APL-2015-00052
New York County Surrogate's Court File No. 2604/ 08
Qiourt of ~pp-eals
STATE OF NEW YORK
•••
Proceeding of KEVIN AOKI, KANA AOKI NOOTENBOOM, KYLE AOKI and
KENNETH PoDZIBA, as Trustees of the Benihana Protective Trust, for Relief with
Respect to the Benihana Protective Trust dated June 8, 1998 by and between
Rocky H. Aoki, as grantor, and Kevin Aoki and Darwin C. Dornbush, as trustees,
for the benefit of Rocky H. Aoki and others.
KEVIN AOKI, KANA AOKI NOOTENBOOM, KYLE AOKI
and KENNETH PODZIBA,
Respondents,
- against-
ECHO AOKI, OLIVIA YUMI NOOTENBOOM, NATALIE EMI NOOTENBOOM,
SKY AI AOKI, NOA AOKI, DEVON AOKI and STEVEN AOKI,
Respondents,
- and-
KEIKO ONO AOKI,
Appellant.
AMICUS CURIAE BRIEF OF LAW PROFESSOR
GEOFFREY C. HAZARD, JR., IN SUPPORT OF APPELLANT
Date Completed: December 31, 2015
LAUREN M. WEINSTEIN
MOLOLAMKEN LLP
The Watergate, Suite 660
600 New Hampshire Avenue, N .W.
Washington, D.C. 20037
(202) 556-2000 (telephone)
(202) 556-2001 (fax)
Attorney for Amicus Curiae
Law Professor Geoffrey C. Hazard, Jr.
TABLE OF CONTENTS
INTRODUCTION ..................................................................................................... 1
STATEMENT OF INTEREST .................................................................................. 2
BACKGROUND ....................................................................................................... 3
I. An Attorney's Duty of Undivided Loyalty ............................................... .3
II. Proceedings Below ..................................................................................... 4
A. The Irrevocable Release ..................................................................... 4
B. The Surrogate Court's Findings ......................................................... 5
C. The Appellate Division's Categorical Rule ........................................ 7
SUMMARY OF ARGUMENT ................................................................................. 8
ARGUMENT ............................................................................................................. 9
I. Dornbush and Shaw Violated Foundational Precepts of Attorney
Ethics .......................................................................................................... 9
A. Dornbush and Shaw Failed To Disclose a Conflict of Interest .......... 9
B. Dornbush and Shaw Failed To Adequately Advise Rocky
About the True Significance and Effect of the Irrevocable
Release .............................................................................................. 12
C. The Sensible and Ordinary Remedy Is To Invalidate the
Release .............................................................................................. 13
II. A Robust Constructive-Fraud Doctrine Is Needed To Ensure
That Clients Are Able To Repose Absolute Confidence in Their
Attorneys .................................................................................................. 14
A. The Constructive-Fraud Doctrine Should Apply Whenever a
Contracting Party Benefits from Fiduciary Disloyalty ..................... 15
B. A Flexible Constructive-Fraud Doctrine Promotes the Lawyer's
Duty ofLoyalty ................................................................................. 18
CONCLUSION ........................................................................................................ 20
11
TABLE OF AUTHORITIES
Page(s)
Cases
Matter of Aoki v. Aoki, 985 N.Y.S.2d 523 (1st Dep't 2014) ............................. 5, 7, 8
Baker v. Humphrey, 101 U.S. 494 (1879) ................................................................ .4
Callahan v. Callahan, 514 N.Y.S.2d 819 (3d Dep't 1987) ..................................... 17
Cardinale v. Golinello, 43 N.Y.2d 288 (1977) .......................................................... 9
Matter of Cooperman, 83 N.Y.2d 465 (1994) ........................................................... 3
Cowee v. Cornell, 75 N.Y. 91 (1878) ...................................................................... 15
Fisher v. Bishop, 108 N.Y. 25 (1888) ...................................................................... 16
Gardine v. Cottey, 230 S.W.2d 731 (Mo. 1950) ...................................................... 17
Greene v. Greene, 47 N.Y.2d 447 (1979) ................................................................. .4
GSI Commerce Sols., Inc. v. BabyCenter, LLC, 618 F.3d 204
(2d Cir. 2010) ...................................................................................................... 10
Matter of Kelly, 23 N.Y.2d 368 (1968) ...................................................... 3, 4, 10, 12
Olitkowski v. St. Casimir's Sav. & Loan Ass 'n, 4 N.W.2d 664
(Mich. 1942) ....................................................................................................... 17
People v. Gomberg, 38 N.Y.2d 307 (1975) ............................................................. 10
Matter ofPriestv. Hennessy, 51 N.Y.2d 62 (1980) ................................................ 10
Stockton v. Ford, 52 U.S. (11 How.) 232 (1850) ....................................................... 3
Other Authorities
Francis Bacon, Of Counsel, in The Essays of Francis Bacon (1846) ....................... .3
Model Rules ofProf'l Conduct (Am. Bar Ass'n 2015) ..................................... 10, 12
Restatement (Third) of the Law Governing Lawyers .............................. 3, 10, 11, 12
111
INTRODUCTION
In 2002, Rocky Aoki, the founder of the Benihana restaurant chain, signed a
release irrevocably disinheriting his wife from his restaurant fortune. Rocky had
not previously expressed any desire to exclude his wife from this inheritance.
Unbeknownst to Rocky, his lawyers, Darwin Dornbush and Norman Shaw, drafted
the document at the behest of Rocky's children. After hearing live testimony from
both Dornbush and Shaw, the trial court found that they never disclosed to Rocky
that they were simultaneously representing his children and that Dornbush and
Shaw never fully advised Rocky of the true purpose and effect of the document.
As the Surrogate's Court found, that is a prime example of constructive fraud.
Rocky's children exploited Dornbush's and Shaw's disloyalty to their advantage,
reaping the benefits of the irrevocable release, to solidify their control of their
father's business. As a result, the Surrogate concluded, the irrevocable release was
invalid.
The Appellate Division, however, announced a new categorical rule for
constructive fraud: An attorney's fiduciary disloyalty, it held, cannot invalidate the
release unless the attorney was a party to or had an interest in the subject
transaction. That categorical rule finds no support in this Court's precedent and
undermines the principle of undivided fiduciary loyalty that is at the heart of every
attorney-client relationship.
STATEMENT OF INTEREST
Geoffrey C. Hazard, Jr., is a leading expert on legal ethics in the United
States. He is a Columbia Law School graduate and an Emeritus Professor at Yale
Law School, University of Pennsylvania Law School, and University of
California's Hastings College of the Law. Professor Hazard is the author of The
Law of Lawyering (4th ed. 2014) (with W. William Hodes and Peter R. Jarvis), an
annually updated legal ethics treatise; and The Law and Ethics of Lawyering (5th
ed. 2010) (with Susan P. Koniak, Roger C. Cramton, George M. Cohen, and
W. Bradley Wendel), a textbook widely used in American law schools. Professor
Hazard was Reporter for the American Bar Association's Model Rules of
Professional Conduct promulgated in 1983. He frequently serves as an expert
witness and consultant on professional ethics issues, including legal malpractice.
From his academic and professional work related to legal ethics, Professor Hazard
has developed extensive knowledge of the legal issues presented that he believes
will be of special assistance to the Court in this appeal.
Professor Hazard, who is not being compensated in this matter, submits this
amicus brief in support of Appellant Keiko Ono Aoki and urges this Court to
reverse the Appellate Division's judgment.
2
BACKGROUND
I. AN ATTORNEY'S DUTY OF UNDIVIDED LOYALTY
This case concerns one of the most basic principles of the attorney-client
relationship: the lawyer's duty of undivided loyalty to his or her client. "There are
few of the business relations of life involving a higher trust and confidence than
that of attorney and client .... " Stockton v. Ford, 52 U.S. (11 How.) 232, 247
(1850); see Matter of Cooperman, 83 N.Y.2d 465, 472 (1994) ("[T]he greatest
trust between [people] is the trust of giving counsel." (quoting Bacon, Of Counsel,
in The Essays of Francis Bacon 181 (1846))). Clients entrust their attorneys with
their most sensitive problems. "Assurances of the lawyer's . . . loyalty are
therefore vital" and "[s]pecial safeguards are therefore necessary." See
Restatement (Third) of the Law Governing Lawyers § 16, cmt. b. Courts thus have
a duty "to be watchful and industrious" to ensure that clients' confidences "shall
not be used to [their] detriment or prejudice." Stockton, 52 U.S. (11 How.) at 247.
The duty of loyalty is a central tenet of a lawyer's fiduciary relationship with
a client. To fulfill that duty, an attorney must devote "a high degree of undivided
loyalty to his client." Matter of Kelly, 23 N.Y.2d 368, 375 (1968). That obligation
of undivided loyalty "superimposes onto the attorney-client relationship a set of
special and unique duties, including ... avoiding conflicts of interest." Matter of
Cooperman, 83 N.Y.2d at 472. "[W]ith rare and conditional exceptions, the
3
lawyer may not place himself in a position where a conflicting interest may, even
inadvertently, affect, or give the appearance of affecting, the obligations of the
professional relationship." Matter of Kelly, 23 N.Y.2d at 376; see also Greene v.
Greene, 47 N.Y.2d 447, 451 (1979) ("[A]ttorneys historically have been strictly
forbidden from placing themselves in a position where they must advance, or even
appear to advance, conflicting interests.").
A lawyer who fails to disclose a conflict of interest breaches the duty of
loyalty. That "breach of duty is 'constructive fraud,' and is sufficient" to void a
transaction. Baker v. Humphrey, 101 U.S. 494, 502 (1879). And where a lawyer
represents parties who have competing interests in the same subject matter,
disclosure may not cure the conflict. In that situation, "the likelihood of prejudice
to one party may be so great that misconduct will be found despite disclosure and
consent." Matter of Kelly, 23 N.Y.2d at 378.
II. PROCEEDINGS BELOW
A. The Irrevocable Release
For decades, Rocky Aoki, the founder of the Benihana restaurant chain, had
counted on his "trusted friend and attorney," Darwin Dornbush, to give him both
business and personal legal advice. RA 38; see also RA 645-46, 722-23. Rocky's
Benihana stock was held in a protective trust (the "Benihana Protective Trust").
RA 723. Dornbush and two of Rocky's children served as the three trustees of the
4
Benihana Protective Trust. Matter of Aoki v. Aoki, 985 N.Y.S.2d 523, 524 (1st
Dep't 2014).
Rocky married Keiko Ono Aoki in 2002. RA 723. Because the couple did
not have a prenuptial agreement, Rocky's children began to worry that "Keiko is
gonna take Dad's wealth." RA 18, 305. To prevent that, they turned to
Dornbush-Rocky's attorney. RA 18-19, 305, 308-09, 628. Although Rocky had
never expressed any desire to disinherit Keiko from his Benihana assets, Dornbush
enlisted the help of Norman Shaw, his law partner, to alleviate the children's
concerns. See RA 18, 319-20. Shaw ultimately drafted an irrevocable release that
was designed to eliminate Rocky's power to appoint trust assets to Keiko.
RA 398-401, 541, 661.
On September 24, 2002, Rocky signed the irrevocable release at Dornbush's
office. RA 21-22. Dornbush testified at trial that, at that meeting, he told Rocky
that, "when you sign this piece of paper, that means you will no longer be entitled
in your will to leave the [Benihana] stock to anyone who you choose. Right now
you can give it to the ASPCA. After you sign this piece of paper, you can only
leave it to your children." RA 365.
B. The Surrogate Court's Findings
After Rocky died in 2008, the trustees of the Benihana Protective Trust
petitioned the Surrogate's Court for a determination of the validity of the 2002
5
irrevocable release. The Surrogate initially held that Keiko offered sufficient
evidence to preclude summary judgment on the question of validity. See RA 733-
34. "It seems clear," the Surrogate observed, "that Dornbush had an impermissible
conflict of interest, and there is also no question that, when the [irrevocable]
Release was signed, neither he nor anyone else present informed Rocky of that
conflict." RA 726-27.
The case proceeded to a three-day bench trial on whether Rocky's signature
on the release was the product of constructive fraud. After weighing the credibility
of witnesses, the Surrogate found that Dornbush had committed
"misrepresentations, omissions or concealment" in the course of representing
Rocky. RA 42 (brackets and quotation marks omitted). According to the
Surrogate, Dornbush did not "clearly convey[] the meaning of [the release] to
Rocky, and may have even misled him." RA 43. Although Dornbush explained to
Rocky that, after signing the release, he could leave his Benihana stock only to his
children, RA 36, there was "no evidence that [Dornbush] told Rocky [the release]
was 'irrevocable,"' RA 42 n.51. Indeed, "the language [Dornbush and Shaw]
used" to explain the release, the Surrogate determined, "could easily have been
understood by Rocky as something less than 'irrevocable."' RA 35. Rocky, the
Surrogate thus concluded, did not understand that the release was irrevocable:
"Rocky had no idea that he had forever surrendered his power to appoint some or
6
all of [the Benihana Protective Trust] to Keiko .... " RA 38. Instead, the
Surrogate concluded that Rocky likely assumed that "he was always free to change
his mind." RA 35 n.42.
Because the Surrogate found that Rocky was not fully informed about the
release, and because a fiduciary relationship existed between Rocky and his
lawyers, the Surrogate held that the constructive-fraud doctrine shifted the burden
to the children to demonstrate that Rocky nevertheless signed the release
voluntarily. RA 40-41. Finding that "Rocky would not have signed the Release[]
had he understood [its] true import," RA 43, the Surrogate concluded that the
children failed to meet their burden, RA 40. The Surrogate therefore held that the
release was invalid. RA 44-45.
C. The Appellate Division's Categorical Rule
The Appellate Division did not disturb the Surrogate's factual findings.
Instead, it reversed based on a new categorical rule: "[F]or constructive fraud to
apply," it announced, "the fiduciary must be a party to or have an interest in the
subject transaction." Matter of Aoki, 985 N.Y.S.2d at 527 (emphasis added).
Finding that "neither Dornbush nor Shaw w[as a] part[y] to the release[] and thus
could not benefit from [it]," the Appellate Division concluded that the
constructive-fraud doctrine did not apply to this case. Id. Accordingly, it held that
Keiko had the burden "to prove that the release[] [was] ... procured by fraud." ld.
7
Disregarding the Surrogate's findings and credibility determinations, the Appellate
Division held that burden was not met. !d. at 528. This appeal followed.
SUMMARY OF ARGUMENT
This lawsuit involves professional misconduct. Rocky's trusted attorneys,
Darwin Dornbush and Norman Shaw, not only formed a simultaneous attorney-
client relationship with Rocky's children (whose interests were adverse to his), but
they also failed to disclose their divided representation to Rocky. Dornbush and
Shaw then failed to adequately advise Rocky about the true significance and effect
of his signing the irrevocable release. Although they explained that it meant he
could only leave his beneficial interest in the Benihana Protective Trust to his
children, they did not inform him that he could never change his mind. Relying on
those findings, and after a full bench trial, the Surrogate's Court held that the
irrevocable release was invalid. Because the children benefitted from Dornbush's
and Shaw's disloyalty, they had the burden of proving that Rocky understood and
voluntarily signed the release. Discrediting the lawyers' self-serving testimony,
the Surrogate held that the children could not meet that burden.
Ignoring the Surrogate's factual findings and credibility determinations, the
Appellate Division announced a new categorical rule: The constructive-fraud
doctrine, it held, only applies when the disloyal fiduciary was a party to or had an
interest in the subject transaction. That narrowing of the capacious and important
8
constructive-fraud doctrine should not be sustained. The doctrine has long been
used to remedy fiduciary disloyalty, regardless of litigation context. A robust
constructive-fraud doctrine is critical. It protects a client's entitlement to
undivided attorney loyalty and encourages clients to repose trust and confidence in
their attorneys without fear of becoming a victim of fiduciary disloyalty. Because
Rocky's children took advantage of Dornbush's and Shaw's disloyalty, the
irrevocable release should not be enforced.
ARGUMENT
I. DORNBUSH AND SHAW VIOLATED FOUNDATIONAL PRECEPTS OF
ATTORNEY ETHICS
This is a textbook case of attorney disloyalty. Dornbush and Shaw
simultaneously represented adverse parties: Rocky and Rocky's children. That
was a conflict of interest, and the failure to disclose it violated the duty of
undivided loyalty. And the disloyalty engendered precisely the result-harm to a
client-that the duty of loyalty seeks to avoid. Dornbush and Shaw failed to
disclose the true nature of the release to one client (Rocky), which induced Rocky
to sign it for the benefit of their other, undisclosed clients (Rocky's children).
A. Dornbush and Shaw Failed To Disclose a Conflict of Interest
"[A]n attorney must avoid not only the fact, but even the appearance, of
representing conflicting interests." Cardinale v. Golinello, 43 N.Y.2d 288, 296
( 1977). "Concurrent representation"-" an attorney's simultaneous representation
9
of one existing client in a matter adverse to another existing client"-often leads to
impermissible conflicts. GSI Commerce Sols., Inc. v. BabyCenter, LLC, 618 F.3d
204, 209 (2d Cir. 2010). In such a circumstance, "a lawyer shall not represent a
client" unless "each affected client gives informed consent, confirmed in writing."
Model Rules of Prof'l Conduct r. 1.7(a), (b)(4) (Am. Bar Ass'n 2015) (emphasis
added); see People v. Gomberg, 38 N.Y.2d 307, 314 (1975) ("Disclosure alone is
not enough. The lawyer may not act for the client unless the client has given his
informed consent to further representation."). Sometimes even disclosure and
consent will not suffice. Where a lawyer represents parties who have competing
interests in the same subject matter, "the likelihood of prejudice to one party may
be so great that misconduct will be found despite disclosure and consent." Matter
of Kelly, 23 N.Y.2d at 378.
Here, as the Surrogate found, Dornbush and Shaw formed an attorney-client
relationship with Rocky's children. The hallmarks of an attorney-client
relationship are not a written contract or an agreement to pay the lawyer. See
Restatement (Third) of the Law Governing Lawyers § 14, cmt. c. An attorney-client
relationship arises "when one contacts an attorney in his capacity as such for the
purpose of obtaining legal advice or services." Matter of Priest v. Hennessy, 51
N.Y.2d 62, 68-69 (1980). That is what happened here. Dornbush testified that
Rocky's children-not Rocky-contacted Dornbush to ask him to prevent Keiko
10
from "tak[ing] Dad's wealth." RA 18, 305. Shaw confirmed that testimony: One
of Rocky's sons, he testified, asked him if there were some way to protect Rocky's
assets. RA 628. Thus, as the Surrogate recognized when denying summary
judgment, Rocky's children "sought legal advice [from Dornbush] individually, as
potential beneficiaries of [the Trust]." RA 724 n.6 (emphasis in original)
(quotation marks omitted).
It was not merely that Rocky's children sought Dornbush's and Shaw's legal
advice; the lawyers provided that advice and legal assistance. "[A] lawyer may
manifest consent to creating a client-lawyer relationship ... by action, for example
by performing services requested by the client." Restatement (Third) of the Law
Governing Lawyers § 14, cmt. e. Dornbush and Shaw did precisely that here.
After the children contacted Dornbush, Shaw followed up by doing research and
reporting the results to Dornbush and one of Rocky's sons. RA 628. The solution,
Shaw reported, was for Rocky to release his power of appointment. /d. Shaw then
drafted the irrevocable release for Rocky to sign. See RA 724-25. An attorney-
client relationship was thus formed when the children contacted Dornbush to
obtain legal advice on how to prevent Keiko from "tak[ing] Dad's wealth," and
Dornbush and Shaw confirmed the attorney-client relationship by supplying the
advice and drafting a release to effectuate it.
11
As the Surrogate concluded in denying summary judgment, Dornbush and
Shaw "had an impermissible conflict of interest" because of their "simultaneous
representation" of Rocky and his children. RA 726-27 & n.14. Because they did
not disclose their divided representation, RA 727 n.14, the Surrogate correctly held
that Dornbush's and Shaw's actions were inconsistent with their duty of
"undivided loyalty" to Rocky, RA 728 n.16. Indeed, the Surrogate later confirmed
that the trial evidence "reinforce[ d] the charge of conflict of interest," showing that
Dornbush and Shaw had "violat[ed] ... their professional responsibility to Rocky."
RA 36. Simply put, the lawyers violated Rocky's trust by not disclosing the
conflict and obtaining his written, informed consent. See Matter of Kelly, 23
N.Y.2d at 378; Model Rules ofProf'l Conductr. 1.7(a), (b)(4).
B. Dornbush and Shaw Failed To Adequately Advise Rocky About
the True Significance and Effect of the Irrevocable Release
Dornbush and Shaw also failed to adequately inform Rocky of the nature
and consequences of the release. "A lawyer ... must explain a matter to the extent
reasonably necessary to permit the client to make informed decisions regarding the
representation." Restatement (Third) of the Law Governing Lawyers §20(3). "[A]
lawyer must ... proceed in a manner reasonably calculated to advance a client's
lawful objectives, as defined by the client after consultation .... " !d. § 16(1)
(emphasis added). As Rocky's lawyers, Dornbush and Shaw had a duty to advise
12
Rocky about all of the consequences of signing the release and to ensure that the
release reflected his desires.
The Surrogate found, however, that Rocky did not understand that the
release was irrevocable. RA 34, 38. His misunderstanding, the Surrogate further
found, stemmed from Dornbush's '"misrepresentation[s], omission[s] or conceal-
ment.'" RA 42. Dornbush and Shaw failed to explain that the release would
irrevocably bar Keiko from being a beneficiary of the Benihana Protective Trust.
Dornbush testified that he explained that Rocky " [could] only leave [his trust
assets] to [his] children"; but he never explained that Rocky could not change his
mind once he signed. RA 365-66. All told, the Surrogate found, "Rocky would
not have signed the Release[] had he understood [its] true import." RA 43.
C. The Sensible and Ordinary Remedy Is To Invalidate the Release
Dornbush's and Shaw's failure to fulfill multiple fiduciary duties reads like
an exam hypothetical. First, they formed an attorney-client relationship with
parties (Rocky's children) who were adverse to an existing client (Rocky). Next,
they failed to disclose that conflict to Rocky. Then, they failed to get informed
consent. Finally, acting under that undisclosed conflict of interest, they induced
Rocky to sign the release without telling him that it was irrevocable.
The constructive-fraud doctrine was designed to provide relief in exactly
that kind of factual scenario: where a party to a transaction unfairly profits from
13
attorney disloyalty. Rocky's children engaged Dornbush and Shaw knowing that
they represented Rocky; Dornbush and Shaw then concealed their divided loyalty
from Rocky while helping his children get what they wanted. Moreover, by
concealing the release's irrevocability, Dornbush and Shaw convinced Rocky to
sign the release for the benefit of Rocky's children, for whom (unbeknownst to
Rocky) the lawyers were also working. Because the children benefitted from
Dornbush's and Shaw's disloyalty, the Surrogate's Court correctly held that the
constructive-fraud doctrine should apply and that the children should have the
burden to prove that the release was valid.
II. A ROBUST CONSTRUCTIVE-FRAUD DOCTRINE Is NEEDED To ENSURE
THAT CLIENTS ARE ABLE To REPOSE ABSOLUTE CONFIDENCE IN THEIR
ATTORNEYS
If an attorney's duty of undivided loyalty is to have more than superficial
meaning, the constructive-fraud doctrine should remedy such breaches whenever
one contracting party benefits from that fiduciary's disloyalty. The Appellate
Division, however, limited the doctrine to cases where the disloyal attorney is a
party to, or has an interest in, the challenged transaction. That rule has no support
in this Court's precedent. It improperly limits the doctrine's necessarily flexible
scope. A robust constructive-fraud doctrine plays a critical role: In tandem with
basic principles of legal ethics, it ensure that clients can repose absolute trust in
their attorneys, with whom they share their most sensitive confidences. The
14
Appellate Division's new categorical rule would deprive victims of attorney
disloyalty of any effective remedy in third-party litigation.
A. The Constructive-Fraud Doctrine Should Apply Whenever a
Contracting Party Benefits from Fiduciary Disloyalty
The constructive-fraud doctrine has long applied whenever a party to a
contract benefits from fiduciary disloyalty. That broad approach is rooted in this
Court's explanation of the rule in Cowee v. Cornell, 75 N.Y. 91 (1878). There, this
Court held that "[w]henever ... the relations between the contracting parties
appear to be of such a character as to render it certain that they do not deal on
terms of equality," the burden of proving fraud "is shifted, the transaction is
presumed void, and it is incumbent upon the stronger party to show affirmatively
that no deception was practiced, no undue influence was used, and that all was fair,
open, voluntary and well understood." !d. at 99-100. One such circumstance
arises when one party gains an "unfair advantage in [the] transaction" that is
"derived from a fiduciary relation." !d. (emphasis added).
That is not to say, as Rocky's children assume, that one need only show that
a fiduciary relationship exists or that the fiduciary negligently failed to explain a
transaction. Resps.' Br. 4. One of the contracting parties must gain "superior
knowledge" about the transaction from "a fiduciary" and gain an "unfair
advantage" as a result. Cowee, 75 N.Y. at 99-100 (emphasis added). Here,
Rocky's children placed themselves in a superior position by obtaining the service
15
of Rocky's own lawyers; by having them draft a release Rocky did not even ask
for; by the lawyers' failure to disclose that the idea of a release originated with the
children for their benefit, not with Rocky's lawyers for his benefit; and by the
lawyers' failure to mention the irrevocable nature of the release. A more obvious
case of obtaining an unfair advantage, by exploiting a breach in a relationship of
absolute trust and confidence, is hard to imagine. The constructive-fraud doctrine
should apply whenever a contracting party profits from fiduciary disloyalty. That
describes this case perfectly.
This Court's case law confirms the constructive-fraud doctrine's breadth.
For example, in Fisher v. Bishop, 108 N.Y. 25 (1888), this Court invalidated a
mortgage and bond where a farmer's "legal adviser" had pressured him into
signing the mortgage. !d. at 27-28. Because his legal counsel had exercised
"undue influence," the court refused to uphold the mortgage:
One who has by reason of his supposed ability and integrity been
employed by another as a confidential adviser . . . occupies a
confidential position towards his employer, which, in good faith and
common honesty, should preclude him from taking advantage of his
situation, and using the information thus acquired to the detriment or
disadvantage ofhis employer.
!d. at 28-29. Because the farmer's creditors used the fiduciary disloyalty to their
advantage, the Court held that the burden of proof fell on the creditors to show that
the transaction had nevertheless been "just and fair." !d. at 29.
16
Other courts, both in this State and elsewhere, have followed the same
approach, broadly applying the constructive-fraud doctrine in cases of attorney
disloyalty-rather than limiting it to lawyer self-dealing. See Callahan v.
Callahan, 514 N.Y.S.2d 819, 821-22 (3d Dep't 1987) (wife stated claim for
constructive fraud where her husband's attorney had deceptively induced her to
agree to an unfavorable settlement agreement); Gardine v. Cottey, 230 S.W.2d
731, 739 (Mo. 1950) (en bane) (applying constructive-fraud doctrine where a
lawyer breached his fiduciary obligations by simultaneously representing a
husband and wife during a divorce and where the lawyer convinced the wife to
agree to an inequitable settlement); Olitkowski v. St. Casimir's Sav. & Loan Ass 'n,
4 N.W.2d 664, 666-68 (Mich. 1942) (applying constructive-fraud doctrine in a case
between a depositor and a bank where the depositor's attorney simultaneously
represented the bank and convinced depositor to make an ineligible transaction at
the bank).
Thus, a lawyer need not be a party to or have an interest in the "subject
transaction," as the Appellate Division held. The duty of loyalty cannot be cabined
as a prohibition on lawyers making secret profits or having undisclosed financial
interests. The duty of loyalty is far broader; so too is the constructive-fraud
doctrine. It cannot be that there is no remedy in the case where a lawyer betrays a
client in favor of the client's children, but there is a remedy where the lawyer
17
profits $10 by doing so. Whenever one of the contracting parties unjustly benefits
from a lawyer's disloyalty to the other party, the constructive-fraud doctrine
requires that party to bear the burden of showing the disloyalty in no way
influenced the result.
B. A Flexible Constructive-Fraud Doctrine Promotes the Lawyer's
Duty of Loyalty
A flexible constructive-fraud doctrine gtves effect to the principles of
fiduciary loyalty by requiring those who benefitted from fiduciary disloyalty to
bear the burden of justifying the fiduciary's questionable conduct. That burden
shifting is justified. Where a party's lawyer secretly advances an adverse party's
interests in a transaction, and the client agrees to that transaction based on the
lawyer's disloyal counsel, the adverse party surely should bear the burden of
proving the transaction was nevertheless just and fair.
This case provides a key example of why a flexible rule is warranted. In a
case of fraud based on attorney disloyalty, the lawyer is not always a party to the
litigation. Parties to the subject transaction should not profit from that fiduciary
disloyalty if the transaction is later challenged. The Appellate Division's contrary
rule would insulate a broad range of fraudulent conduct from review and would
strip clients of their entitlement to attorney loyalty where, as here, their attorney is
not a party in the transaction or resulting lawsuit. The Appellate Division's rule
thus eliminates a remedy for attorney misconduct, perpetuating the client's
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vulnerability to the disloyalty in actions involving third parties who benefit from
the fiduciary's betrayal. A robust constructive-fraud doctrine, by contrast, protects
vulnerable clients from fiduciary disloyalty, regardless of the context. The more
flexible rule also encourages clients to rely on their counsel's loyalty, without fear
that they will be left without a remedy in third-party litigation later on.
Applying the constructive-fraud doctrine to this case will not trigger the
parade of horribles that Rocky's children envision. See Resps.' Br. 4, 6. This is
not a typical legal-malpractice claim for failure to explain; it is not mere attorney
negligence. Here, Dornbush and Shaw secretly worked on behalf of their client's
counterparty and to their client's detriment. The irrevocable release was the
product of blatant fiduciary disloyalty. The constructive-fraud doctrine should
apply.
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CONCLUSION
This Court should reverse the Appellate Division's decision and reinstate the
Surrogate's decree invalidating the irrevocable release.
December 31, 20 15 Respectfully submitted,
~ /0.- ~s
LAUREN M. WEINSTEIN
MOLOLAMKEN LLP
The Watergate, Suite 660
600 New Hampshire Avenue, N. W.
Washington, D.C. 20037
(202) 556-2000 (telephone)
(202) 556-2001 (fax)
lweinstein@mololamken.com
Attorney for Amicus Curiae Law Professor Geoffrey C. Hazard, Jr.
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