Tcl - Entity Formation: Defining the Client and the Duty of Confidentiality - July 2005 - Professional Conduct and Legal Ethics
| Publication year | 2005 |
| Pages | 77 |
2005, July, Pg. 77. TCL - Entity Formation: Defining the Client And the Duty of Confidentiality - July 2005 - Professional Conduct and Legal Ethics
July 2005
Vol. 34, No. 7 [Page 77]
Professional Conduct and Legal Ethics
Entity Formation: Defining the Client And the Duty of Confidentiality
This column is sponsored by the CBA Ethics Committee. Articles published in this column do not necessarily reflect the views of the Committee and may be those only of the individual authors.
Column Editor:
Susan Bernhardt, Denver, of Netzorg, McKeever, Koclanes & Bernhardt LLP - (303) 864-1000, sbernhardt@ nmkb.com
About The Author:
This month's article was written by Alec Rothrock, Englewood, a share-
When a business fails and fingers start to point, the lawyer who formed the business is a prime target. One or more of the principals may be tempted to sue the lawyer for failing to protect their individual interests. Although there may be nothing wrong with the lawyer's documents for purposes of operating the business, those documents are not likely to protect the principals from each other if the business fails.
A principal who sues the lawyer will claim that he or she thought the lawyer was representing that principal. The lawyer will insist that the representation was only of the company. In many instances, the engagement agreement is inconclusive on the identity of the client or the alleged conflict predates the formation of the company. How can a lawyer represent a company that does not yet exist? It will take a trial to determine whether the plaintiff was the lawyer's client.
This article examines the identity of the client prior to a lawyer's formation of an organization. It discusses an emerging body of case law that identifies the client as the organization, even retroactively, before the entity takes on a legal existence. The article also discusses how lawyers can and should identify the client prior to the entity's official existence. It concludes with a discussion of the duty of confidentiality when lawyers represent multiple parties, such as the entity and one or more of its constituents.
Implied Attorney-Client Relationships in the
Several factors should be considered in the context of entities and the attorney-client relationship. Discussed below are: (1) standards for the implied attorney-client relationships; and (2) retroactive application of the entity rule.
Implied Attorney-Client
An attorney-client relationship is "established when it is shown that the client seeks and receives the advice of the lawyer on the legal consequences of the client's past or contemplated actions."1 The relationship may be inferred from the conduct of the parties. The proper test is a subjective one, and an important factor is whether the client believes that the relationship existed.2
A putative client's subjective belief in the existence vel non of an attorney-client relationship must be objectively reasonable; otherwise, that subjective belief would be conclusive evidence, however unreasonable it may be.3 As a Georgia court stated, "An attorney-client relationship cannot be created unilaterally in the mind of a would-be client; a reasonable belief is required."4
Retroactive Application of
Colo.RPC 1.13(a) states that a lawyer who is
employed or retained by an organization represents the organization which acts through its duly authorized constituents, and the lawyer owes allegiance to the organization itself, and not its individual stockholders, directors, officers, employees, representatives or other persons connected with the entity.5
This is known as the "entity rule."6
According to Arizona Opinion No. 02-06 of the Committee on the Rules of Professional Conduct of the Arizona State Bar (hereafter, "Arizona Opinion"), the "entity" theory holds that "a lawyer may represent the corporation and does not, necessarily, represent any of the constituents that act on behalf of the entity - even if it is a closely held corporation."7
In a 1992 Wisconsin Supreme Court decision, Jesse v. Danforth,8 a group of twenty-three physicians hired an attorney to create and represent a corporate entity for the purpose of purchasing and operating a magnetic resonance imaging ("MRI") machine. Three years after the attorney formed the corporation, another lawyer in the same firm commenced a medical malpractice action against two of the twenty-three physicians. The two physicians moved to disqualify the firm, alleging that they were current clients of the firm by virtue of its formation and continued representation of the MRI entity.
The Wisconsin Supreme Court denied the motion. It reasoned that Wisconsin Rule of Professional Conduct 1.13, which in relevant part is identical to Colo.RPC 1.13, expresses the "entity rule."9 According to the court, the "clear purpose of the entity rule was to enhance the corporate lawyer's ability to represent the best interests of the corporation without automatically having the additional and potentially conflicting burden of representing the corporation's constituents."10 The Court extended the entity rule to the incorporating lawyer's pre-incorporation activities, stating:
If a person who retains a lawyer for the purpose of organizing an entity is considered the client, . . . then any subsequent representation of the corporate entity by the very lawyer who incorporated the entity would automatically result in dual representation. This automatic dual representation, however, is the very situation the entity rule was designed to protect corporate lawyers against.11
The Jesse court then formulated the following "guideline":
[W]here (1) a person retains a lawyer for the purpose of organizing an entity and (2) the lawyer's involvement with that person is directly related to that incorporation and (3) such entity is eventually incorporated, the entity rule applies retroactively such that the lawyer's pre-incorporation involvement with the person is deemed to be representation of the entity, not the person.
In essence, the retroactive...
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