An attorney who represents companies, particularly small companies, must take care not to unintentionally create an attorney-client relationship with individual shareholders or partners. The consequences of creating a relationship can be serious if the attorney unknowingly assumes a competing fiduciary duty to the constituents of the corporate entity. In Sprengel v. Zyblut, (2019) 40 Cal.App.5th 1028, the Court of Appeal summarized the factors courts consider to determine whether a corporate attorney also represents the individual shareholders or partners.
The general rule is an attorney who represents a corporation represents only the entity, not the individual shareholders or directors. Rule of Professional Conduct 1.13 provides a lawyer employed or retained by an organization represents the organization, acting through authorized individuals within the organization overseeing the engagement. California courts recognize other jurisdictions have held that an attorney representing a corporation may owe duties to individual owners with whom he or she has had “close interaction.” However, under California law, the mere fact an attorney may foresee an adverse consequence of advice on an individual shareholder does not create an attorney-client relationship.
Under some circumstances an attorney’s representation of a partnership may create an implied attorney-client relationship with the individual partners. The court will consider whether the totality of the circumstances implies an agreement by the attorney not to accept representation adverse to an individual partner’s personal interests. Other factors include the type and size of the partnership, the nature and scope of the attorney’s representation, the kind and extent of contacts between the attorney and the partners, and the attorney’s access to information related to the individual partner’s interests.
Attorneys who perform work for entities should be aware of factors courts will consider to determine whether an attorney-client relationship exists to steer clear of unintentionally creating attorney-client relationships with shareholders or partners. An effective first step is a retention agreement clarifying the identity of the client. This should be followed by conforming the representation consistent with protection of the entity’s interests above all else. This can help an attorney avoid unintentionally assuming conflicting fiduciary duties.
About the Author:
John Sullivan is a partner at Long & Levit, where he handles professional liability cases, attorney fee disputes, partnership disputes, and state bar disciplinary matters. He also serves as the Chair of BASF’s Legal Malpractice Section.