LLC’s Members are not Clients of the LLC’s Attorney

LLC’s Members are not Clients of the LLC’s Attorney

       In a recent decision from the Seventh Circuit Court of Appeals, it affirming the holding of the trial court, it was confirmed that an attorney to an LLC is not, consequent to that role, the attorney for the LLC’s members. Reynolds v. Henderson & Lyman, __ F.3d __, 2018 WL 4348013 (7^th Cir. Sept. 12, 2018).

      Reynolds was a member of several LLCs that had retained Henderson & Lyman (“H&L”) as its legal counsel. Reynolds would allege that H&L gave advice, ultimately incorrect or incomplete, that led him to violate certain federal securities disclosure laws in the preparation of the LLC’s financial statements. Reynolds, for himself, brought suit against H&L. The trial court rejected that suit on the basis that Reynolds could not bring a malpractice suit for himself when he did not have a personal attorney-client relationship with Henderson & Lyman. It was that determination that was appealed to the Seventh Circuit Court of Appeals.

      As recounted by the Seventh Circuit, in the course of upholding the trial court’s dismissal, it was observed that:

Reynolds admits that he never asked H&L to represent him and that H&L never said anything that suggested it thought it was representing him.  In other words, the parties never entered into any agreement that would have created an attorney-client relationship between them.  H&L did have an attorney-client relationship with the LLCs that Reynolds co-owned and managed, but that is different.  It was in his capacity as a managing member of these LLCs that Reynolds communicated with, and was advised by, H&L.  Reynolds’s primary argument on appeal is that H&L owed him something akin to a third-party duty of care arising out of its representation of the LLCs, because his personal interest were so closely bound with the interest of the LLCs as to be functionally indistinguishable.  This theory might sound plausible on its face, but unfortunately for Reynolds it is foreclosed by decades of Illinois law.

Illinois courts consistently have held that neither shared interest nor shared liability gives rise to third-party liability.  For third-party liability in Illinois, Reynolds must have been a direct and intended beneficiary, and “[s]imply because the [officers of a business entity] were at risk of personal liability does not transform the incidental benefits of [the law firm’s] representation of [the business entity] into direct and intended benefits for [the officers]. In fact, the only time an Illinois attorney owes a duty of care to third party is when the attorney was hired for the primary purpose of benefitting that third party.  Illinois courts have emphasized that the primary purpose of a retainer agreement between a business entity and a lawyer is to benefit the business entity, not to benefit that entity’s owners or officers, however closely aligned their interests might be. (citations omitted)

      The court went on to observe that any “contrary rule would undermine the integrity of the attorney-client relationship by forcing attorneys to assume competing duties of care to non-clients.” and that:

In addition, the rule that Reynolds asks us to adopt would chip away at the legal distinction between entities and individuals-a distinction that serves as the basis for the existence of many business structures, including that of the LLC. It would be bizarre indeed if a business’s owners or officers could cloak themselves in the protections provided by the limited-liability corporate structure when they entered contracts or defend against a lawsuit, yet cast that structure aside when seeking to recover as plaintiffs for injuries sustained by the business. In law, as in life, double standards are frowned upon.