Legal Opinions in Business Transactions (Excluding the Remedies Opinions) -- May 2005, Revised October 2007. The Corporations Committee of The State Bar of California Business Law Section

III. Legal Standards Applicable to Preparation of an Opinion

A. Standard of Care

1. Generally

A lawyer is expected to be well informed and to exercise "such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks which they undertake."32 Restatement Section 52 states that "a lawyer who owes a duty of care must exercise the competence and diligence normally exercised by lawyers in similar circumstances."33 When a matter falls within a recognized area of legal specialty, such as tax or securities law, a more stringent "prudent expert rule" is generally applied.34

2. Customary Practice

The Restatement's articulation of the lawyer's duty of care as consisting of the "competence and diligence normally exercised by lawyers in similar circumstances" naturally calls for an examination of "customary practice" in assessing the lawyer's conduct; that is, the care that a competent lawyer, exercising customary diligence, would exercise in similar circumstances. Since the 1989 Report was published, a large body of commentary has developed describing customary practice in the preparation and interpretation of third-party opinion letters.35 This commentary, including this Report and the Remedies Report, may be consulted for guidance on customary practice in the preparation and interpretation of legal opinions.36 The Remedies Report contains an extensive discussion of the role of customary practice in preparing and interpreting the remedies opinion.37

However, there is currently no case law authority in California that definitively establishes customary practice as the touchstone by which to measure the due care exercised by an opinion giver in rendering a legal opinion. An examination of customary practice would appear to be called for by the Supreme Court's reference in Lucas v. Hamm to the "diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks which they undertake." 38 It is reasonable to expect that a California court examining the duty of care applicable to an opinion giver subject to the laws of California would give weight to the analysis and conclusions of commentaries regarding the role of customary practice.

In Smith v. Lewis, a 1975 decision, the California Supreme Court upheld a jury verdict of negligence against a family law lawyer for wrongly advising his client that her husband's retirement benefits were not community property.39 In upholding the jury's verdict, the Court (over the dissent of Justice Clark) articulated the lawyer's duty as follows:

As the jury was correctly instructed, an attorney does not ordinarily guarantee the soundness of his opinions and, accordingly, is not liable for every mistake he may make in his practice. He is expected, however, to possess knowledge of those plain and elementary principles of law which are commonly known by well informed attorneys, and to discover those additional rules of law which, although not commonly known, may readily be found by standard research techniques.40

The italicized language would be troubling if it were read to require an opinion giver to go beyond what customary practice would entail in conducting legal diligence in the preparation of a legal opinion: with electronic databases and the Internet, and with the right query to the right database, a first year law student might "readily" find virtually any law, rule, regulation, case or administrative decision. The test of the care exercised by an opinion giver in rendering an opinion should not be what the opinion giver could have found but what a competent lawyer, exercising customary diligence, would have found.41

This Report provides guidance on customary practice for opinion givers governed by California law in preparing and delivering legal opinions on the topics addressed. 42 The Committee has not independently evaluated the role that customary practice would play in court in establishing an opinion giver's due care in rendering an opinion letter. That evaluation is beyond the scope of this Report. The reader is invited to review Appendices 5 and 8 of the Remedies Report for such an evaluation.

The opinion preparers should devote the time needed to interpret and apply legal principles relevant to the situation at hand, ascertain (through appropriate inquiry and certificates of officers of the Company) the facts that underlie the opinion, and identify areas of significant uncertainty (if any) in the interpretation and application of legal principles. In certain cases, opinion givers may conclude that it is necessary to conduct research with respect to particular legal principles or to conduct an investigation of the underlying facts relevant to the opinion. Early consideration of the opinions requested will also afford the opinion preparers a better opportunity to identify potential problem areas and to negotiate an appropriate form of opinion or, if appropriate, to modify the structure or terms of the transaction.

B. Fraudulent or Misleading Opinions

An opinion giver may be liable for an opinion that constitutes fraudulent misrepresentation. A lawyer owes a duty to nonclients to refrain from fraudulent misrepresentation.43 One recent California case looked to the Restatement to identify obligations of lawyers to refrain from knowingly making false statements on behalf of a client.44

It is generally understood that, regardless of compliance with other standards, and even if an opinion is technically correct, a lawyer should not render an opinion that the lawyer recognizes would be misleading to the opinion recipient.45

C. Ethical Issues Relating to the Provision of Opinions to Nonclients

A lawyer delivering an opinion letter to a nonclient should also consider ethical principles. For example, rendering an opinion to a nonclient may conflict with the opinion giver's ethical obligations to maintain the confidences of its client. No California ethical rule directly addresses the giving of legal opinions to third parties, but California has strict rules regarding preservation of client confidences.46

The 2002 ABA Model Rules of Professional Conduct (the "ABA Model Rules") and the Restatement set forth similar standards for providing "evaluations" to third parties. A legal opinion to a third party is considered an evaluation for purposes of the ABA Model Rules and the Restatement. Rule 2.3 of the ABA Model Rules permits a lawyer to provide an evaluation for a nonclient's use when the lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer's relationship with the client.47 Section 95 of the Restatement states that a lawyer may provide a professional evaluation or an opinion to a nonclient in furtherance of the objectives of a client in that representation. Both the ABA Model Rules and the Restatement require, however, that a lawyer obtain the client's informed consent if the evaluation is reasonably likely to affect the client's interests materially and adversely.48

As a practical matter, third-party opinion letters are typically negotiated by the lawyers for the parties rather than by their respective clients. A lawyer should always consider whether rendering an opinion will lead to the disclosure of sensitive or confidential information about the client. The opinion giver should consult with the client and obtain the client's consent before disclosing confidential information to a third party.49

D. Inside Lawyers

An "inside" or "in-house" lawyer is one who is an employee of either the company for whom the opinion is delivered or an affiliated company. Inside lawyers often render opinions in business transactions. An inside lawyer is subject to the same standard of care as outside counsel. An inside lawyer signing an opinion letter acts not as an officer or employee of the Company but as an individual lawyer subject to the professional standards applicable to all lawyers. Inside lawyers may therefore wish to evaluate the indemnification and insurance policies of their employers before giving legal opinions.50

Endnotes

32 Lucas v. Hamm, 56 Cal. 2d 583, 591, 15 Cal. Rptr. 821, 825, cert. denied, 368 U.S. 987 (1961) (finding lawyer not liable for a violation of the rule against perpetuities because a lawyer of ordinary skill in similar circumstances might have made a similar error); Betts v. Allstate Ins. Co., 154 Cal. App. 3d 688, 715, 201 Cal. Rptr. 528, 544 (1984). See also RESTATEMENT (SECOND) OF THE LAW OF TORTS § 299A (1965) ("Unless he represents that he has greater or less skill or knowledge, one who undertakes to render services in the practice of a profession or trade is required to exercise the skill and knowledge normally possessed by members of that profession or trade in good standing in similar communities."). The California Rules of Professional Conduct (the "Rules of Conduct") state the obligation in the negative: "A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence." Rule 3-110(A). "Competence" in any legal services is defined to mean the diligence, learning and skill, and mental, emotional, and physical ability reasonably necessary for performance of such service. Rule 3-110(B). Back

33 Under the Restatement, a lawyer owes a duty to use care to certain nonclients, including a nonclient when and to the extent that "the lawyer or (with the lawyer's acquiescence) the lawyer's client invites the nonclient to rely on the lawyer's opinion or provision of other legal services, and the nonclient so relies...." RESTATEMENT § 51(2)(a). Back

34 When a legal matter falls within an officially or commonly recognized legal specialty, courts have imposed a duty on the lawyer to refer the client to a specialist (or to recommend a specialist) "if under the circumstances a reasonably careful and skilled lawyer would do so." Horne v. Peckham, 97 Cal. App. 3d 404, 414, 158 Cal. Rptr. 714, 720 (1979). Note that Horne was overruled on other grounds by ITT Small Business Corp. v. Niles, 9 Cal. 4th 245, 36 Cal. Rptr. 2d 552 (1994), which was overruled four years later by Jordache v. Brobeck, Phleger & Harrison, 18 Cal. 4th 739, 76 Cal. Rptr. 2d 749 (1998). Rule 3-110(C) of the Rules of Conduct provides that if a member does not have sufficient learning and skill when the legal service is undertaken, then the member may nonetheless perform such services competently by (i) associating with or, where appropriate, professionally consulting another lawyer reasonably believed to be competent, or (ii) by acquiring sufficient learning and skill before performance is required. Lawyers rendering advice with respect to matters falling within a recognized legal specialty have been judged by the standard of whether they possessed the knowledge and skill ordinarily possessed, and whether they exercised the case and skill ordinarily used, by a specialist in similar circumstances. See Horne, 97 Cal. App. 3d at 414; see also Wright v. Williams, 47 Cal. App. 3d 802, 809, 121 Cal. Rptr. 194, 199 (1975). If due care is exercised in referring to a specialist, the referring lawyer should have no liability as a result of the specialist's negligent actions. See also comment d to RESTATEMENT § 52. Back

35 See TriBar Report; ABA Principles; ABA Guidelines; TriBar Opinion Committee, Special Report of the TriBar Opinion Committee: The Remedies Opinion -- Deciding When to Include Exceptions and Assumptions, 59 BUS. LAW. 1483 (2004); SEC Filings Report; Special Report of the Task Force on Securities Law Opinions, ABA Section of Business Law, Negative Assurance in Securities Offerings, 59 BUS. LAW. 1513 (2004) [hereinafter Negative Assurance Report]; Committee on Legal Opinions, ABA Section of Business Law, Law Office Opinion Practices, 60 BUS. LAW. 327 (2004); Donald W. Glazer, Scott FitzGibbon & Steven O. Weise, GLAZER AND FITZGIBBON ON LEGAL OPINIONS: DRAFTING, INTERPRETING AND SUPPORTING CLOSING OPINIONS IN BUSINESS TRANSACTIONS (2d ed. 2001) [hereinafter GLAZER & FITZGIBBON]. Back

36 The Reporter of the Restatement, Professor Wolfram, cites this commentary as having been "instrumental in furthering understanding of the evaluation process and contributing to uniformity in practice among lawyers issuing legal opinions." RESTATEMENT § 95, Reporter's Note, comment b. Back

37 See Appendix 8 ("Application of Customary Practice to the Remedies Opinion") to the Remedies Report. Back

38 See note 32. Back

39 Smith v. Lewis, 13 Cal. 3d 349, 118 Cal. Rptr. 621 (1975). Back

40 13 Cal. 3d at 358, 118 Cal. Rptr. 627 (emphasis added). See also Stanley v. Richmond, 35 Cal. App. 4th 1070, 1092, 41 Cal. Rptr. 2d 768, 780 (1995). Back

41 For the Remedies Report's analysis of Smith v. Lewis, see Appendix 8, Section III.B.2 to the Remedies Report. Back

42 Based upon its review of the TriBar Report and the other bar association reports referred to in this Report, the Committee believes that the customary practice it describes in this Report as followed by California practitioners is substantially similar to national customary practice. Back

43 See Cicone v. URS Corp., 183 Cal. App. 3d 194, 120-21, 227 Cal. Rptr. 887, 890-91 (1986) (holding a lawyer liable to a non-client for intentionally tortious fraudulent statements without the duty or public policy limitations of a negligence claim); Shafer v. Berger, Kahn, Safton, Moss, Figler, Simon & Gladstone, 107 Cal. App. 4th 54, 131 Cal. Rptr. 2d 777 (2003) (allowing a claim against a lawyer by non-clients for fraudulent misrepresentation); Vega v. Jones, Day, Reavis & Pogue, 121 Cal. App. 4th 282, 17 Cal. Rptr. 3d 26 (2004) (finding law firm for buyer of company in merger transaction could be liable to seller based on allegations that law firm "actively conceal[ed]" information from seller after undertaking to disclose information). See also William Freivogel, The Ethics and Lawyer Liability Issues Raised by Third-Party Opinion Letters 228-29, 230-32 (Practising Law Institute, Corporate Law and Practice Course Handbook Series, PLI Order No. B0-002V, 1998) (indicating the biggest risks in issuing opinions, based on settled malpractice claims, are client fraud and conflict of interest). Back

44 See Shafer, 107 Cal. App. 4th 54, 131 Cal. Rptr. 2d 777 (2003) ("A lawyer communicating on behalf of a client with a nonclient may not ... knowingly make a false statement of material fact ... to the nonclient.") (ellipses in original) (quoting RESTATEMENT § 98). Back

45 See Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57 Cal. App. 3d 104, 128 Cal. Rptr 901 (1976). In this case the Court of Appeal reviewed a judgment of dismissal entered by the trial court, following its granting of defendants' demurrer. The Court of Appeal reversed the judgment. Plaintiff alleged that the defendant law firm had rendered an opinion to a general partnership, at the partnership's request, with the knowledge that the opinion would be shown to plaintiff, a prospective creditor of the partnership. The firm rendered its opinion that the partnership was a duly organized general partnership, consisting of 14 individuals who were general partners of the partnership. Plaintiff alleged that (i) at the time the opinion was rendered, the firm knew that a large number of the partners did not believe the partnership to be a general partnership, and (ii) the firm failed to disclose this knowledge to plaintiff. Under these alleged facts, the Court found that plaintiff had stated a cause of action for negligent misrepresentation:

Even though defendants may have believed that there was a general partnership in spite of the claims of some of the general partners, the firm had a duty to reveal to plaintiff this doubt as to the status of the partnership as a general partnership, since the firm knew that disclosure of this doubt might well be determinative of plaintiff's decision to make loans to [the partnership].

57 Cal. App. 3d at 111.

The Ball Hunt case is now generally understood to stand for the proposition that a lawyer may not render a misleading opinion. See also TriBar Report §§ 1.4(d), 1.9(m); ABA Guidelines § 1.5. Back

46 All California lawyers should be sensitive to the requirements of Business and Professions Code Section 6068(e), which requires a California lawyer to maintain client secrets "at every peril to himself or herself." CAL. BUS. & PROF. CODE § 6068(e). The closest comparable provisions of the Model Rules of Professional Conduct are found in Rule 1.6, but that rule is primarily useful to California lawyers only to demonstrate obligations that are subsumed within Business and Professions Code Section 6068(e). See MODEL RULES OF PROF'L CONDUCT R. 1.6. Back

47 MODEL RULES OF PROF'L CONDUCT R. 2.3. Back

48 See also MODEL RULES OF PROF'L CONDUCT R. 2.3; RESTATEMENT § 95. The Rules of Conduct (as amended through July 1, 2004) have no counterpart to Model Rule 2.3 or Restatement § 95. See CAL. RULES OF PROF'L CONDUCT (2004). Back

49 See Appendix 4 ("Report of Threshold Committee") to the Remedies Report, Section II(B), discussing certain ethical issues in the context of remedies opinions. Back

50 See Comm. on Legal Opinions, American Bar Association, Closing Opinions of Inside Counsel, 58 BUS. LAW. 1127 (2003) [hereinafter Inside Counsel Report]; Carolyn Harris, Personal Liability for In-House Legal Opinions--Is it Worth the Risk, BUS. LAW NEWS, Volume XXII, Issue 2 (2003). Back

IV. Preparation of the Opinion Letter / Table of Contents