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Attempted Release of Sanctions Liability by Law Firm Spells Trouble

By Oran F. Whiting, Litigation News Associate Editor – February 13, 2012


A standard mutual release between parties does not release counsel from sanctions liability, according to the U.S. Court of Appeals for the Third Circuit. The court also held that a conflict of interest arises if a lawyer attempts to include in such an agreement a release of his firm’s liability for sanctions.

Ferguson v. Valero Energy Corp., et al. involved a wrongful death and other claims arising from the death of a worker at an oil refinery. The U.S. District Court for the Eastern District of Pennsylvania made several pretrial in limine evidentiary rulings. These rulings limited, among others, questioning about the defendants’ desire to recoup profits lost during two major hurricanes; personnel shortages; and accidents at defendants’ other plants.

Plaintiff’s Firm Sanctioned for Multiplying Proceedings
The plaintiffs’ attorney repeatedly violated the district court’s orders during his opening statement, prompting defense counsel to move for a mistrial. Defense counsel withdrew the motion after a conference with the judge, a curative instruction to the jury, and a promise from the plaintiffs’ attorney to refrain from further inappropriate conduct.

Plaintiffs’ counsel continued violating the court’s orders during direct examination of his first and second witnesses, provoking a flurry of objections from defense counsel, nearly all of which the district court sustained. The court also deemed plaintiff's counsel’s behavior “very disturbing.” Defense counsel again moved for a mistrial. Neither the plaintiff’s attorney nor his law firm opposed the renewed motion.

The trial court granted the defendants’ motion for a mistrial and their subsequent motion for sanctions against both plaintiff’s counsel individually and his law firm—but not their client—pursuant to 28 U.S.C. §1927. The court also set a briefing schedule for a motion concerning the amount of sanctions.

Before the court set the amount of sanctions against the lawyer and his firm, the parties settled the wrongful death and other claims and executed what the district court referred to as a “routine settlement agreement.” The court subsequently ordered both the plaintiff’s counsel individually and his law firm to pay the defendants $100,436.25 in sanctions. Plaintiff’s counsel, through their attorneys who were retained solely to defend the sanctions motion, appealed.

Release Applied Only to Parties’ Liability.
Plaintiff’s counsel argued that sanctions were unwarranted because, among other reasons, the broad mutual release language in the parties’ settlement agreement. They asserted that because the release resolved “any and all differences and claims,” it included defendants’ “claim” for sanctions. The appellate court disagreed.

The appeals court found the settlement agreement did not in any way purport to release plaintiff’s counsel from liability as neither plaintiff’s counsel nor his firm was a party to the settlement. It stated, “[t]hat contract bound Plaintiffs and Defendants, and legal representatives are mentioned only in a paragraph in which Plaintiffs and their legal representatives agree to release Defendants from any and all claims.”

“The settlement agreement and release belongs to the client and ultimately to the parties,” says John C. Martin, Chicago, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “Anything substantive between counsel should be handled independently.”

“From a drafting perspective, the release should have contained language specifically dismissing, with prejudice, both the principal case and the sanctions motion, since both were pending simultaneously,” according to Jennifer B. Bechet, New Orleans, cochair of the Section of Litigation’s Ethics and Professionalism Committee. “Of course, this would run afoul of the ethics rules unless another attorney represented the plaintiffs’ attorney and his firm in the sanctions motion which, according to the district court’s written opinion, is what occurred.”

Concurrent Negotiation of Sanctions Motion a Conflict of Interest
The Third Circuit noted that had plaintiffs’ counsel and his firm negotiated their own release from sanctions during settlement negotiations regarding their clients’ action, they could have been subject to disciplinary action under the conflict-of-interest provisions of the Pennsylvania Rules of Professional Conduct. Rule 1.7 [PDF] states, in part, that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if there is a significant risk that the representation of one or more clients will be materially limited by a personal interest of the lawyer.”

“First, it is unethical for an attorney to use or accept the threat of sanctions to settle a case,” agrees Martin. “The pending sanctions motion presents an obvious conflict of interest because the lawyer now has a personal interest or stake in the outcome, which may supersede the clients’ interests. A lawyer cannot make his problem his client’s problem,” he adds.

 “A pending motion for sanctions against a lawyer generally makes the lawyer want to resolve his client’s case quickly,” concurs Bechet. “This desire could, consciously or subconsciously, cause the attorney to unduly pressure a client to settle the case for less than it is worth.”

“The lawyer must first acknowledge the existence of the conflict,” offers Martin. “This conflict must then be disclosed to the client so the client can determine whether to continue the relationship. Really careful lawyers will advise their clients to seek guidance from an independent attorney before proceeding,” he concludes.

The Supreme Court Concurs in Part
The Supreme Court’s January 12, 2012, decision in Maples v. Thomas further confirms that putting an attorney’s interest ahead of the client’s interest creates a conflict of interest. In Maples, the Court opined that a significant conflict of interest arose when a firm continued representing a client in a capital murder case after associates (who were no longer associated with the firm) missed a crucial filing deadline, resulting in a default judgment. Following the default, the firm’s interest in avoiding damage to its own reputation was at odds with the petitioner’s position, the Court held, and the firm should have resigned.

Keywords: sanctions, liability, Third Circuit, conflict of interest

Related Resources

  • » Ferguson v. Valero Energy Corp., et al., 2011 U.S. App. LEXIS 24167 (3d Cir. Dec. 6, 2011).
  • » Maples v. Thomas, 565 U. S. ____ (2012), No. 10-63, January 18, 2012.

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