Article Hold Me Close: Lawyers Beware, the Closely Held Company, 0217 UTBJ, Vol. 30, No. 1. 22

Author:Eric Maxfield and Darren Reid, J.
 
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Article Hold Me Close: Lawyers Beware, the Closely Held Company

Vol. 30 No. 1 Pg. 22

Utah Bar Journal

February, 2017

January, 2017

Eric Maxfield and Darren Reid, J.

Utah’s standard for forming an implied attorney-client relationship is nebulous from a loss prevention perspective, creating potential problems for even the most careful practitioner who clearly defines who the client is and the scope of such representation. See Roderick v. Ricks, 2002 UT 84, ¶ 40, 54 P.3d 1119 (“An attorney-client relationship exists when a person reasonably believes that the attorney represents the person’s legal interests. In order for a person to ‘reasonably believe’ that an attorney represents the person, (1) the person must subjectively believe the attorney represents him or her and (2) this subjective belief must be reasonable under the circumstances.” (internal citation and quotation marks omitted)). Though a person’s belief must be reasonable under the circumstances of a particular case, this standard provides a pathway for malpractice claims against lawyers representing only a corporate client. This can be particularly tricky for transactional lawyers helping corporate clients navigate the varied interests of multiple shareholders. It is not uncommon for an officer, director, or shareholder of a company to later argue, “Hey, I thought you were my lawyer, too!”

ARGUMENTS SUPPORTING AN IMPLIED ATTORNEY-CLIENT RELATIONSHIP

The problem intensifies when lawyers represent closely held companies with relatively few shareholders or members. As most transactional lawyers are aware, the line between legal advice to the corporate client and legal advice to the person running the company can sometimes get blurry. Consequently, lawyers must be careful not to unwittingly expand the client relationship or the scope of representation beyond what was originally intended.

In recent legal malpractice cases, plaintiffs have argued that when a lawyer represents a closely held business, Utah courts should automatically impute an attorney-client relationship between the lawyer and the founder or majority shareholder of that closely held company regardless of what the engagement letter or other signed documents provide. The argument suggests that because the company is “virtually indistinguishable” from its founder or shareholder, the lawyer represents both the company and the founder/shareholder individually as a matter of law. See, e.g., In re Brownstein, 602 P.2d 655, 657 (Or. 1979) (“Where a small, closely held corporation is involved…the attorney in such a situation represents the corporate owners in their individual capacities as well as the corporation unless other arrangements are clearly made.”); In re Banks, 584 P.2d 284, 290–91 (Or. 1978); see also Detter v. Schreiber, 610 N.W.2d 13, 17 (Neb. 2000) (holding that lawyer assisting closely held corporation acted on behalf of the corporation and both shareholders); Matter of Nulle, 620 P.2d 214, 217 (Ariz. 1980) (holding that attorney represented two principal owners of closely held company in their individual capacities while also serving as attorney for the company).

In support of implying attorney-client relationships between company lawyers and the founders/shareholders of closely held companies, litigants have pointed to two Oregon cases, Brownstein and Banks, and suggested the Utah Supreme Court implicitly adopted this approach in Margulies v. Upchurch, 696 P.2d 1195 (Utah 1985). In Margulies, the court dropped a footnote citing Banks, noting “where the Oregon Supreme Court found that an attorney who was representing a closely held corporation was in fact representing both the corporation and its dominant shareholder because the interests of both were at stake.” Id. at 1201 n.2.

We do not believe Margulies or current Utah law supports an argument that lawyers for closely held companies per se represent the company’s founder or majority shareholder. Indeed, adopting such a per se standard would turn the legal representation of companies on its head and irrevocably change transactional practice in Utah.

Such a standard is contrary to the well-established rule that “[a] corporation exists apart from its shareholders, even where the corporation has but one shareholder.” Fassihi v. Sommers, Schwartz, Silver, Schwarts & Tyler, P.C., 309 N.W.2d 645, 648 (Mich. Ct. App. 1981). Even in a closely held company “the attorney’s client is the corporation and not the shareholders.” Id.; see also Johnson v. Superior Court, 45 Cal.Rptr.2d...

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