Friday, April 22, 2011

Applying the Principles of Legal Ethics to New York Development: Lawyers Are Not Supposed to Represent Deceiving Clients

(above, "nationally renowned ethicist" and NYU law professor Stephen Gillers)

This turns out to be the second in what will now be a series of articles inspired by recent courses I’ve been taking to bank additional CLE (Continuing Legal Education) hours required in connection with continuing my state registration as an attorney. The first such post I put up concerned reverse morals clauses in celebrity contracts of interest to me particularly because of Jay-Z’s involvement promoting the Atlantic Yards mega-monopoly in Brooklyn and also because of Jay-Z’s wife BeyoncĂ©’s morally questionable performance for the Gaddafi clan. (See: Friday, April 8, 2011, “Reverse Morality” Clauses for Celebrity Endorsers: What Are They? Something Celebrities, Including Jay-Z, Should Try Enforcing.) (BeyoncĂ© has also been of assistance in promoting the destructive Atlantic Yards megadevelopment.)

Legal Ethics of Working For the Unethical

For this go-round the subject is again ethics, and again the ethics of working for someone who is behaving unethically. For lawyers it will hit a little closer to home. This time the subject is when lawyers have an ethical duty to withdraw from representing a client who is behaving dishonestly.

On April 14th I attended “Legal Ethics: Real World Issues and Considerations,” a truly excellent two-hour morning course presented by the law firm of Paul Weiss (aka Paul, Weiss, Rifkind, Wharton & Garrison LLP) at the Pierre Hotel. The firm has regularly hosted sessions like this focusing on the real world ethical conundrums lawyers face.

An important contribution to the morning’s success was NYU School of Law Professor Stephen Gillers moderating the discussion. Also present and participating in the discussion were the Paul Weiss attorneys: Claudia L. Hammerman, Jeffrey D. Marell and the wonderfully gruff Gerald E. Harper. (Gruff frankness goes a long way when discussing legal ethics.)

(panel above: Gillers, Marell, Hammerman and Harper)

As Professor Gillers’ official NYU biography makes clear he is a specialist in legal ethics. For those of you who missed the Paul Weiss program, Professor Gillers will soon be giving another CLE legal ethics course for the City Bar of New York on Wednesday, April 27, 2011 from 6:00 p.m. to 9:00 p.m.: Current Legal Ethical Issues. The City Bar is advertising Professor Gillers as a “nationally renowned ethicist and well-regarded speaker.”

Lawyerly Noise About Selling Misrepresentations

While all the topics covered during the morning were interesting (and I will write about another of them in a later post) the topic that I will deal with here concerns a lawyer’s ethical responsibility if, when representing a client-seller in the course of a sales transaction, the lawyer becomes aware that the client is submitting false information about what is being sold to the buyer.

What is the lawyer obligated to do? We were told during the discussion that the lawyer can’t be an aider and abettor to the perpetration of a fraud, that the lawyer likely has to withdraw from the matter but that even withdrawal from the matter may not alone be enough to satisfy ethical concerns. Especially if the lawyer was involved in transmitting false information, it may be incumbent upon the lawyer to make what is referred to as a “noisy withdrawal” from the transaction. While a lawyer can’t actually say that his client has lied, a “noisy withdrawal” where for example the lawyer “retrieves or takes back” the false information the lawyer was involved in delivering sends a definite “signal” to the other side that will allow them to investigate to discover for themselves what is amiss. That the lawyer responds, when asked why he is taking back documents by saying, “I can’t tell you” only “exacerbates the noisiness of the withdrawal.”

Rules, Rules

Rule 1.6 (b) (3) of the New York Rules of Professional Conduct (the ethics rules New York attorneys are supposed to follow) is specifically written to permit such noisy withdrawals, “where the lawyer has discovered that the opinion or representation was based on materially inaccurate information or is being used to further a crime or fraud.” The American Bar Association model rules, adopted in some form in 46 jurisdictions, actually go further in possibly mandating the disclosure of otherwise confidential information to rectify or prevent a fraud whether or not the lawyer transmitted something he can retract.

Dealing With the Root of the Problem

Of course, things may not get so dramatic as a withdrawal. The lawyer’s first step probably will and should be to go to the client and tell the client that they need to correct the record because at this point the lawyer can no longer allow the transaction to move forward. Professor Gillers quoted Elihu Root, lawyer, statesman (including U.S, Secretary of State), and Nobel Laureate who said:
About half the practice of a decent lawyer consists of telling would-be clients that they are damned fools and should stop.
A Dramatically Raised Ante

On the other hand things can get much more dramatic if the lawyer doesn’t withdraw from assisting the transaction when he/she should. Assisting the client who has engaged in fraudulent activity (as defined by the substantive law) in exploiting that fraud by going to closing can make the lawyer liable to the buyer for damages (as would also be the lawyer’s client, the seller). In fact, it was pointed out that clients like these often go bankrupt while law firms have malpractice insurance (a source to recover damages from), and therefore lawyers are increasing being sued in such situations. The rule is that once the lawyer knows that false information has been transmitted the lawyer cannot help the client exploit the falsity by helping the client accomplish the sale.

Hypothetically Framed

The discussion was framed with the aid of an orally summarized hypothetical that focused in on the fact that some of the numbers given to the buyer were wrong. There was also a written version of that hypothetical furnished under the heading of “Lawyer Liability to Third Parties”:
You represent a company selling one of its subsidiaries to a buyer. You have transmitted various financial documents from your client to the buyer’s counsel based on which the buyer formulates its bid, which is accepted. Prior to closing, you learn that your client changed some of the numbers to make the subsidiary appear more profitable than it is. What do you do? Does it matter what you said about the documents in your transmittal to opposing counsel?

Does the answer change if you learn about the alterations after the closing but the buyer still remains ignorant of them?
Closing In On the Answer

Despite that phrasing of the hypothetical it was made clear that for the most part, it probably doesn’t make a difference whether the lawyer transmitted the false information or the client did. As for the question of whether the transaction had already closed makes a difference (because the reduced possibility the buyer would alter their conduct or be able to mitigate damages), Paul Weiss partner Gerald Harper had this view:
The ability to withdraw the statement persists and the fact the transaction has closed doesn’t strip you of your right to take back any statement that you sponsored as a lawyer to the counterparty. I don’t think it matters whether the transaction is closed or not. You are free to withdraw any fraudulent statement that you, as a lawyer sponsored, and I think I would do that.
Mr. Harper qualified this by saying that in the real world the lawyer is going to go back to his client first, explaining that if they don’t correct the matter they will be sued for fraud.

Noticing New York Question: Does the Rule Apply To. . .

At this point most Noticing New York readers have probably guessed where we are heading. When the session commenced Professor Gillers had stated that each of the four hypotheticals that would be discussed during the day “brings up an issue that could arise in any practice any time.” I was chomping at the bit to ask the first question. The following is my exchange with Professor Gillers:
MDDW: This will test the notion that these hypotheticals transpose to all practice areas: Say you are representing the developer of a publicly financed real estate project, so, in essence, the public is the buyer- Do you think this principle applies there as well if the developer has misrepresented the project?

PROF. GILLERS (being careful to precisely define the situation): To whom has the developer misrepresented the project?

MDDW: You could consider either that it has been misrepresented to the public or that its been misrepresented to the public officials who are responsible for handling the project.

PROF. GILLERS: My answer is yes, it applies there as well. I suppose federal securities laws can apply there as well, but here we are talking about the state common law of fraud, but yes, it applies there as well. It doesn’t have to be an A to B sale of private parties. I don’t see why it couldn’t apply.
As you see from the above, I did not mention any particular publicly financed real estate project but certainly some come readily to mind, foremost among them probably being Atlantic Yards. Before applying what Professor Gillers said above to a project such as Atlantic Yards it should be remembered that exchanges at a legal conference are never intended to constitute actual legal advice and Professor Gillers had not been asked to consider a specific set of real world facts.


Further, after the questions (one involving lawyer suspicion rather than knowledge of client misconduct), Professor Gillers had more to say on the subject that would be relevant to any evaluation of the ethical conduct of the lawyers working for Forest City Ratner on Atlantic Yards. Specifically, the rules of misrepresentation are different for what are considered “non-facts,” which extend to “predictions,” the idea of “puffing and exaggeration” and “prospective events” we might even be talking about dubious assumptions and insufficiently backed up assertions.

While it can clearly be said that the Atlantic Yards has regularly and routinely been grossly misrepresented to the public, those who would defend the ethics of the lawyers working to further Ratner’s project-promoting goals would certainly argue that all these misrepresentations are in this “non-fact” category, amounting to no more than “puffing and exaggeration” with respect to the prediction of prospective events and that no matter how misrepresentative of the project it is, Forest City Ratner is no more than the permissible purveyor of dubious assumptions and insufficiently backed up assertions.

The Politics of Actually Non-Factual

One question that comes to mind is whether lawyers consider that a different standard does apply to Forest City Ratner and perhaps any developer that does publicly financed projects, the thinking being that when you are talking about projects financed by the public one has entered the realm of politics, a realm where truth is no longer important and “factual statements” take on entirely new definitions. A recent example of the extreme we have gone to in this regard was when an aide to Senate Minority Whip Jon Kyl (R-Ariz.), condoned Kyl’s senate floor whopper that abortions are, “well over 90% of what Planned Parenthood does” (only 3% of what Planned Parenthood does relates to terminating pregnancies) by saying the senator’s declaration of the percentage “was not intended to be a factual statement.” The political humorists are rightly having a field day with this “not intended to be a factual statement” ploy, Stephen Colbert and Wait Wait...Don't Tell Me! included.

Maybe in the political realm one can get away with virtually any misrepresentation of the truth no matter how “factual” sounding the statements appear to be. But would the perpetual Forest City Ratner promotions be acceptable if Ratner were foisting the transaction on a private party instead of the New York taxpaying public? The idea that a distinction might exist is an intriguing theory worthy of consideration but not necessarily the law.

Real World Misrepresentations

Only two days ago Noticing New York circled back to look again at how bonds for the arena were marketed with a crafty non-statement of fact conveying the misimpression that the arena could just possibly one day earn additional revenue by hosting a professional hockey team (See: Thursday, April 21, 2011, Question Revisited: How Craftily Close Did Forest City Ratner Skate On Thin Ice of Securities Law Violation With Non-Promise of a Hockey Arena?) That was selling participation in a financing to bond purchasers, private parties, so the standards for truthfulness perhaps should be high. (Not to mention Professor Gillers' reminder about federal securities laws.)

The following Noticing New York article provides more than a baker’s dozen bullet listed items cataloging other misrepresentations involved in selling Atlantic Yards to the public: Tuesday, December 1, 2009, Unfair Substitution of Fiction For Fact in the Atlantic Yards Dialogue. One can go through them analyzing which of the misrepresentations might be sufficiently “factual” to invoke the question of legal fraud but certainly huge deceptions have been perpetrated. Adding to the list, Ratner's vastly exaggerated claims about `creating jobs' has recently been a focus of recent news.

One area where it seems that misrepresentations of fact did occur is with respect to the misrepresentations to Justice Marcy Friedman about the legitimately expected timetable for the development of the mega-project was: With lawyer assistance it was represented to the justice that Forest City Ratner and ESDC officials expected to complete the project within ten years while withholding from her (and the plaintiff parties representing the public in opposing the project) documents between them providing for and clearly envisioning a multi-decade build-out.

Similarly, sale of the EB-5 investments to prospective Chinese “investors” has been rife with misrepresentation. Technically, the misrepresentations being made to the Chinese are being made to them as private parties on the other side of a business transaction (rather than just an unwitting public being subjected to a spiel) so a high standard should apply respecting any misrepresentations. On the other hand is there thinking that as the Chinese are not American citizens they should not be expected to benefit from the full protection of U.S. law?

Addendum on Paul Weiss and Atlantic Yards

Although it may sound a little bit like biting the hand that legally educates you (and lets you munch a Pierre Hotel mini-bagel breakfast) I didn’t think I could conclude this article without researching whether the Paul Weiss firm had involvement with the Atlantic Yards project. It turns out they have. It was not surprising to discover this given that something that facilitates big development (and potentially helps mute criticism) is the way a lot of work can be spread around the professional community. The bigger your firm is- and Paul Weiss is a very big firm- the more likely you will be on the list.

Here is what I found involving partners in two departments at the firm:

Meredith J. Kane, a partner in the Real Estate Department and a member of the firm's Management Committee, who “regularly represents developers, equity investors, institutional and entrepreneurial owners and government agencies in all aspects of development, finance” and whose “experience includes all aspects of the finance and development of complex public/private joint venture projects” has, according to her page on the firm’s website worked on:
the development of MTA’s Atlantic Yards in Brooklyn as a proposed new development of up to 16 residential and commercial buildings
Astute readers will quickly note that the reference to the MTA’s “Atlantic Yards” rather than being to the MTA’s “Vanderbilt Yards” is reflective of a basic problem the MTA had in negotiating its transaction with Ratner and also when it handed the property over to Ratner at a below-market price with a less-than-real feint at a bid process: The MTA was treating its publicly-owned land (the Vanderbilt Yards) as constituting a project deemed to be already owned by the developer (Atlantic Yards.)

Here is more from the Paul Weiss website advertising this aspect of their involvement with some better language, but it nevertheless refers to “Atlantic Yards” as if it is the MTA’s development project which is arguably inaccurate:
MTA's Atlantic Yards Development Project Closes

We represented Metropolitan Transportation Authority in the sale to Forest City Ratner Companies of the air space development rights over MTA's Vanderbilt Railyards to be included in the multi-billion dollar Atlantic Yards development project. Under the State approved project plan, which covers 22 acres in the Brooklyn, New York neighborhoods of Prospect Heights and Park Slope, Forest City is to build a new arena for the Nets basketball team, as well as up to 16 residential and commercial buildings and a new railyard facility for MTA. Much of the residential and commercial construction is to occur on platforms to be constructed by the developer over the MTA Railyards.
Also, in November 2005, Ms. Kane was a featured speaker at a Pace University Real Estate Law Institute seminar on "Reinventing Redevelopment Law" which looked at the roles of the public and private sector in major urban redevelopment projects including Ratner’s MetroTech and Atlantic Yards.

A second partner of the firm, Daniel J. Leffell, in the litigation department, was also involved with Atlantic Yards. According to his page on the firm’s website Mr. Leffell’s “successful representations” include:
Montgomery v. Metropolitan Transp. Auth., 25 Misc. 3d 1241A (Sup. Ct. N.Y. Co. Dec. 15 2009) (successful defense of the New York Metropolitan Transportation Authority against a challenge to its sale of property for the Atlantic Yards development project)
The “Montgomery” in that case is State Senator Velmanette Montgomery (18th District) and “Montgomery” is an abbreviated stand-in for the entire list of plaintiffs who in that case were suing the MTA. Also suing the MTA were Assemblymember Jim Brennan (44th District), Assemblymember Joan Millman (52nd District), NY City Councilmember Letitia James (35th District), NYPIRG/Straphangers Campaign and Develop Don’t Destroy Brooklyn.

The plaintiffs were suing the MTA because it violated the still fresh-on-the-books Public Authorities Accountability Act of 2005, an effort by the state legislature to reform and rein in public authorities. The suit was brought because MTA failed to obtain an independent appraisal of the Vanderbilt Yards or seek out competitive offers for the Vanderbilt Yards property after a last minute rush was used for Forest City Ratner to get through a restructuring of the mega-deal into a plan far worse for the public than what original misrepresentations said would be provided. The case was lost when State Supreme Court Justice Michael Stallman found, among other things that the elected state legislative officials who enacted the public authorities reform law were not entitled to seek its enforcement to benefit the public (and under the theory that probably no on else is either, the law might thereby be nearly unenforceable).

In other words, Mr. Leffell’s page advertises that he was successful in preventing the plaintiff state legislators from doing anything more effectual than loudly crying foul when Forest City Ratner side-stepped honoring its dubiously intended exaggerations about what it would one day prospectively provide the public.

This article has concerned itself principally with the ethical obligation of attorneys directly representing Forest City Ratner in making misrepresentations. The question of attorneys representing the public officials dealing with Ratner who are supposed to, in turn be representing the public, is another more difficult one, complicated mightily by the terrific extent to which Ratner’s goals have seemingly, without question, been adopted by many public officials as their own.

The state legislators who sought to enforce the reform measures of the Public Authorities Accountability Act (and others of us as well), probably feel that the public was not well served when the MTA succumbed to Forest City Ratner. As such they are probably unhappy about the Paul Weiss firm’s representation of the MTA. But while that might be the case, most lawyers would agree that the Paul Weiss firm did not cross the kind of ethically lines discussed here when it represented the MTA. That is provided that the MTA was not making misrepresentations, say through its Chief Financial Officer Gary Dellaverson, about it could find how no other bidder for the project except for Ratner or how it needed to rush the project forward in 48 hours without one. But the ethically rules pertaining to litigation are also different from what we have been discussing.

The Paul Weiss firm’s “Legal Ethics: Real World Issues and Considerations” was a very good program and, like all good educational programs, thought provoking.

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