NEW YORK COUNTY LAWYERS’ ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 683
TOPIC: REIMBURSEMENT BY CLIENT OF MONETARY SANCTIONS IMPOSED BY A COURT.
DIGEST: Under certain circumstances it is ethical for an attorney to accept reimbursement from a client of monetary sanctions imposed by a court.
CODE: Canon 7, EC 7-4, EC 7-5, EC 7-7, DR 4-101(C)(4), DR 6-102(A), DR 7-102.
May an attorney include in a retainer or other agreement with a client a provision requiring the latter to pay any sanctions which might be imposed in the future? After sanctions are imposed, may the attorney accept reimbursement from the client?
Both Federal and New York State law provide for the awarding of costs (attorneys’ fees and disbursements) and sanctions as a remedy for frivolous conduct. For example, Part 130 of the Rules of the Chief Administrator of the Courts (22 NYCRR) provides that a court in a civil action may award to a party or an attorney costs, financial sanctions or both against an attorney, a party, or both, for frivolous conduct. The rule outlines two factors for determining if conduct is frivolous: (1) if it is completely without merit in law or fact and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; or (2) if it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another.
Under the State rules, a court may make an award of costs or impose sanctions only upon a written decision setting forth the conduct on which the award or imposition is based, the reasons why the court found the conduct to be frivolous, and the reasons why the court found the amount awarded or imposed to be appropriate. 12 NYCRR 130-1.2.
Rule 11 of the Federal Rules of Civil Procedure permits a court to impose sanctions against an attorney or party or both if papers are filed which are not well grounded in fact or are not warranted by existing law or “a good faith argument for the extension, modification or reversal of existing law.” Sanctions may also be imposed if documents are “interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Rule 26(g) of the Federal Rule of Civil Procedure permits sanctions if discovery requests, responses or objections do not conform to Rule 11 or are unreasonable, unduly burdensome or expensive. A federal court, under 28 U.S.C. §1927, may also impose sanctions against an attorney who “so multiplies the proceedings in any case as to increase costs unreasonably and vexatiously.”
Significant public policies support the sanctions rules. As the New York Court of Appeals noted in A.G. Ship Maintenance Corp. v. Lezak, 511 N.Y.S.2d 216 (1986):
“[F]rivolous court proceedings present a growing problem which must be deterred. Indeed, the problem . . . extend[s] beyond the institution of vexatious litigation or the assertion of meritless defenses or counterclaims and includ[es] baseless procedures pursued to gain tactical advantage in a lawsuit or to exhaust an opponent. Such practices not only injure and debilitate the honest litigant, but they also waste judicial resources. . . . [T]he assessment of attorneys fees and disbursements has become the single most important device suggested to deter such misconduct.”
To a certain extent, the purpose of the sanction rules is to place upon the lawyer the burden for minimizing the number of frivolous actions and defenses that are brought.
We believe there are certain situations in which a lawyer may never shift the burden of costs and sanctions to a client. For example, where the court has specifically assessed costs and sanctions against the lawyer or the lawyer’s firm, it would violate public policy for the lawyer to shift the burden of the assessment to the client. See N.Y. City 1989-4 (1989). In addition, it would be improper for a lawyer to request reimbursement for sanctions imposed because of the lawyer’s negligence, recklessness, willful misconduct or malpractice.
Beyond these circumstances, there are three stages at which the shifting of costs or sanctions might be considered, Such a provision might be included in a retainer agreement, in an agreement requested by the attorney after commencement of the representation as a condition to taking certain specific action, or in an agreement made after sanctions are imposed. The remainder of this opinion discusses those three circumstances.
The Retainer Agreement
We believe it is inappropriate for a lawyer to agree with the client in the retainer agreement that the client will be liable for any costs and sanctions imposed. This situation is analogous to agreements prospectively limiting the lawyer’s liability to the client for malpractice. Cf. DR 6-102(A). Before a particular set of facts implicating possible sanctions arises, we believe it would be impossible for a lawyer to make full disclosure of the circumstances justifying, and for a client to give knowing consent to, a shifting of sanctions.
In Advance of Particular Action
We can foresee many instances in which an attorney in good faith believes there are grounds for an extension, modification or reversal of existing law, but believes that a court may disagree. Where the lawyer has explained to the client that proceeding may result in the imposition of costs or sanctions, and the client still wishes to pursue the claim or defense, we believe the lawyer may follow the client’s decision to proceed. In addition, although the lawyer may not request an unconditional indemnity against costs or sanctions that may be imposed against the lawyer, we believe the lawyer may request the client’s permission to disclose to the court the circumstances surrounding the decision to proceed and obtain the client’s agreement to pay any costs or sanctions not specifically imposed against the lawyer. Of course, the lawyer must provide full disclosure of the possibility that the court may take the client’s instruction to proceed as justifying the imposition of costs and sanctions solely against the client. Cf. Calloway v. Marvel Entertainment Group, 854 F.2d 1452, 1474 (2d Cir. 1988)(discussing circumstances in which it is appropriate to assess sanctions against the party rather than the lawyer); Eastway Constr. Corp. v. City of New York, 637 F. Supp. 558 (E.D.N.Y. 1986)(discussing allocation of sanctions between lawyer and client); BR 4-101 (C)(4)(without consent of client, lawyer may reveal confidences and secrets necessary to defend the lawyers against an accusation of wrongful conduct).
We believe that courts should be willing to impose costs or sanctions on clients in these circumstances. Canon 7 provides that a lawyer should represent a client zealously within the bounds of the law. DR 7-102 provides that an attorney is acting properly if a position is supported by a good faith argument for an extension, modification or reversal of existing law. EC 7-4 is of similar import. Moreover, EC 7-5 provides that an attorney “may continue in the representation of the client even though the client has elected to pursue a course of conduct contrary to the advice of the lawyer so long as the lawyer does not thereby knowingly assist the client to engage in illegal conduct or to take a frivolous legal position.” See N.Y. County 282 (1931) (lawyer may not obey orders of client in violation of Canons of Professional Ethics). EC 7-7 provides that “the authority to make decisions is exclusively that of the client and if made within the framework of the law, such decisions are binding on the lawyer.” We are concerned that a rule that would rigidly prohibit the allocation of costs or sanctions in all circumstances may cause lawyers to become overly conservative in their litigation strategy and clients will thus forfeit their right to zealous pursuit of their interests. See generally Rosiny, “Full Cost Shifting and Part 130: New York Version of Statutum Armorum”, New York Law Journal, April 20, 1990. A lawyer’s zeal on behalf of a willing client should not be dampened by an inflexible rule favoring imposition of monetary sanctions on lawyers under all circumstances.
After the Imposition of Sanctions
There are also limited circumstances under which it would be proper for the lawyer to obtain reimbursement from the client after sanctions and costs have been imposed by the court. One is where the costs and sanctions are not specifically imposed on the lawyer. Cf. DR 6-102(A). Another is where the lawyer reasonably believes that the court’s order would be reversed on reargument, reconsideration, renewal or appeal, agrees to forego such review at the request of the client in exchange for the client’s undertaking to reimburse the lawyer. The imposition of sanctions is often overturned on appeal. See, e.g., McMahon v. Shearson/American Express, Inc., 896 F.2d 17 (2d Cir. 1990); Securities Indus. Ass’n v. Clark, 898 F,2d 318 (2d Cir. 1990). Accordingly, the right to appeal is a valuable one. We believe that accepting a payment made to compensate the lawyer for giving up the right to apply for reargument, reconsideration or renewal or to take an appeal would not be unethical, as long as (1) the lawyer’s belief that the sanctions would be reversed is bona fide and well grounded in law; (2) the client is fully informed of the chances of success and any likely effect of such reconsideration on the client’s case or other interest; and (3) the client’s decision to reimburse counsel is voluntary and free from undue influence or pressure.
In requiring that the client’s decision to reimburse counsel be voluntary and free from pressure, we hasten to observe that the lawyer may possess confidences or secrets of the client that were not previously disclosed to the court and that might have a bearing upon the court’s review of the imposition of sanctions. Such information as would tend to exonerate counsel could be revealed to the court under DR 4-101 (C)(4), although the opportunities provided by law to introduce such additional facts to a reviewing authority are limited. It is appropriate for the lawyer to discuss with the client the possible revelation of such confidences and secrets in connection with the court’s review. Because of the right of self-defense recognized by DR 4-101 (C)(4) and the unfairness of imposing a burden on counsel which rightly should have been borne or shared by the client, we believe that the lawyer’s discussing such revelations with the client should not be deemed undue influence or pressure.
Under certain circumstances it is ethical for an attorney to request or accept reimbursement from a client of monetary sanctions imposed by a court.
November 15, 1990