By William J. Wernz
In August 2023, the ABA adopted a new first sentence for Rule 1.16(a) of the Model Rules of Professional Conduct, requiring lawyers to “inquire into and assess the facts and circumstances of each representation [of a client] to determine whether the lawyer may accept or continue the representation.” The amendment’s proponents stated, “This Resolution also will demonstrate to the U.S. Government… and the public that the profession takes seriously its obligations to avoid becoming involved in a client’s criminal and fraudulent conduct, including money laundering, terrorist financing, human trafficking and human rights violations, tax related crimes, sanctions evasion, and other illicit activity.”
The ABA also adopted amendments to two Comments to Model Rule 1.16. Comment [1] provides guidance regarding Rule 1.16(a). Comment [2] identifies factors for assessing “the risk that the client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud.” The ABA adopted the amendments to Rule 1.16 and its Comments to preempt possible federal legislation that might well burden lawyers heavily.
The ABA Standing Committee on Ethics and Professional Responsibility, which proposed the amendments, stated, “These are not new obligations. Lawyers already perform these inquiries and assessments every day to meet their ethical requirements.”1
This article will examine evidence that supports and weighs against this statement. This article will also examine hypotheticals in several areas of the practice of law, to show how the amendments could create new obligations and important uncertainties.
ABA Model Rules are not the law until they are adopted in a governing jurisdiction. However, the Model Rules provide the basic template for ethics rules in all U.S. jurisdictions. In Minnesota, the MSBA, the Lawyers Board, and the Office of Lawyers Professional Responsibility will consider whether to recommend that the Minnesota Supreme Court add Model Rule 1.16(a) to the Minnesota Rules of Professional Conduct.2 Minnesota typically adopts Model Rules amendments unless it finds a strong reason for not doing so. However, the Minnesota authorities have occasionally not submitted any recommendation to the Court, because they regarded a Model Rule amendment as addressing a situation that did not exist in Minnesota to any significant degree.
Will the ABA’s action preempt federal legislation?
About 20 years ago, after the frauds and implosions of prominent entities like Enron and Arthur Andersen, courts and commentators asked, “Where were the lawyers?” To prevent future frauds, the Congress enacted the Sarbanes-Oxley Act. The Securities & Exchange Commission adopted rules requiring reporting by lawyers for public companies of certain insider misconduct. The ABA amended Model Rules 1.6 (Confidentiality) and 1.13 (Organization as Client) to permit and in some instances require lawyers to report fraud and other misconduct by clients and their representatives. With several variations, in 2005 Minnesota followed the ABA’s lead. On the whole, these ethics rules amendments served their purposes of preventing more onerous federal lawmaking and enhancing lawyers’ duties and permissions to deal more effectively with insider corporate misconduct.
How likely is it that, with or without the Model Rule amendments, the U.S. Congress would enact legislation burdening American lawyers with responsibilities to prevent money laundering, terrorist financing, etc.? The ABA Report supporting the proposed amendments contended that, without the amendments, there was a substantial likelihood of legislation. If this contention is persuasive, how likely is it that the amendments will persuade the Congress that legislation is no longer needed?
If the amendments did not add any “new obligations,” why would federal legislators desist from imposing genuinely new obligations on lawyers? If money laundering through lawyers is a serious problem, how would mere codification of existing obligations affect the perceived need for legislation?
Do the amendments create new obligations? Reasons for answering “no.”
Twenty-some years ago, a leading legal ethics expert, Peter Jarvis, testified that “because of the duty of loyalty, lawyers ‘tend to very strongly believe [their] clients’ and, at least in the civil bar, lawyers ‘tend not, by and large, to be immediately suspicious of [clients] if they ask us to do things.’” The opposing expert agreed that lawyers could give clients the benefit of the doubt regarding veracity of client statements.3 In the last few decades, however, lawyers’ due diligence duties regarding their clients have increased, as three examples will illustrate.
First, Rule 11, R. Civ. Proc., has long required civil litigators to certify, after a reasonable inquiry, that filings have a reasonable basis in fact and law. Rule 3.3, R. Prof. Conduct is a partially parallel ethics rule. These rules apply, however, only to litigation; and money laundering, crime, and fraud are more likely to occur in transactional matters.
Second, malpractice insurers have counseled their insureds to scrutinize clients, because “unworthy clients” are arguably the greatest cause of claims and losses. Enforcement of Rule 5.1, R. Prof. Conduct, covering partners’ supervisory responsibilities, has also increased in recent years. Many law firms have new business committees to screen new clients and new matters. The committees often do background checks on new clients. The committees often reject proposed clients who give evidence of being dishonest, disorganized, litigious, pugnacious, or lacking experience for the underlying matter. Internet scammers deserve special scrutiny. The committees also check conflicts of interest. But they generally focus on new clients rather than ongoing representations, and on risks to law firms rather than to the public. In addition, a law firm’s failure to prudently screen new client matters does not, by itself, create a basis for attorney discipline unless the failure relates to a matter covered by the MRPC, such as conflicts of interest.
Third, the duty of competence has expanded. Rule 1.1, Comment 5 states, “Competent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem….” However, this Comment focuses on problem-solving, not on the bona fides of the client and, in Minnesota, Comments are not adopted by the Court.
Do the amendments create new obligations? Reasons for answering “yes.”
Words matter. The Terminology section of the rules provides three strong indicators that Model Rule 1.16(a) would transform the rules. The duty to “inquire” appears only twice in the current rules, and not as a general duty; a synonym, “ascertain,” appears more frequently, but not as a general duty. Many duties under the rules depend on whether a lawyer “knows” relevant facts, but the rules do not generally require a lawyer to make inquiries to gain actual knowledge. Indeed both the rules and the common law require lawyers to resolve doubts in the client’s favor. The most frequent characterization in the rules is that a lawyer must act “reasonably,” but the amendments do not require only reasonable inquiry and assessment.
First, “reasonably should know” denotes when “a lawyer of reasonable prudence and competence would ascertain the matter in question.” The meaning of “ascertain” is very similar to the operative phrase of new Model Rule 1.16(a), “inquire into and assess.” The phrase “reasonably should know” appears only 18 times in the MRPC and Comments. None of these usages creates any general obligation to “ascertain.” Almost all usages of “reasonably should know” relate to duties to non-clients—such as whether a non-client understands the lawyer’s role, whether documents were inadvertently transmitted, and whether an employee is a disbarred or suspended lawyer. In short, current rules only infrequently and in limited circumstances expressly require a lawyer to “ascertain”—that is, to “inquire into and assess.”
Synonyms for “ascertain” are rarely found in the rules. “Investigate” does not appear at all. The word “inquiry” does not appear as a lawyer’s duty. “Inquiry” appears as a lawyer’s duty just twice, both times in comments: (1) Rule 1.1 cmt. 5, noted above; and (2) Rule 3.3 cmt. 3, stating that a lawyer should not make a representation to a tribunal as of the lawyer’s own knowledge without actual knowledge or a belief based on diligent inquiry.
Second, the Terminology section defines “knows” (and related words) as denoting “actual knowledge of the fact in question. A person’s knowledge may be inferred from circumstances.” Rule 1.0(g). “Know,” “knows,” “knowledge,” and “knowingly” appear 174 times in the rules. Many of the rules’ obligations and prohibitions require that the attorney “know” the fact in question. An attorney cannot turn a “blind eye” to avoid knowledge, but a blind-eye prohibition is readily distinguishable from an obligation to “inquire into and assess.” The amendments’ broad requirement that lawyers gain knowledge on subjects relating to the MRPC before and during every representation represents a substantial addition beyond current requirements that lawyers act on what they know or what is so obvious they may be deemed to know it.
Regarding a lawyer’s knowledge, it is also important that the rules and Minnesota common law recognize that lawyers have a duty to resolve doubts in favor of clients. “A lawyer’s reasonable belief that evidence is false does not preclude its presentation to the trier of fact…. [A]lthough a lawyer should resolve doubts about the veracity of testimony or other evidence in favor of the client, the lawyer cannot ignore an obvious falsehood.” Rule 3.3 cmt. 8. In a leading case, a non-client plaintiff claimed a lawyer had a legal duty to independently investigate the assertions of his clients, to determine whether those assertions were true, and to communicate that information to the adversary. The Court firmly rejected that idea: “We cannot recognize such a duty. It would undermine the attorney’s duty to zealously represent the client and resolve all doubts in favor of the client. It would also undermine the trust between the attorney and client, which is an essential element of the relationship.”4 How does a lawyer whose duty is to “resolve all doubts in favor of the client” also independently and objectively “inquire into” and “assess” the facts of the matter?
Third, the word “reasonable” does not qualify the new duties to inquire into and assess. This omission is intrinsically important and belies the claim the amendments did not create new obligations. The most common standard in the rules is that lawyers must adhere to what is “reasonable.” “Reasonable” and “reasonably” denote “the conduct of a reasonably prudent and competent lawyer.” Rule 1.0(i). These words appear hundreds of times in the rules. Good, experienced lawyers can proceed with some confidence by doing what their counterparts customarily do. The dominance of the standard of reasonableness in the rules is also conservative, because lawyers’ habits change only gradually. If the drafters wanted to avoid creating new obligations, they should have followed the standard vocabulary of the rules and tied the obligation to inquire and assess to the prevailing practices of reasonably prudent and competent lawyers.
What would be the impact of a duty to “inquire into and assess” client representations?
Amended Comment 1 to Rule 1.16 provides an example of a trigger for the duty to inquire and assess: “during the course of a representation, a new party is named or a new entity becomes involved.” This example, and the broad language of Rule 1.16(a), show that the rule is not restricted to money-laundering situations, nor to fraud prevention. Rather, the obligation to inquire and assess applies to all sorts of ethics obligations, such as potential conflicts of interest arising when a new party becomes involved in a representation.
Other hypotheticals may be analyzed to try to understand how the amendments might apply. Here it bears repeating that, because the duties to inquire and assess are not qualified by “reasonable” or “reasonably,” the hypotheticals cannot be answered by citing the prevailing practices of good lawyers as benchmarks.
A typical tax preparer, whether a lawyer or accountant, asks a taxpayer to acknowledge that the preparer is relying entirely on the taxpayer for the accuracy of relevant information. Under Rule 1.16(a), however, a lawyer-preparer has duties to “inquire into and assess the facts and circumstances” of each tax representation, and to continue to perform those duties throughout the representation. What, exactly, would these new duties require of the lawyer-preparer? If more is required of a lawyer than of another preparer—and of the lawyer’s client in responding to and paying for the lawyer’s inquiries and assessments—will the lawyer be at a competitive disadvantage?
A criminal defense attorney in some cases deliberately does not ask a client questions about certain important matters. The attorney intends not to know too much, in some cases to avoid adducing perjured testimony. How would a new duty to inquire and assess affect the attorney’s customary mode of practice?
• Cassie, a plaintiff’s personal injury lawyer, obtains a doctor’s permanent injury rating for a client, Harmon. Two months later, while Cassie is negotiating a settlement with the insurer, Harmon makes a total recovery but does not inform Cassie. Cassie does not inquire about Harmon’s condition. A large settlement is obtained. The insurer learns of Harmon’s recovery and files a complaint with OLPR, alleging that Cassie violated Rule 1.16(a). The insurer also sues Cassie for abetting a fraud. Citing Rule 1.16(a) as “some evidence” of a lawyer’s duty, the insurer’s expert opines that Cassie should have inquired whether Harmon had a recovery and then disclosed it.
• Anu, a business lawyer, represents several members of the Owen family, in the dissolution of Owen, Inc. Initially, it appears that the Owens have harmonious interests. Due to family developments unknown to Anu, these interests come to diverge and conflict, but the Owens do not inform Anu. After the matter is concluded, one of the Owens files an ethics complaint against Anu, alleging that Anu did not periodically inquire into and assess whether conflicts had arisen. Did Anu violate amended Rule 1.16(a)?
• Fred was retained to appeal a civil judgment. Fred relied entirely on the trial record and the law. After the briefs were filed, but before oral argument, a development occurred that, if disclosed, would affect the remedies available to the appellate court. The appellant knew of the development and would have disclosed it to Fred if Fred had asked, but Fred did not. Did Fred violate Rule 1.16(a)?
• Nancy, a family lawyer representing H, received from H an appraisal of a business operated by H. The appraisal appeared to have been prepared by XYZ Appraisals, a reputable firm. In fact, H altered the XYZ appraisal. Nancy did not verify the authenticity of the appraisal by contacting XYZ. Nancy presented the appraisal to H’s spouse and later filed it with the court in support of a marital termination agreement. Did Nancy violate Rule 1.16(a) by not inquiring into and assessing the appraisal?
How will these questions be answered? The author has rendered ethics opinions for 42 years but cannot confidently opine on how OLPR or courts would answer the questions above. Are the customs and practices of good lawyers irrelevant? Many new rules initially have some measure of uncertainty, but the broad duty to “inquire and assess”—especially without any qualification of reasonableness—creates extraordinary uncertainty.
Whither Minnesota?
Should Minnesota adopt a rule whose purpose is to thwart money laundering but whose application extends far beyond that purpose? Minnesota has less than a handful of reported cases of lawyers involved in money laundering. It seems unlikely that the Congress would legislate or not based on whether certain states where lawyer involvement in money laundering is negligible adopt Rule 1.16(a).
Putting money-laundering concerns aside, should Minnesota adopt Rule 1.16(a) based on the assertion that the new rule and its Comments make explicit obligations that are already found under existing rules?
Consideration of amended Rule 1.16(a) and its Comments should also cause consideration of Rule 1.16(b)(2) and Rule 1.2 cmt. 13. Rule 1.16(b)(2) provides, “[A] lawyer may withdraw from representing a client if:… (2) the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.”5 The ABA rejected a proposal to make the withdrawal duty mandatory in these circumstances. In the author’s opinion, rejecting this proposal was a clear mistake. “May withdraw” implies “may continue.” It is difficult to conjure circumstances in which it would be prudent or ethical to continue providing services to a willful client in what very likely is a criminal or fraudulent enterprise.
Comment 13 to Rule 1.2 has an error that should be corrected whenever the next petition to amend the MRPC is filed. The error is attempting to add an obligation via a comment, when a basic principle is that “Comments do not add obligations to Rules....” SCOPE [14]. Rule 1.2(d) forbids a lawyer to assist a client when the lawyer “knows” the client’s conduct is criminal or fraudulent. Comment 13 interprets Rule 1.2 to apply when a lawyer “knows or reasonably should know” that the lawyer’s assistance is improper. The italicized words represent an attempt to use a comment to add an obligation to a rule.
Conclusion
In recent decades the traditional principle that lawyer may rely on clients for the facts of a matter has become subject to a growing number of qualifications. The pace of this evolution has been slow and gradual. Those considering the present amendments should ask several questions. Do the amendments involve a substantial leap rather than step-by-step evolution? Is omission of the frequent qualifier “reasonable” prudent? Does the rationale of preempting federal legislation apply in Minnesota? And if not, are there good reasons for adopting the amendments? Would adoption of the amendments create fundamental uncertainties for practicing lawyers?
William J. Wernz is the author of the online legal treatise Minnesota Legal Ethics. He has been a member of the Board on Judicial Standards and has also served as Dorsey & Whitney's ethics counsel and as director of the Office of Lawyers Professional Responsibility.
Notes
1 Revised Report to the House of Delegates (Aug. 2023) at 6.
2 The Court declines to adopt Comments but gives permission for the Comments to be published with the rules.
3 United States v. Kellington, 217 F.3d 1084, 1190 (9th Cir. 2000). See also United States v. Wuliger, 981 F.2d 1497, 1505 (6th Cir. 1992), cert. denied, 510 U.S. 1191 (1994) (“Although an attorney must not turn a blind eye to the obvious, he should be able to give his clients the benefit of the doubt.”).
4 L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372, 379 (Minn. 1989).
5 Rule 1.2(d) requires withdrawal if the lawyer “knows” the client’s conduct is criminal or fraudulent. The difference between “reasonably believes” and “knows” can be very slender in real-world settings.