In Pederson v. Barnes the Alaska Supreme Court was faced with the issue of the circumstances under which a guardian’s lawyer is liable to the ward for the guardian’s wrongdoing.
Aiken became Barnes’ guardian after Barnes’ parents died. (Barnes was a minor at that the time of their death.) Pederson represented Aiken in the proceedings to become Barnes guardian. In about two years the $111,000 estate was almost entirely dissipated.
Barnes sued Aiken and Pederson and another lawyer working with Pederson. The lawyers moved for summary judgment, arguing that they did not have any actual knowledge of wrongdoing by Aiken. The motion was denied, and the jury returned a verdict against Pederson for compensatory and punitive damages.
The Alaska Supreme Court ruled that "Section 51 of the Restatement (Third) of the Law Governing Lawyers articulates the correct standard for determining the circumstances in which a guardian’s lawyer owes a duty to the guardians ward. Section 51 explains that
a lawyer owes a duty to use care . . . .
(4) to a nonclient when and to the extent that:
(a) the lawyer’s client is a . . . guardian[;]
(b) the lawyer knows that appropriate action by the lawyer is necessary with respect to a matter
within the scope of the representation to prevent or rectify the breach of a fiduciary duty owed by the client to the nonclient, where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach;
(c) the nonclient is not reasonably able to protect its rights; and
(d) such a duty would not significantly impair the performance of the lawyer’s obligations to
Remember, however, how the Restatement defines actual knowledge. "The Restatement defines know as having actual knowledge or, alternatively, reason to know, which is further defined as having information from which a person of reasonable intelligence or of the superior intelligence of the actor would infer that the fact in question exists." (Restatement (Third) of the Law Governing Lawyers 51 cmt. h.)(emphasis added).
The Court held that there was sufficient evidence from which the jury could find that Pederson had "several warning signs of Aiken’s misconduct" and therefore "had enough information from which to infer, and thus had reason to know, that Aiken was defrauding [Barnes]."
However, the Court reversed the verdict on compensatory damages because, under Alaska law, liability was "several" rather than "joint and several." The Court also reversed and dismissed the punitive damage claim.
Once again, the case is Pederson v. Barnes, Supreme Court No. S- 11621 ( Alaska S. Ct. July 21, 2006). Read it here.
We adopt the Restatement standard and
conclude that liability exists only if the lawyer knew or had
reason to know of the wrongdoing.