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Business Divorce and Attorney-Client Relationship

| Nov 3, 2016 | Business Management, Legal Ethics, Texas Law Update, Uncategorized

In our previous blog post titled Is My Company’s Lawyer Also My Lawyer?, we talked about attorney-client relationship in the context of an LLC business divorce case.  In that case, Yun, one of the two business partners, refused to produce certain documents in her possession during discovery, claiming attorney-client privilege.  For a party to asset this privilege, however, there must be an attorney-client relationship, which arises when someone contacts an attorney in his or her capacity as an attorney for the purpose of obtaining legal advice.  The court found that Yun’s use of her personal email address to communicate with the attorney about the legal work to be done for the benefit of the company and the attorney’s belief that he represented Yun as an individual were not sufficient to establish an attorney-client relationship.

Recently, an appeals court in Texas addressed the same issue in the context of a closely held corporation.[1]  In that case, two business partners, Krueger and Torres, co-founded a renewable energy company called Cru Energy, Inc.  Over time, the parties’ relationship deteriorated as the two wrestled over control of the company, which led to a messy legal battle beginning in 2011.  The underlying case involved a multitude of issues, including breach of fiduciary duties, fraud, conversion, and tortious interference claims, as well as a temporary restraining order against Krueger and a Chapter 7 bankruptcy petition filed by Krueger.  The appeal was an offshoot of what the court called the long-running “business divorce” litigation, whose immediate focus was legal malpractice claims asserted by Torres, derivatively on behalf of the company, against two attorneys and their law firm who represented Krueger (the “lawyers”).

For Torres to be able to assert legal malpractice claims against the lawyers on behalf of the company, however, there must be an attorney-client relationship between the lawyers and the company.  According to the court, this relationship arises when an attorney and client mutually agree that the attorney will render professional services for the client.  And while such an agreement need not necessarily be express and may sometimes be implied from the objective manifestations of the parties’ conduct, the court said, in either case “there must be evidence both parties intended to create an attorney-client relationship.”

That said, the lawyers presented evidence that they had once represented Krueger pursuant to an explicit engagement letter but had never represented the company—and that, in fact, much of their representation of Krueger had been adverse to the company.  Meanwhile, the only proof that Torres offered in support of his claim that there was an implied attorney-client relationship between the lawyers and the company consisted of emails and other communications between the lawyers and Krueger.  Torres argued that those communications objectively manifested the relationship’s evolution from representation of Krueger alone to representation of the company Krueger had come to control.  The court, however, disagreed, finding that the evidence was merely consistent with the lawyers’ representation of Krueger and not sufficient to show an attorney-client relationship.

So the question to ask, before we even get to whether my company’s lawyer is also my lawyer, might be whether the lawyer representing my business partner is also my company’s lawyer.  While it seems highly unlikely that Torres was confused about whom the lawyers represented in this case, one lesson to be learned here is to clearly define and document the relationship to avoid any ambiguities.

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This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally Torres v. Whitaker Chalk Swindle & Schwartz, PLLC, No. 03-15-00706-CV (Ct. App.—Austin June 15, 2016).  Unless otherwise noted, all references to the case are from this citation.  See also Krueger v. Torres, No. 14-11355 (5th Cir. Jan. 19, 2016).