Lawyer liability for bad business advice.

• Author: Jarvis, Robert M.

Lawyers give business advice to clients all the time, in part because clients ask for it and in part because lawyers fancy themselves astute entrepreneurs. (1) But is the lawyer liable when the advice turns out to be bad and the client loses everything? Surprisingly, research turns up no ready answer.

Model Rules

The 1983 Model Rules of Professional Conduct, as amended, do not say whether lawyers can be held liable for giving bad business advice to clients. (2) The closest they come to the issue is Rule 2.1, which combines Canons 8 (Advising Upon the Merits of a Client's Cause) and 32 (The Lawyer's Duty in its Last Analysis) of the 1908 Canons of Professional Ethics with Canon 5 (A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client) of the 1969 Model Code of Professional Responsibility.

After authorizing lawyers to act as independent advisors, Rule 2.1 encourages them to give candid advice that takes into account any "moral, economic, social [or] political factors that may be relevant to the client's situation." The accompanying comment consists of five paragraphs, only one of which is germane. Paragraph four notes that when it comes to business matters, clients may need to be directed to other professionals, such as accountants and financial specialists. Whether such a referral is necessary is left up to the lawyer, who is expected to make such a recommendation if a competent lawyer would do so. The paragraph concludes by recognizing that such other professionals may give conflicting advice, in which event it may fall to the lawyer to suggest the ultimate course of action. (3)

Restatement

Section 94(3) of the Restatement (Third) of the Law Governing Lawyers adopts Rule 2.1 because it says that lawyers, when counseling clients, "may address nonlegal aspects of a proposed course of conduct, including moral, reputational, economic, social, political, and business aspects." Notice that this formulation actually is broader than Rule 2.1, for it adds reputation and business as factors the lawyer may take into account in formulating his or her advice. Unfortunately, the comment (h) to [section] 94(3) focuses entirely on the first factor (morality), and, therefore, does not shed any additional light on the subject. (4)

Case Law

In Matter of DiMisa, 639 N.Y.S.2d 835 (App. Div. 1996), a real estate lawyer was charged with looting his trust account. In what turned out to be a futile attempt to avoid disbarment, he raised four arguments, including "that bad business advice is not grounds for discipline." (5) The court's opinion does not provide any further details and, as the evidence of theft was overwhelming, all of the defendant's objections were summarily dismissed.

Other than DiMisa, no case is directly on point. However, in In re...