A recent decision from California considered
and rejected the suggestion that an individual who had been a member of an LLC and then a shareholder in a successor converted corporation
was, individually, a client of the firm retains to effect that
conversion. Brafman v. Wilson Sonsoni Goodrich & Rosati P.C., No. A153595,
2019 WL 2267049 (Ca. Ct. App. 1st Dist. May 28, 2019).
Ori Brafman and Peter Sims started a business assisting business
authors. In December
of 2014, under
the name “Silicon Guild,” they retained an unnamed law firm to organize their venture as an LLC, jointly owned by each of them.
By mid-2015, they decided the company should
be a C corporation
in order
that it could take in additional capital. Sims contacted
Wilson Sonsoni (“WSGR”) to assist in the incorporation process. In connection therewith, Sims, on behalf of Silicon Guild, signed an engagement letter
with WSGR, it providing that WSGR had been “retained to advise Silicon Guild (the
“Company') with respect to formation and general corporate matters.” That same engagement letter
went on to specify that the representation was
of the company “and not any of its affiliates, owners, or agents, or any of the individuals associated
with the Company.” The engagement letter
went on to provide that WSGR’s representation of
the company did not mean that it “represent[ed] any of the Company’s parents,
subsidiaries, employees, officers, directors, shareholders, or founders.” After signing the engagement letter, Sims emailed a copy of it to Brafman. Shortly thereafter, WSGR realized that Silicon Guild
LLC already existed, and that the process would involve the conversion of that LLC into a C corporation. Throughout this process, WSGR communicated
primarily with
Sims. While that process was continuing, and even as the company was signing up customers, the relationship
between Sims
and Brafman deteriorated, and Sims was no longer willing
to proceed as an equal owner in Silicon Guild. Working
with WSGR, Sims drafted a proposal in which he would become the 90% owner of the corporation, Brafman would hold
5%, and two other individuals would
split the remaining 5%.
Sims and Brafman agreed to
mediate their
dispute over
the ownership
of the company. While that mediation process was
taking place, Sims retained WSGR to incorporate
a new company, Parliament, it having the same purpose as Silicon
Guild. To that end, Sims signed a new engagement
letter with
WSGR for the incorporation of
Parliament.
WSGR
asserted it did not know, and had no reason to know, that Parliament was
intended to compete with Silicon Guild. WSGR did send an e-mail to both Brafman
and Sims setting forth its understanding that its relationship with Silicon
Guild was ending, and that WSGR was going forward engaged by Parliament. Brafman, having certainly by this point
learned of Sims' efforts with respect to Parliament and WSGR’s relationship
thereto, “did not seek a temporary restraining order or injunction to stop Sims
or WSGR's actions with respect to Parliament.”
At the culmination of the mediation, Brafman sold his
interest in Silicon Guild to Sims, and Sims, Silicon Guild and Parliament, as
well as Brafman, entered into comprehensive releases. Two months after that
settlement, Brafman filed his initial complaint against WSGR, which a year and
a half later was followed by an amended complaint alleging seven causes of
action against WSGR. Each of these
claims was premised, inter alia, upon
the notion that Brafman was a client of WSGR. WSGR then moved for summary
judgment and, after oral argument, the trial Court issued a ruling granting the
requested summary judgment on the basis that WSGR owed no duty to Brafman. This
appeal followed:
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Affirming the summary judgment and a
determination that WSGR owed no fiduciary or similar obligations to Brafman,
the court began by reviewing the necessary elements for the attorney-client
relationship to arise, including that the clients belief that they were being
represented is of itself “not sufficient
to create such a relationship, as that belief must have been reasonably induced
by representations or conduct by the attorney.”, citing Fox v. Pollack, 181 Cal. App. 3d 954, 959 (1986). In this respect,
the court looked to the engagement letter, which “limited the scope of
representation to formation and corporate matters and expressly disclaim
representation of any person or entity other than the company Silicon Guild.”
In addition, “WSGR did not perform any other work for Brafman or have any
interaction with Brafman that would have led him to reasonably believe WSGR
represented him personally in any capacity.” The court as well rejected Brafman’s
efforts to recharacterize Silicon Guild LLC as a partnership and to then apply
the elements of an attorney-client relationship arising from a partnership
circumstance, finding that even under that paradigm, Brafman failed to
demonstrate that an attorney-client relationship would have arisen.
Turning to the assertion that the engagement letter with WSGR
was invalid on the basis that the intended C corporation did not exist, and
after noting that Silicon Guild LLC, while perhaps inartfully described, was in
existence, the court noted that a contract with a nonexistent party is simply
void. The invalidity of that engagement letter between the firm and the not yet
existing business entity would not have the consequence of creating an
attorney-client relationship between WSGR and Brafman Even then:
Moreover, public policy favors allowing attorneys to
represent only the entity being incorporated, to avoid potential conflicts that
could arise with continued representation of the newly-incorporated company and
its founders after incorporation.
Next, the court dismissed, on the basis of derivative action
standing, Brafman’s allegations that WSGR’s actions caused him injury. Finding
there to be no standing, the court determined that, even if the allegations
were true, the injury was to Silican Guild, LLC. As such, Brafman had no
individual injury, and having not satisfied the requirements for bringing a
derivative action, he lacked standing to proceed.
This case is yet another that may be categorized under the
heading “no good deed goes unpunished.” WSGR, while perhaps without as firm a
grasp of the facts as would have been desired, at least got a signed engagement
letter specifying who was its client and what it was engaged to do. That letter
was provided to Brafman, the plaintiff in this action. It was that written
engagement letter that provided the bulk of the successful defense of this
action. Still, it is unfortunate that the firm, through an appeal, had to
defend the allegation of an attorney-client relationship that was in direct
opposition to that written agreement.
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