United States: Whose Attorney?

A lawyer for a business organization needs to be careful in identifying both who they serve and to make express who they do not serve.  Confusion as to these points has important implications in a variety of contexts including the related (albeit not co-extensive) realms of the attorney-client privilege and an attorneys obligation of confidentiality and who has standing to assert a malpractice claim against the attorney.

These issues can be especially fraught in the area of small businesses, and the outcome of the analysis can turn on questions of organizational form.  Historically, the attorney for a corporation and the consequent obligations are owed to the corporation, that "person that exist in the mind of the law," itself and not to any of the constituents thereof such as directors, officers, employees and shareholders.  While it is possible for an attorney to enter into an attorney-client relationship with both the corporation and a constituent thereof, proper disclosure and preferably written documentation of the existence and parameters of the parallel relationships is important.

In contrast, while there has been law to the contrary, an attorney for a partnership has traditionally been deemed to be the attorney for every partner. 

Between those two poles, what then is the treatment of the LLC; should the corporate model apply, should the partnership model apply, or should there be developed a model unique to this organizational form.  To date, most of the courts that have considered the question have applied the corporate model and deemed counsel for the LLC to not in consequence thereof be as well counsel for any of the constituent members or managers.  That apparent agreement has been brought into question by a recent decision from California. 

Sprengel v. Zbylut, 194 Cal.Rptr.3d 407 (Ca. Ct. App. 2 Dist. Oct. 13, 2015; modified Oct. 29, 2015), arose out of the falling out between Jean Sprengel and Lanette Mohr, the two members in Purposeful Press, LLC.  Sprengel field an action for dissolution of the LLC, and Mohr hired counsel, including Zbylut, to represent the company; in retaining counsel she acted as a manager of the LLC.  After that suit was resolved Sprengel brought a malpractice action against Zbylut and the other attorneys:

"violated the duty of loyalty they owed to her under the Rules of Professional conduct by pursuing Mohr's interests in the underlying dissolution and copyright actions.  Sprengel alleged she had an implied attorney-client relationship with each defendant based on her status as a 50 percent owner of Purposeful Press."

The attorneys sought dismissal of the suite based upon the California anti-SLAPP suit statute, it basing asserted that the representation of the LLC was "constitutionally protected petitioning activity." and other law including the direct/derivative distinction.  Springel asserted as well that:

"several factors support[ed] a finding that there was an [implied] attorney client-relationship between [them]," including" (1) the limited "size of [Purposeful Press][, which] suggest[ed] an individual representation of the [company's] members"; (2) the defendants' legal services were paid with funds that belonged to Sprengel; (3) the subject matter of the representation involved Sprengel's copyrights and her intellectually property rights; and (4) the district court's order in the copyright action had specifically found that Purposeful Press had no interests independent of its two members.  Sprengel also argued that the litigation privilege did not provide a defense to her claims because the privilege was inapplicable where "a client has asserted claims against an attorney for breaches of duties...and conflict of interest."

The anti-SLAPP defense was rejected, and this appeal followed.

Ultimately, the denial of dismissal on the basis of the anti-SLAPP statute was upheld, so maybe (hopefully) all else is dicta, but it is disturbing that the court did not ab initio reject:

  • the assertion that an implied attorney-client relationship exists between counsel to an LLC and its members, especially a member who is seeking the dissolution of that LLC (i.e., its legal death); or
  • the suggestion that counsel engaged in malpractice "by accepting Sprengel's funds to pay for their legal services without her consent."

As to the first point, if counsel to an LLC are as well counsel to each member, including a member who has already brought an action against the LLC, then no LLC can ever successfully hire counsel to defend itself.  Rather, counsel who considers the matter will never agree to accept the engagement without the plaintiff's consent, and the plaintiff is never going to consent. The same outcome will result if the LLC is the plaintiff against a member.

As to the second point, the funds the LLC used to pay its legal counsel was never Sprengel's money.  Rather, it was the LLC's money.  A member of an LLC has no ownership interest in the LLC's property. Only if a distribution had been declar4ed and then those funds had been diverted to pay legal bills would "Sprengel's money" have been used to pay for legal services.  But until a distribution was declared, it was the LLC's money.

Originally published on Kentucky Business Entity Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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