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holding that the punitive provisions of the Delaware Consumer Fraud Act were not applicable to attorney conduct occurring within the practice of law given the state supreme court's inherent, constitutional, and statutory authority to discipline members of the state bar; noting the lack of consensus in different jurisdictions as to the applicability of state consumer fraud acts to attorney conduct
Summary of this case from Kelly v. Palmer, Reifler, Associates, P.A.Opinion
CIVIL ACTION NO: 99C-10-022.
Date Submitted: May 9, 2000.
Date of Decision: August 31, 2000.
Mark D. Olson, Esquire, Wilson, Halbrook Bayard, 107 West Market Street, P.O. Box 690, Georgetown, Delaware 19947 and David G. Whitworth, Jr., Esquire, Whitworth, Smith, and Trunnell, P.A., 2101 Defense Highway, Croflon, Maryland 21114, attorneys for Plaintiff;
Wayne N. Elliott, Esquire, Prickett, Jones Elliott, 11 North State Street, Dover, Delaware 19901 and Lisa M. Mezzetti, Esquire and Leslie C. Esposito, Esquire, Cohen, Milstein, Hausfeld Toll, P.L.L.C., 1100 New York Avenue, Northwest, West Tower, Suite 500, Washington, D.C. 20005-3964, attorneys for Defendant.
MEMORANDUM OPINION
This matter is before the Court upon the Defendant's motion to dismiss the allegations of a violation of the Delaware Consumer Fraud Act as recited in Count IV of the Plaintiffs Complaint. For the reasons set forth below, the Court finds that regulation of attorneys is not contemplated by the Act. Count IV of the Complaint is therefore dismissed.
NATURE AND STATUS OF THE PROCEEDINGS AND STATEMENT OF FACTS
The present action arises out of an attorney-client relationship involving Michael Jamgochian ("Jamgochian") as President, Chairman of the Board and 100% stockholder in PKR Enterprises, Inc. ("PK.R"), a Maryland corporation, and Thomas Prousalis, Jr. ("Prousalis"), an attorney licensed to practice in the District of Columbia. Jamgochian hired Prousalis to assist in preparing the company for a both a private placement and an initial public offering ("IPO"):of stock in the company by obtaining an underwriter for the issuance of securities and performing other legal work associated with this transaction.
According to the allegations of the Complaint, Prousalis assured Jamgochian that the IPO could be realized within a six-month period, which was necessary due to Jamgochian's financial status. Prousalis secured the services of a brokerage firm, Stratton Oakmont, Inc. of New York, to underwrite and effectuate the IPO. Upon the counsel of Prousalis and Stratton Oakmont, Inc., Jamgochian consented to reincorporating PKR in Delaware and changing the name of the company to NuRx, Inc. for purposes of the IPO.
Apparently unknown to PKR and Jamgochian, the brokerage firm was under investigation by the Securities and Exchange Commission ("SEC") at the time and had been sanctioned by the National Association of Securities Dealers ("NASD") for dealings unrelated to the current matter. Eventually, the SEC upheld the NASD's sanction and suspended Stratton Oakmont's trading status. This eliminated any opportunity for PKR's planned private and public offerings of stock within the proposed period.
Following the collapse of the deal, Jamgochian, individually and on behalf of PKR, brought this suit. Jurisdiction is seated within the State of Delaware as a result of a forum selection and choice of law clause in the retainer agreement between PKR and Prousalis. Among the causes of action brought in this case are allegations of common law fraudulent and negligent misrepresentation, and legal malpractice. In addition, the Plaintiff sought recovery under the District of Columbia Consumer Protection Act and the Delaware Consumer Fraud Act.
Defendant, Prousalis, moved for dismissal of the Jamgochian's claims as an individual, as well as the allegations under the D.C. Consumer Protection Act and the Delaware Consumer Fraud Act. Following oral argument, the Court dismissed the action brought in an individual capacity, ruling that the attorney-client relationship existed only between PKR and Prousalis. In addition, the Court dismissed the putative claim under the D.C. Consumer Protection Act, but requested briefing on the issue of whether the Delaware Act is applicable. This is my decision on the issue.
STANDARD OF REVIEW
Where a motion to dismiss is supported by materials outside the pleadings, such a motion is reviewed as though it was a motion for summary judgment. Brown v. Colonial Chevrolet Co., Del. Super., 249 A.2d 439 (1968). In this case, since the Court requested briefing on the issue raised by the motion, it is incumbent upon the Court to examine the matter under the summary judgment standard of review.
Summary judgment is appropriate where there are no issues of material fact and the moving party is entitled to judgment as a matter of law. Super. Ct. Civ. R. 56(c). The moving party bears the burden of establishing the lack of any material fact issue. Moore v. Sizemore, Del. Super., 405 A.2d 679 (1979). The Court, after viewing the record in the light most favorable to the non-moving party and finding no issue of material fact, may grant summary judgment. Camac v. Hall, Del. Super., 698 A.2d 394 (1996). A material factual dispute exists when the parties disagree on the factual predicates necessary for the legal theory supporting a claim or providing a defense. Merrill v. Crothall-American, Inc., Del. Supr., 606 A.2d 96 (1992).
DISCUSSION
I. Applicability of the Act in General
The purpose of the Consumer Fraud Act is stated in 6 Del. C. § 2512. The Act is intended to protect consumers from unfair trade practices while engaged in the "conduct of any trade or commerce in part or wholly within this State." Therefore, relief is only available under the Act for unlawful practices occurring or performed partially or fully within Delaware. Goodrich v. E.F. Hutton Group, Inc., Del. Ch., 542 A.2d 1200 (1988). Bolstering this view is additional statutory language that requires the Attorney General to bring action against those involved in fraudulent practices in the Court of Chancery in the county in which the acts are alleged to have occurred. 6 Del. C. § 2522.
In support of its claim under the Act, plaintiff alleges in its Complaint that it was induced to reincorporate in the State of Delaware. The entire allegation reads: "Through, among other things, the incorporation of NuRx, Inc. in the State of Delaware, Defendant conducted trade or commerce in part within the State of Delaware." Complaint at Paragraph 68. Plaintiff levels no allegations that the incorporation process was performed fraudulently or resulted in anything less than the desired result — a properly and legally incorporated Delaware entity.
Thus, the present situation is analogous to that faced by the Hutton Court, wherein the Court noted the plaintiff alleged "only one connection between Hutton and Delaware: that Hutton `actively conducts business' here. There are no allegations, however, that any Delaware customer received any checks from Hutton, that any Delaware bank account was involved, or that any E.F. Hutton branch office was located in Delaware."Id at 1203. The Chancery Court concluded that because none of these allegedly fraudulent transactions occurred within this State, the Act could not apply, and the plaintiffs claim under the Act was dismissed.Id.
Similarly, the plaintiff in the instant case has not alleged any facts, which, if accepted as true, would establish that any unfair or deceptive act occurred wholly or in part within this State. Without any information providing additional nexus with the State of Delaware, this Court could find an adequate basis to dismiss Count V of the Complaint. Although this Court may well be within its authority to do so, considering the fact that the parties did not brief the issue, I decline to dismiss the Count on this basis alone. Therefore, I turn to the question of whether or not the attorney-client relationship is contemplated by the Act's protections.
A number of potential issues would have to be considered by the Court if it were to rely upon this basis alone. For example, Plaintiff could assert that the existence of the forum selection and choice of law clause in the retainer agreement establishes the necessary additional support for application of the Act. Deciding this matter in accord withHutton without allowing the parties the benefit of making their case in this regard would not serve the interests of fairness.
Applicability of Act to Attorney Conduct
While other jurisdictions have faced the same or similar circumstances interpreting their Consumer Fraud and Deceptive Trade Practices Acts with respect to their applicability to attorney conduct, this is an issue of first impression for the Delaware Courts. the paths of other jurisdictions have been divergent. A few have ruled that their Act does not apply to attorney conduct at all. See Cripe v. Leiter, III. Supr., 703 N.E.2d 100 (1998); Frahm v. Urkovich, III. App., 447 N.E.2d 1007 (1983); Vort v. Hollander, N.J. Super., 607 A.2d 1339 (1992); Rousseau v. Eshleman, N.H. Supr., 519 A.2d 243 (1986). Some states, such as Maryland, have statutorily excluded the practice of law, along with other professions requiring the use of discretion in their practice, from the purview of their Acts. Md. Code Ann., Coin. Law § 13-104 (1990 Supp. 1994); N.C. Gen. Stat. § 75-1.1(b) (1994); Ohio Rev. Code Ann. § 1345.01(A) (Baldwin 1988). At least one has taken the view that one section of its Deceptive Trade Practices Act applies to attorney conduct across the board. See DeBakey v. Staggs, Tex. App., 605 S.W.2d 631 (1980). Finally, a growing majority of jurisdictions have taken the position that some activities of attorneys may be governed by their consumer fraud acts. More often than not the courts draw a distinction between the commercial or entrepreneurial aspects of the profession and the "pure" practice of law. See Short v. Demopolis, Wash. Supr., 691 P.2d 163 (1984); Ivey v. Indian Harbor Properties, Inc., Conn. Supr., 461 A.2d 1369 (1983); Heslin v. Connecticut Law Clinic, Conn Supr., 461 A.2d 938 (1983); Matthews v. Berryman, Mont. Supr., 637 P.2d 822 (1981); Reed v. Allison Perrone, La. Ct. App., 376 So.2d 1067 (1979).
These jurisdictions have examined a number of factors in ruling on the applicability of their statutes to lawyer activity. While every state has enacted some sort of consumer protection act, these statutes can vary greatly in how they provide their safeguards. As such, the factors that Courts in other jurisdictions have made the basis of their decisions on this issue, while having some weight, are not necessarily definitive of the situation at hand.
Other states have looked to whether attorneys are engaged in `trade or commerce' under their applicable statute. Frahm, supra; Vort, supra. Some have examined the definition of consumers and how clients of attorneys fit within that definition. LJS Co. v. Marks, S.D. Fla., 480 F. Supp. 241 (1979); Roach v. Mead, Ore. Supr., 722 P.2d 1229 (1986). Still others have reviewed the issue with an eye toward whether the attorney-client relationship entails a "public wrong" or a "private conflict." Ivey, supra. A number have viewed the applicability of their respective Acts as a distinction between a lawyer engaged in the "actual practice of law" as opposed to "entrepreneurial aspects" that a law practice shares with other commercial enterprises. Short, supra.
Delaware's Supreme Court has adopted this distinction in other types of consumer transactions. In Young v. Joyce, Del. Supr., 351 A.2d 857 (1975), the Court ruled that an isolated, private real estate transaction was not covered by the Act. Subsequently, in Stephenson v. Capano Dev. Inc., Del. Supr., 462 A.2d 1069 (1983), the Court clarified the matter by applying the Act to those transactions between consumers and "those involved in the sale of real estate as a business or occupation." Id at 1073.
Each of these approaches has merit and helps shine some light upon the issue. None of them, however, gives divine guidance for this Court in this jurisdiction. The differences in consumer protection legislation, other statutory provisions, constitutional standards and underlying case law between this and all the jurisdictions that have faced the issue demand that Delaware's approach fit Delaware's statutory and constitutional standards. This Court could well decide this matter upon one or more of the factors above; however, my analysis rests upon a more fundamental ground. The Constitutional and statutory framework of the regulation of attorneys in this state preclude application of the Act, as written, to the conduct of lawyers.
A. Constitutional and Inherent Power Basis
The Supreme Court is granted the authority to regulate the court system for the efficient administration of justice, including the attorneys who practice before the bench. Constitution of the State of Delaware (1897), Art. IV, § 13; 10 Del. C. § 1906 .
This Code section states, in pertinent part: "There may be a competent number of persons of honest disposition and learned in the law, admitted by the Supreme Court of the State to practice as attorneys in the State. Attorneys, so admitted, shall behave themselves justly and faithfully in their practice; and if they misbehave themselves therein, they shall be subject to such disciplinary measures as the Supreme Court, in its discretion, may determine." This statute was first enacted as part of our organic laws derived from the Constitution of 1792. 1Del, Laws 133 (1797).
Control of the Bar by the Court is an ancient vestige of our legal system, derived from the common law of England. In Re Green, Del. Supr., 464 A.2d 881 (1983); Delaware State Bar Assoc'n v. Alexander, Del. Supr., 386 A.2d 652 (1978); Delaware Optometric Corporation v. Sherwood, Del. Supr., 128 A.2d 812 (1957). This power to regulate admission to and discipline of the Bar is inherent in the highest court of this state, "independent of any statutory grant of authority." In Re Member of the Bar, Del. Supr., 257 A.2d 382 (1969). According to the Supreme Court, the provisions of 10 Del. C. § 1906 "are nothing more than legislative recognition of the inherent powers of this Court." Id at 383. In deference to the long tradition and further recognition of the intrinsic powers of the Court, the legislature has not undertaken regulation of the Bar by statute. Sherwood at 816.
Past attempts to convey authority over the Bar to legislative or executive control have met with failure. One of the latest examples is "The Neal Bill" (S.D. 303 of the 132nd General Assembly), introduced and defeated in 1983. Winslow, Helen L. (ed.), The Delaware Bar in the Twentieth century 155 (1994).
Pursuant to this authority, the Court has promulgated rules governing the admission and conduct of attorneys as well as providing for the sanctioning of lawyers in violation of these regulations. See generally Supreme Court Rules, Part V — Attorneys; Board of Bar Examiners Rules; Delaware Lawyer's Rules of Professional Conduct; Rules of the Board of Professional Responsibility of the Supreme Court of Delaware; Rules of the Lawyer's Fund for Client Protection. Every aspect of a lawyer's practice is encompassed by these rules. Everything from admission procedures to responsibilities of an attorney leaving practice are regulated. Advertising, accounting of client funds, communication with clients, dealings with third parties, competence of the attorney, conflicts of interest, and the unauthorized practice of law are among the myriad subjects that these comprehensive rules contemplate. The penalty for attorney misconduct in violation of these rules may range from censure to fines to disbarment, subject to the recommendations of the Office of Disciplinary Counsel.
Advertising is one of the targeted areas of the Consumer Fraud Act. 6 Del. C. § 2511-13.
Clearly, the Supreme Court has an outstanding tradition of upholding its obligation of controlling the activities of the Bar. As evidenced by the promulgation of far-reaching and thorough rules and the efficient enforcement of them, the Supreme Court has guarded the public trust inherently implicated by the lawyer-client relationship. Its goal has been to "protect the public from incompetent and dishonest lawyers, and to assure that those admitted to the Bar possess the requisite attributes of good moral character, learning and ability." Green, supra, at 819.
This diligent protection of the public trust is mirrored by the stated intent of the Consumer Protection Act. Those purposes are set forth in 6 Del. C. § 25 12, which states:
The purpose of this subchapter shall be to protect consumers and legitimate business enterprises from unfair or deceptive merchandising practices in the conduct of any trade or commerce in part or wholly within this State. It is the intent of the General Assembly that such practices be swiftly stopped and that this subchapter shall be liberally construed and applied to promote its underlying purposes and policies.
It is clear to this Court that the strictures of the Supreme Court's regulation of 'attorneys more than satisfies this stated intent. That body moves swiftly and efficiently in the protection of clients and the greater public trust. The Supreme Court more closely controls the conduct of attorneys than the Consumer Fraud Act affects other business enterprises through its dictates.
A criticism has arisen in other jurisdictions that, although the Supreme Court may sanction an attorney for misbehavior, malfeasance directed toward a client resulting in the defrauding of that client is not satisfactorily assuaged by reprimanding, suspending or disbarring an attorney. The client is not made whole by such administrative action.
While this initially appears to have some merit, it is not particularly compelling upon further examination. First, there are other actionable remedies available to the client. He or she may pursue a malpractice action or a common law fraud action, as the plaintiff has done in other counts of this case. Second, the Supreme Court of Delaware has already made provision for returning ill-gotten attorney gains to defrauded clients. Supreme Court Rule 66 establishes a Lawyer's Fund for Client Protection. Attorneys contribute to the Fund as part of their annual dues. A client may make a claim on the Fund, subject to the established procedures, in instances where an attorney has defrauded him or her and the attorney is unable to make reparations.
B. Statutory Basis
There is, however, a caveat to this proposition that the Supreme Court holds ultimate sway over all things related to the admission and discipline of attorneys. The legislature certainly has the authority to enact laws that, in covering a broader range of interests, have an effect on the legal system. This is not so much of a usurpation of the Court's power as it is an incidental consequence of the enactment. For example, lawyers and law firms are required to pay taxes and purchase workers compensation insurance, are subject to anti-discrimination laws, and are liable for criminal activity. The question that confronts this Court is whether the Consumer Fraud Act is such a statute of broader application.
Even assuming, arguendo, that the Court's authority to regulate the Bar is not absolute,ample evidence exists to indicate that the legislature did not intend the strictures of the Act to apply to attorney conduct. Statutory construction precedent instructs that where a later statute is enacted and calls into question another act, it is assumed that the legislature had in mind the prior statute. Thus, each statute is to be read in such a manner to give full effect to every provision. Green v. County Council of Sussex County, Del. Ch., 415 A.2d 481 (1980). Further, where a provision is included in one statute, but omitted from the other, the Court must assume that the legislature intended the omission. Giuricich v. Emtrol Corp., Del. Supr., 449 A.2d 232 (1982) (en banc). Therefore, where the legislature has absolved itself of the responsibility and placed the duty of control upon the Supreme Court, it follows that, unless the legislature specifically notes otherwise in the subsequent enactment, the Supreme Court's authority remains unrestricted and controlling.
The legislature has enacted a handful of statutes affecting attorney conduct. For example, the General Assembly has mandated that attorneys take an oath before practicing and attorneys are granted notary power by statute. 10 Del. C. § 1907; 29 Del. C. § 4323(a)(3). By and large, though, the legislature has taken a hands-off attitude toward attorney conduct and delegated the majority of any authority it may have retained under the Constitution through passage of 10 Del. C. § 1906.
Further, the very nature of the Act itself weighs heavily against any inference that the General Assembly intended it to apply to the conduct of attorneys in their practice. The Consumer Fraud Act, while nominally a "protective" enactment for the benefit of consumers, has the effect of being a "punitive" statute. This alone would not necessarily preclude application to lawyers. After all, lawyers are subject to the criminal code. However, the disciplinary nature of this Act is specifically targeted toward the conduct of a business enterprise. The business of an attorney is his or her practice.
The grant of authority to the Supreme Court calls for attorneys to "behave themselves justly and faithfully in their practice, and if they misbehave themselves therein, they shall be subject to such disciplinary measures as the Supreme Court, in its discretion, may determine." 10 Del. C. § 1906 (Emphasis added.) In light of this language, it is clear to this Court that lawyers, engaged in the practice of law, are subject to discipline only by the Supreme Court. Since the Supreme Court holds at least a statutory monopoly over the discipline of attorneys, had the General Assembly wished to include attorney conduct under the Act's purview, that body would have specifically inserted such language to override the provisions of 10 Del. C. § 1906.
CONCLUSION
In light of the Supreme Court's inherent, Constitutional, and statutory authority to discipline members of the Bar, the punitive provisions of Delaware's Consumer Fraud Act are not applicable to attorney conduct occurring within the practice of law. As such, dismissal of the allegation of a violation of the Consumer fraud Act is warranted.
IT IS SO ORDERED.