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Ethics & Professional Responsibility FLASHPOINTS December 2018

December 14, 2018Print This Post Print This Post

Terrence P. McAvoy & Thomas P. Sukowicz
Lawyers for the Profession, Hinshaw & Culbertson LLP, Chicago
312-704-3000 | E-mail Terrence McAvoy | E-mail Thomas Sukowicz

Law Firm Retained To Represent LLC Owes No Duty to Owner or Officer of LLC

In Reynolds v. Henderson & Lyman, 903 F.3d 963 (7th Cir. 2018), the Seventh Circuit Court of Appeals affirmed the grant of summary judgment to the defendant law firm on the basis that the law firm did not have an attorney-client relationship or owe a duty to a coowner and manager of an LLC.

The plaintiff was the coowner and manager of an LLC. He filed suit against the defendant law firm for legal malpractice. According to the plaintiff, the defendant firm provided him with bad advice, causing him to violate federal laws when he drafted the LLC’s financial statements. The plaintiff never asked the law firm, however, to represent him personally. Instead, the defendant only represented the LLC. The district court granted summary judgment in favor of the defendant because the plaintiff did not have a personal attorney-client relationship with the defendant. The plaintiff appealed. His primary argument on appeal was that he was essentially a third-party beneficiary to the attorney-client relationship. The plaintiff’s reasoning was that his personal interests were very closely tied to the interests of the LLC, such that their interests were indistinguishable.

The Seventh Circuit affirmed the district court’s decision and relied on long-standing Illinois law that has consistently held that neither shared interests nor shared liability give rise to third-party liability. Third-party liability in Illinois requires a plaintiff to have been a direct and intended beneficiary. It is not enough that the officers or owners of a business entity are at risk of personal liability to morph the benefits of a law firm’s representation of a business into direct and intended benefits for the owners or officers. Reddick v. Suits, 2011 IL App (2d) 100480, ¶44, 960 N.E.2d 1182, 356 Ill.Dec. 59. Lawyers and law firms owe a duty of care to only those whom they were hired for the primary purpose of benefitting. Schechter v. Blank, 254 Ill.App.3d 560, 627 N.E.2d 106, 109, 193 Ill.Dec. 947 (1st Dist. 1993). Illinois courts have consistently held that when a law firm is hired to represent a business entity, the representation is to benefit the business entity, not the owners or officers.

The Seventh Circuit went on to explain that they cannot change Illinois law, but even if they could, the court agreed with the law. Holding otherwise would begin to erode the purpose of an LLC or business in the first place — an owner or officer cannot use the legal protections of an LLC but then “cast them aside” when it comes to attorney-client relationships. The court thus concluded that the plaintiff failed to demonstrate an attorney-client relationship or a duty owed to him to support his legal malpractice claim. Under well-settled Illinois law, a plaintiff must prove five elements to prevail on a claim for legal malpractice: “(1) an attorney-client relationship; (2) a duty arising out of that relationship; (3) a breach of that duty; (4) causation; and (5) actual damages.” Washington Group International, Inc., v. Bell, Boyd & Lloyd, LLC, 383 F.3d 633, 636 (7th Cir. 2004), quoting Griffin v. Goldenhersh, 323 Ill.App.3d 398, 752 N.E.2d 1232, 1238, 257 Ill.Dec. 52 (5th Dist. 2001).

The plaintiff also argued on appeal that a jury was required to decide whether a duty was owed in a professional negligence matter. However, federal law holds that the question of whether a duty exists is a question of law for the judge. Dunn v. Menard, Inc., 880 F.3d 899, 906 (7th Cir. 2018). And, even if duty were a question for a jury, Illinois law holds that representation of a business entity is for the benefit of the business, not the owners and officers, which was again fatal to the plaintiff’s alleged claim.

Finally, the plaintiff argued there was a breach-of-contract claim against the defendant, but the Seventh Circuit determined that the claim was duplicative and failed for the same reason: there was no contract with the plaintiff, only the LLC and not for the benefit of plaintiff.

With this decision, the Seventh Circuit reaffirmed long-standing Illinois law — you must have an attorney-client relationship to support a malpractice claim, and a law firm retained to represent an LLC owes no duty to an owner or manager of the LLC.

California Court Holds Plaintiff Must Only Prove Attorney Was “Substantial Factor” of Loss, Rejecting “But For” Causation

In Knutson v. Foster, 25 Cal.App.5th 1075, 1077, 236 Cal.Rptr.3d 473 (2018), a competitive swimmer was successful in reinstating a jury verdict against her lawyer for fraudulent concealment and intentional breach of fiduciary duty. The court of appeal determined the jury verdict was supported by the evidence because the swimmer need only prove that her attorney’s conduct was a substantial factor in the result, not that she would have obtained a better result “but for” her attorney’s alleged conduct.

The plaintiff, a rising swimming star, agreed to forgo swimming in college when the head coach of USA Swimming orally agreed to provide room, board, tuition, and a stipend and train her at the “Center for Excellence” in Fullerton, California, while she earned a college degree if she would swim professionally and competitively. The agreement was never reduced to writing, and shortly after she arrived in Fullerton, USA Swimming’s head coach was fired. The plaintiff retained the defendant to get USA Swimming to honor the oral agreement. The defendant considered himself a high-level person in the aquatics industry and had an ongoing relationship and close personal ties to people at USA Swimming. The defendant formerly represented USA Swimming’s head coach in his employment contract but declined to represent him in a wrongful-termination suit because he did not want to have a negative relationship with USA Swimming in the future. The defendant specifically told the former USA Swimming head coach that he would have a conflict of interest in suing USA Swimming. The plaintiff testified she was never informed of these facts.

The defendant negotiated with USA Swimming and eventually helped the plaintiff obtain an agreement for the support and training that included performance markers, which were not initially discussed with the former head coach. (At trial, plaintiff's expert testified that only one percent of top athletes would have met the performance markers.) The plaintiff failed to meet the performance markers, entered treatment for an eating disorder, lost USA Swimming’s support, and ultimately quit competitive swimming. Two years later, the plaintiff learned about the defendant’s conflict. Feeling betrayed, she sued for fraudulent concealment and breach of fiduciary duty. The jury ruled in favor of the plaintiff and awarded over $600,000 in damages. The trial court granted the defendant’s motion for a new trial on the grounds that the plaintiff failed to demonstrate causation. The plaintiff appealed.

The appellate court determined the trial court erred by applying an incorrect causation standard in granting a new trial. The court noted the well-recognized standard from Viner v. Sweet, 30 Cal.4th 1232, 70 P.3d 1046, 1054, 135 Cal.Rptr.2d 629 (2003): in a legal malpractice action, a plaintiff must show that “but for the alleged malpractice, it is more likely than not that the plaintiff would have obtained a more favorable result.” Knutson, supra, 25 Cal.App.5th at 1091. However, the court also noted that there is different causation for legal malpractice than there is for fraudulent concealment and intentional breach of fiduciary duty. The standard for causation in a fraud claim and an intentional breach of fiduciary duty is determined using the substantial factor test. The court determined the trial court recognized the different standards of causation but incorrectly applied the legal malpractice standard to the fraudulent concealment claim.

In the fraud and intentional breach-of-fiduciary-duty claims, the plaintiff must prove “it was more likely than not that the conduct of the defendant was a substantial factor in the result.” [Emphasis by Knutson court.] Stanley v. Richmond, 35 Cal.App.4th 1070, 1095, 41 Cal.Rptr.2d 768 (1995). The appellate court concluded that when the correct (and lower) standard was applied, there was enough evidence to support the jury’s verdict. The court also allowed for recovery of emotional distress, veering from California precedent that only allowed recovery of noneconomic damages where a liberty interest was involved. See Holliday v. Jones, 215 Cal.App.3d 102, 264 Cal.Rptr. 448 (1989).

For more information on Ethics and Professional Responsibility, see ATTORNEYS’ LEGAL LIABILITY — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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