The District of Columbia Court of Appeals heard arguments today in a case that tests the limits on when non-clients – or, at least, non-traditional clients – can sue an attorney for legal malpractice and breach of fiduciary duty.
Boston-Maine Airways Corp. wants the appeals court to scrap the dismissal of the company's lawsuit against Sheppard, Mullin, Richter & Hampton. Boston-Maine wasn't formally a Sheppard client, but the company argued that Sheppard's representation of its sibling companies and a shared owner meant that Sheppard couldn't take actions that would harm members of the corporate family.
A District of Columbia Superior Court judge granted Sheppard Mullin's motion for summary judgment, finding that Boston-Maine failed to prove that Sheppard owed them any care. During today's hearing, Senior Judge Michael Farrell pressed Boston-Maine's attorney, J. Michael Hannon of The Hannon Law Group, to explain the full extent of his argument on when non-clients could sue; wouldn't requiring lawyers to learn the business and adverse interests of a client's affiliates create a "pretty broad obligation" for lawyers, Farrell asked.
Hannon said that the D.C. Rules of Professional Conduct, which govern D.C. Bar members, offered guidance. The rules required attorneys and law firms to have systems in place to check for conflicts involving a client and a client's constituents, he said. Even absent a formal attorney-client relationship, which might knock out a legal malpractice claim, Hannon said, Boston-Maine should still be allowed to ask a jury to decide whether Sheppard had a duty of care to Boston-Maine's corporate family.
Alan Strasser of Robbins, Russell, Englert, Orseck, Untereiner & Sauber, lead counsel for Sheppard and co-defendant former partner John Fornaciari, said that the Rules of Professional Conduct stated that a lawyer hired for a specific purpose didn't have an obligation to learn about all matters in which a client might have an interest. Strasser and Judge Roy McLeese III went back and forth about how much weight judges could give the rules, with Strasser saying that they could be used as a guide on the standard of care, but not to determine which parties a lawyer owed a duty.
McLeese asked about what's known as an "alter-ego theory," in which a lawyer could owe a duty to one company if he or she knew that it was the alter ego of a client. Strasser said there is some flexibility for those types of situations, but that wasn't at play in the Boston-Maine case. Strasser said there was no evidence that Fornaciari knew about Boston-Maine, let alone that he had a duty to the company.
Boston-Maine, which was affiliated with Pan American Airways Corp. and Pan American Railways Inc. blamed Sheppard for a bad outcome in proceedings before the U.S. Department of Transportation.
Sheppard had represented the two Pan Am companies in other matters, as well as their shared owner, Timothy Mellon. According to filings, a shared general counsel for Boston-Maine and the Pan Am companies, John Nadolny, approached Fornaciari in May 2005, asking for confidential advice. Nadolny revealed that he had forged the signature on a surety bond in a matter involving Pan Am Airways. Fornaciari didn't disclose the forgery to any of the Pan Am companies.
Several weeks later, Nadolny's forgery was brought to the attention of the Transportation Department, which was weighing an application from Boston-Maine to expand its airline business. The department later denied Boston-Maine's application and revoked its certificate to provide air transportation, citing mismanagement and a lack of financial fitness.
Boston-Maine, Pan Am Airways, and Pan Am Railways sued Sheppard and Fornaciari. Sheppard attacked Boston-Maine's claims, arguing that there was no duty of care and that Boston-Maine couldn't prove that the firm's actions caused the Transportation Department's decision. Superior Court Judge Anita Josey-Herring found that although the issue of causation was unsettled, the lack of an attorney-client relationship was fatal to Boston-Maine's case.
The two Pan Am companies eventually reached an agreement with Sheppard to voluntarily dismiss their claims and for Sheppard to drop its counterclaims.
Today, Hannon said that Fornaciari had an obligation to blow the whistle on Nadolny as soon as Fornaciari learned what happened. Hannon, pointing to an earlier decision in the case by a trial judge, said that the "totality" of circumstances should determine whether a lawyer owed a duty – in this case, to warn the Pan Am companies. Had Fornaciari disclosed what he learned about Nadolny right away, Boston-Maine could have taken steps to minimize damage in the Transportation Department proceedings, Hannon said.
But Strasser said there was no proof that learning about Nadolny's action three weeks in advance would have made any difference. He pointed to the fact that the Transportation Department based its decision on mismanagement as well as the lack of funds.
Judge Anna Blackburne-Rigsby, who was not in court today, is also on the three-judge panel deciding the case.