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 (7th 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.
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