People v. Stender: Important Tool in the Anti-Fraud Arsenal or Danger to All Lawyers?
LACBA Update, April 2013
By Clare Pastore, member of LACBA's Professional Responsibility and Ethics Committee, and Professor of the Practice of Law at the USC Gould School of Law, where she teaches professional responsibility. The views expressed are her own.
The setting for People v. Stender, 212 Cal. App. 4th 614 (2013), is that unsavory sector of immigration practice where vulnerable and unsophisticated clients are often easy prey for unscrupulous attorneys, “notarios,” and others who take money—often a client’s life savings—and leave a trail of broken promises and unresolved legal problems. One such attorney was Martin Resendez Guajardo, who resigned from the California Bar with charges pending in April 2008, after three prior impositions of discipline dating back to 1992.
Around the time of Guajardo’s 2008 resignation, attorney Christopher Stender, licensed in two states but not California, acquired Guajardo’s practice, changed its name to “Immigration Practice Group P.C.” (IPG), and registered it as a law corporation with the California Bar pursuant to Business and Professions Code Section 6160 et seq. Stender employed Guajardo at IPG from the time of purchase until sometime in 2010.
In November 2010, the San Francisco City Attorney sued Guajardo, Stender, and IPG, calling Guajardo “one of San Francisco’s most notorious predators,” and alleging claims under California’s Unfair Competition Law (UCL), Business and Professions Code Section 17200.1 The gist of the allegations is that Guajardo has continued to practice law notwithstanding his resignation, and that Stender and IPG have aided and abetted him in doing so. The complaint alleges that neither Guajardo nor Stender nor IPG ever notified clients that Guajardo was no longer a licensed attorney, that all three defendants actively participated in misleading clients into believing Guajardo was permitted to practice, and that defendants actively fostered the impression that Guajardo remained an attorney.
The complaint seeks civil penalties under the UCL, an injunction prohibiting the defendants from continuing their practices, disgorgement of profits, and restitution. The San Francisco Superior Court granted a preliminary injunction in March 2011, holding that the injunction was necessary to protect clients from seeking assistance from Guajardo in the belief he was an attorney, to ensure that “Stender and IPG comply with their obligations to notify clients that Guajardo is no longer licensed to practice law,” and to “ensure that Stender and IPG no longer aid and abet the unauthorized practice of law by Guajardo.” Stender at *6.
The First Appellate District upheld the injunction in an unpublished opinion. After requests for publication from the San Francisco and Oakland City Attorneys, the Asian Law Caucus, the Immigrant Legal Resource Center, and a private immigration lawyer (all pointing to the pressing need for action against dishonest immigration practitioners as well as Guajardo’s deplorable history), the court ordered the opinion published.
It is hard to imagine a less sympathetic subject for the profession’s concern than Guajardo, with his lengthy history of proven harm to vulnerable clients, some of whom were doubtless deported as a result. However, in their petition for review, Stender and IPG argue that the court of appeal’s decision raises at least three issues of law and legal ethics that should concern all lawyers.
First, should violations of the State Bar rules be allowed to be used as predicates to UCL claims? Second, do the obligations of the State Bar Act and rules of conduct attach to law corporations and out-of-state lawyers? And third, how should a court proceed when an attorney defendant in a suit by a non-client contends that a proper defense cannot be mounted without disclosing privileged communications between attorney and client?
On the first issue, Section 17200's deceptively simple one sentence defines “unfair competition” as “any unlawful, unfair or fraudulent business practice.” The UCL “borrows” definitions of unfair practices from other statutes as well as the common law. In this instance, the trial court looked to the Rules of Professional Conduct, the Rules of Court, and the State Bar Act to find that the defendants had breached duties to inform clients that Guajardo was suspended and no longer entitled to practice law, and that such violations could serve as unlawful business practices under Section 17200.
Stender and IPG argue that allowing such a UCL claim interferes with the State Bar’s discretion and expertise in interpreting and enforcing the rules governing the practice of law. The court of appeal rejected that contention, noting that violations of the rules have long served as a measure of improper conduct in breach of fiduciary duty and legal malpractice cases. Stender at *8.
However, while “it is well-established that a Section 17200 claim may be based on violation of a statute that the plaintiff could not directly enforce with a private action,”2 violations of the State Bar Act or Rules of Professional Conduct have apparently not been previously used as the predicate for a Section 17200 claim. Notably, the reach of the UCL is already before the California Supreme Court in a pair of pending cases, Rose v. Bank of America (formerly published at 200 Cal. App. 4th 1441 (2011)) and Zhang v. Superior Court (formerly published at 178 Cal. App. 4th 1081 (2009)). Like Stender, each raises in different contexts the issue of which statutes without private rights of action can nonetheless serve as the basis of a UCL claim. Clarification from the supreme court as to whether violations of the State Bar Act can so serve would aid both the plaintiffs’ UCL bar and practicing attorneys in general.
Stender and IPG’s petition for review next raises an important issue regarding the reach of the State Bar Act. Should its requirements apply to law corporations such as IPG or to out-of-state attorneys such as Stender? With regard to law corporations, the act provides for their existence (Business and Professions Code Section 6160), and, under the heading “Misconduct,” states at Section 6167:
A law corporation shall not do or fail to do any act the doing of which or the failure to do which would constitute a cause for discipline of a member of the State Bar, under any statute, rule or regulation now or hereafter in effect. In the conduct of its business, it shall observe and be bound by such statutes, rules and regulations to the same extent as if specifically designated therein as a member of the State Bar.
On its face, this provision seems plain, yet difficult questions lurk. Must law corporations comply with MCLE requirements? Pay bar dues? Most importantly, can law firms (as opposed to individual bar members) be disciplined? Remarkably, none of these questions seems ever to have arisen before. Only one case (T&R Foods, Inc. v. Rose, 47 Cal. App. 4th Supp., 1, 9 (1996)), is reported under Section 6167, and it was not cited by either the court of appeal or the defendants in their petition for review. In that case, an attorney-owner of a registered law corporation was held personally liable for the law firm’s failure to segregate client funds in a trust account as required by the rules of conduct, based on the principle that “a professional person cannot avoid personal liability for his or her own malpractice or tortious conduct through incorporation....” (emphasis original). However, the responsible individual in Rose was a California attorney, unlike Stender. In Stender, the court of appeal held that Section 6167 imposed the same obligations on IPG as the professional conduct rules on individual members. Stender at *9.
The court was equally unsympathetic to the argument that Stender himself, as a nonmember of the California Bar, was beyond the reach of Section 17200 actions stemming from violations of professional conduct rules. Reasoning that since IPG was responsible for compliance with bar rules under Section 6167, and Stender, as the “sole shareholder, director, president, treasurer, and secretary of IPG, necessarily controlled IPG’s practices in general” as well as the specific information IPG provided to clients and the bar, the court held that “Stender could be held liable for IPG’s unlawful business practices.” Stender at *9. Whether as a matter of interpretation of Section 6167 or traditional corporate veil-piercing, this seems reasonable. Indeed, if Stender prevails and non-California attorneys who own California law firms are beyond the reach of the obligations of Section 6167, one wonders why nonmembers of the State Bar should be permitted to continue to own California law corporations at all.
Finally, Stender and IPG argue that review should be granted so that the supreme court can clarify how courts should determine whether they must dismiss a case when an attorney is sued by a nonclient and contends he or she cannot adequately defend without revealing client confidences.3 It is not clear this issue is properly presented on review of the preliminary injunction, however, since (as the court noted) the injunction was based on evidence that notices to clients of Guajardo’s status were not sent, rather than upon any details of what legal advice was provided to clients. Stender at *18. The court likewise rejected the claim that revelation of IPG’s clients’ identities would risk their prosecution or deportation merely because the practice is an immigration one. Id. On the other hand, the complaint seeks “disgorgement of all profits,” (Complaint at 19) and restitution, which could well implicate issues of what services were contracted for and provided. It may be that the privilege issue is not necessary to resolution of the injunction appeal but could become highly important in the underlying case.
Cases presenting such an array of compelling and complex ethical issues, especially in a context as important as this, are rare. Ethics mavens and court-watchers alike will be keeping a close watch on People v. Stender.
1 The complaint is available at http://www.sfcityattorney.org/Modules/ShowDocument.aspx?documentid=723.
2 Stender, at *8, citing Stop Youth Addiction, Inc., v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998).
3 See, e.g., McDermott, Will & Emery v. Superior Court, 83 Cal. App. 4th 378 (2000) (due process sometimes requires dismissal when the attorney-client privilege precludes attorney from a reasonable defense).