In this instance, the U.S. District Court for the Southern District of New York had found that attorney Rosenberg violated §487, and awarded the Amalfitano plaintiffs three times their costs and legal fees to defeat a lawsuit brought by Rosenberg on behalf of Peter Costalas, in which Rosenberg had accused the Amalfitanos of fraudulently purchasing the Costalas’s family business (Amalfitano v. Rosenberg, 428 F Supp 2d 196 [SDNY 2006]). In considering Rosenberg’s appeal, the Second Circuit certified two questions to the state Court of Appeals: “Can a successful lawsuit for treble damages brought under N.Y. Jud. Law §487 be based on an attempted but unsuccessful deceit?” (533 F3d at 126); and, “In the course of such a lawsuit, may the costs of defending litigation instituted by a complaint containing a material misrepresentation of fact be treated as the proximate result of the misrepresentation if the court upon which the deceit was attempted at no time acted on the belief that the misrepresentation was true?” (533 F3d at 126).
Ancient Origin
On the first question, the Court of Appeals, in a survey of the origins of §487 that will fascinate legal history buffs, draws a clear distinction between common law fraud, which under New York case law requires proof that the plaintiff was in fact deceived by the defendant’s fraud, and “the first Statute of Westminster, which was adopted by the Parliament summoned by King Edward I of England in 1275. The relevant provision of that statute specified that:
The Court then traces the origin of §487 through a series of criminal law statutes adopted in New York beginning in 1787 and continuing through the course of the 19th century, culminating, during the 20th century, when: “Section 148 was subsequently recodified as section 273 of the Penal Code of 1909. In conjunction with the Legislature’s adoption of the revised Penal Law of 1965, section 148 was transferred from the Penal Law to the Judiciary Law as section 487 (see L 1965, ch 1031). There it remains today – the modernday (sic) counterpart of a statute dating from the first decades after Magna Carta; its language virtually (and remarkably) unchanged from that of a law adopted by New York’s Legislature two years before the United States Constitution was ratified.”
The Court concluded its answer to the first question as follows: “As this history shows, section 487 is not a codification of a common law cause of action for fraud. Rather, section 487 is a unique statute of ancient origin in the criminal law of England. The operative language at issue – “guilty of any deceit” – focuses on the attorney’s intent to deceive, not the deceit’s success. . . . Further, to limit forfeiture under section 487 to successful deceits would run counter to the statute’s evident intent to enforce an attorney’s special obligation to protect the integrity of the courts and foster their truth-seeking function.” (emphasis added)
Accordingly, for an attorney to be liable for treble damages under §487, it is enough that the attorney engaged in fraudulent or deceitful conduct, and it is not necessary to prove that the court or anyone else was actually fooled.
Following from its answer to the first question, the Court made short shrift of the Second Circuit’s second question: ” . . . recovery of treble damages under Judiciary Law §487 does not depend upon the court’s belief in a material misrepresentation of fact in a complaint. When a party commences an action grounded in a material misrepresentation of fact, the opposing party is obligated to defend or default and necessarily incurs legal expenses. Because, in such a case, the lawsuit could not have gone forward in the absence of the material misrepresentation, that party’s legal expenses in defending the lawsuit may be treated as the proximate result of the misrepresentation.”
It remains to be seen whether this decision sets the table for an increase in the number of claims made for treble damages under §487. Nevertheless, in the light of the Court of Appeals’ very clear explanation of the circumstances under which the §487 treble damage remedy is available, all litigators should take new note of the potentially serious consequences of engaging in any form of sharp practice that a court might later classify as fraud or deceit.
Beyond Ethics Violation
While this column does not often venture into cases decided in the Delaware Chancery Court, the recent decision of Chancellor William B. Chandler III in Rohm and Haas Co. v. The Dow Chemical Company, Delaware Chancery Court Civil Action No. 4309-CC (letter decision Feb. 12, 2009), is a clear and useful guide to understanding the role that the Disciplinary Rules (soon, in New York, the Rules of Professional Conduct) play, or do not play, when courts are considering motions to disqualify counsel.
In this case, Dow Chemical Company sought to disqualify the law firm representing Rohm and Haas, a chemical manufacturer, because of an alleged conflict of interest arising from the law firm’s prior representation of Dow. Dow alleged that in seeking to represent Rohm, the firm was violating the Delaware Rules of Professional Conduct because: (1) Dow was a current client of the firm; (2) even if Dow should be regarded as a former and not a current client, the firm had previously represented Dow in matters substantially related to the matter in which the firm was now seeking to represent Rohm; and, (3) the firm was privy to sensitive information in its capacity as Dow’s (former) counsel.
Dow’s argument that it remained a current client of the firm was based on the argument that the firm had never taken any steps to inform Dow that it was no longer a client following its representation of Dow in 2007 and 2008 in connection with the termination of two Dow executives and potential defensive measures in response to rumors of a takeover bid. Dow further argued that the firm’s representation of Dow involved matters substantially related to Rohm’s claims, and in the course of that representation the firm had obtained confidential information that will materially advance Rohm’s position in the litigation.
On behalf of Rohm, opposing the motion, the law firm took the position that it should have been clear to Dow that Dow was no longer a client of the firm when in mid-2008 the firm appeared opposite Dow in its representation of Rohm in the negotiations of the initial confidentiality agreement and the merger agreement that were the subject of the present litigation, and that Dow had had every opportunity to object at that time, but had entirely failed to do so.
Rohm further argued that the nature and scope of the prior representation and the current litigation were distinct and that it had received no confidences from Dow that could be used to advantage Rohm in this case, and assured the court that it had in any event set up a screen between the lawyers working on Rohm’s case and the attorneys who had previously acted for Dow.
Before assessing the factual elements of this dispute, Chancellor Chandler addressed the underlying issue of the relationship of the rules of ethics and the appropriate considerations to be applied when determining disqualification motions. His succinct explanation is worth quoting:
While the Court’s evaluation of these issues is guided by the Delaware Rules of Professional Conduct, the moving party is not entitled to disqualification merely by showing a violation of the ethical rules. The Supreme Court of this State made this clear when it stated that:
