Must a lawyer disclose to subcontractors a payment the client made after a lien notice, and can the lawyer summarize the balance owed without mentioning that payment?

Plain-English summary

A client had a construction contract with a general contractor who became insolvent, leaving subcontractors to file mechanics' liens and foreclosure proceedings. The client owed the general contractor $150,000 when a plumber gave notice of his lien claim, then paid the general contractor an additional $50,000; further subcontractor liens followed, totaling $250,000. The client's attorney told the subcontractors that $100,000 remained unpaid under the contract, and the plumber did not know about the $50,000 payment made after his notice. The inquiry asked whether the attorney had to disclose the post-notice $50,000 payment, and whether he could tell the subcontractors that $100,000 was all that was owed without mentioning that payment.

On the first question, the committee declined to decide the duty to disclose under Rule 4.1(b), because whether disclosure was required turned on whether a criminal or fraudulent act had occurred, a question of substantive law beyond its scope; assuming no such act, it said there was no duty to disclose the payment. It noted the attorney was under no duty to give any information at all (the subcontractors could obtain it through discovery).

On the second question, the committee concluded the proposed statement violated Rule 4.1(a). Rule 4.1 bars a lawyer from knowingly making a false statement of material fact to a third person. Although a lawyer has no affirmative duty to inform an opposing party of relevant facts and certain negotiation statements (price estimates, settlement intentions) are not treated as material fact, the committee found that having chosen to give a summary of the law and facts, the attorney had a duty not to make a false or misleading statement of material fact. The summary was false and misleading because it omitted the amount due to the general contractor before the client received notice of the plumber's lien; opposing parties could still obtain the facts through discovery.

Currency note

This opinion was issued in 1998, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Does a lawyer have to volunteer a client's payment to the other side?

A: The committee concluded that, assuming no criminal or fraudulent act, there is no affirmative duty to disclose the client's payment; it declined to decide the Rule 4.1(b) duty because it turned on substantive law.

Q: Can the lawyer give a summary of what is owed that leaves out the post-notice payment?

A: No. The committee concluded that once the lawyer chose to summarize the amount owed, omitting the payment made the statement false and misleading under Rule 4.1(a).

Q: How can the subcontractors get the omitted information?

A: The committee noted the lawyer need not volunteer it; the opposing parties can obtain the facts through discovery under the South Carolina Rules of Civil Procedure.

Background and rules framework

The opinion applied South Carolina RPC 4.1 (Rule 407, SCACR), corresponding to Model Rule 4.1, which bars knowingly making a false statement of material fact to a third person (4.1(a)) and, in some circumstances, failing to disclose a material fact to avoid assisting a client's crime or fraud (4.1(b)). The committee treated the 4.1(b) disclosure duty as turning on a substantive-law question of fraud outside its purview.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 4.1(a) (Rule 407, SCACR) / Model Rule 4.1: knowingly false statement of material fact to a third person.
• South Carolina RPC 4.1(b) / Model Rule 4.1: disclosure to avoid assisting a crime or fraud (not decided here).

See also

• SC Bar Ethics Op. 05-03: Reporting a Lawyer's Lie
• SC Bar Ethics Op. 24-03: Client Dies Before Suit

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-98-18/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 98-18

Attorney's Client contracted with General Contractor to construct a project on Client's land. The project is completed; however, several subcontractors have filed mechanics' liens and commenced foreclosure proceedings on these liens. General Contractor has declared insolvency and is unable to pay the subcontractors.

Client owed General Contractor $150,000 under their contract when a plumber gave notice of his claim under a mechanics' lien filing. Client thereafter made an additional payment of $50,000 to General Contractor. Several more subcontractors' mechanics' liens were then filed, totaling $250,000.

Attorney has informed plumber and the other subcontractors that $100,000 remains unpaid by Client to General Contractor under their contract. Plumber is not aware of the $50,000 payment made by client to General Contractor after notice had been given by plumber.

QUESTIONS:

1. Must Attorney disclose to plumber that client paid $50,000 to General Contractor after notice of plumber's mechanics' lien?
2. May Attorney make a statement to all of the subcontractors that client owes to subcontractors no more than the amount owed to General Contractor and stating that $100,000 is the amount currently owed, not mentioning the $50,000 payment made after notice of the plumber's mechanics' lien?

SUMMARY:

1. The issue of disclosure is a question of substantive law beyond the scope of this committee because it turns on the issue of whether a criminal or fraudulent act has occurred. Assuming no fraudulent or criminal act has occurred, there is no duty to disclose Client's payment to General Contractor.
2. Attorney's statement that $100,000 is all that is owed to the subcontractors violates RPC 4.1(a), Rule 407, SCACR, because this proposed statement is false and misleading.

OPINION:
Rule of Professional Conduct 4.1 states:
In the course of representing a client a lawyer shall not knowingly:
(a) Make a false statement of material fact of law to a third person; or
(b) Fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.
Applicable comments under this Rule are:

MISREPRESENTATION
A lawyer is required to be truthful when dealing with others on a client's behalf, but generally has no affirmative duty to inform an opposing party of relevant facts. A misrepresentation can occur if the lawyer incorporates or affirms a statement of another person that the lawyer knows is false. Misrepresentations can occur by failure to act.

STATEMENT OF FACT
This rule refers to statements of fact. Whether a particular statement should be regarded as one of fact can depend on the circumstances. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party's intentions as to an acceptable settlement of a claim are in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.

This committee does not pass on the issue of the duty to disclose under section (b) of Rule 4.1 because among the other issues raised, it raises an issue of substantive law which is beyond this committee's scope.

Attorney is under no duty to give any information concerning the issue if he so chooses. This could be obtained in accordance with discovery procedure under the rules of civil procedure. However, having chosen to give a summary statement of the law and facts, there is a duty not to make a false or misleading statement of a material fact to a third person. The summary given by Attorney is false and misleading in that it did not state the amount due to General Contractor prior to client receiving notice of the plumber's mechanics' lien.

The summary stated by Attorney is in the nature of negotiation between parties. A lawyer is not required to inform an opposing party of all relevant facts, but must not make false statements of fact. Opposing parties can get the facts through the discovery procedure contained in the South Carolina Rules of Civil Procedure.