A vast majority of professional malpractice matters arise from an alleged conflict of interest. Legal malpractice claims, for example, most frequently involve conflicts of interest; a whopping 46% according to a recent study. Perhaps this is no surprise. According to one scholar, the “exercise of his independent professional judgment” goes to the “heart of the skills” which a professional offers to his client. Thus, lawsuits typically follow in the event of a breach – or perceived breach – of that independence. Of course, there is no bright line test that delineates what a client may perceive as a conflict and therefore the conflict of interest waiver may be the professional’s saving grace.
The recent decision issued by the 7th Circuit in French v. Wachovia Bank, NA is instructive on this point. Plaintiff Jim French founded a successful manufacturing firm in 1968 that he sold 30 years later for approximately $200 million. Following the advice of his estate attorney, French established a trust to benefit his children. Those trusts were eventually managed by Defendant Wachovia Bank. Upon receipt of the trusts, Wachovia recommended that they be replaced to lower French’s premium. French and his lawyers agreed to this change but balked when they learned that a Wachovia affiliate would serve as the broker for the insurance exchange and therefore would be entitled to a hefty commission (over $500,000). When French’s children subsequently learned of the commission they sued Wachovia claiming that it breached its fiduciary duty and engaged in self-dealing.
The district court rejected the claim due to the express conflict-of-interest waiver in the trust documents. Specifically, the documentation that French executed included a “broad release of ‘any claim’ arising out of Wachovia’s purchase of new insurance on behalf of the trust.” As interpreted by the trial court, and upheld on appeal, the contractual trust documentation “specifically allows the trustee to deal ‘without regard to conflicts of interest.’”
Adding insult to injury, the court ordered the Frenches to pay the bank’s costs and attorney’s fees.
A conflict of interest is only a problem if it is not disclosed and/or it is not waived. Here, the legal team that drafted the waiver saved Wachovia hundreds of thousands of dollars. All professionals must be cognizant of the lurking conflict as well as the specific ethical rules that may govern the situation. Upon discovery of a potential independence issue, professionals must disclose, obtain a waiver, or disengage.