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Answers to Summer 2014
California Bar Exam Questions

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Summer 2014 Bar Question 3

Professional Responsibility, Business Associations

  Question
 

Alice’s and Bob’s law firm, AB Law, is a limited liability partnership. The firm represents Sid, a computer manufacturer. Sid sued Renco, his chip supplier, for illegal price-fixing.

Renco’s lawyer asked Alice for a brief extension of time to respond to Sid’s interrogatories because he was going on a long-planned vacation. Sid told Alice not to grant the extension because Renco had gouged him on chip prices. She denied the request for an extension. Sid also told Alice that he’d had enough of Renco setting the case’s pace, so he wasn’t going to appear at his deposition scheduled by Renco for the next week, and that he’d pay his physician to write a note excusing him from appearing. Alice did nothing in response.

In the course of representing Sid, Alice learned that Sid planned a tender offer for the publicly-traded shares of chipmaker, Chipco. Alice bought 10,000 Chipco shares. By buying the 10,000 Chipco shares, she drove up the price that Sid had to pay by $1 million. When Alice sold the 10,000 Chipco shares, she realized a $200,000 profit.

1.What ethical violations, if any, has Alice committed regarding:

a. The discovery extension? Discuss.

b. The physician’s note? Discuss.

c. The Chipco tender offer? Discuss.

Answer according to California and ABA authorities.

2. What claims, if any, does Sid have against Alice, AB Law, and Bob? Discuss.

All questions © 2014 California State Bar Exam. All rights reserved

 
Answer

Professional Responsibility, Business Associations
Question 3, Summer 2014

1 Ethical violations.
a. Alice, Sid’s lawyer, denied Renco’s lawyer’s request for a short extension of time to answer interrogatories, at Sid’s insistence. Sid wanted revenge on Renco for price-gouging.
Duty of Fairness, Decisions. The client determines the objectives of suit; the attorney determines the means. Decisions concerning discovery are for the attorney to make, not the client. Sid’s reason for not wanting to extend the time for Renco to answer interrogatories was not related to any legitimate concern over the schedule of litigation. Alice violated her duty to be the sole arbiter of means of litigation.

Duty of Integrity to opposing counsel. An attorney has a duty as an officer of the court to treat cooperate with opposing counsel during discover.. Here, Alice violated her duty by treating refusing opposing counsel’s request for a short extension of time to answer interrogatories for no legitimate calendaring reason, but simply to enact revenge on the opposing party. This violates A’s duty of integrity.

b. A did nothing when her client said he would fail to appear for his scheduled deposition and that he would obtain a false excuse from his doctor.
Duty of Integrity to Opposing Counsel. A apparently did not inform opposing counsel that her client would not attend the deposition. This is also a violation of her duty of integrity.

Duty of Respect. An attorney should conduct him or herself in a manner above reproach so as to bring no disrespect on the profession. Here, A’s client is engaged in a feud with his opponent and is enlisting A to carry out dirty tricks toward the opponent. A has violated her duty of respect by helping her client to carry out unethical tactics that demean the practice of law.

c. Duty of Loyalty, independence of judgment. An attorney has a duty not to have a personal interest in the subject of representation that could interfere with the attorney’s independence of judgment in representing the client’s interests.

Here, A bought 10,000 shares of Chipco stok, knowing that her client, Sid, planned a tender offer for Chipco shares.

A now has her own business interest in a matter in which she knows her client has an interest.

A has a duty to inform Sid that she has acquired Chipco shares, and disclose that A’s personal interest is a potential conflict of interest. A must seek written waiver from Sid concerning her conflict.

A’s failure to disclose the conflict and seek a waiver violates her Duty of Loyalty, Independence of Judgment.

Duty of Loyalty, Confidences and Secrets. An attorney has a duty to maintain the confidentiality of any information she obtains during the course of representation, and not to use the information. Here, A learned of Sid’s plan to make a tender offer of Chipco stock while she represented Sid in litigation on chip price-fixing. This was a client secret.

A used the information when she purchased 10,000 shares of Chipco stock, hoping she would benefit from an increase in Chipco share price once Sid’s tender offer became public. This, in and of itself, is a violation of A’s duty of loyalty to maintain confidences and secrets.

However, A actually caused Sid economic harm by her use of the information. By buying the 10,000 shares, A drove up the price Sid had to pay in the tender offer by $1 million. While Sid’s financial loss is not necessary for the ethical violation, it raises a sepaate issue.

Therefore, A violated her duty of loyalty, by failing too maintain her client’s confidences and secrets.

2. A’s liability
Misappropriation of information about tender offers.
Under SEC law, a non-insider who acquires material nonpublic information about a tender offer and trades on it is liable, even in the absence of breach of a fiduciary duty. An outsider who misappropriates confidential information to personally benefit violates Section 10(b) because there is deception in connection with the purchase or sale of a security.

Here, A was not an insider of Chipco. A represented Sid’s company, and learned during the course of representing Sid that Sid was considering making a tender offer for Chipco. A used this information to trade in Chipco stock. A used the information by deceit. A did not tell Sid that she traded in Chipco stock. Sid was harmed by A’s trading, forcing Sid to raise the price of his tender offer by $1 million.

Under the SEC, A violated Section:10(b) and Section:14(e) for misappropriating confidential information. A could be convicted criminally for the 10(b) violations, as well as being personally liable to Sid for his losses.

Respondent.trading on nonpublic information about a tender offer, even though she was not a fiduciary either of the trading corporations.

Therefore, A is personally liable to Sid for the loss of $1 million A caused.

AB law. In a partnership, the partnership is liable for the acts of its partners that are in the course and scope of partnership business.. The partnership is liable for a partner’s actions under contracts and even negligence. But the partnership would not be liable for the crimes by the partner. A limited liability paratnership does not change the partnership’s liability for actions of partners.

 Course and scope? Here A probably intended to profit personally from trading in Chipco stock, and not to treat it as a partnership profit. Therefore AB is not liable for A’s SEC violations and Sid’s subsequent economic loss.

Crimes. Violations of 10(b)(5) under the SEC law are unlawful, and are prosecuted as crimes. A partnership is not liable for criminal acts by its partners.

Therefore, AB Law is not liable for A’s misappropriation of nonpublic information about the Chipco tender offer.

B’s liability. A limited liability partnership shields partners from the negligence of the other partners. Here, A’s 10(b)(5) violation is beyond negligence and is a crime. Further, Sid’s $1 million losses are a result of A’s SEC violation. Since B is shielded even from his partner, A’s negligence, B is certainly shielded from A’s.

 

Analysis and Answers © 2014 Vivian Dempsey, The Writing Edge™ All rights reserved.

 

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