Patents, Dennis Comeau, discussed the Maryland malpractice suit with Howard on multiple occasions. (2CR414-15). Comeau told Howard that the lawsuit was based on the claim that Bernardo 1’s former patent attorneys messed up several of its design patents by filing the patent applications too late. (Id. at ¶4).

As Haynes and Boone’s unpaid legal fees mount, Howard looks to find a buyer of Bernardo 1’s tainted assets.

Over the first year of the Lawyers’ representation of Bernardo 1, H&B had run up significant amounts in unpaid legal fees dating back to the firm’s very first invoice. (2CR572-73; 2CR361 at pp. 164-65). Howard was concerned about getting his firm paid. (2CR350 at pp. 70-71). He knew that a clear path to payment was through the sale of Bernardo 1’s assets in an asset purchase agreement (“APA)” he could prepare. (2CR351 at pp. 75-76).

Howard wrote in an e-mail to his law partner on the subject of “Outstanding Fees,” “hopefully we will get a deal done to sell the business in October which will put us in the position of being able to collect the outstanding deferral ($) – see attached.” (2CR574).

Consistent with the Lawyers’ all-encompassing scope of engagement (“any and all business, financial and legal matters”), the work that Howard did for Bernardo 1 involved not just legal matters, but also financial matters and business decisions that were made on behalf of the company. (2CR368 at pp. 14-15). Naturally, Howard was involved in the decision to sell the assets of Bernardo 1 (2CR368 at p. 16) – a non-legal decision.

Within 6 days of the e-mail he had sent tohis law partner about “Outstanding Fees,” Howard prepared a corporate resolution, which he had Mrs. Smith sign, commissioning himself (along with non-lawyer sandal designer Dennis Comeau) to “immediately pursue the potential sale of the Company or its assets . . .” (2CR571; 2CR349 at pp. 68-69; 2CR370 at p. 35).4

TO MARKET THE COMPANY, LAWYERS PREPARE A CONFIDENTIAL “BUSINESS PROFILE” THAT CONTAINS FALSE STATEMENTS ABOUT THE PATENTS, WHICH WAS FORWARDED TO POTENTIAL BUYER BERNARDO

In his mission to sell the Bernardo 1 assets, Howard prepared a Confidential Business Profile for the company which prominently references Howard and H&B on the cover page. (2CR576-86; 2CR 351 at pp. 76-77). It is essentially a sales brochure, and it states that any interested recipients should contact Howard directly. 2CR576. By this time, Howard was not merely engaged in legal matters, but was also involved in brokering the sale of Bernardo 1 and in the making of other business and financial decisions for the company. (see, e.g., 2CR368 at pp. 15-16).

Even Mrs. Smith, a member/manager of Bernardo 1, described Howard as the one who “brokered the deal.” (2CR376 at p. 107).

In the intellectual and intangible property section of the Profile, Howard wrote that it is a routine part of Bernardo 1’s business practice to develop, protect and defend its intellectual property rights. Howard also wrote that the I.P. of Bernardo 1 comprised a “significant portion” of the overall value of the business. (2CR579; 2CR352-53 at pp. 79-80, and 87).

4 The fact that a non-lawyer was co-assigned the same task makes clear that there was nothing about this assignment that required the professional skill, training and experience of a lawyer.

Immediately below this statement was a listing of Bernardo 1’s design patents including the Patents that were known by the Lawyers to be worthless (e.g., D495,855 S1; D496,147 S1; D508,305 S1; D487,183 S1; and D489,517 S1). (2CR579; 2CR592-93 at ¶¶15-17; 1CR289 at footnote 5). Howard failed to disclose in the Profile that these Patents were unenforceable.

In February 2011, Howard personally authorized forwarding the Profile, with its false and misleading statements, to be the Bernardo 2 owners, as potential buyers. (2CR586; 2CR602 at ¶6). By this time, the fees that Bernardo 1 owed to Haynes and Boone were growing at a faster pace. (2CR572).

The Profile touted the value of Bernardo 1’s Patents and Trademarks, stating that “the value of Bernardo 1 is in its intellectual property,” which was among the statements Bernardo 2 trusted and relied on in making their decision to buy. (2CR602-03 at ¶¶6, 7 and 10; 2CR608 at ¶¶3 and 5).

AS APA DISCUSSIONS WERE ONGOING, HOWARD MADE FALSE REPRESENTATIONS DIRECTLY TO BERNARDO 2’S OWNERS, WHILE ALSO SOLICITING HIS FUTURE REPRESENTATION OF THEM.

The Lawyers had a further motive for making the deal go through with Bernardo 2. Howard had a prior relationship with one of Bernardo 2’s co-owners, Todd Miller (the other co-owner was Peter Cooper). In mid-2011 (several months before the APA closed), unprompted, Howard contacted his friend Miller and stated that he was representing Bernardo 1 in the potential sale. Thereafter, Howard initiated multiple communications with Miller. During some of these, Howard would tell Miller that, given his institutional knowledge of the Bernardo 1 business, he would be well-suited to represent Bernardo 2 if they acquired the business.

Howard made these solicitations while still representing Bernardo 1. (2CR601-07 at ¶¶2-5).

On another occasion before the APA was signed, Miller invited Howard, Cooper and others to his house for some wine. Thereafter, the group went to Kenneally’s Pub in Houston. While at Kenneally’s, Howard made false statements to Cooper to the effect that Bernardo 1 had an unnamed buyer who was ready, willing and able to purchase the Bernardo 1 assets in cash if Bernardo 2 did not do so. (2CR608-10 at ¶5).

He made similar false statements to Miller, including that the supposed buyer was willing to pay $6.5 million just for the intellectual property. (2CR603 at ¶9). Howard also falsely represented to Cooper that, other than a trademark issue (which was disclosed), there were no other issues of concern with any of Bernardo 1’s patents or trademarks. (2CR609 at ¶5).

In truth, there was no $6.5 million bona fide cash offer from a third party to Bernardo 1, and there were mortal problems with the Patents.

(2CR371 at p. 54; 2CR361 at p. 162; 2CR384; 2CR389-98; 2CR414-15; 2CR587-600).

Howard made these false statements knowing that Bernardo 2 was a prospective buyer of the assets.

(2CR601-02 at ¶¶2- 5; 2CR608-09 at ¶¶2, 3 and 5).

Howard’s solicitations to represent Bernardo 2 in the future is significant. Because of their prior relationship, Miller placed a great deal of trust in Howard throughout the pre-sale process. (2CR601-02 at ¶¶5 and 7). Howard’s lies to the Bernardo 2 owners about a “stalking horse” buyer waiting in the wings to pay cash if Bernardo 2 hesitated on the deal were among the representations that his then- client Bernardo 1 never authorized him to make; Howard was acting on his own. (2CR371 at p. 54).

At no time during any of their many discussions did Howard tell the Bernardo 2 owners that there were serious problems with Bernardo 1’s Patents, or that Bernardo 1 had filed a legal malpractice lawsuit against its former Maryland lawyers for causing its key design Patents to be unenforceable.

If Mr. Howard had ever advised Miller or Cooper about the unenforceable Patents, Bernardo 2 would have walked away from the potential deal.5

(2CR601-03 at ¶¶6-9; 2CR608-10 at ¶¶3-5).

Petitioners attempt to marginalize Respondents’ fraud claims by claiming in their Brief, at p. 4, that records of the Maryland malpractice case were made available for Bernardo 2 to review in a box labeled “Malpractice Suit.”

The suggestion that this is a “fact of the case” for purposes of this appeal is a red herring that has previously been refuted when the issues between Bernardo 2 and Barnardo 1 were arbitrated as required by the APA. (4SuppCR1699 at ¶¶7-11, 1703 at ¶4, and 1706 at ¶4).

5 Petitioners state in their Brief, at p. 2, that the Maryland legal malpractice case was a failure, intentionally inviting speculation that perhaps the patent applications were timely filed by the Maryland lawyers and thus valid. That is incorrect, and the implication is false, as there were other reasons for the outcome in that case including Maryland’s contributory negligence bar to recovery (rather than a comparative negligence scheme).

In fact, the issue has already been litigated and the assertion was rejected as contrary to the credible evidence. (5SuppCR2060 at ¶14). The truth is that the Bernardo 2 owners and/or counsel were very diligent in “kicking the tires” of Bernardo 1’s assets and I.P.

They reviewed all documents made available to them, and none of those made any reference to Bernardo 1 having to dismiss its patent infringement claims against an alleged infringer because of patent invalidity; nor did any of those documents include any reference to the Maryland malpractice litigation. Id.

Additionally, Bernardo 2’s counsel checked the records of the USPTO to confirm that Bernardo 1 was the owner of the patents and trademarks made the basis of the asset sale, and nothing unusual turned up. (4SuppCR1701 at ¶10).

Further, notwithstanding the APA’s requirement that Bernardo 1 identify all pending and past lawsuits (notably, Howard and Bernardo 1 did not identify any), Bernardo 2’s counsel nonetheless conducted his own search of lawsuit records in Harris County and found none. (4SuppCR1701 at ¶11).

HOWARD WROTE FALSE REPRESENTATIONS AND WARRANTIES INTO THE APA.

The Lawyers suggest in their Brief, at p. 6, that the APA did not contain any representations that addressed the “enforceability” or “validity” of the Patents. This misses the point. Besides Howard’s face-to-face false statements to the Bernardo 2 owners and the written misrepresentations about the value of the Patents in the Business Profile, there were multiple representations and warranties in the APA itself that covered the same ground.

The Lawyers knew that Bernardo 1 had historically “used” its patent rights to sue for infringing conduct.

Prior to the APA being consummated, Howard knew that in the past Bernardo 1 had “used its patent rights” to sue for infringement. (2CR348 and 352, at pp. 52 and 79-80; 2CR579). He also knew that the design Patents were material to the APA. (2CR363 at p. 177).

Howard is an experienced transactional lawyer and understands the significance of representations and warranties in an agreement.

(2CR341-42 at pp. 10-11, and 14-15).

He also knows that representations and warranties are relied upon by the party to whom they are directed. If there turns out to be a false representation or warranty, it can be actionable. (2CR358 at pp. 108- 09).

In fact, in the APA, Bernardo 1 agreed to indemnify Bernardo 2 for any damages if a representation or warranty proved to be false. (Id.; 2CR629-30 at §13).

The APA included false representations and warranties regarding Bernardo 1’s Patents.

Section 8 represents and warrants that the Acquired Assets, which includes the Patents, are “free and clear of all . . . restrictions of any kind”.6 (2CR621 at § 8). Subsection 9.n. of the APA represents and warrants that all of Bernardo 1’s assets, including the Patents, are suitable for the purpose for which they are presently used or have historically been used.7 (2CR624-25 at §9.n).

6 Patents that are unenforceable are not “free and clear of all … restrictions of any kind.”

Subsection 9.s. states that the Seller owns and/or has the right to use each item of Intellectual Property,8 and that, except as set out in Schedule 9.s., no other party has the right to use any of the Intellectual Property or, to Seller’s or Owner’s knowledge, is infringing upon any Intellectual Property. (2CR626 at §9.s.).

Importantly, Schedule 9.s. (corresponding with subsection 9.s.), entitled “Intellectual Property Exceptions,” required Bernardo 1 to identify any patents or trademarks that were impaired or unusable in some way. Any I.P. disclosed in Schedule 9.s. would be exempt from the seller’s representations and warranties under subsection 9.s. (2CR694, and 626; 2CR609 at ¶4).

Significantly, nowhere in the APA including Schedule 9.s. is there any reference to the five unenforceable design Patents.9

(2CR346 at p. 36).

Subsection 9.u. is particularly important in a catch-all sense.

It states that “[n]o representation or warranty made by Seller or Owners, nor any . . . schedule attached to this Agreement . . . contains any untrue statement of material fact or omits to state any material fact necessary to make the statement contained herein not misleading.” (2CR626 at § 9.u).

This subsection protects against tricky or deceitful conduct.

7 An unenforceable patent is not “suitable.”

8 An unenforceable patent cannot be “use.”

9 Based on the express purpose of Schedule 9.s., Howard’s failure to disclose the tainted Patents in that Schedule was a representation that those Patents had no issues in terms of any impairment or their capability of being used.

Nowhere in the APA including Schedule 9.s. is there any reference to Bernardo 1’s design Patents being impaired, unenforceable, invalid, useless, or unusable in the past or present. (2CR346 at p. 36). In their many discussions and his solicitations, Howard never disclosed the truth about the Patents to Miller or Cooper. (2CR357 at pp. 103-04; 2CR602-03 at ¶¶ 6-9; 2CR608-10 at ¶¶ 3-5).

Howard admits that the patent enforceability problems should have been disclosed in the 2011 APA.

Howard agrees that if there is a known issue with the enforceability of patents, it should be disclosed to the buyer. (2CR 362 at p. 166).

To that end, Howard does not deny that the Olem Shoe suit (dismissed when Bernardo 1 learned the patent-in- suit was unenforceable) and the Maryland malpractice suit over the bad Patents should have been disclosed in the APA. He states early in his deposition that if he had known that Bernardo 1 had filed a lawsuit asserting that the Patents were unenforceable and worthless, this would have been disclosed in the APA

(“It would have been disclosed.”) (“I am telling you that if I had known these facts, those issues would have been disclosed…”).10 (emphasis added).

(2CR344-45 at pp. 29 and 33).

10 Howard implies that Bernardo 2 should have essentially disbelieved the seller’s representations and warranties and done its own investigation to discover the Patent problems. (Id.). Any such “buyer beware” excuse does not work as it would defeat the purpose of a seller’s representations and warranties in an asset purchase agreement, which is to allow the buyer to rely on those statements without incurring the significant expense of going behind them. 4SuppCR1700 at ¶7.

But Howard did know. Later in his deposition Howard admitted that, prior to the 2011 APA, he knew of the Olem Shoe suit filed by Bernardo 1 and the fact that it had to be dismissed. (2CR355 at p. 96).

He also knew about the Maryland legal malpractice suit. (Id.)

In fact, Howard even mentioned the malpractice suit in the “Investigative Report” that he finished on November 1, 2010 (i.e., prior to the APA). (2CR565).

Despite this knowledge, the Lawyers never made any reference to this litigation in response to Bernardo 2’s due diligence index furnished several months prior to the 2011 APA, which required a “[l]ist and brief description of litigation claims and proceedings settled or concluded.” (2CR355 at pp. 95, and 97-98; 2CR717-32 at 730).

The due diligence index also asked for communications, studies or reports relating to the “validity or infringement” of the Company’s patents, or the “validity or value” of the Company’s patents. (2CR729). But, again, no responsive information about the bad Patents was provided. Id.

Howard also admitted that the responsibility for accurately drafting exceptions to the intellectual property representations and warranties in the APA lay with the Seller. (2CR360 at pp. 140-41; 2CR733). Instead of disclosure, however, Howard told Bernardo 2’s counsel just days before the APA was executed – “[y]ou have everything there is in the realm of IP,” and then later, “you have a list of everything we have.” (2CR735-48, at 736-37).

BERNARDO 2 JUSTIFIABLY RELIED ON THE LAWYERSMISREPRESENTATIONS.

The facts set out above show

(i) a pre-existing cordial relationship between Howard and Todd Miller of Bernardo 2;

(ii) multiple unsolicited telephone and one- on-one contacts initiated by Howard;

(iii) broker-like sales pitches made orally and in writing by Howard;

(iv) Howard enticing Bernardo 2 to do the deal by falsely stating that there was a ready, willing and able buyer waiting in the wings;

(v) Howard giving false assurances to Bernardo 2 about the quality of the I.P. they were buying;

(vi) Howard promising his future legal representation of them; and

(vii) statements by Howard that Bernardo 2 already has been provided “everything there is in the realm of IP”.

(2CR601-04; 608-10; 576-86; 737).

Indeed, Todd Miller of Bernardo 2 testified that the intellectual property, and the Patents in particular, were critical to Bernardo 2’s decision to buy. (2CR602 at ¶7).

All of this leading up to the APA created a sense of trust and reliance on the part of Bernardo 2 in what Howard was telling them, and a belief that Howard had always been open to them about all issues regarding Bernardo 1’s business, including its intellectual property (2CR602 at ¶¶ 7 and 10).

In fact, after the APA closed in September 2011, the trust that Howard had cultivated with Bernardo 2 led them to retain him and H&B as their attorneys. (2CR603 at ¶ 9).

THE LAWYERS’ PLAN e., TO USE THE CASH GENERATED FROM THE SALE OF BERNARDO 1 ASSETS TO PAY THEIR OUTSTANDING INVOICES – PAID OFF.

The Lawyers had a pecuniary interest in the APA being consummated. Howard set it up so that the payment of his firm’s past-due legal fees from the cash at closing became “a part of the final deal,” which closed on September 16, 2011.

(2CR361 at pp. 164-65).

The moment Bernardo 2’s $2.65 million payment was put into escrow, $436,177.22 of that amount was wired out of the escrow to H&B. (Id.).

The plan worked.

The Lawyers finally got paid in full for two years of past due receivables. (2CR572-73).

 

SUMMARY OF ARGUMENT

Petitioners ask this Court to expand attorney immunity beyond its historical boundaries.

The essential premise of Petitioners’ and amici’s position is that attorneys have always been immune from liability for fraudulent conduct in a business transaction – so long as the lawyer was representing the co-fraudster in the This is false. The Fourteenth Court did not “carve out an exception” to attorney immunity, nor is the NFTD opinion a “minority view.” Rather, Petitioners are attempting to expand the defense –tellingly also called litigation immunity11 – into an arena that no appellate court in Texas or any other state has countenanced. The Court should reject this invitation to adopt this outlier view.

Texas courts have clearly and sensibly limited the attorney immunity defense to the “litigation context.”

Despite Petitioners’ suggestions otherwise, the parameters of “litigation context” are clear. It is limited to litigation-like proceedings, pre-suit demands where litigation is imminent, and foreclosure proceedings. There is no mystery to these boundaries. And they are entirely sensible.

First, litigation and litigation-like situations are highly adversarial and often emotional. There is a winner and a loser, and a lawyer who often has to make split-second decisions for the client should not have his/her judgment clouded by concern for exposure to the opposite party if they step too far in their advocacy.

11 Youngkin v. Hines, 546 S.W.3d 675, 679 n. 2 (Tex. 2018).

Transactional work is different.

By contrast, the ultimate goal is a business transaction in the parties’ mutual interest. Second, disputes in the litigation context have or will have a judge or other independent referee with the authority to take measures to keep the playing field level when one side cheats.

No such referee exists in the transactional context.

And, in the case of foreclosure proceedings, there are due process protections.

If immunity were expanded to business transactions, there will be no repurcussions to the lawyer who facilitates the fraud for a significant fee and, correspondingly, no remedy to the innocent buyer—especially when the seller becomes an empty vessel shortly after the sale is consummated.

Petitioners’ and amici’s “sky is falling” arguments are overblown.

Because Texas courts have long confined the attorney immunity doctrine to the litigation context, the predictions of doom by Petitioners and their amici ring hollow. Indeed, if this unremarkable rule were so destabalizing—and transactional immunity so essential to the functioning of law and business in America—why have other states not  already  recognized  transactional immunity?

Competent  and ethical transactional lawyers have fared just fine without any state appellate court in the United States protecting them with immunity for two centuries.

All a transactional attorney need 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.” See TEX. DISCIPLINARY RULES OF PROF’L CONDUCT, Preamble ¶7.

In Texas, this merely calls for the lawyer to

(i) not assist a client in conduct that the lawyer knows is fraudulent; and

(ii) not knowingly make a false statement of material fact to a third person or assist a client in defrauding a third party.

Id. at DR 1.02 and 4.01.

This Court has previously recognized a distinction between the litigation context and transactional work when assessing attorney liability.

Petitioners urge this Court to eliminate any distinction between the litigation context and transactional conduct for purposes of attorney immunity. But this distinction is In addition to the attorney immunity context, this Court applied the distinction for purposes of statutes of limitations. In 2019, this Court rejected a further extension of the Hughes v. Mehaney & Higgins, 821 S.W.2d 154 (Tex. 1981), statute of limitations tolling rule, concluding that the tolling principle it had enunciated in connection with litigation and quasi-litigation matters should be limited to such cases, and that malpractice cases growing out of transactional work are not entitled to any greater protection than the traditional ones (e.g., discovery rule, etc.). See Erickson v. Renda, 590 S.W.3d 557 (Tex. 2019).

The Fourteenth Court’s ruling is consistent with the RESTATEMENT.

Petitioners’ and amici’s argument for universal attorney immunity under Texas law would be in conflict with the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS. Section 51 of the RESTATEMENT imposes a duty of care on lawyers toward a nonclient to the extent the lawyer invites the nonclient to rely on the lawyer’s opinion and the nonclient is not too remote from the lawyer to be entitled to protection. See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

51. This “not too remote” exclusion from liability expressly recognizes that §51 does not apply to claims against opposing counsel in litigation. Id. at cmt c. In short,

51 is consistent with the limiting the application of the attorney immunity defense to litigation-related conduct. Additionally, RESTATEMENT §56 states that a lawyer is subject to liability to a nonclient when a nonlawyer would be under similar circumstances.

Recognizing no special protections for lawyers outside the litigation context, the RESTATEMENT is consistent with the law in Texas and around the country. Also, because §56 equates a lawyer’s conduct to that of a nonlawyer for liability purposes, this standard for attorney liability would certainly apply to business transactions, but it could not apply to litigation as such activity requires a law license which a nonlawyer would not have.

McCamish is still good

If this Court were to expand the immunity defense to protect attorneys for their transactional fraud, it would abrogate McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999). There is no basis for creating such turbulence in the law.

Lawyers have understood the rules that guide their behavior toward nonclients for over 100 years and have managed quite well without what would be a blanket immunity to nonclients.

Factual grounds also exist to support affirmance because the Lawyers failed to meet their summary judgment burden on the “scope of representation” test.

There are two inquiries that must be made for attorney immunity to apply:

The conduct must be (1) within the scope of representation and not foreign to the duties of an attorney, and (2) in litigation or the litigation context.

The underlying outcome at the trial court was summary judgment in favor of the Lawyers on the immunity issue (or, confusingly, the granting of the Lawyers’ Plea to the Jurisdiction as to Bernardo 2’s Restatement §552 claim).

Fact issues exist as to the first inquiry, and it is undisputed under the second inquiry that the Lawyers’ conduct was not in the litigation context.

Accordingly, the Fourteenth Court’s decision can also be affirmed because the Lawyers failed to meet their summary judgment burden on the first inquiry.

ARGUMENT

With its origins in English common law, the attorney immunity defense is limited to conduct occurring in litigation and the litigation context. See T. Leigh Atkinson, ABSOLUTE IMMUNITY FROM CIVIL LIABILITY: LESSONS FOR LITIGATION LAWYERS, 31 Pepp. L. Rev. 915 (2004).

Attorney immunity’s purpose is to protect the integrity of the adversary system by allowing a lawyer to zealously advocate for the client in litigation without any fear of reprisal by the opposing litigant for the lawyer’s hostile or aggressive conduct. Id. at 922.

Unlike in litigation where there is a judge to provide oversight with the power to sanction or foreclosure proceedings that employ procedural due process protections, the immunity defense, if extended to conduct in business transactions, would give transactional lawyers an oversight- free license to defraud counterparties in business deals with impunity.

That would be a bad policy, harmful to the public, and damaging to the integrity of the legal profession.

NEITHER THIS COURT NOR ANY LOWER COURT HAS EVER EXTENDED ATTORNEY IMMUNITY TO PURELY BUSINESS TRANSACTIONS.

Because this Court is obviously well-familiar with its recent decisions on attorney immunity, the background facts of the Cantey Hanger, Youngkin and Bethel cases will not be discussed in any detail.

Cantey Hanger holds that attorney immunity applies in the litigation context (but not beyond).

An attorney’s shelter from liability on immunity grounds has boundaries. The immunity defense “does not apply to all causes of action against an attorney”, and does not cover all acts by an attorney. Cantey Hanger, LLP v. Byrd, 467 S.W.3d at 477 (Tex. 2015), 481; Alpert v. Crain, Caton & James, P.C., 178 S.W.3d 398, 405 (Tex. App.—Houston [1st Dist.] 2005, pet. denied). To begin, the immunity is limited to “conduct . . . involving ‘the office, professional training, skill, and authority of an attorney.’” Reagan Nat’l Advert. of Austin, Inc. v. Hazen, No. 03- 05-00699-CV, 2008 WL 2938823, at *3 (Tex. App.—Austin July 29, 2008, no pet.) (mem. op.) The burden falls on the attorney to prove that his conduct is protected by immunity.  Cantey Hanger, 467 S.W.3d at 481.

The attorney immunity defense is extends only to litigation or the quasi- litigation context. Texas appellate courts have never applied attorney immunity to a transactional setting. This Court recognized: “[T]here is a consensus among the court of appeals that, as a general rule, attorneys are immune from civil liability to non-clients ‘for actions taken in connection with representing a client in litigation.’” Cantey Hanger, 467 S.W.3d at 481 (quoting Alpert, 178 S.W.3d at 405).

Cantey Hanger applied attorney immunity to conduct that fell within the scope of the lawyers’ duties representing their clients in litigation. Id. at 481.

The dissent worried that “the Court overlook[ed] an important element of the form of attorney immunity at issue in this case—that the attorney’s conduct must have occurred in litigation.” Id. In response, the majority expressly disclaimed broadening attorney immunity to conduct unrelated to litigation, stating the dissent “mischaracterizes the scope of our opinion in asserting that we ‘suggest[ ] that this form of attorney immunity applies outside of the litigation context.’”. Id. at 482, n. 6. Indeed, the only issue between the majority and dissent was whether the alleged fraud on the part of the Cantey Hanger firm following from a contested divorce proceeding was part of the litigation. Id. at 482, n. 6, 486, 489. The majority said it was and held that immunity applied, while the dissent disagreed. Id. at 484, 486.

Here, there is no debate on this point; it is undisputed that the Lawyers’ conduct had nothing to do with litigation or the litigation context.

The basic purpose of the immunity defense is to protect an attorney’s right to be aggressive in litigation. Id. at 480-81. The defense was conceived and exists “to promote zealous representation,” and to ensure “loyal, faithful, and aggressive representation by attorneys employed as advocates.”

Id. at 481 (quoting Mitchell v. Chapman, 10 S.W.3d 810, 812 (Tex. App.—Dallas 2000, pet. denied);

Alpert, 178 S.W.3d at 405. “The courts of appeals have universally reasoned that litigation immunity furthers this goal.” Id. at 488-99 (quoting Alpert, 178 S.W.3d at 405) (emphasis added);

Applying attorney immunity as a defense to conduct in business transactions has nothing to do with that goal.

In the Cantey Hanger dissent, Justice Green juxtaposed the litigation context against the transactional context, explaining that attorney immunity should not extend to the latter because it would be overly broad and would immunize “attorneys for conduct arising from fraudulent business schemes.” Id. at 489.

Justice Green further stated that the limited application of attorney immunity has the benefit of maintaining the procedural safeguards that only apply to litigation and serve as recourse for litigants wronged by an attorney’s misconduct (e.g., TEX. R. CIV. P. 13, requiring all papers attorneys file in a lawsuit be signed, certifying that the attorney believes that they are not groundless and brought in bad faith or to harass, and authorizing sanctions for violation of the rule; TEX. CIV. PRAC. & REM. CODE §§ 9.001–.014, 10.001–.006, allowing for sanctions and the offended party’s recovery of expenses). Id.

In contrast, there are no such restraints to keep attorneys in line in the transactional context.

Within litigation and quasi-litigation matters, there are checks and balances to police a lawyer’s actions. See e.g., Alpert, 178 S.W.3d at 406. For example, the court has the power to impose sanctions or contempt as necessary. Id.

Non-judicial foreclosures are still subject to due process rules and protections.

TEX. PROP. CODE 51.002 (mandating that any foreclosure must involve notice to the borrower, occur at a specific time and place, and provide notice of the sale to the public).

In a business transaction where a lawyer can mislead the counter-party by misrepresenting material facts, there is no judge to ensure fairness or levy sanctions, nor are there due process requirements to provide a level playing field. That is why, after over a century of jurisprudence, no published opinion in any state appellate court in Texas, or nationwide, has ever declared on the facts of that case that an attorney rendering legal services in a transactional/business context has an absolute immunity from claims by a nonclient for fraudulent conduct or negligent misrepresentations.

This Court should maintain the limits of attorney immunity to the policy it serves. Lawyers should not be given a free pass when they do something intentional or negligently to deceive others in a business transaction, especially when they profit from that deceit.

Youngkin v. Hines set a bright line that regardless whether a lawyer’s wrongdoing is in the name of, with or on behalf of a client in a fraudulent business scheme, immunity will not apply.

As with every other case that has found attorney immunity to apply, Youngkin 79. Hines, 546 S.W.3d 675 (Tex. 2018), was based on alleged wrongful conduct by the lawyer in litigation or the litigation context, in that case arising from a Rule 11 settlement agreement made in open court. at 678-79. Petitioners cite the case but gloss over the most important portion of the opinion for purposes of this appeal:

This is also not to say that attorneys are insulated from all liability for all wrongdoing in the name of the client. Though attorney immunity is broad, it is not limitless. In Cantey Hanger, we identified several nonexhaustive examples of conduct that may fall outside the reach of the attorney-immunity defense—participation in a fraudulent business scheme with a client, knowingly helping a client with a fraudulent transfer to avoid paying a judgment, theft of goods or services on a client’s behalf, and assaulting opposing counsel during trial.

Thus, while we recognize that some fraudulent conduct, even if done on behalf of a client, may be actionable, Hines does not allege any such behavior. Id. at 682-83 (emphasis added). A clearer line of demarcation could not have been drawn to show that a lawyer’s fraudulent conduct toward a nonclient in a business transaction is not immune from liability.

The Lawyers’ artificial distinction between fraudulent conduct “with” vs. “for” a client does not bear out.

The Lawyers parse language about an attorney participating in a fraudulent business scheme “with” a client, as being meaningfully different for immunity purposes than doing so “for” a client. Petitioners’ Br., pp. 22-24.

They imply that there is no immunity in the former scenario, but that immunity attaches to the latter.

The Lawyers’ attempt to marginalize the key pronouncement in Youngkin with an artificial distinction is silly. In fact, the above quote from Youngkin contradicts the Lawyers’ false distinction. 546 S.W.3d at 682-83. The Court uses three phrases to frame the type of conduct that is not subject to immunity – describing such conduct alternatively as being done “in the name of a client,” “with a client,” and, most tellingly, “on behalf of a client.” Id. at 683.

Regardless whether the lawyer is participating in a fraudulent business scheme with or for a client, assuming arguendo there was any difference intended, the immunity defense would not apply. Id. The Court has made it clear for over a century that such conduct, even if done “on behalf of a client” (as stated in Youngkin), is not immune from liability because “such acts are entirely foreign to the duties of an attorney.” Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477, 482 (Tex. 2015) (citing Poole v. H.&T.C.R’y Co., 58 Tex. 134, 137 (Tex. 1882); Youngkin, 546 S.W.3d at 683.

“Litigation privilege” and “attorney immunity” are labels that describe the same doctrine.

Attempting to distance themselves from the reality that attorney immunity has always been limited to litigation and the litigation context, the Respondents have suggested in the past that the Supreme Court in Youngkin implicitly rejected the “litigation immunity” label to describe the defense. The Court actually embraced the label, stating: “Youngkin referred in his briefs to litigation privilege rather than attorney immunity, but both labels describe the same doctrine.” (emphasis added).

Youngkin v. Hines, 546 S.W.3d 675, 679 n. 2 (Tex. 2018).

Bethel v. Quilling reinforced that attorney immunity shields a lawyer from suit by a third party for conduct “connected with representation of a client in litigation.”

Petitioners likewise miss the mark regarding this Court’s opinion in Bethel v. Quilling, Selander, Lownds Winslett & Moser, P.C., 595 S.W.3d 651 (Tex. 2020). In Bethel, the Court famed the issue in terms of “whether the alleged destruction of evidence is an action ‘taken in connection with representing a client in litigation,’ thus entitling the respondent attorneys to attorney immunity.” 12 (emphasis added). Id. at 653. Immunity applied because the lawyer’s “complained-of actions are the kind of actions that are ‘taken in connection with representing a client in litigation.’” (emphasis added). Id. at 658.

No less than ten times in the opinion when discussing the standard for immunity to apply, the Court specifically referenced the “in litigation” requirement as part of the test.  Id.

In both Poole and Chu v. Hong, the Court refused to extend immunity to fraudulent conduct in a business transaction.

From the beginning, this Court has made clear that attorney immunity does not apply to conduct occurring in purely business transactions.

First, in Poole, the Supreme Court ruled that an attorney cannot be heard to deny liability to a nonclient for his own fraudulent conduct on a merchant in a purely transactional context, even though it was performed for the benefit of the client.

Such conduct is considered foreign to the duties of an attorney.

Poole v. H. & T. C. Co., 58 Tex. 134, 137 (1882). Contrary to Petitioners suggestion, the Court in Poole clearly understood that the immunity doctrine was the issue, stating that an attorney acting as the “agent of the [client]” cannot perpetrate a fraud on a third party and then deny liability “under the privilieges of an attorney at law”.

Such acts are entirely foreign to the duties of an attorney.13

Second, in Chu v. Hong, discussing whether an attorney could be held liable to a nonclient in a buy-sell business transaction, this Court stated “[a]n attorney who. . . tells lies on a client’s behalf may be liable for conversion or fraud in some cases. Chu v. Chong Hi Hong, 249 S.W.3d 441, 446 (Tex. 2008). In Chu, however, the Court could not address or rule on the immunity defense because no allegations were made by the nonclient that could have given rise to assertion of the defense. Id.

THE “SCOPE OF REPRESENTATION” TEST HAS ALWAYS BEEN EVALUATED IN CONJUNCTION WITH LITIGATION OR THE LITIGATION CONTEXT

The underlying premise to the Petitioners’ argument for reversal is that the only issue a court need ever address to determine if the immunity defense exists is whether, at the time of the conduct in question, the lawyer was acting in the scope of representation of the client.

The premise is wrong.

The inquiry is two-tiered— namely, whether the lawyer’s alleged conduct (i) was within the scope of the lawyer’s representation of the client and not foreign to the duties of a lawyer (itself two factors); and (ii) was done in litigation or in the litigation context. Cantey Hanger, 467 S.W.3d at 482-86; U.S. Bank Nat’l Ass’n v. Sheena, 479 S.W.3d 475, 478-81 (Tex.App.—Houston [14th Dist.] 2015, no pet.).

12 The Court points to its earlier opinion for the framing of the issue: “In Cantey Hanger, LLP v. Byrd, we held that, ‘as a general rule, attorneys are immune from civil liability to non-clients for actions taken in connection with representing a client in litigation. 467 S.W.3d 477, 481 (Tex. 2015) (quotations omitted).’”  Id. at 657 (emphasis added).

The proper inquiry, first identified in 1882 with Poole, and articulated throughout the 14th court’s Sheena opinion, is demonstrated as follows:

 

 

 

 

 

 

 

Poole, 58 Tex. at 137; Sheena, 479 S.W.3d at 478-81.

The second element is rarely discussed on any detail because, until the past few years, there has been little suggestion that immunity applies outside the litigation context. To eliminate the litigation context element would deviate from the reason for the rule, which is to assure that an attorney can engage in aggressive advocacy for the client without fear of reprisal by offending or slandering the opponent in the heat of litigation. See, e.g., Cantey Hanger, 467 S.W.3d at 480-81; Sheller v. Corral Tran Singh, LLP, 551 S.W.3d 357, 363 (Tex. App.—Houston [14th Dist.] 2018, pet. denied). These considerations do not apply to negotiating a business deal, especially when the seller’s lawyer is concurrently soliciting his future representation of the buyer. 2CR601-07 at ¶¶2-9.

The “scope of representation” inquiry is itself two-fold—the conduct must be within the scope and not foreign to the duties of an attorney.

The “scope of representation” test for immunity to attach is only the first of a two-tiered inquiry, requiring the lawyer to establish that the alleged conduct was within the scope of the attorney’s legal representation of the client and not foreign to the duties of an attorney. Cantey Hanger, 467 S.W.3d at 484.

The lawyer must be discharging his/her duties to the client.

Simply because a lawyer is billing the client does not mean the lawyer is acting in the scope of his representation. See Kelly v. Nichamoff, 868 F.3d 371, 375- 76 (5th Cir. 2017). The lawyer must be discharging the duties to his/her client by advancing the client’s rights, even if such conduct is characterized as fraudulent. Cantey Hanger, at 483-84; Sheena, 479 S.W.3d at 479-80.

The conduct must also require the “office, professional training, skill, and authority of an attorney.” Cantey Hanger, at 482 (quoting Dixon Fin. Servs. Ltd. v. Greenberg, Peden, Siegmyer & Oshman, P.C., No. 01-06-00696-CV, 2008 WL 746548, at *7 (Tex. App.—Houston

[1st Dist.] March 20, 2008) (remanded on other grounds)). Immunity cannot apply when the attorney’s actions do not involve the “provision of legal services.” Cantey Hanger at 482; Bethel at 658.

Additionally, for immunity to apply under this inquiry, the attorney’s conduct cannot involve fraudulent conduct that is considered “foreign to the duties of an attorney”, such as, for example, participation in a fraudulent business scheme in the name of, with, or on behalf of the client.

Cantey Hanger at 482-83 (quoting Poole, 58 Tex. at 137));

Youngkin at 682-83; Sheena, 479 S.W.3d at 479-80.

In the Poole case, the high court rejected the notion that one’s status as an attorney representing the client would give the him immunity from liability to the party allegedly damaged by the business fraud, “for no one is justified on that ground in knowingly committing willful and premeditated frauds on another.” 58 Tex. at 137-38.

Even before Cantey Hanger, the Texas Supreme Court, in Chu v. Chong Hi Hong, stated that “[a]n attorney who personally steals goods or tells lies on a client’s behalf may be liable for conversion or fraud in some cases.” Cantey Hanger, 467 S.W.3d at 483 (quoting Chu, 249 S.W.3d 441, 446 (Tex. 2008)).

The mere fact that an attorney was representing the client at the time of alleged fraudulent activity is not enough to warrant immunity.

A lawyer “cannot shield his own willful and premeditated fraudulent actions from liability simply on the ground that he is an agent of his client.” Alpert v. Crain, Caton & James, P.C., 178 S.W.3d 398, 406 (Tex.App.—Houston [1st Dist.] 2005, pet. denied).

The Kelly v. Nichamoff case is a good example of the proper application of this principle.

Applying Texas law to the pleadings, the Fifth Circuit affirmed Judge Werlein’s order denying lawyer Nichamoff’s immunity-based on his Rule 12(b)(6) motion to dismiss on alternative grounds.

Kelly v. Nichamoff, 868 F.3d 371 (5th Cir. 2017).

The Fifth Circuit held that the pleadings did not establish that all of lawyer Nichamoff’s alleged conduct fell within the scope of his legal representation of his client:

Kelly acknowledges in her complaint that “Nichamoff was Rembach’s attorney” at the time Kelly acquired the Legacy shares. But this information establishes only that Rembach was Nichamoff’s client. It does not establish the scope of Nichamoff’s representation.

The mere fact that an attorney was representing a client at the time of alleged fraudulent activity is not enough to warrant immunity.

Id. at 375 (emphasis added) (citing to Alpert v. Crain, Caton & James, P.C., 178 S.W.3d at 406).

The Lawyers’ position in this case—that immunity applies merely because they were representing a client when the alleged fraudulent activity took place— should be rejected based on the reasoning in Kelly v. Nichamoff.

Petitioners’ “scope of representation” argument overlooks settled law that fraudulent conduct in a business transaction is outside the scope and “foreign to the duties of an attorney.”

The Poole and Chu cases involved allegedly fraudulent conduct by an attorney in a bill of lading transaction and a buy-sell agreement, respectively, unrelated to any pending or threatened litigation. These cases make clear that immunity will not apply to such transactional conduct.

Indeed, in its February 2020 opinion in Bethel 654 v. Quilling, the Supreme Court parenthetically summarized Poole as “holding that attorney immunity did not protect actions taken ‘for the purpose and with the intention of consummating [] fraud upon [the] appellant’”. Bethel at 654.

This is because this an attorney’s participation in a fraudulent business scheme with the client falls outside of the scope of the attorney’s representation of the client:

An attorney is not immune from suit for participating in criminal or “independently fraudulent activities” that fall outside the scope of the attorney’s representation of a client.

Cantey Hanger, 467 S.W.3d at 483.

For example, immunity does not apply when an attorney participates in a fraudulent business scheme with her client or knowingly facilitates a fraudulent transfer to help her clients avoid paying a judgment.

Id. at 482. …

Bethel at 657 (emphasis added).

The final phrase from this passage (i.e., knowingly facilitating a fraudulent transfer to help the client) has not received much attention in this case, because Bernardo 2’s claims against the Lawyers did not involve a “fraudulent transfer” cause of action. But the essence of that statement directly parallels why Howard’s conduct here cannot pass muster for purposes of permitting immunity.

Distilled to the essence, Howard’s misrepresentations and deceit that he directed to the Bernardo 2 owners about supposedly valuable Patents that he knew to be unenforceable, effected a fraudulent transfer of bogus assets to the innocent purchaser.

Such conduct is always actionable, with or without the bad actor having a law license.

This Court’s consistent holdings that fraudulent conduct with or on behalf of a client in a business transaction falls outside the scope of representation is a critical distinction that Petitioners ignore as they make their distorted “scope of representation” argument.

Moreover, even if the lawyer acted solely as the client’s agent, that does not shield their fraudulent actions from liability.

Edwin K. Hunter & Hunter, Hunter & Sonnier, LLC v. Marshall, No. 01-16-00636-CV, 2018 WL 6684840 at *21 (Tex. App.—Houston [1st Dist.] Dec. 20, 2018, no pet.).

In addition to the Supreme Court’s history of statements declining to extend immunity to an attorney’s participation in a fraudulent business scheme with or for a client, Texas courts of appeals, prior to the NFTD case, have also uniformly ruled that the immunity defense does not apply in those situations:

Stover ADM Milling Co., No. 05-17-00778-CV, 2018 WL 6818561 (Tex. App.—Dallas, Dec. 28. 2018, pet. filed) (immunity denied where attorney was sued for fraud respecting his involvement in a failed business agreement for purchase of real property);

Edwin K. Hunter & Hunter, Hunter & Sonnier, LLC v. Marshall, 2018 2018 WL 6684840 (Tex. —Houston [1st Dist.] Dec. 20, 2018, no pet.) (immunity defense was raised in jurisdictional context, and not permitted where lawyer’s alleged wrongful conduct pertained to tortious interference with business relations and existing contracts);

JJJJ Walker, LLC v. Yollick, 447 S.W.3d 453 Tex. App—Houston [14th ] 2014, pet. denied) (attorney involved for bank client and entity under bank’s control in defrauding investors in business transaction was not entitled to immunity); and

Likover Sunflower Terrace, 696 S.W.2d 468, 473 (Tex. App.—Houston [1st Dist.] 1985, no writ) (attorney assisting client in real estate conveyance that divested title from true owner not entitled to immunity).

Tellingly, none of these cases are discussed or distinguished by Petitioners or amici.

Texas appellate courts have addressed the issue on both sides of the coin, and have drawn a bright line that attorney immunity will not attach to conduct beyond litigation and the litigation context. These holdings were on the facts applied to the law, not mere dicta. The Supreme Court of Texas has not changed its analysis after 138 years of jurisprudence. The limits of attorney immunity remain at litigation and the litigation context, for good reasons noted by all the courts.

The DISCIPLINARY RULES might also have bearing on what constitutes conduct foreign to the duties of an attorney.

All a transactional attorney need do to avoid exposure to a nonclient in a business transaction is meet the “minimum standards of conduct below which no lawyer can fall without being subject to disciplinary action.”

See TEX. DISCIPLINARY RULES OF PROF’L CONDUCT, Preamble ¶7.

In Texas, this merely calls for the lawyer to

(i) not assist a client in conduct that the lawyer knows is fraudulent;

(ii) not knowingly make a false statement of material fact to a third party, and

(iii) not knowingly fail to disclose a material fact to a third person when disclosure is necessary to avoid knowingly assisting a client in defrauding a third party.

Id. at DR and 4.01.

While the violation of a DISCIPLINARY RULE does not create an independent cause of action, it would seem that conduct which knowingly violates the DISCIPLINARY RULES would be considered “foreign to the duties of an attorney.”

Respondents’ attempt to marginalize Poole disregards specific findings by the Supreme Court in the body of its 1882 opinion.

Petitioners spend eight pages of their brief attempting to recast Poole v. Houston & T.C. Ry. Co., 58 Tex. 134 (1882), as basically not even evoking the need for an attorney immunity analysis. Petitioners’ Br., pp. 22-29.

The problem is that Petitioners’ primary argument relies on the parties’ handwritten briefs from 1882 and not the actual Supreme Court opinion, plus Petitioners engage in some convenient partial quoting of the key holding in Poole.

First, rather than parsing the handwritten briefs, which are not evidence or the law, one need only look to the facts set out in the three-page opinion. On the first page of the opinion, second paragraph, the fact finding is made that the La Presses “assigned their bill of lading to Scott, their attorney, without consideration…”

(emphasis added) Id. at 135.

Does such a finding in support of the Court’s opinion need to be stated more than once?

Petitioners attempt to negate this finding by suggesting that this reference to Scott was merely to note the fact that he had appeared in the lawsuit as counsel for the purchasers. Petitioners’ Br., p. 27. This obfuscation does not even deserve a response.

The Poole opinion continues with the statement that some of the witnesses testified that Scott was the attorney for and representing the La Prelles.    Id. at 137.

Given the brevity of the opinion, this statement would not have been included if it were not material to the Court’s ruling.

Second, at p. 24 of their Brief, Petitioners quoted from a passage in Poole, but omitted the most important language of that paragraph.

The excluded language immediately follows from the opinion’s reference to acts that are “entirely foreign to the duties of an attorney”:

neither will [Scott] be permitted, under such circumstances, to shield himself from liability on the ground that he was the agent of the La Presses, for no one is justified on that ground in knowingly committing wilful and premeditated frauds for another. In this particular the charge of the court was clearly erroneous. (emphasis added). Id. at 137-38.

The Poole case has not been misread or misunderstood through the years. And the Poole court’s refusal to extend the attorney immunity privilege beyond its historical limits dating back to English common law is hardly unsurprising.

The second inquiry asks whether the conduct occurred in litigation or the litigation context.

The “litigation or litigation context” requirement is the other essential requirement for attorney immunity to apply. Sheena, 479 S.W.3d at 478-81.

“Litigation context” refers to highly adversarial litigation-like proceedings where Texas courts have routinely held immunity also applies—specifically,

(i) conduct in foreclosure proceedings,

(ii) proceedings before administrative bodies,

(iii) bankruptcy proceedings, and

(iv) pre-suit demands where litigation is contemplated in good faith.

See, e.g., Landry’s, Inc. v. Animal Legal Def. Fund, 566 S.W.3d 41 (Tex. App.—Houston [14th Dist.] 2018, pet. denied) (immunity applied to pre-suit notice letter related to contemplated lawsuit);

Alanis v. Wells Fargo Bank Nat’l Ass’n, No. 04-17-00069-CV, 2018 WL 1610939 (Tex. App.—San Antonio April 4, 2018, pet. denied) (immunity applied where attorney sued for debt acceleration/foreclosure notices);

Highland Capital Mgmt., LP v. Looper Reed & McGraw, P.C., No. 05-15-00055-CV, 2016 WL 164528 (Tex. App.—Dallas Jan. 14, 2016, pet. denied) (immunity applied to attorney’s “extortion” efforts directed to client’s former employer with litigation actually contemplated);

Dixon Fin. Servs. Ltd. v. Greenberg, Peden, Siegmyer & Oshman, P.C., No. 01-06-00696-CV, 2008 WL 746548 (Tex. App.—Houston [1st Dist.] March 20, 2008) (remanded on other grounds) (immunity applied to claim that attorneys knowingly facilitated client’s fraud in post-arbitration proceedings).

Petitioners and amici feign confusion as to how attorney immunity applies outside the walls of a courtroom. But there is no mystery.

As these Texas authorities (and others) make clear, if the conduct falls within one of the recognized “litigation context” categories, immunity applies.

Moreover, Petitioners’ attempts to muddy the waters are simply a distraction. Here, there is no question that the Lawyers’ conduct fell outside “the litigation context”—the conduct occurred in the paradigmatic non-litigation/transactional context, to which Texas law has never extended the blanket attorney immunity Petitioners seek.

Both inquiries must be satisfied for the immunity defense to succeed.

Just weeks after Cantey Hanger issued, the Fourteenth Court of Appeals undertook a detailed analysis of the state of the law on attorney immunity. See U.S. Bank Nat’l Ass’n v. Sheena, 479 S.W.3d 475 (Tex.App.—Houston [14th Dist.] 2015, no pet.). The Court of Appeals construed Cantey Hanger to provide for what it described as either the “Complete Immunity Rule” or, alternatively, the “Partial Immunity Rule.”  Id. at 479-80.

Under the Complete Immunity Rule, which assumes that the scope of the attorney’s representation is the only requirement for attorney immunity, “an attorney would enjoy complete immunity from civil liability for all conduct committed during the representation of the client in litigation, even if the conduct is fraudulent”. Id. at 479 (emphasis added). Under the Partial Immunity Rule, the 14th Court held that the lawyer must “conclusively prove[ ] that

(1) all of the allegedly actionable conduct was part of the discharge of [the lawyer’s] duties to his client in the litigation context;

and

(2) none of the allegedly actionable conduct was ‘foreign to the duties of an attorney.’”

Id. at 480-81 (emphasis added).

What is most important to note from the Sheena opinion is that, under both the Complete Immunity Rule and the Partial Immunity Rule, the actionable conduct must have taken place as part of the discharge of the attorney’s duties to the client in litigation or the litigation context. Id. at 479-81.

Similarly, just weeks after the Supreme Court issued the Youngkin v. Hines opinion, the 14th Court issued another opinion on attorney immunity.

See Sheller v. Corral Tran Singh, LLP, 551 S.W.3d 357, 363 (Tex. App.—Houston [14th Dist.] 2018, pet. denied).

The nonclient’s claims against the Corral Tran Singh law firm (“CTS”) all arose out of the CTS lawyers’ conduct in a bankruptcy proceeding, including alleged failure to prepare witnesses to testify, failure to list expert witnesses and exhibits, and improper witness exams. Id. at *3-4.

Citing its earlier Sheena opinion, the 14th Court affirmed the summary judgment in favor of the CTS lawyers based on their affirmative defense of attorney immunity, stating:

Each of these challenged actions falls within the kind of activity that would be expected as part of the discharge of an attorney’s duties in representing his client in a bankruptcy matter and, in particular, in the underlying proceeding. We conclude that CTS Defendants’ conduct was directly within the scope of their representation of their client New Millennium as the debtor-in-possession in the context of the chapter 11 bankruptcy proceeding, regardless of whether such conduct was ‘meritorious’.

Id. at 11 (emphasis added) (citing Sheena, 479 S.W. 3d at 480)

As this Court has made clear most recently in Cantey Hanger, Youngkin and Bethel, and supported by the reasoning in Sheena and Sheller among other court of appeals cases, cases finding attorney immunity to exist share a common factual thread that does not exist in Bernardo 2’s claims against the Lawyers.

All the cases finding immunity involved conduct by the attorney either in litigation or in what the courts have narrowly defined to be in the “litigation context.”

There is no ‘conflict’ or ‘split’ among courts: Texas law does not apply attorney immunity outside the litigation context.

Petitioners and amici attack the Fourteenth court’s NFTD opinion for its statement that it has not found a single Texas state case that extends attorney immunity beyond litigation or the litigation context. See NFTD, LLC v. Haynes & Boone, LLP, 591 S.W.3d at 775-76. They claim that if NFTD is not reversed, it will create “an intolerable split of authority with other Texas appellate courts and the Fifth Circuit.” Petitioners’ Brief, p. 13.

Petitioners are wrong.

The 14th Court’s statement is accurate. None of the four cases that Petitioners and amici reference as being in conflict with NFTD involved wrongful attorney conduct in a business transaction, which is the issue here. Those cases involved claims in what Texas courts have defined to be the “litigation context,” and hence immunity was afforded in those cases.

The four court of appeals decisions that Petitioners claim create a split of authority with NFTD are distinguishable and recite mere dicta.

Unlike NFTD, each of those cases involved claims in the litigation context where the Texas courts agree attorney immunity applies:

Santiago Mackie Wolf Zientz & Mann, P.C., No. 05-16-00394-CV, 2017 WL 944027 (Tex. App.—Dallas March 10, 2017, no pet.) (immunity applied to alleged misconduct by lawyer sending notice of default and acceleration as part of foreclosure proceeding);

Farkas v. Wells Fargo Bank, 03-14-00716-CV, 2016 WL 7187476 (Tex. —Austin Dec. 8, 2016, no pet.) (immunity applied to alleged misconduct by lawyer sending out notices of default and intent to accelerate planned foreclosure proceeding);

Campbell v. Mortgage Elec. Registrations Sys., Inc., No. 03-11-00429- CV, 2012 WL 1839357 (Tex. App.—Austin May 18, 2012, pet. denied) (mem. ) (immunity applied to lawyer sending notice of foreclosure and intent to accelerate as prelude to non-judicial foreclosure proceeding); 14

and

Reagan Nat’l Adver. of Austin, Inc. v. Hazen, No. 03-05-00699-CV, 2008 WL 2938823 (Tex. —Austin July 29, 2008, no pet.) (immunity applied where lawyer’s “alleged actions were in the context of an adversarial dispute in which litigation was contemplated, impending or actually ongoing.”).

None of these cases involved conduct in a business transaction. Any suggestion in those cases that attorney immunity would apply beyond litigation or the litigation context is, at best, the mere expression of an opinion on a matter not at issue, and, as such, dicta. Dicta does not create binding precedent. Travelers Indem. Co. v. Fuller, 892 S.W.2d 848, 852 (Tex. 1995). Nor are such comments the basis for the intolerable “conflict” claimed by Petitioners.

Petitioners’ reliance on the Fifth Circuit’s opinion in Troice, to claim a split in authority, is misplaced.

There is likewise no merit to Petitioners’ invocation of Troice v. Greenberg Traurig, L.L.P., 921 F.3d 501 (5th Cir. 2019). Troice is of no binding effect on this Court, but a careful reading will also show it to have limited if any application to the issue in this case.

13 Petitioners’ attempt to explain away Poole based on the tortured reading that the lawyer (Scott) was never found to have been acting in a representative capacity for the client is dealt with in subsection II.A.4.

First, in Troice, the Fifth Circuit noted that the plaintiffs never argued that attorney immunity did not apply because Greenberg Traurig’s conduct was outside the scope of representation (nor, apparently, was there any related argument that Greenberg’s acts were foreign to the duties of a lawyer). Because of the plaintiffs’ waiver, the Fifth Circuit noted it could not address that issue, and was left with addressing only whether alleged criminal conduct automatically negates immunity. Id. at 507.

The issue the Fifth Circuit could not address or answer is the issue in the NFTD case, which makes the holding in Troice inapplicable.

The answer as this Court has made clear is that an attorney’s participation in a fraudulent business scheme with or on behalf of a client falls outside of the scope of the attorney’s representation of the client and/or is foreign to the duties of a lawyer. Bethel, 595 S.W.3d at 657; Youngkin, 546 S.W.3d at 682.

Second, to the extent Petitioners rely on Troice as holding that the immunity defense applies outside the litigation context, the opinion curiously cites as authority three unpublished Texas court of appeals opinions that, in fact, involved conduct in the litigation context. Troice, 921 F.3d at 505.

See e.g., Alanis, 2018 Tex.App. LEXIS 2376 (sending notice of acceleration and intent to foreclose); Rogers v. Walker, No. 09-15-00489-CV, 2017 Tex.App. LEXIS 7303 (Tex.App.—Beaumont Aug. 3, 2017, pet. denied) (litigation of a contested probate proceeding);

Santiago v. Mackie Wolf Zientz & Mann, P.C., No. 05-16-00394-CV, 2017 Tex.App. LEXIS 2092 (Tex.App.—Dallas March 10, 2017, no pet.) (sending notice of default and acceleration as part of foreclosure proceeding).

Each of those cases involved alleged wrongful attorney conduct in proceedings which Texas case law has long held to be eligible for immunity. See supra, section B.

Third, while the Fifth Circuit cited to three unpublished cases in its discussion of whether immunity applies beyond the litigation context that are not on point, it inexplicably did not cite to the Supreme Court’s Poole and Chu opinions which are on point. Nor did it cite to relevant published court of appeals opinions.

See, e.g., Landry’s, Inc., 566 S.W.3d 41; JJJJ Walker, LLC, 447 S.W.3d 453; Likover, 696 S.W.2d 468.

EVEN WITHOUT APPLYING THE LITIGATION CONTEXT INQUIRY, THE LAWYERS’ CONDUCT DOES NOT SATISFY THE “SCOPE OF REPRESENTATION” TEST—HENCE IMMUNITY DOES NOT APPLY FOR THIS ADDITIONAL REASON.

Because of its ruling that attorney immunity does not extend beyond the litigation context, the Fourteenth Court of Appeals in NFTD did not have to consider if the Lawyers But the Lawyers cannot satisfy that requirement, either. In their summary judgment motion, the lawyers failed satisfy their burden to conclusively establish that all their alleged wrongful conduct was within the scope of their representation of Bernardo 1 and not foreign to the duties of an attorney.

The only testimony included with the Lawyers’ Motion was from Cynthia Smith, one of the co-owners of Bernardo 1, for the proposition that the Lawyers represented Bernardo 1, and not Bernardo 2, in the 2011 APA. (1CR 184; 1CR 241-42, and 243 at pp. 60- 61 and 124).

As noted in Youngkin v. Hines, this is of little if any consequence to the scope of representation inquiry. 524 S.W.3d at 291. There must be a deeper inquiry which the Lawyers did not support with evidence in their motion for summary judgment on attorney immunity. Petitioners’ failure to present evidence that satisfies the “conduct within the scope of representation and not foreign to the duties of an attorney” test is an additional ground for affirmance.

On the other hand, as set out in Respondents’ Statement of Facts, supra, Bernardo 2 presented evidence that raises fact issues on Bernardo 2’s claim that the Lawyers’ conduct went beyond the scope of their legal representation of Bernardo 1, and strayed into misconduct acting in the non-immune capacity as an investment banker/broker and perpetrator of a knowing fraud in a business transaction. Indeed, the Bernardo 1 corporate resolution, which Howard prepared, authorized the Lawyers to represent Bernardo 1 and communicate with third parties on “any and all” business, financial and legal matters. (2CR 417).

To this end, the Lawyers were involved in the non-legal business/financial decision to sell the Company. (2CR 368 at pp. 14-16). Howard also drafted the corporate resolution that commissioned the Lawyers to find someone to buy the Company assets. (2CR 370 at p. 35; 2CR 570- 71). As Bernardo 1 owner Jean Smith stated, “[Howard’s] the one that brokered the deal.”. (2CR 368 and 376, at pp. 15-16, 107). During the entire time, the Lawyers knew that the key Patents were worthless and could not be enforced against infringers. See supra, Statement of Facts, Section C. And, after acting like an investment banker/broker in preparing the “Confidential Business Profile” that misrepresented the quality of Bernardo 1’s intangible assets, Howard traded on his pre-existing friendship with Todd Miller of Bernardo 2 to privately solicit his future representation of them once the APA was completed. (2CR 579, 601-03 at ¶¶ 3-7 and 9).

This conduct is highly inappropriate and unethical. Howard’s overtures to his friend on the buyer’s side were done not as a lawyer, but rather more like a broker with a mission to complete the sale and get his firm paid out of the sales proceeds – all without the permission of his client Bernardo 1. (2CR 371 and 376 at pp. 54-55, and 107).

This duplicity was outside the scope of Howard’s legal representation of Bernardo 1, and foreign to his duties as a lawyer.

As a result of Howard’s private communications and false assurances about the value of the intellectual property to Miller, combined with their pre-existing friendship and Howard’s solicitation to represent Bernardo 2 if the deal went through, Miller placed a great deal of trust in him and his on-going advice throughout the pre-APA process. (2CR 601-02 at ¶¶ 3-7).

Further, while socializing at a pub with the Bernardo 2 owners, Howard also misrepresented to Peter Cooper that there were no issues with any of the Patents. (2CR 609-10 at ¶ 5). Then, to further induce Bernardo 2 to go through with the transaction, Howard lied to both Cooper and Miller that Bernardo 1 had an anonymous buyer in reserve who would pay cash if Bernardo 2 chose to back out of the deal. (2CR 603 at ¶ 9; 2CR 609-10 at ¶ 5).

This statement was false—and made without the consent of Bernardo 1, not to mention it being false. (2CR 371 at pp. 54-55). Howard obviously was not billing his client when socializing with and soliciting his future representation of the Bernardo 2 owners. These actions did not require the “office, professional training, skill, and authority of an attorney.” Howard was on his own mission to make sure the deal would go through so his firm could get paid hundreds of thousands of dollars in past- due fees. (2CR 572-73; 2CR 350 at pp. 70-71; 2CR 361 at pp. 164-65; 2 CR 574).

To top it off, with full knowledge about the Patents being unenforceable, Howard wrote false and misleading representations and warranties into the APA. (2CR 602- 03 at ¶ 8; 2CR 608-09 at ¶ 4; 2CR 611-714 at §§ 8, 9.h., 9.s. and 9.u., and Schedule 9.s).

The scheme worked.

Not knowing that the Patents were “worthless” (Bernardo 1’s own words in its malpractice suit against the Maryland I.P. lawyers), Bernardo 2 bought the tainted assets, and the Lawyers got paid $436,000 out of the closing proceeds to cover two years of their unpaid invoices. (2CR 361 at pp. 164- 65). Howard agreed that structuring the APA closing for his firm to get paid out of Bernardo 2’s purchase proceeds was done “as a part of the final deal”. (Id.)

This voluminous evidence showed, or at least created multiple fact questions, that the Lawyers’ fraudulent conduct fell are outside the scope of their representation.

EXPANDING ATTORNEY IMMUNITY TO TRANSACTIONAL WRONGDOINGS WOULD ABROGATE THIS COURT’S HOLDING IN MCCAMISH.

Accepting Petitioners’ invitation to recognize for the first time blanket immunity for transactional lawyers would not only upend decades of Texas law, but would also abrogate this Court’s opinion in McCamish, Martin, Brown & Loeffler v.

F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999). In McCamish, this Court considered whether the elements of Section 552 of the Restatement (Second) of Torts can be applied to lawyers in business transactions. Section 552, titled Information Negligently Supplied for the Guidance of Others, states in pertinent part:

One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

. . .

RESTATEMENT (SECOND) OF TORTS §552 (emphasis added).

Applying §552, this Court held that, like other professionals, attorneys can be liable to a nonclient for misrepresentations made in a business transaction context when the attorney is aware of the nonclient’s reliance on the misrepresentations. See McCamish, 991 S.W.2d at 791-94.

The Court explained that §552 extends to numerous professionals including lenders, auditors, physicians, real estate brokers, securities agents, accountants, surveyors, and title insurers, and there was no discernable reason why it should not extend to attorneys. Id. at 791 (citations omitted).

Further, §552 was/is the most widely adopted standard of negligent misrepresentation in attorney liability and economic cases. Id. at 792 (noting that Tennessee, Massachusetts, Louisiana, Illinois, Pennsylvania, Colorado, and New Mexico all permit attorney-liability for misrepresentations to a nonclient). Section 552 imposes a duty to avoid misrepresentation regardless of privity.  Id.

The lawyer defendants in McCamish argued that the application of §552 causes a client to “lose control over the attorney-client relationship”, “damages an attorney’s ability to represent a client”, and “creates a conflict of duties and threatens the attorney-client privilege.” Id. at 793. Those arguments—echoing the sky-is- falling arguments by Petitioners here—sound in attorney immunity. The Court rejected those contentions, explaining that liability only extends where an attorney who provides the information is aware of and intends that the nonclient rely on the information. Id. at 794. (internal citations omitted). As discussed above, the same is true here. See 1CR284-305. at ¶¶17, 18, and 34.

The McCamish holding centered on the attorney’s intent for the nonclient to rely on his/her misrepresentation of a material fact in a business transaction, and the nonclient’s justified reliance on same. Id. at 794. To determine whether the nonclient justifiably relied on the representation, the reviewing court must consider the nature of the relationship between that attorney, client and nonclient. Id. The nonclient cannot rely on the attorney’s representations unless the attorney invites that reliance. Id. at 795.

Based on the facts and pleadings in this case, the McCamish precedent clearly applies to the Lawyers’ conduct alleged in this suit.

1CR284-305. at ¶¶17, 18, and 34.

If the Fourteenth Court’s opinion is reversed, and the Court holds that that attorney immunity applies in the context of business transactions, McCamish will be abrogated. The Court should not follow Petitioners in creating such an upheaval in Texas law. Indeed, in Cantey Hanger itself, the Court embraced McCamish’s analysis 467 S.W.3d at 483 n. 7 (“In McCamish, we held that an attorney can be liable to a non-client for negligent misrepresentation where ‘an independent duty to the nonclient [arises] based on the [attorney’s] manifest awareness of the nonclient’s reliance on the misrepresentation and the [attorney’s] intention that the nonclient so rely.’ 991 S.W.2d at 792.

The plaintiffs do not assert such a claim here.”). Petitioners offer no reason for the Court to reverse course now.

There is clear line of separation between the furthest reaches of the attorney immunity defense, on the one hand, and a McCamish/§552 cause of action against lawyers who provide false information to others “in their business transactions,” on the other hand. The reason is because §552 is limited to business transactions, an area that has always been beyond the reach of attorney immunity. Attorney immunity cannot be applied to Bernardo 2’s claims against the Lawyers for negligent misrepresentations in a business transaction, because that is territory occupied by RESTATEMENT §552.

THIS COURT HAS PREVIOUSLY RECOGNIZED THAT THERE IS A DISTINCTION BETWEEN THE LITIGATION CONTEXT AND TRANSACTIONAL WORK WHEN ASSESSING ATTORNEY LIABILITY IN A LEGAL MALPRACTICE CONTEXT.

Ruling favor of Petitioners would reverberate throughout Texas law.

While Petitioners reject any distinction between the litigation context and business transactions, this Court has recently applied that distinction in the context of limitations. In Erickson v. Renda, 590 S.W.3d 557 (Tex. 2019), this Court declined to extend the “Hughes tolling rule,” which governs malpractice claims regarding litigation and quasi-litigation matters, to malpractice claims arising from transactions. Id.

Petitioners’ broad-based immunity rule would call Erickson into question as well.

PUBLIC POLICY FAVORS NOT EXPANDING IMMUNITY TO ATTORNEY WRONGDOING IN PURELY BUSINESS TRANSACTIONS.

The consequences of the rule advocated by Petitioners are grave.

Granting blanket immunity for anything done in the scope of an attorney’s representation of his client in a business deal, even where the conduct is fraudulent, would violate the norms of American law. Attorneys would be immunized from setting up fraudulent business schemes merely because they have a law license, while other professionals would not enjoy such an indulgence.

As the Cantey Hanger dissent put it, “[t]his scope-of-representation test cannot be the law, or almost anything an attorney does would be protected from civil liability.

This is not the law in Texas, and it is inconsistent with the approach the RESTATEMENT adopted.” 467 S.W.3d at 489-490. Professionals in many other fields remain liable for such conduct. See McCamish, 991 S.W.2d at 791 (noting that auditors, physicians, real-estate brokers, accountants and others are liable for misrepresentations).

The outcome that would result from applying attorney immunity to business transactions is nonsensical, and prompts these questions:

Why can a tax CPA be liable under RESTATEMENT §552 for making negligent misrepresentations in a business transaction that he or she is aware the other party will rely on, but not a tax lawyer who engages in the identicalconduct?

What policy is served by shielding the tax lawyer from suit but not the tax CPA when everything else is the same?

The essential differences between litigation and transactions cannot be ignored.

Unlike in litigation where there is a referee with the power to sanction inappropriate conduct, or foreclosure proceedings where notice and due process protections exist, there are no similar protections against mischievous conduct by a lawyer left to his own devices in a business transaction.

If attorney immunity were extended to business transactions, a lawyer could intentionally defraud a counter-party buyer in an asset sale to assure payment of his fees out of the sale proceeds, and then openly admit to his deceit once the deal is done with no repercussions from the defrauded buyer.

Shielding a lawyer from liability for such conduct would be harmful to the public and the integrity of the legal profession and violate the norms of American law.

The counterargument against limiting the attorney immunity defense to the litigation context is that transactional lawyers also face adversity in their business deals, and they need the same protection. But no court has ever equated the degree of adversity in litigation with a business deal—and for good reason.

The goal in a business deal is to enter into an arrangement that both parties find mutually desirable. In litigation, where there is a winner and a loser, and regular conflict, there is no common goal.

The Fourteenth Court’s opinion is consistent with the RESTATEMENT’S standards for attorney liability to nonclients.

On the other hand, Petitioners’ and amici’s argument for universal attorney immunity under Texas law cannot be reconciled with the RESTATEMENT. Their attempt to suggest that the RESTATEMENT draws completely different boundaries than the attorney immunity doctrine under Cantey Hanger and progeny is wholly dependent on acceptance of their false narrative that attorney immunity has no limits. Petitioners’ Br., pp. 35-36.

Section 51 of the RESTATEMENT imposes a duty of care on lawyers toward a nonclient to the extent the lawyer invites the nonclient to rely on the lawyer’s opinion and the nonclient is not too remote from the lawyer to be entitled to protection.    See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS §51.   This “not too remote” exclusion from liability expressly recognizes that the §51 does not apply to claims against opposing counsel in litigation. Id. at cmt c.

In short, §51 is consistent with the application of the attorney immunity defense to litigation-related conduct, and is equally consistent with not extending immunity to fraudulent conduct in business transactions.

Additionally, RESTATEMENT §56 states that a lawyer is subject to liability to a nonclient when a nonlawyer would be in similar circumstances.

This standard for attorney liability would certainly apply to business transactions where attorneys are not immune from liability. But it could not apply to litigation as such activity requires a law license which a nonlawyer would not have, and so the remedy permitted in RESTATEMENT §56 would not apply in litigation. In sum, the RESTATEMENT parallels the law in Texas, and elsewhere, that attorney immunity does not apply outside the litigation context.

No Texas appellate court—or any American court—has ever granted a lawyer carte-blanche immunity from suit or liability for false representations made to a counter-party in a business transaction.

For all the reasons stated above, this Court should not be the first.

CONCLUSION

Respondents request that the Petition for Review be refused, and, alternatively, if the Petition is granted, Petitioners request that the opinion of the court of appeals be affirmed, and for such other and further relief to which they are entitled.

Respectfully submitted,

14 In Campbell, the court implicitly recognized litigation immunity’s contextual requirement when it concluded that “[n]either the Campbells’ petition nor their response to the motion to dismiss alleged that the Attorney Defendants committed any wrongful acts outside of the foreclosure proceedings.” See id. at *6 (emphasis added). The wording of the court’s holding, coupled with the fact that foreclosure proceedings employ specific notice and process protections and may become highly adversarial, demonstrate that the Campbell court recognized litigation immunity’s contextual requirement. See TEX. PROP. CODE § 51.002.

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.

1 See Reid Br. at v (forthrightly explaining that the amicus “has a national practice of pursuing both negligence and intentional tort claims against law firm defendants”).

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

2 For examples consistent with this reading, see Stover v. ADM Milling Co., No. 05-17-00778-CV, 2018 WL 6818561, at *15 (Tex. App.—Dallas Dec. 28, 2018, pet. denied) and LJH, Ltd. v. Jaffe, 4:15-CV-00639, 2017 WL 447572, at *3-4 (E.D. Tex. Feb. 2, 2017).

Second, the fallacy of Respondents’ interpretation is exposed by the record. Petitioners went beyond the face of the Poole opinion to investigate its substance precisely because we agree that the meaning of Poole should not turn on semantics. Our historical analysis revealed that (a) the attorney immunity doctrine did not exist at the time of Poole; (b) the parties did not litigate the question of attorney immunity; and (c) the facts did not prove—and the Court did not hold—that J.L. Scott had acted in his capacity as a lawyer. In short, the Likover gloss on Poole is mistaken.

Unable to respond, Respondents completely ignore the historical record and blithely quote the Poole opinion out of context. See Br. at 38-39. It is curious that Respondents accuse Petitioners of engaging in semantics, yet they are willfully blind to the substance of the Poole decision and double down on a superficial reading that is divorced from historical reality. The Court should seize this opportunity to correct the mistaken Likover gloss on Poole, which Respondents cannot defend.3

Third, Respondents’ reading of Poole is incompatible with Cantey Hanger. They read Poole as support for a categorical exception for “fraudulent conduct in a business transaction,” Br. at 34, but this Court has rejected a general fraud exception. Cantey Hanger, 467 S.W.3d at 483. Our reading harmonizes the two decisions.

3 Respondents quote Youngkin’s statement in dictum that “some fraudulent conduct, even if done on behalf of a client, may be actionable.” Br. at 26-27 (citing Youngkin, 546 S.W.3d at 683) (emphasis added). That equivocal statement signaled that exploring the contours of Poole was a question for another day. This case is the opportunity to address that issue.

McCamish does not warrant an exception to attorney immunity in the transactional context.

Finally, relying on an argument that the court of appeals did not embrace, Respondents argue that applying attorney immunity to transactional lawyers would be inconsistent with McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999). Br. at 52, 20-21. In this case, there is no inconsistency. And if there is a threat of inconsistency in other cases, there are better solutions than drawing an artificial line between litigation and transactional practice.

McCamish and Cantey Hanger are not in conflict. McCamish recognized the existence of a cause of action (under unusual facts). McCamish, 991 S.W.2d at 793. Recognizing an affirmative defense does not “abrogate” the cause of action itself. Br. at 52. It simply establishes conditions under which the claim cannot succeed. Those conditions will be satisfied in some—but not all—cases in which attorneys are sued by non-clients for negligent misrepresentation. And when they are satisfied (i.e., when the attorney proves the conduct was within the scope of representation), there would rarely be a valid McCamish claim in any event. McCamish emphasized that only a “narrow” class of non-clients could successfully sue an opposing attorney for negligent misrepresentation—namely, those who have a justifiable right to rely on opposing counsel. McCamish, 991 S.W.2d at 791. And reliance is “not justified” when it occurs in an adversarial context like an arms-length transaction. Id. at 794. Thus, recognizing immunity in this context would not materially limit McCamish.

Furthermore, recognizing the applicability of the attorney immunity doctrine to transactional practice would not necessarily have changed the result in McCamish. McCamish was an unusual case in which lawyers expressly undertook obligations to a counterparty in transaction documents. The McCamish attorneys expressly gave a legal opinion to the counterparty (and signed a contract certifying that they did so). Id. at 789. This unique situation was the key to McCamish’s holding. Id. at 793-95 (explaining that non-clients may justifiably rely on opinion letters). By bargaining for the right to rely on the lawyers’ representations, the McCamish plaintiffs created a direct relationship with the opposing lawyers; in substance, a limited engagement was created between the counterparty and the lawyers. Courts could reasonably hold that attorney immunity is not a defense in such a rare situation.

Compare this scenario to Cantey Hanger, where the lawyers also participated in transactions related to (and outside of) litigation but did not undertake obligations to the adverse party. Cantey Hanger, 467 S.W.3d at 485. McCamish did not support a claim in that case, see id. at 483 n.7, and this Court found immunity appropriate.

This comparison illustrates two conceivable types of misrepresentation claims by non-clients against opposing counsel: cases that fit the McCamish fact pattern (i.e., the non-client expressly bargained for the right to rely on opposing counsel), and cases that do not. The latter category is much more common—and in those cases, there is no tension because there is no valid McCamish claim in the first place.

This case falls into the latter category. Petitioners made no representations in the Asset Purchase Agreement, nor did they sign any agreement with Respondents or furnish any opinion letter to Respondents. On the contrary, the APA recited that “Buyer has independently relied on its own judgment,” 2CR628 at ¶ 10(f), that the transaction was entirely “a product of an arm’s length transaction,” 2CR633 at ¶ 28, that Buyer “had the benefit of legal representation by counsel of its own choosing,” id., and that it was not “relying upon any verbal promise or representation. ” Id.

Thus, the Court need not consider whether attorney immunity would apply to a case satisfying the McCamish fact pattern; it could leave that question for another day. But if it wishes to address the issue now and hold that attorney immunity will not lie when a non-client bargains for the right to rely on opposing counsel, it may do so. Declaring that immunity is not a defense if (but only if) a non-client bargains for the right to rely on opposing counsel would be a simple and principled way to reconcile the holdings of McCamish and Cantey Hanger.

A faithful synthesis of McCamish and Cantey Hanger would recognize that attorney immunity is the background rule, but parties are free to contract around it. Contracting parties who want the right to rely on opposing counsel could then insist on making the opposing attorney’s representations an essential term of the bargain, putting them in the same position as the McCamish plaintiffs. This simple solution would resolve any tension between McCamish and Cantey Hanger.

In this case, for example, Respondents could have asked the seller’s lawyers to make specific representations about patent enforceability. But they did not do so, so there is no viable McCamish claim and no tension with Cantey Hanger.

In any event, any tension between McCamish and Cantey Hanger could not be resolved by limiting attorney immunity to litigation and “litigation-like” contexts. McCamish itself involved a “litigation-like” context: the misrepresentation occurred during the negotiation of a settlement agreement. McCamish, 991 S.W.2d at 789. McCamish is thus indistinguishable from Youngkin, which involved representations made by attorneys in “negotiat[ing] a settlement agreement.” 546 S.W.3d at 678. Thus, Respondents are wrong to suggest that the tort of negligent misrepresentation “is limited to business transactions.” Br. 53; see also id. at 51. This Court adopted the tort in the context of a settlement agreement, a classic “litigation-like” context, so drawing an artificial line in this case between litigation and transactional conduct would not resolve any tension between Cantey Hanger and McCamish. See, e.g., Sheller, 551 S.W.3d at 365-66 (discussing McCamish in the litigation context).4

In the end, Respondents are fighting the last war, criticizing the principles of Cantey Hanger rather than offering any persuasive justification for the artificial line drawn by the court of appeals between litigation and transactional practice.

4 Similarly, Chu v. Hong, 249 S.W.3d 441 (Tex. 2008), arose in a “litigation-like” context. There, an attorney demanded performance of a bill of sale and “threatened civil litigation.” Id. at 443. Thus, Chu does not support a litigation/transaction distinction (or even discuss attorney immunity).

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.

1 See, e.g., Sheller v. Corral Tran Singh, LLP, 551 S.W.3d 357, 366 (Tex. App.—Houston [14th Dist.] 2018, pet. denied); Kelly v. Nichamoff, 868 F.3d 371, 375 (5th Cir. 2017).

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

2 Following Petitioner’s historical analysis of Poole v. H. & T. C. R’y Co., a case that illustrates this distinction is LJH, Ltd. v. Jaffe, 2017 U.S. Dist. LEXIS 14436, 2017 WL 447572 (E.D. Tex. February 2, 2017).

There, a law firm and individual attorney were both sued based on the individual attorney’s conduct representing a client in a transaction. Id. The individual attorney was also a part-owner of the client, which sold equipment to another entity. Id.

The individual attorney was not dismissed because he was an “owner and authorized representative” of the client and the court recognized attorney immunity did not apply when the attorney acts outside of his legal capacity based upon his ownership interest in the company. Id.

Owning the seller is foreign to the duties of an attorney. Id.

The firm, on the other hand, was dismissed even though its actions were those taken by the individual attorney because it owned no interest in the client.

As a result, “its actions were purely those of legal representation, which must be protected under the attorney immunity doctrine.” Id.

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.

3 TEX. RULE EVID. 503(b).

4 See TEX. RULE EVID. 503(c)(reading, “The person who was the client’s lawyer or the lawyer’s representative when the communication was made may claim the privilege on the client’s behalf— and is presumed to have authority to do so.”).

5 Currently, this Court has before it another case in which this is taking place. In Cause No. 20- 0727; Taylor v. Tolbert, the Fourteenth Court of Appeals also refused to extend attorney immunity to criminal conduct despite this Court’s holding in Bethel v. Quilling, Selander, Lownds, Winslett & Moser, P.C., 595 S.W.3d 651 (Tex. 2020). On page seven of her Petition for Review, Terisa Taylor reveals, “She could not defend herself—privilege prevented her from addressing the actual allegations or in disclosing conversations.”

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

6 TEX. R. EVID. 503(d).

7 In re XL Specialty Ins. Co., 373 S.W.3d 46, 50 (Tex. 2012).

8 Id. (citing In re JDN Real Estate—McKinney L.P., 211 S.W.3d 907, 922 (Tex. App.—Dallas 2006, pet. denied) and TEX. R. EVID. 503(d)(5)).

9 Bethel v. Quilling, Selander, Lownds, Winslett & Moser, P.C., 595 S.W.3d 651, 657 (Tex. 2020); Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477, 482 (Tex. 2015).

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

10 TEX. R. EVID. 503(d)(3).

11 West v. Solito, 563 S.W.2d 240, 245 n. 3 (Tex.1978).

12 TEX. R. EVID. 503(d)(2).

13 Barcelo v. Elliott, 923 S.W.2d 575, 576 (Tex. 1996).

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

14 Cause No. 4:15-cv-02563; Kelly v. Rembach et al.; in the U.S. District Court for the Southern District of Texas- Houston Division

15 TEX. RULE EVID. 503(d)(1).

16 Chu v. Hong, 249 S.W.3d 441, 446 (Tex. 2008).

17 Id.

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

18 See id. (“[T]here are no such allegations here; the only claim is that Chu should have refused to draw up the bill of sale (although his client asked him to)”).

19 Granada Corp. v. Honorable First Court of Appeals, 844 S.W.2d 223, 227 (Tex. 1992).

20 Id.

21 In re Harco Nat. Ins. Co., No. 2-09-351-CV, 2010 WL 2555629, at *5 (Tex. App.—Fort Worth June 24, 2010, no pet.).

22 In re Seigel, 198 S.W.3d 21, 26 (Tex. App.—El Paso 2006, orig. proceeding).

23 Id.

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.

24 TEX. R. EVID. 503(d)(1).

25 See Chu v. Hong, 249 S.W.3d 441, 446 (Tex. 2008)(“As an attorney, Chu had a fiduciary duty to further the best interests of his clients, the buyers”); Riverwalk CY Hotel Partners, Ltd. v. Akin Gump Strauss Hauer & Feld, LLP, 391 S.W.3d 229, 236 (Tex. App.—San Antonio 2012, no pet.)(“A breach of fiduciary duty occurs when an attorney, among other things, subordinates his client’s interest to his own”).

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

26 Cantey Hanger, L.L.P. v. Byrd, 467 S.W.3d 477, 485 (Tex. 2015).

27 See TEX. R. EVID. 503(b)(1)(limiting the privilege to “confidential communications made to facilitate the rendition of professional legal services to the client”).

28 Poole v. H. & T. C. R’y Co., 58 Tex. 134, 137 (Tex. 1882).

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.

29 LJH, Ltd. v. Jaffe, 2017 U.S. Dist. LEXIS 14436, 2017 WL 447572 (E.D. Tex. February 2, 2017); JJJJ Walker, LLC v. Yollick, 447 S.W.3d 453, 462 (Tex. App.—Houston [14th Dist.] 2014, pet. denied).

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

30 Fredonia State Bank v. Gen. Am. Life Ins. Co., 881 S.W.2d 279, 282 (Tex. 1994).

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.

1 Notably, the Consortium’s argument that transactional lawyers would “need to do their own diligence of their clients’ representations to avoid liability,” Consortium Br. at 25, is belied by the fact that a fraud claim requires proof that the defendant knowingly made the misrepresentation and intended that the other party act upon it. See Formosa, 960 S.W.2d at 47.

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
1301 S. Capital of Texas Hwy.
Building C, Suite 300
Austin, Texas 78746
T: (512) 647-6100
F: (512) 647-6129

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