The Sometimes Fuzzy Line Between Representing an LLC and its Members
A prior LLC Jungle post — An LLC’s Attorney Represents the LLC’s Members Too, Right? — covered the Sprengel v. Zyblut opinion, which confirmed the general rule that 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.” But, as recognized in the Sprengel case, there are exceptions to the rule depending on the facts.
Another case recently published by California’s Fourth Appellate District — De Meo v. Cooley LLP — also addressed the issue.
Facts: law firm represents LLC and corporation; buyout transaction ensues
Giovanni De Meo , along with Abhishak Beniwal, co-founded ReTech Labs, Inc. (ReTech). ReTech engaged Cooley to serve as ReTech’s corporate counsel. At some point, De Meo asked Cooley to represent him in a dispute with a former employer, but Cooley refused, stating that since it represented ReTech and not its owners individually, it would be best if De Meo retained separate counsel for his individual issues.
Soon after, De Meo and Beniwal formed Rebotics, LLC (Rebotics). De Meo held 33.33 percent of the ownership interests, and ReTech owned the rest.
In 2017, De Meo transferred to ReTech a portion of his interest in Rebotics, resulting in De Meo having a 15 percent interest in Rebotics, and ReTech owning the rest. Cooley, representing ReTech, prepared the documents for this 2017 transaction. Cooley did not communicate with De Meo regarding the transaction.
In 2018, Rebotics signed an engagement agreement with Cooley concerning a software services agreement. Cooley did not interact with De Meo during that engagement.
In 2021, a significant transaction unfolded. Beniwal informed De Meo about a planned transaction whereby a third party would purchase ReTech and Rebotics. The deal had been negotiated over the course of several months, with Cooley representing ReTech and Rebotics. De Meo immediately searched for and retained a separate law firm to represent him in connection with this 2021 transaction — Procopio, Cory, Hargreaves & Savitch LLP (Procopio).
Cooley sent De Meo transaction documents for signature. De Meo responded that he was consulting his attorney about the transaction and needed more time for review. In emails, Cooley invited a conversation with De Meo and his attorney to walk through the transaction documents. Cooley reminded De Meo that the firm did not represent De Meo individually. In deposition, De Meo admitted that Cooley’s attorney “made it clear” that they were not his attorney.
Eventually, De Meo reached a separate deal with the third party buyer, which gave him a slightly better payout and other terms in the transaction. Cooley did not participate in those negotiations.
De Meo then sued Cooley, alleging breach of fiduciary duty and fraudulent concealment. De Meo’s complaint alleged that due to Cooley’s representation of Rebotics, he believed Cooley was acting as his attorney and would protect his interests in the transactions. He also alleged the Cooley owed and breached a fiduciary duty to him under State Bar Rule of Professional Conduct 1.13(f) to explain the identity of the firm’s client, and that Cooley fraudulently concealed the identity of its client.
Trial court: summary judgment granted for law firm
The trial court granted Cooley’s motion for summary judgment. The court held that Cooley was not in an attorney-client relationship with De Meo, and that Cooley complied with its ethical duties.
De Meo appealed.
Court of Appeal: affirmed; law firm represented the entities, not the owners
The Court of Appeal affirmed.
The court first recited the general rule applicable to all business entities: “when representing a corporation, an attorney’s client is the corporate entity, not individual shareholders or directors, and the individual shareholders or directors cannot presume that corporate counsel is protecting their interests.” As such, De Meo could not reasonably believe Cooley represented him simply because Cooley had entered into written agreements with ReTech or Rebotics.
The court also held there was no evidence supporting an implied attorney-client relationship between De Meo and Cooley. The court found that the trial court properly excluded a declaration by De Meo where he stated that Cooley’s main attorney on the matter never told him that Cooley did not represent him. The declaration was inadmissible because it directly conflicted with De Meo’s prior deposition testimony, where he admitted that Cooley “made it clear” that it was not representing him.
The court also held that De Meo’s subjective belief was not enough to create an attorney-client relationship — “a plaintiff cannot unilaterally establish an attorney-client relationship, and its hindsight ‘beliefs’ that such a relationship existed are thus legally irrelevant. … Instead it is the intent and conduct of the parties that controls the question as to whether an attorney-client relationship has been created.”
Here, the parties’ conduct did not support De Meo’s contentions. Cooley and De Meo had very limited contact over the years, and the communications that did occur only showed that Cooley was acting for the entities, not De Meo. De Meo retained his own attorney to represent his interests in connection with the buyout transaction, and De Meo did not rely on Cooley to negotiate on his behalf.
Without an attorney-client relationship with De Meo, the court held, Cooley owed him no fiduciary duties. Because De Meo was not a client, Rule 1.13(f) could not provide any basis for a claim. Likewise, there was no basis for De Meo’s fraudulent concealment claim.
Lesson
The default rule remains that an attorney representing a business entity pursuant to a written representation agreement does not also represent the entity’s owners. An implied attorney-client relationship with the owners will only be found when the evidence shows that the parties intended and acted in that manner.