Committee Reports

Formal Opinion 1995-13: Threatening Criminal Prosecution; Agreements to Forbear from Presenting Criminal Charges in Connection with Civil Settlements

Cite as: 1995 WL 877125 (N.Y.C.Assn.B.Comm.Prof.Jud.Eth.

Formal Opinion Number 1995-13 November 1, 1995

DIGEST: A lawyer who represents a client against whom both a civil suit and criminal charges could be brought may ethically offer to settle the civil claim on the condition that the adversary not bring the criminal matter to the attention of law-enforcement authorities. Settlements that include non- reporting agreements may not be enforceable, however, and non-reporting agreements themselves are fraught with numerous legal problems. Provided such an offer is first introduced into settlement discussions by the potential defendant, however, the lawyer for the aggrieved party may ethically negotiate a settlement that includes a non-reporting agreement.

Code: DRs 1-102(A)(3), (4), (5), 1-103(A), 7-102(A)(5), 7-105(A), 7-109(A); EC 7-21. QUESTIONS

1. May a lawyer who represents a client against whom both a civil suit and criminal charges could be brought offer to settle the civil claim on the condition that the adversary not bring the criminal matter to the attention of law-enforcement authorities?

2. If such an offer may lawfully be made, may the lawyer for the aggrieved party negotiate a settlement that includes such a non-reporting agreement? OPINION

Disciplinary Rule 7-105(A) of the New York Code of Professional Responsibility provides:

A lawyer shall not present, participate in presenting, or threaten to present criminal charges solely to obtain an advantage in a civil matter.

The rationale for this rule is stated in Ethical Consideration 7-21:

The civil adjudicative process is primarily designed for the settlement of disputes between parties, while the criminal process is designed for the protection of society as a whole. Threatening to use, or using, the criminal process to coerce adjustment of private civil claims or controversies is a subversion of that process; further, the person against whom the criminal process is so misused may be deterred from asserting legal rights and thus the usefulness of the civil process in settling private disputes is impaired. As in all cases of abuse of judicial process, the improper use of criminal process tends to diminish public confidence in our legal system.

DR 7-105(A) does not forbid a lawyer who is seeking civil remedies on a client’s behalf against a person who has also violated a criminal statute from reporting the crime to the appropriate authorities. ABA Inf. 1484 (1981); C.W. Wolfram, Modern Legal Ethics s 13.5.5, at 717 (1986). [FN1] The rule has, however, been broadly interpreted to forbid even veiled allusions in settlement discussions to an adversary’s potential criminal liability. See C.W. Wolfram, supra, at 717. [FN2] Consequently, a lawyer who represents the aggrieved party in a matter in which the potential defendant could have both civil and criminal liability may not suggest that the client would not report the crime if the potential defendant were to settle the civil claim satisfactorily. [FN3]

*2 From time to time, the question arises whether a lawyer who represents a person who may have criminal as well as civil liability is permitted by the ethics rules to offer to settle the civil claim in return for a promise that the client’s criminal conduct will not be brought to the attention of law- enforcement authorities. The question that necessarily follows is whether DR 7- 105(A) forbids the lawyer for the potential plaintiff/complaining witness ever to negotiate such an agreement, even when the potential defendant has initiated the discussion. [FN4]

Before addressing that issue, however, we believe it appropriate to sound a number of cautionary notes concerning agreements not to bring criminal matters to the attention of law enforcement officials.

A lawyer contemplating a settlement in a civil matter that includes an agreement not to report a crime may wish to consider whether there is a risk that the entire settlement could be held void as contrary to public policy, even if the settlement is not in itself illegal. See Corbin, Contracts s 1421 (3d ed.); Williston, Contracts s 1718 (3d ed.). It is a settled principle of the law of contracts that a settlement that extinguishes a civil obligation arising from an act that also creates a criminal liability is entirely legal and enforceable, even if it is made in apprehension of a criminal complaint or in the hope that no complaint will be made if the civil liability is settled. Corbin, supra, s 1421; Williston, supra, s 1719. If, however, such a settlement includes a promise, express or implied, not to report the crime, it has been held that neither side may avail itself of the usual contractual remedies against the other. Union Exchange Nat’l Bank v. Joseph, 231 N.Y. 250, 252 (1921). Consequently, a lawyer should not undertake to negotiate a settlement that includes a non-reporting agreement without full disclosure to the client that the presence of such an agreement may render the entire settlement unenforceable by either side. Should the aggrieved party choose to report the defendant’s conduct after the defendant has performed pursuant to the settlement, the defendant will not be able either to prevent a prosecution or to obtain damages. In the event of non-performance of settlement conditions by the potential defendant, on the other hand, the potential plaintiff may not be permitted by the courts to recover on the settlement because it contains a non- reporting agreement.

A lawyer representing the aggrieved party in a case in which there is potential criminal as well as civil liability should also be cautious when a potential defendant requests a non-reporting agreement because the aggrieved party threatened prosecution before seeking advice of counsel. In such a case, and particularly if the potential defendant remains unrepresented, the lawyer who represents the potential plaintiff/complaining witness must bear in mind that it is a form of extortion, punishable as a felony, to obtain property from a person by instilling in him or her a fear that, if the property is not delivered, the actor or another will accuse some person of a crime or cause criminal charges to be instituted against him. N.Y. Penal Law ss 155.05(2)(e), 155.30(6). It is an affirmative defense to this crime that the accused “reasonably believed the threatened charge to be true and that his sole purpose was to compel or induce the victim to take reasonable action to make good the wrong which was the subject of such threatened charge.” N.Y. Penal Law s 155.15(2). If it is unreasonable to believe that a crime was committed, or if the property sought from the potential defendant has a value in excess of that required to “make good the wrong,” the lawyer representing the potential plaintiff/complaining witness must withdraw the client’s threat. Otherwise, the lawyer risks becoming an accomplice to extortion, and violating DR 7-105(A) as well as DR 1-102(A)(3) (illegal conduct involving moral turpitude) and DR 1- 102(A)(4) (conduct involving dishonesty, fraud, deceit or misrepresentation).

*3 It must also be emphasized that an agreement not to report a crime cannot possibly be lawful if it goes beyond a promise by the victim not to initiate contact with government agencies responsible for enforcement of the criminal laws. The victim may not agree to falsify, suppress, alter or destroy physical or documentary evidence of the crime in the victim’s possession. See N.Y. Penal Law ss 215.40 (Tampering with Physical Evidence), 175.05/175.10 (Falsifying Business Records) & 205.50 (Hindering Prosecution). [FN5] The victim may not promise to refuse to comply with lawful subpoenas for such evidence or for the victim’s testimony, nor may the victim promise to testify falsely. See N.Y. Penal Law ss 215.50 (Criminal Contempt), 215.00 (Bribing a Witness) & 215.05 (Bribe Receiving by a Witness). The victim may not agree to misrepresent the cause of losses the victim suffered, nor to mischaracterize any recovery the victim has obtained in any official filings — tax returns, for example — that the victim is required to make. See N.Y. Penal Law s 175.35 (Offering a False Instrument for Filing). The potential defendant may not solicit any of the aforementioned conduct. See N.Y. Penal Law s 100.00/100.05 (Criminal Solicitation). In addition to the criminal statutes cited, a lawyer should be alert, in seeking to resolve any dispute in which enforcement of the criminal laws may be implicated, to DR 1-102(A)(5), which forbids a lawyer to engage in conduct prejudicial to the administration of justice.

Finally, the legality of every agreement not to report a crime is controlled by N.Y. Penal Law s 215.45, Compounding a Crime, which forbids offering or accepting “any benefit” [FN6] upon an understanding that, in return, criminal conduct will not be reported. [FN7] The statute provides an affirmative defense that excludes from criminal liability a person who offers or accepts a benefit upon a reasonable belief that the benefit was no more than the amount due as restitution or indemnification for the harm caused by the crime. N.Y. Penal Law s 215.45(2). This law places strict limits upon anyone who wishes to negotiate a civil settlement that includes an agreement not to report criminal conduct. First, one must have a reasonable belief that facts in the case support a criminal charge. See ABA 92-363. Second, any civil claim that is settled must arise from the same facts that give rise to the criminal charge. Third, any benefit conferred may be no more than the amount reasonably believed to constitute restitution or indemnification for the crime. [FN8]

Provided the agreement sought does not constitute “Compounding a Crime,” and does not contemplate the fabrication, concealment or destruction of evidence of the criminal conduct, the Code does not prevent a lawyer from seeking a non- reporting agreement for a client who could be charged with a crime. It is therefore our view that if a lawyer believes that the harm caused by a client’s criminal conduct can be repaired by the settlement of a directly related civil claim, the lawyer commits no impropriety in making an appropriate settlement offer contingent upon an assurance that the aggrieved party will not make a criminal complaint.

*4 The lawyer who represents a potential plaintiff/complaining witness, however, is forbidden by DR 7-105(A) from injecting the subject of the adversary’s possible criminal liability into settlement negotiations. This rule exists to prevent lawyers from assisting, encouraging or guiding clients in the use of the criminal justice system to serve purely personal ends. If the potential defendant perceives a risk of prosecution and introduces the possibility of forbearance into negotiations, the victim’s civic duty to assist in the detection and punishment of crime cannot be said to have been perverted into a strategy for recovery. [FN9] Indeed, if it is possible to make the victim whole for the damage caused by the crime, there is value for society, as well as for the parties, in resolution of the dispute without the expense of a prosecution. Accordingly, it is our opinion that DR 7-105(A) should not be extended beyond its clear language to require a lawyer to refrain from discussing a proposal first raised by counsel for a potential civil and criminal defendant to include a non-reporting agreement in an otherwise lawful civil settlement.

In conclusion, this Committee believes that a lawyer who represents a client against whom both a civil suit and criminal charges could be brought may, consistent with ethical requirements, offer to settle the civil claim on the condition that the adversary not bring the criminal matter to the attention of law-enforcement authorities. We further believe that when an otherwise lawful settlement offer by a potential criminal and civil defendant introduces into negotiations the possibility that the potential plaintiff will forbear from presenting a criminal complaint, the lawyer for the aggrieved party may negotiate a settlement that includes such a non-reporting agreement. Lawyers should caution their clients, however, that settlements including such agreements may not be enforceable, and that any such settlement must be strictly limited to compensation for the harm caused by the criminal conduct. CONCLUSION

Subject to the caveats set forth above, we answer the questions presented in the affirmative.

FN1 As it is the client in this situation who is the witness and may be required to testify in an eventual prosecution, the lawyer’s knowledge of the adversary’s criminal conduct should be treated as a client secret, pursuant to DR 4-101, to be disclosed only with the client’s consent.

FN2 Indeed, a threat to report an adversary to a purely civil enforcement agency of government has been held by one bar association ethics committee to violate DR 7-105(A). See N.Y. County 607 (1972).

FN3 Under the Model Rules, by contrast, a lawyer may offer a client’s forbearance from reporting an adversary’s alleged criminal conduct in return for settlement of the client’s civil claim, provided the criminal matter is related to the client’s civil claim, the lawyer has a well-founded belief that both the civil claim and the criminal charges are warranted by the law and the facts, and the lawyer does not attempt to exert or suggest improper influence over the criminal process. ABA 92-363.

FN4 This opinion addresses only negotiations between non-governmental parties. It does not address the issues that may be presented when one of the lawyers is in an official position to act or refrain from acting with respect to the bringing of criminal charges. See Cowles v. Brownell, 73 N.Y.2d 382 (1989); cf. Town of Newton v. Rumery, 480 U.S. 386 (1987).

FN5 Lawyers negotiating a non-reporting agreement are also forbidden by DR 7- 102(A)(5) from participating knowingly in the creation or preservation of false evidence, and by DR 7-109(A) from suppressing any evidence that the lawyer or the client has a legal obligation to reveal or produce.

FN6 “‘Benefit’ means any gain or advantage to the beneficiary and includes any gain or advantage to a third person pursuant to the desire or consent of the beneficiary.” N.Y. Penal Law s 10(17).

FN7 Penal Law s 215.45 provides:

1. A person is guilty of compounding a crime when:

(a) He solicits, accepts or agrees to accept any benefit upon an agreement or understanding that he will refrain from initiating a prosecution for a crime; or

(b) He confers or offers or agrees to confer, any benefit upon another person upon an agreement or understanding that such other person will refrain from initiating a prosecution for a crime.

2. In any prosecution under this section, it is an affirmative defense that the benefit did not exceed an amount which the defendant reasonably believed to be due as restitution or indemnification for harm caused by the crime.

Compounding a crime is a class A misdemeanor.

FN8 As used in the Penal Law, the term “restitution” means the return of the amount stolen, exclusive of interest, or of the value of stolen property, or of the property itself. N.Y. Penal Law s 60.27(5)(b). The Penal Law uses the term “reparation” to mean payments to make a victim whole for medical expenses to the date of sentence, or for other quantifiable losses. Id. The term “indemnification,” used in N.Y. Penal Law s 215.45, is not defined anywhere in the Penal Law. In referring to the “amount” of the benefit conferred, the statute appears to provide the affirmative defense only for cases in which a liquidated payment can be measured against a dollar amount of harm caused. The wording of the statute leaves open whether, in return for an agreement not to present criminal charges, one may offer or accept a benefit that is not easily susceptible of quantification.

FN9 A crime victim ordinarily has no legal obligation to bring criminal matters to the attention of law enforcement officials; however, some individuals and entities are required to report certain crimes. See, e.g., N.Y. Insurance Law s 405 (a person licensed to do insurance business in New York who has reason to believe that an insurance transaction may be fraudulent must report it to the insurance frauds bureau of the state Insurance Department); N.Y. Banking Law s 37(3) & 3 N.Y.C.R.R. s 300.1 et seq. (an institution organized, licensed or registered under the Banking Law must report, immediately upon discovery, crimes against the institution by outsiders as well as crimes, falsification of records and even non-criminal misconduct by officers, directors and employees). See also 12 C.F.R. s 353.1 (a bank must file the Interagency Criminal Referral Form in any case of a suspected criminal violation involving the bank by any executive officer, director or principal shareholder of the institution, as well as in any case involving a non-employee in which there is an actual or potential loss of one thousand dollars or more).

A lawyer who has knowledge, not protected as a confidence or secret, of misconduct by another lawyer that violates any subsection of DR 1-102(A) must “report such knowledge to a tribunal or other authority empowered to investigate or act upon such violation.” DR 1-103(A); Wieder v. Skala, 80 N.Y.2d 628 (1992). Such misconduct must be reported: it cannot be used to extract an advantage for a client. See In re Himmel, 125 Ill. 2d 531, 533 N.E.2d 790 (1988) (an attorney who was retained to recover a converted settlement payment from another attorney was suspended from practice for one year for agreeing, in return for a monetary settlement of the conversion claim, not to initiate criminal, civil or attorney disciplinary claims against the other attorney). See generally Association of the Bar of the City of New York, Committee on Professional Responsibility, The Attorney’s Duties to Report Misconduct of other Attorneys and to Report Fraud on a Tribunal, 47 The Record 905 (1992).