Commercial Law (Mgmt 348)

1. Commercial Law (Mgmt 348) Professional Liability and Accountability (Chapter 51) Professor Charles H. Smith Spring 2011

2. Introduction • Professionals – e.g., lawyers, accountants – can provide much assistance to their clients. • The evil flip side is that professionals can also inflict much damage to their clients. • Professionals are often held to high standards due to extent of their education, compensation and the traditional notion that a profession is not just a job or career – it is a calling.

3. Common Causes of Action in Lawsuits Against Professionals • Negligence – often called malpractice; most common cause of action; usually covered by insurance. • Negligent misrepresentation – false statement made while honestly believing in truth but having no reasonable ground for that belief. • Fraud – professional intentionally misrepresents or conceals facts. • Breach of contract – professional fails to perform contract with client. • Conversion/embezzlement – professional steals property/money entrusted by client.

4. Negligence – Generally • Refer to the elements of any negligence case • Defendant must owe duty of care to plaintiff, • Defendant must breach duty owed to plaintiff, and • This breach must cause damage to plaintiff. • But, some issues are unique to professional negligence cases as discussed in following slides.

5. Negligence – Duty of Care • What is the duty of care owed by a professional? – Refer to “standard of care” in the profession, such as • Accountants must possess skills and exercise care of ordinarily prudent accountant; ordinarily determined by generally-accepted accounting principles (GAAP) and generally-accepted auditing standards (GAAS); may be additional requirements based on statutes and/or cases. • Lawyers – reasonably competent general practitioner of ordinary skill, experience and capacity in same locality; if lawyer holds him/herself out as expert, then standard is one of expertise.

6. Negligence – Duty of Care cont. • How can lawyer decrease his/her duty of care? • Do not hold him/herself out as expert? • Expressly disclaim expertise in retainer agreement? • Examples of areas of “expertise.”

7. Negligence – Duty of Care cont. • To whom is the duty of care owed? • Traditionally, duty owed only to client and not third parties who might rely on professional’s work. • Currently, some states and the Restatement (Second) of Torts increase the scope of the duty owed to “foreseen users” – see page 1055 for 2-part standard. • Small number of states include “reasonably foreseeable” users. • Case studies – Ultramares Corp. v. Touche (page 1053); Reznor v. J. Artist Management, Inc. (pages 1053-54); Bily v. Arthur Young & Company, 3 Cal.4th 370 (1992) (see next slide for Bily).

8. Negligence – Duty of Care cont. • In Bily v. Arthur Young & Company, 3 Cal.4th 370 (1992) • Investors sued accountants based on accountants’ audit opinion of financial statements of company in which investors invested. • Company went bankrupt and investors alleged accountants’ negligence due to reliance on the audit opinion. • California Supreme Court held accountants had no professional negligence liability to investors since they were not accountants’ clients; irrelevant whether or not investors were foreseeable users (traditional view under Ultramares); however, see subsequent slide about potential liability for negligent misrepresentation and fraud.

9. Negligence – Duty of Care cont. • If lawyer retained by insurance company to defend insured commits negligence, can insurance company sue lawyer even though lawyer’s client technically was the insured? • Case study – Unigard Insurance Group v. O’Flaherty & Belgum, 38 Cal.App.4th 229 (1995) – insurance company has standing to sue because insurance company hired and paid lawyer to defend insured, but standing to sue conditioned on no conflict of interest between insurance company and insured.

10. Negligence – Breach • How can professional breach the duty of care? • Failure to follow applicable law; e.g., lawyer does not file client’s lawsuit before deadline set by statute of limitations. • Failure to comply with professional standards such as lawyers’ ethics codes; case study – In re Disciplinary Proceedings Against Inglimo (pages 1050-51).

11. Negligence – Causation and Damage • Causation – must be logical link or reasonable relationship between professional’s breach of duty of care and damage (financial loss) suffered by client. • Damage – any financial loss caused by professional’s negligence; e.g., lawyer fails to file lawsuit before statute of limitations expires, so client deprived of settlement/judgment (also, general damages such as emotional distress are available).

12. Negligent Misrepresentation and Fraud • Negligent misrepresentation made with honest belief in truth of statement but with no reasonable ground for that belief. • Fraud done with knowledge of statement’s falsity and intent to deceive plaintiff. • According to Bily case, Restatement standard applies so “foreseen users” can sue.

13. Breach of Contract • Professional-client relationship usually based on contract. • Therefore, professional’s failure to perform obligations stated in contract would be breach of contract. • Professional negligence is failure to perform so client usually just sues under negligence theory due to insurance coverage for negligence but not breach of contract.

14. Conversion/Embezzlement • Professionals often are entrusted with client’s property/money to be used for client’s purposes. • Conversion/embezzlement occurs when professional uses property/money for his/her own purposes; property/money is “converted” from client to lawyer’s use. • Example – lawyer receives settlement check and deposits it into client trust account for purpose of paying litigation expenses, experts and lawyer’s fee; instead, lawyer uses the money for personal expenses.