In this my last column for the Journal of Passthrough Entities, it seems appropriate to return to a first principle of serving as an attorney, namely clear identification of who is the client. A reasoned determination of who is the client serves a number of important roles, most particularly the core question of whose interest the attorney is charged to assess, protect and advance. "Where you stand" (i.e., whose interest you will advance) "depends on where you sit" (i.e., to whom do you owe your loyalty).1 From the opposing perspective, identifying who is the client necessarily identifies a different class, namelypossibility that the attorney will not prevail.
Many disputes in this area begin with the application of Model Rule of Professional Conduct 1.13(a), it providing, inter alia, that the attorney for an organization has as his or her client an organization, and does not by representation of an organization undertake to represent any of its constituents. 3 However, the attorney in representing the business organization must take instructions on its behalf from those same constituents. Meanwhile, even as attorneys should be particularly sensitive to the different offices an individual may have vis-a-vis a business entity, 4 non-attorneys may and often do have limited appreciation of those distinctions, thinking of it simply as "their company" and the attorney as "their attorney."
In connection with the organization of a business venture, there are at least four options as to who is the client, namely:
- One of the owners;
- The venture itself;
- One owner and the venture; or
- More than one of the owners. 5
If the decision is made to represent one and only one of the owners, then the attorney should do only that. If and when the owners meet, whether all or in a subset, the attorney needs to advise all of the other participants in the meeting as to who is his or her client. That identification of who is the client should be supplemented with a negative statement, namely that the attorney, in representing a particular owner, undertakes no representation of the other owners or the venture itself. In an optimal world, every participant would have his/her own independent legal counsel, and no participant could think that they are piggybacking on the guidance afforded another participant. In this situation, it is important that the attorney remains focused on the client and that there not be "mission creep." For example, assume the attorney represents one participant in the venture. All of the participants decide it should be organized as an LLC, and the one attorney prepares the articles of organization and a draft operating agreement. Absent clarity as to what role he or she does these tasks, he or she may be charged with having now undertaken representation of the LLC. The attorney for one of the participants in the to-be-formed LLC who agrees to prepare its organizational documents should in writing clarify to all of the other participants in the venture that those documents are being drafted exclusively at the request of the attorney's client and likewise for that client. Put another way, the attorney needs to disabuse in writing the other participants in the venture from any reasonable expectation that the attorney is representing the interests of the venture or of any of its participants other than the identified client.
Should the attorney be representing a subset of the members, not only are the obligations already described above binding upon the attorney, but he or she must as well fully advise the joint clients of the consequences of a joint representation, including the absence of any confidentiality amongst them as to disclosed information and the obligation of the attorney, in the event discord amongst them should arise, to withdraw from the representation, a withdrawal that likely will have negative consequences vis-à-vis their total expenses and upon transaction timelines.
The approach of representing one of the participants in the venture and the venture itself, with it typically being the case that the member being represented is the source of its funding and to be its majority owner, is fraught with complications. First, there is the necessity of disclosure to the other members of who the attorney represents. This structure, in the view of the other participants, is necessarily going to give rise to perceptions of conflict. Assuming the attorney in the representation of the venture will be paid with company assets, every other member likely will assume that the LLC is in effect underwriting the legal cost of the majority member. Furthermore, in that it is anticipated that company assets will be utilized to pay the attorney's fee, underwriting certain of the otherwise incurred expenses of the represented member, that engagement may constitute a conflict of interest transaction requiring the disinterested approval of the other members of the LLC. 6
Also, this constitutes a joint representation, and there needs to be consideration given to the eventuality that the majority member, a client of the attorney, and the venture itself, another client of the attorney, may come to be in opposition with one another. In that instance, the attorney will need to withdraw,7 and it may be necessary that the attorney withdraw from both representations. Considering that eventuality, the attorney will need to advise his or her individual client that, in the event of a conflict between the individual and the venture, the company will not only have a claim upon the attorney's file with which to support its claim against that member, but the attorney likely cannot make a claim of confidentiality in that one of the jointly represented clients, the LLC, seeks the information.
The last option here considered is representation of only the venture. In that instance, it and it alone is the client, and all of the attorney's obligations of confidentiality and promotion/protection are to it. In this instance, the attorney is not representing any of the constituents of the venture, and none of them should be able to assert that the attorney as well represented them as an individual. However, as is reviewed below, often attorneys engage in activities and/or fail to express as to their role, opening the door to a multitude of allegations.
As suggested above, at least anecdotally, it seems that there has been a flurry of recent decisions involving claims by LLC constituents that an attorney has violated his or her obligations to that constituent even as the attorney has claimed "you are not my client." A review of a sample of these cases will identify common fact patterns that have led to these disputes.
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* The author is as well an adjunct professor at the University of Kentucky College of Law and was formerly the Gordon Davidson Fellow at the University of Louisville School of Law. A frequent commentator on the law of business organizations, he is an elected member of the American Law Institute. In 2018, he joined Ribstein and Keatinge on Limited Liability Companies as a co-author in place of the late Professor Larry Ribstein.
1 See also Rufus E. Miles, Jr., The Origin and Meeting of Miles' Law, 38 Public Administration Review 339 (Sept.–Oct. 1978).
2 I learned this adage from my friend and coauthor Bob Keatinge.
3 See Model Rules of Professional Conduct 1.13(a) ("A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.").
4 For example, the same person may be a shareholder, a director and an officer in a corporation, the same person may be both a member and a manager in an LLC, and the same person may be both the managing general partner and a limited partner in a limited partnership.
5 See also Robert R. Keatinge, The Implications of those who are not clients and whose interests the attorney is not bound to either protect or advance.
Problems arise when attorneys fail to carefully identify who is and is not the client. These failures result in litigation that at least anecdotally would appear is becoming more and more common. There is an adage that "the second worst thing that can happen to you is that you win a lawsuit." 2 This is particularly true in the context of a suit brought by one who believes he or she was the attorney's client. The attorney is now in the position of needing to defend him/herself. True, typically the attorney's insurer will retain counsel to provide a defense, but few and far between are the attorneys who will be comfortable turning over the action entirely to that counsel. Rather, the attorney charged with misconduct will want to be intimately involved in defending the action. There's certainly nothing wrong with that attitude, but it must be recognized that every hour the attorney is focused upon defending his or her own conduct, he/she is not performing services on behalf of a paying client. As such, the attorney may prevail in the action only with significant personal costs and, of course, there is always the Fiduciary Relationships and Representing Limited Liability Companies and Other Unincorporated Associations and Their Partners or Members, XXV Stetson L. Rev. 389 (1995).
6 See also Model Rules of Professional Conduct 1.13(g) ("A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.").
Originally published on Kentucky Business Entity Law
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