Not long ago, The LLC Jungle posted an article addressing the perils of attorney representation of an LLC with two equal “co-managing members.” See Why Having “Co-Managers” for Your LLC is a Terrible Idea.
This post addresses another common source of confusion regarding attorney representation of LLCs. When an attorney represents an LLC, does he/she also represent and owe duties to the LLC’s individual members?
A recent opinion published by California’s Second Appellate District — Sprengel v. Zbylut — explores the issue.
Facts: LLC breakup; one member “lawyers up” for the LLC
Jean Sprengel and Lanette Mohr established Purposeful Press LLC to market a guidebook that Sprengel had written about treating the side effects of chemotherapy. Sprengel and Mohr were each 50 percent members of the LLC. The LLC’s operating agreement appointed Mohr as the “sole manager,” but also provided that neither member had the authority to bind the company without the consent and/or approval of the other.
The relationship eventually disintegrated. Mohr informed Sprengel she could not continue to serve as manager unless she began receiving a salary. In response, Sprengel offered to take over managerial duties. Mohr rejected that offer, and began excluding Sprengel from communications regarding the LLC’s business affairs. Sprengel suspected Mohr was using LLC funds for personal expenses.
In the midst of these problems, Mohr hired two attorneys for the LLC. First she retained tax attorney Gregory Zbylut to prepare the LLC’s tax filings and K-1 forms. Then she retained attorney Vincent Cox and his firm, Leopold Petrich & Smith (“LPS”) for advice regarding the LLC’s intellectual property rights — specifically, the copyrights to the chemotherapy guidebook.
Upon learning that Mohr had retained Zbylut and LPS to represent the LLC, Sprengel withdrew $162,000 from the company’s bank account and deposited the funds into her attorney’s trust account. Sprengel then filed an involuntary dissolution lawsuit and a copyright infringement lawsuit against Mohr.
After the copyright action was resolved, Sprengel filed a malpractice lawsuit against Zbylut and LPS. The lawsuit alleged that although the attorneys agreed to represent the LLC and were paid by the LLC, their real purpose was to further the interests of Mohr to the prejudice of Sprengel and the LLC. Sprengel alleged that by undertaking representation of the LLC and accepting payment from the LLC, the attorneys became obligated to her individually, and breached their duties to her by providing advice that benefited Mohr and harmed Sprengel.
Trial court: summary judgment granted for attorneys
Zbylut and LPS filed a motion for summary judgment, arguing that an attorney for an LLC does not owe duties to, and does not represent, the LLC’s individual members.
The trial court agreed, and granted summary judgment for Zbylut and LPS. The court concluded that under California law, the attorneys’ representation of the LLC did not give rise to a professional duty of care toward Sprengel.
Court of Appeal’s Opinion: trial court ruling affirmed; the LLC’s attorneys owed no duty to Sprengel
The Court of Appeal affirmed the trial court’s summary judgment, holding that there was no evidence that would support a finding of an implied attorney-client relationship between the LLC’s attorneys and Sprengel.
The Court first confirmed the general rule: when representing a business entity, an attorney’s client is the entity, not the individual stakeholders, and the individual stakeholders “cannot presume that corporate counsel is protecting their interests.”
As with almost every legal rule, however, there are exceptions. The court observed that an attorney-client relationship between an entity’s attorney and an individual entity stakeholder can be implied under some circumstances. Factors include:
- the size of the entity
- the nature and scope of the attorney’s engagement by the entity
- the nature and extent of any contacts between the attorney and the individual stakeholder
- the attorney’s access to information regarding the individual stakeholder’s interests
Sprengel asserted that because the LLC had only two 50 percent owners, any attorney representing the LLC also represented the owners individually.
The Court, however, concluded that none of the evidence supported an implied attorney-client relationship between the attorneys and Sprengel. The court noted that Sprengel did not contend that the attorneys’ conduct devalued her share of the company. Instead, the attorneys represented the LLC’s legitimate interests, some of which may have conflicted with Sprengel’s personal interests (including ownership of the copyright to the guidebook). That alone was not enough to form an attorney-client relationship between the attorneys and Sprengel.
Further, the evidence demonstrated that Sprengel never had any reason to believe that the LLC’s attorneys were acting to protect her personal interests. Instead, the attorneys “made clear to Sprengel from the outset that their representation to her was adverse in nature” and Sprengel’s interactions with the attorneys, in fact, “were adversarial in nature” from the beginning.
As a general rule, an attorney representing an LLC does not also impliedly represent the LLC’s individual members. While there are exceptions to this rule, LLC members should presume that the LLC’s attorneys are not necessarily looking out for their best interests as members.