By David Majchrzak and Edward McIntyre
19.4.2 Sprengel v. Zbylut (2019) 40 Cal.App.5th 1028 – Court of Appeal of California, Third Appellate District (September 10, 2019 [modified September 17, 2019 and November 4, 2019])
Issue:
Do lawyers potentially owe duties to a member of a limited liability company when the lawyers’ representation of the company causes the member to incur expenses to defend personally owned copyrights?
Analysis:
Potentially, yes. Former Rule of Professional Conduct 3-600 provides that lawyers representing an entity owe no duties to the entity’s constituents unless there is an implied relationship, such as one arising from conduct reasonably suggesting that the lawyers will protect the constituent’s interests.
The manager of a two-member LLC engaged counsel to represent the company in actions to dissolve the company and to hold the other member liable for infringing the company’s copyrights. But the LLC’s operating agreement stated that each was a 50% owner, neither having authority to bind the company without the consent of the other. After the litigation ended, the other member sued the lawyers, claiming they acted without the member’s consent and acted against the member’s interests.
But in this case, the lawyers represented only the company and there was no conduct suggesting that the lawyers represented the non-manager lawyer. Rather, they had taken a position directly adverse to her and the company, not she, had paid the fees.
Whereas shareholders may, in such circumstances, have standing to bring a derivative suit against lawyers for damages caused to the entity by negligent representation, they do not have standing to bring claims based on their own personal losses. There is no authority providing that, “standing alone, a lawyer’s representation of a closely-held corporation gives rise to professional duties to the individuals shareholders with respect to personally-held rights that are both separate from, and adverse to, the corporation itself.”
Notwithstanding this, it was proper to disqualify lawyers who had not obtained consent of both 50% members in an LLC where the LLC had no legitimate interest independent of the owners in the copyright action. The court remarked that, if the two members could not agree on a lawyer to represent the entity’s interests, then they could have stipulated to appointment of independent counsel.
David Majchrzak and Edward McIntyre are co-editors of Ethics Quarterly.