Fraud and misrepresentation claims

Most lawyers are competent, diligent, and honest. No lawyer is immune to
error, however, and some are guilty of serious misjudgments. When lawyers

allegedly err in the course of clients’ representations, or, worse, allegedly en-
gage in deliberate misconduct, aggrieved clients may sue for professional neg-
ligence, commonly described as legal malpractice, or for breach of fiduciary

duty.1 A lawyer who treats a client dishonestly may face liability on either of

* Managing Director, Aon Professional Services, Chicago, Illinois. J.D., University of Kan-
sas; M.Ed., University of Nebraska, B.S., Fort Hayes University. The opinions expressed

here are the author’s alone.
1
Liability for legal malpractice generally requires a plaintiff to prove the existence of an
attorney-client relationship, giving rise to a duty of care on the lawyer’s part, breach of that
duty, proximate cause, and damages. In re Estate of Powell, 12 N.E.3d 14, 19 (Ill. 2014);
Sabin v. Ackerman, 846 N.W.2d 835, 839 (Iowa 2014); Harris v. O’Connor, 842 N.W.2d 50,
54 (Neb. 2014). Breach of fiduciary duty and legal malpractice generally are separate causes
of action. Slovensky v. Friedman, 49 Cal. Rptr. 3d 60, 72 (Ct. App. 2006) (quoting Stanley
v. Richmond, 41 Cal. Rptr. 2d 768, 776 (Ct. App. 1995)). The elements of the causes of ac-

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58 NEVADA LAW JOURNAL [Vol. 16:57
these theories.2 Lawyers’ alleged dishonesty in their practices exposes them to
potential liability to third parties as well. For example, if a lawyer knowingly
and substantially assists or encourages a client’s wrongdoing, those who are

harmed by the client’s misconduct may sue the lawyer in tort for allegedly aid-
ing and abetting the client’s misdeeds.3 Yet, while the potential consequences

of lawyers’ alleged dishonesty should be apparent, lawyers seldom consider
themselves at risk for liability based on fraud or misrepresentation arising out
of clients’ representations. This perspective probably traces, at least in part, to
common notions of litigation practice, where parties generally cannot base
fraud claims on opposing lawyers’ misrepresentations.4 Any comfort lawyers
derive from this impression, however, overlooks three key points. First, lawyers

may be sued for fraud or negligent misrepresentation by adversaries in litiga-
tion, as where, for example, they are alleged to have knowingly misrepresented

material facts in negotiations.5 Second, transactional practice is such that busi-
ness lawyers are natural targets of fraud and negligent misrepresentation claims

by third parties based on alleged false statements and failures to disclose infor-

tion, however, are similar. Liability for breach of fiduciary duty requires a plaintiff to prove
“ ‘(1) the existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage
proximately caused by the breach.’ ” Id. (quoting Stanley, 41 Cal. Rptr. 2d at 776); see also
Robert T. McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W.3d 786, 792–93 (Mo.
Ct. App. 2009) (quoting Koger v. Hartford Life Ins. Co., 28 S.W.3d 405, 411 (Mo. Ct. App.

2000)). Some states distinguish between legal malpractice claims based on alleged profes-
sional negligence, or a breach of the standard of care, and an alleged breach of fiduciary du-
ty, sometimes described as a breach of the standard of conduct. See, e.g., Crist v. Loyacono,

65 So. 3d 837, 842 (Miss. 2011) (employing this terminology). Other states merge the causes
of action where the lawyer’s alleged misstep is both a breach of the standard of care and a
breach of fiduciary duty. See, e.g., Klemme v. Best, 941 S.W.2d 493, 496 (Mo. 1997) (“If

the alleged breach can be characterized as both a breach of the standard of care (legal mal-
practice based on negligence) and a breach of a fiduciary obligation (constructive fraud),

then the sole claim is legal malpractice.”).
2

See, e.g., Charnay v. Cobert, 51 Cal. Rptr. 3d 471, 480–81, 481 n.12 (Ct. App. 2006) (stat-
ing that “billing for work not performed or performed by others with lower billing rates than

those charged constitutes a breach of fiduciary duty”); Capital Care Corp. v. Hunt, 847 A.2d
75, 84 (Pa. Super. Ct. 2004) (“[A]n attorney who undertakes representation of a client owes
that client both a duty of competent representation and the highest duty of honesty, fidelity,
and confidentiality. An intentional misrepresentation to a client during any transaction where
an attorney represents that client is clearly a violation of that attorney’s duty of honesty.”)
(citation omitted).
3
See Frederico v. Maric, 226 P.3d 403, 405 (Ariz. Ct. App. 2010) (listing elements of the
tort of aiding and abetting); Tensfeldt v. Haberman, 768 N.W.2d 641, 649 n.12 (Wis. 2009)

(same). See generally Douglas R. Richmond, Lawyer Liability for Aiding and Abetting Cli-
ents’ Misconduct Under State Law, 75 DEF. COUNS. J. 130 (2008) (exploring aiding and

abetting claims against lawyers). 4
Safeway Ins. Co. v. Guerrero, 106 P.3d 1020, 1029 (Ariz. 2005).
5
See, e.g., Slotkin v. Citizens Cas. Co. of N.Y., 614 F.2d 301, 314 (2d Cir. 1979) (reasoning

that jury reasonably could have found lawyer liable for fraud under New York law for mis-
representing the amount of insurance coverage available to settle the plaintiff’s medical mal-
practice claim).

mation.6 Third, clients may sue their own lawyers for alleged fraud and misrep-
resentation in appropriate cases.7

In fact, fraud and misrepresentation are common theories of liability in
suits against lawyers by both clients and third parties.

8 In 2012, for example,
the Cincinnati law firm of Dinsmore & Shohl LLP suffered a $12.6 million

judgment after a jury found the firm and one of its partners, Harvey Cohen, lia-
ble for fraud and negligent misrepresentation.9 Cohen had represented Douglas

Machine & Tool Co. in its sale to TurboCombustor Technology Inc.10 He al-
legedly knew of a Douglas Machine shareholder dispute that substantially low-
ered the company’s value but he did not disclose the dispute to TurboCombus-
tor in connection with the sale.11 TurboCombustor alleged that it would not

have purchased Douglas Machine had it known of the shareholder dispute.12 In
addition to awarding compensatory damages, the jury found that Dinsmore &
Shohl was liable for punitive damages, but that aspect of the case was bifurcat-

6
See, e.g., Cromeans v. Morgan Keegan & Co., 69 F. Supp. 3d 934, 938–40 (W.D. Mo.
2014) (permitting the plaintiff to pursue a negligent misrepresentation claim against a law
firm for allegedly false statements in a bond offering); Farmers State Bank v. Huguenin, 469
S.E.2d 34, 36–37 (Ga. Ct. App. 1996) (reversing summary judgment for lawyer on bank’s

claim that lawyer for borrower failed to disclose cloud on title to real estate to be used to se-
cure loan); Taylor v. Riley, 336 P.3d 256, 272 (Idaho 2014) (permitting non-client’s suit

against lawyer based on allegedly false statements in an opinion letter); Hansen v. Anderson,
Wilmarth & Van Der Maaten, 630 N.W.2d 818, 827 (Iowa 2001) (permitting lawyer to sue
opposing counsel for indemnity based on falsified documents presented during the sale of a
business); Dean Foods Co. v. Pappathanasi, No. Civ.A. 01-2595 BLS, 2004 WL 3019442, at
*11–21 (Mass. Super. Ct. Dec. 3, 2004) (concluding that a law firm committed negligent
misrepresentation in issuing an opinion letter); JJJJ Walker, LLC v. Yollick, 447 S.W.3d

453, 459–73 (Tex. App. 2014) (concluding that a lawyer could be liable for fraud while act-
ing as a bank’s agent).

7
See, e.g., Bryant v. Robledo, 938 So. 2d 413, 419 (Ala. Civ. App. 2005) (permitting fraud
claim against lawyer for lawyer’s attempt to obtain fees to represent an incompetent client);

Ratcliff v. Boydell, 674 So. 2d 272, 280 (La. Ct. App. 1996) (concluding that lawyer de-
frauded client by inflating value of structured settlement to obtain an excessive contingent

fee); Vt. Mut. Ins. Co. v. McCabe & Mack, LLP, 964 N.Y.S.2d 160, 163 (App. Div. 2013)
(holding that client stated fraud claim by alleging that lawyers said they had filed a motion

for default judgment when they had not done so and billed the client for preparing the phan-
tom motion).

8
See RONALD E. MALLEN & ALLISON MARTIN RHODES, 1 LEGAL MALPRACTICE § 8:31 (2015
ed.) (“Fraud is a common claim, easy to allege, and often accompanied by other theories.”). 9
Jon Newberry, Law Firm Dinsmore & Shohl Hit with $12.6 Million Judgement,
CINCINNATI BUS. COURIER (Oct. 26, 2012, 2:55 PM), http://www.bizjournals.com/cincinnati
/blog/2012/10/law-firm-dinsmore-shohl-hit-with.html; Nate Raymond, Dinsmore Hit with
$12.6 Mln Fraud Verdict, REUTERS (Oct. 29, 2012), http://newsandinsight.thomsonreu
ters.com/Legal/News/2012/10_October/Dinsmore_hit_with_$12.6_mln_fraud_verdict. 10 Newberry, supra note 9; Raymond, supra note 9. 11 Newberry, supra note 9; Raymond, supra note 9. 12 Newberry, supra note 9; Raymond, supra note 9 (reporting TurboCombustor’s claim that
the undisclosed shareholders’ dispute lowered Douglas Machine’s value from $19 million to
$4 million).

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60 NEVADA LAW JOURNAL [Vol. 16:57
ed, and the firm confidentially settled with TurboCombustor before the jury
could reconvene to weigh punitive damages.13
Fraud and misrepresentation claims pose an array of challenges for targeted
law firms and lawyers. Fraud claims may support punitive damage awards in
cases where punitives would not otherwise be recoverable, or open the door to
discovery that a court might refuse if only the lawyer’s professional negligence
was in dispute.14 Because the presence of fraud normally is a question of fact,15
well-pleaded fraud claims are difficult for defendants to defeat at the motion to
dismiss stage. Similarly, “[a] claim for negligent misrepresentation is ordinarily
one for a jury, unless the undisputed facts are so clear as to permit only one
conclusion,”16 thus devaluing a motion to dismiss as a defense tactic in many

cases. Again, because fraud and negligent misrepresentation claims are fact-
intensive,17 a plaintiff may be able to avoid summary judgment, and by forcing

the defendant to contemplate the risk of trial, achieve a favorable settlement.

Fraud and negligent misrepresentation claims are particularly valuable to plain-
tiffs who cannot establish the existence of an attorney-client relationship with a

lawyer-defendant because they avoid the general requirement of privity for lia-
bility based on professional negligence.18 First Ark. Bank & Trust v. Gill Elrod

Ragon Owen & Sherman, P.A.,

19 is an illustrative case.

First Arkansas arose out of a failed attempt by a limited liability company
known as Dream Team to develop a residential subdivision called Belclaire.20

Dream Team formed a municipal improvement district to issue tax-free munic-
ipal bonds to finance streets, sewers, and other public improvements in

13 Kimball Perry, Dinsmore Settles Second Half of $12.6M Suit, CINCINNATI.COM (Nov. 26,

2012, 3:35 PM), http://www.cincinnati.com/article/20121126/news0107/311260075. 14 See RESTATEMENT (SECOND) OF CONTRACTS § 355 (AM. LAW INST. 1981) (“Punitive dam-
ages are not recoverable for a breach of contract unless the conduct constituting the breach is

also a tort for which punitive damages are recoverable.”); 1 MALLEN & RHODES, supra note

8, § 23:6 (explaining that fraud is separate from legal malpractice and that the fraud is usual-
ly alleged to support a claim for punitive damages). 15 Chism v. Protective Life Ins. Co., 234 P.3d 780, 787 (Kan. 2010); Croslin v. Enerlex, Inc.,

308 P.3d 1041, 1046 (Okla. 2013).
16 Nota Constr. Corp. v. Keyes Assocs., Inc., 694 N.E.2d 401, 405 (Mass. App. Ct. 1998). 17 See St. Louis v. Wilkinson Law Offices, P.C., 55 A.3d 443, 447 (Me. 2012) (“Whether a

party made a misrepresentation and whether the opposing party justifiably relied on a mis-
representation are questions of fact.”). 18 See, e.g., Fortress Credit Corp. v. Dechert LLP, 934 N.Y.S.2d 119, 121–22 (App. Div.

2011) (concluding that the plaintiffs’ professional negligence claim failed for a lack of privi-
ty but finding that the plaintiffs could maintain a negligent misrepresentation claim against

the law firm based on relationship of near-privity before exonerating the firm); Ginsburg
Dev. Cos., LLC v. Carbone, 926 N.Y.S.2d 156, 157–58 (App. Div. 2011) (noting that legal
malpractice allegations predicated on fraud avoid the privity requirement); Credit Union
Cent. Falls v. Groff, 966 A.2d 1262, 1271 (R.I. 2009) (“Fraud is a well-settled exception to
the privity requirement that historically bars nonclient recovery for attorney malpractice.”).
19 427 S.W.3d 47 (Ark. 2013). 20 Id. at 49.

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Fall 2015] FRAUD AND MISREPRESENTATION 61
Belclaire.21 The district hired Christopher Travis of the Gill law firm as bond
counsel. Travis prepared the preliminary official statement (“POS”) and official
statement (“OS”) that were provided to the underwriter, American Municipal
Securities, Inc. (“AMS”), for use in marketing the bonds.22 The district issued
two series of bonds, Series A and Series B. The Series B bonds were backed by

a mortgage on land in Belclaire that Dream Team owned and by capital use im-
provement fees that Dream Team was to collect.23 The POS and OS did not

identify a prior mortgage held by First Federal Bank securing the loan used to
purchase the land for Belclaire.24 AMS sold the Series B bonds to Arkansas
Banker’s Bank, which retained some and sold the remainder to other banks.25
Dream Team defaulted on payment of the capital use improvement fees
and on the First Federal mortgage.26 The banks that purchased the Series B

bonds sued the Gill firm for legal malpractice, violations of the Arkansas Secu-
rities Act, and fraud. They alleged that Travis failed to disclose in the bond of-
fering that the First Federal mortgage was superior to the lien created by the

capital improvement use fees obligation.27 The priority of the First Federal

mortgage allegedly devalued the banks’ Series B bonds.28 The Gill firm ob-
tained summary judgment on all counts and the banks appealed to the Arkansas

Supreme Court.29
The Arkansas Supreme Court affirmed summary judgment for the Gill firm
on the plaintiffs’ Arkansas Securities Act claims because the Gill firm was not
a seller of the bonds, did not control their sale, and did not materially aid in
their sale as required for liability under the Arkansas statute.30 The court also

affirmed summary judgment for the Gill firm on the plaintiffs’ legal malprac-
tice claim based on a lack of privity because the Gill firm was retained by the

district and had no attorney-client relationship with any of the plaintiffs.
31
That left the plaintiffs’ fraud claim, because the Arkansas lawyer-immunity
statute requiring privity for legal malpractice liability contained an exception

for acts or omissions by lawyers constituting fraud or intentional misrepresenta-
tions.32 The court began its analysis by stating that to prove fraud, a plaintiff

had to show that: (1) the defendant made a false representation of material fact;
(2) the defendant knew the representation