When Does A Lawyer’s Demand Letter Become Extortion?

Conventional legal wisdom holds that 95% of lawsuits settle. Is that true? Maybe not, according to this 2009 analysis, but it’s clear that most civil disputes are indeed resolved by the parties before the trial, appeal, and judgment enforcement process is completed. That, in turn, leads civil litigators to spend far too much time and energy trying to psychologically manipulate their opponents into capitulating.

 

Another fact is that civil litigators tend to be, both by training and by nature, writers. The Curmudgeon’s Guide to Practicing Law, written primarily from a litigator’s perspective,  emphasizes repeatedly the importance of taking writing seriously and of producing briefs, memos, and letters of which the author can be proud. There are quite a few litigators who have spend more time agonizing over word choice, sentence construction, and synonyms — is my opponent’s argument frivolous, meritless, groundless, irrelevant, immaterial, not germane, inapposite, inapt or just plain wrong? — than they have perusing the relevant case law.

 

Those two factors create a combustible mix in the demand letter. Thousands of demand letters are sent every day and they are, by and large, boring: here’s why I think I’ll win the case, here’s what my client’s damages are, and here’s how much I’m asking you to pay. They only get exciting when: (1) the damages exceed the available insurance policy limits, and the plaintiff’s lawyer is trying to set up the insurance company for claim of bad faith; (2) when the lawyer threatens to cause harm by way of the legal system itself (e.g., the infamous “legal equivalent of a proctology exam” letter, which was reversed on appeal); or, (3) when the plaintiff attempts to threaten the defendant with some consequence beyond the mere pursuit of the lawsuit, like exposing them to embarrassment or criminal prosecution.

 

The third part is where the problem comes in: the definitions of embezzlement and blackmail differ from state to state, but, by and large, an attempt to obtain money from someone else by threatening to expose them or report them to the authorities arguably constitutes embezzlement or blackmail. So, when does a lawyer’s demand letter become extortion?

 

This isn’t an easy question to answer. Though criminal law has plenty of gray areas, we as a society try to avoid them (e.g., the “rule of lenity”), and imposing criminal liability on lawyers acting within the scope of their representation of others poses significant Constitutional due process and right to jury trial problems.

 

The federal courts generally don’t consider any litigation threats to be extortionate. Sosa v. DIRECTV, Inc., 437 F.3d 923, 939–940 (9th Cir. 2006)(“we do not believe the Hobbs Act imposes liability for threats of litigation where the asserted claims do not rise to the level of a sham.”); United States v. Pendergraft, 297 F.3d 1198, 1208 (11th Cir.2002)(holding threats to sue a public entity cannot constitute Hobbs Act extortion, even where supported by false testimony and fabricated evidence); I.S. Joseph Co. v. J. Lauritzen A/S, 751 F.2d 265, 267 (8th Cir. 1984) (holding threats of groundless litigation cannot constitute extortion under the Hobbs Act); cf. Vemco, Inc. v. Camardella, 23 F.3d 129, 134 (6th Cir.1994) (holding threats to enforce even a fraudulent contract not extortion under RICO); but see United States v. Sturm, 870 F.2d 769, 774 (1st Cir. 1989)(“a Hobbs Act prosecution may be based on a creditor’s fear of nonrepayment”).

 

The state courts, however, have been more open to the idea of criminalizing and creating liability for improper demand letters. The Hynes case in New Hampshire, for example, involved a lawyer sending off demands to salons for $1,000 to settle dubious sex discrimination claims arising from their charging of different rates to male and female customers. The New Hampshire Supreme Court affirmed the lawyer’s extortion conviction. Scott Greenfield concluded, “My guess is that 19 letters [to salons] is probably over the line. But a conviction for extortion? That’s a bit much too.”

 

Marty Singer, the Hollywood lawyer whose flamboyant demand letters have graced these pages before, just won a partial victory from a California state appellate court, which reversed a trial court’s ruling that one of his demand letters could constitute criminal extortion. In the letter, Singer, on behalf of a partner in a restaurant and nightclub consortium, sent the other two partners in the consortium an otherwise routine letter alleging embezzlement, conversion and breach of fiduciary duty, enclosing a draft complaint, and demanding settlement within five days.

 

That’s all standard fare, but Singer’s demand letter included something else: a claim the recipient was “using company resources to arrange sexual liaisons with older men such as ‘Uncle Jerry,’ Judge [name redacted] a/k/a ‘Dad’ (see enclosed photo), and many others,” and pointing out that, “When the Complaint is filed with the Los Angeles Superior Court, there will be no blanks in the pleading.

 

The recipient sued, alleging, inter alia, civil extortion based on the demand letter, claiming that the threat to reveal the sexual liaisons was extortionate. The California appellate court held that Singer’s demand was not extortion and that it was protected by the litigation privilege. Putting aside some California-specific aspects of the case (like the operation of California’s “anti-SLAPP” law), the Court held:

 

[T]he “secret” that would allegedly expose him and others to disgrace was inextricably tied to Arazm’s pending complaint. The demand letter accused Malin of embezzling money and simply informed him that Arazm knew how he had spent those funds. There is no doubt the demand letter could have appropriately noted that the filing of the complaint would disclose Malin had spent stolen monies on a car or a villa, if that had been the case. The fact that the funds were allegedly used for a more provocative purpose does not make the threatened disclosure of that purpose during litigation extortion. We cannot conclude that the exposure of Malin’s alleged activities would subject him to any more disgrace than the claim that he was an embezzler.

 

This “inextricably tied” reasoning has some superficial appeal, but it cannot, in my humble opinion, be squared with the chief California case on extortion-by-demand-letter, Flatley v. Mauro, 139 P. 3d 2 (Cal. 2006).

 

In Flatley, the California Supreme Court held that a letter demanding “seven figures” sent to Michael Flatley (yes, that Michael Flatley) by a lawyer representing an alleged rape victim was, indeed, extortion, because, “At the core of Mauro’s letter are threats to publicly accuse Flatley of rape and to report and publicly accuse him of other unspecified violations of various laws unless he ‘settled’ by paying a sum of money to Robertson,” plus assertions that, in the course of the litigation, information about Flatley’s wealth, tax, and immigration status would be found and filed with the Court.

 

Was the letter in the Flatley case more aggressive, hostile, and belligerent than Singer’s letter? Certainly. Could it have lead to a state bar disciplinary investigation against the lawyer? I’d sure hope so. But those threats were just as “inextricably tied” to his client’s claims as the threats in Singer’s letter were, and in the end the essential threat was the same: settle with me, or we’ll file a public lawsuit that will include the publication of private facts that will embarrass you.

 

I’m glad to see Singer’s exoneration for what looks more like zealous advocacy in pursuit of a legitimate claim than blackmail in support of a sham claim, but the disparate treatment raises an important question: why criminalize and create liability for one demand letter but not the other? The primary difference between the two letters was in tone, not in the intent of the sender or in the effect upon the recipient. There’s no evidence that either lawyer knowingly sent the letters as part of a sham claim. Rather, each lawyer, serving as zealous advocates for their clients, tried to gain settlement leverage over the opposing party by pointing out that, in the course of the litigation, damaging facts would likely come out — a concern the defendant’s own lawyers should also be raise with the defendant.

 

The Model Rules of Professional Responsibility have a relevant rule, Rule 4.4 (“Respect for Rights of Third Persons”), which says: “in representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person …” (Emphasis added). Was there a “substantial purpose” to Singer’s letter and the letter sent to Flatley? I believe so: the purpose was to fully inform the defendant as to what information the plaintiff believed would become public if the was filed. If the claim isn’t a sham, and there’s a legal purpose to the content of the demand letter, then why should the demand be illegal?

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  • Fnord

    If I read you right, this is properly not extortion because the evidence is something that will and must come out as part of a court case over the issue.

    A demand letter saying that “I know you’re improperly using company resources and also hiring male prostitutes” would be extortion, whereas “I know you’re improperly using company resources to pay male prostitutes” is allowed?

    • http://www.litigationandtrial.com/ Max Kennerly

      I think that’s the only reasonable interpretation of the Singer case. I also think such a rule is deeply problematic, for the reasons that come across in your comment.

  • gts109

    I don’t think it’s easy to square the cases because the law of extortion seems to prohibit threats intended to extract money, even when the subject of the threats legitimately owes money to the person levying the threats. That rule could make any demand letter (even one issued after suit is filed and after defense motions are denied) an act of extortion. Of course, lawyers are permitted to send demand letters, and they are all not extortion.

    So, where to draw the line? In Flatley, you had seemingly false allegations, threats not solely tied to a potential lawsuit (bad publicity seemed the bigger threat), a demanding attorney who acted like a mobster, and threats that were not “inextricably tied” to the lawsuit (i.e., disclosure of other alleged criminal conduct unrelated to the claimed sexual assault). Those seem like fair distinctions to me, and very few attorneys would ever cross those lines.

    • http://www.litigationandtrial.com/ Max Kennerly

      I could see that as a fair distinction, but I don’t think it holds up to scrutiny under the facts of those cases. In the Flatley case, I don’t think there was a finding that the lawyer knew the allegations were false, the holding was based on the threat itself, regardless of the truth or falsity of the allegations. Similarly, Singer made exactly the same threat about bad publicity, just coached in nicer words; what other reason could he possibly have for referencing that the allegations would be public on the docket? Finally, I don’t think there’s any reasonable argument that naming the particular persons, and going into the nature of the sex acts, was “inextricably tied” to the lawsuit, which alleged misappropriation of resources. Singer certainly could’ve accomplished exactly the same by alleging that the defendant used the money for personal reasons.

      I realize this is splitting hairs – but that’s the whole problem, that the courts don’t seem to have any clear rhyme or reason for why they split some hairs and not others, and the whole thing leaves me concerned that a demanding lawyer can be held criminally and civilly liable for pointing out the exact same consequences of a lawsuit that the responding lawyer would be obligated to tell their client.

      • gts109

        When alleging fraud, plaintiff is sometimes required to specifically plead. You might question whether the names had to be disclosed, but in Flatley, there was no question that immigration or tax issues had nothing to do with the rape allegations. Moreover, the California Supreme Court clearly thought that the allegations against Flatley were untrue. That may not be strictly relevant, but it’s an unhelpful fact for someone accused of extortion.

        Anyway, I just don’t see this as a big problem. I can’t fathom an ethically decent attorney, you for example, ever having this issue.

        • http://www.litigationandtrial.com/ Max Kennerly

          I don’t think too many ethical attorneys would write a threat like the one in Flatley. But the Singer threat letter seemed, to me, quite tame — and yet the trial judge held it could be extortionate. I just don’t see what guidance lawyers and courts have on this subject other than “tone it down,” which is IMHO a really bad rule to follow.