You’re an attorney. You’re approached by Mortimer who tells you that he recently formed a new business corporation with Archibald, and that they want to hire you to prepare a shareholders’ agreement. You also learn that Mortimer is the 51% "money" partner while Archibald is the 49% operating partner.
You’ve prepared many a shareholders’ agreement, and you know that the interests of Mortimer as majority owner and Archibald as minority owner inherently are in conflict on diverse management and financial issues, not to mention restrictions on stock transfer and redemption. Should you represent both Mortimer and Archibald, or only one of them? The disparate financial wherewithal and contributions of the two partners only accentuates the conflict. If you represent Mortimer alone, and Archibald has no attorney of his own, is that a problem?
The rules of professional ethics set forth standards and proscriptions governing the simultaneous representation of multiple clients with conflicting interests. Under the right circumstances, with appropriate client counseling and disclosure, it may be ethically acceptable to represent both Mortimer and Archibald in the preparation of the shareholders’ agreement. In all events, it is vitally important that the attorney identify and document exactly whom they’re representing — and whom they’re not representing — in these situations. The lawyer who fails to do so is taking on risk of a subsequent lawsuit by a disappointed shareholder for malpractice or fiduciary breach.
That’s pretty much what happened in Schlissel v. Subramanian, 2009 NY Slip Op 52188(U) (Sup Ct Kings County Oct. 26, 2009), decided by Kings County Commercial Division Justice Carolyn E. Demarest. The plaintiff, Schlissel, and the defendant, Wasan, decided to buy a Dunkin’ Donuts franchise in Brooklyn. Wasan, the money partner, was to own 75% and Schlissel the remaining 25% in consideration of past services and for helping Wasan legalize the franchise. In early 2002, Schlissel contacted attorney Van Epps to form a new corporation to acquire the franchise. Van Epps’ initial engagement letter named Wasan as the client and made no mention of Schlissel. Some months after forming the corporation Van Epps also prepared bylaws, stock certificates and tax documents reflecting the 75%/25% ownership, which Schlissel and Wasan jointly executed. In this same time period Van Epps met with Schlissel on at least two occasions in connection with setting up the corporation.
In early 2003, Van Epps proposed to Wasan (but not to Schlissel) that Wasan capitalize the company with $725,000 of which about $90,000 would be loaned to Schlissel for her contribution while reducing her ownership to 12.5%. Wasan agreed. Van Epps prepared a shareholders’ agreement, new stock certificate and promissory note, all dated "as of" February 1, 2003, reflecting Wasan and Schlissel as 87.5% and 12.5% shareholders, respectively. Van Epps sent the documents to Wasan with a note stating that he should
review this [shareholders’] agreement with Jeanne Schlissel and advise if any additional changes are required. As I mentioned in our meeting, Jeanne should hire an attorney to review this agreement and the note on her behalf.
Van Epps also prepared another engagement letter dated February 5, 2003 to be signed by Wasan as the client and by Schlissel as consenting to Van Epps’ representation of Wasan. The letter stated:
I am pleased to represent you in connection with the preparation of a shareholders agreement for Tim & Tab Donuts, Inc.
[After stating the terms of the engagement, the letter continued:] If you agree with the foregoing terms, please indicate by signing below and returning a copy of this letter to me at the above address. Please ask Jeanne Schlissel to sign below indicating her approval of my representation of you.
Immediately above the signature line reserved for Schlissel, the letter stated:
With my signature below, I hereby consent to your representation of [Wasan] in connection with the preparation of a Shareholders Agreement for Tim & Tab Donuts, Inc. and other matters when and as requested by him.
Schlissel and Van Epps disputed the timing of these events. According to Schlissel’s complaint, Wasan brought the corporate documents to her home on February 1, 2003, where she signed them. Schlissel contended that she signed the corporate documents "without having the opportunity to discuss them with Van Epps" because she believed that
as my attorney Mr. Van Epps was protecting my interests. At no point prior to my execution of the [corporate documents], did Mr. Van Epps communicate with me in any manner concerning these documents, in no way did he suggest that any material change in the corporation was occurring, nor did he remotely hint that a notable change effecting [sic] me was in view.
Several days later, she further alleged, she received the February 5 engagement letter and also got a "curt" phone call from Van Epps telling her that he no longer represented her and that this was "in her best interests".
Van Epps contended that Schlissel signed the corporate documents after she signed the February 5 engagement letter, and he denied having the telephone conversation.
Approximately five years later — apparently, Schlissel’s annual K-1 tax forms until 2008 continued to show her with a 25% interest — Schlissel sued Wasan and Van Epps, among other claims, for breach of fiduciary duty in connection with the dilution of her stock interest from 25% to 12.5%. As summarized by Justice Demarest, Schlissel asserted that Van Epps "unilaterally advanced Wasan’s interests over those of plaintiff, that he prepared certain corporate documents for the purpose of diluting and diminishing plaintiff’s interest in [the company], and that he concealed material information from plaintiff concerning the adverse contents of these documents."
Van Epps moved to dismiss the claim, arguing that he was not Schlissel’s attorney and therefore owed her no fiduciary duty. He pointed to the initial 2002 engagement letter which stated that Wasan was his client and, by implication, that he was not representing Schlissel. Justice Demarest observed that "[t]here is no set of rigid rules that must be followed to form an attorney-client relationship" which "may exist without an explicit retainer agreement or payment of fee." Rather, the "court must look to the actions of the parties to ascertain the existence of such a relationship . . . bearing in mind that plaintiff’s unilateral belief does not confer upon her the status of defendant’s client."
Applying this standard, and assuming the truth of Schlissel’s allegations for purposes of a motion to dismiss, Justice Demarest found that Schlissel "had reason to believe" Van Epps was her attorney based on the fact that she was the one who first sought him out, her multiple meetings with Van Epps in 2002, and Van Epps’ preparation of the initial corporate and tax documents signed by Wasan and Schlissel in April and May 2002.
Van Epps alternatively argued that any attorney-client relationship he had with Schlissel terminated when she counter-signed her consent on the February 5, 2003 engagement letter with Wasan. Justice Demarest disagreed, for two reasons. First, Van Epps’ allegation, that Schlissel signed the shareholders’ agreement and related documents after expressly consenting to his retention by Wasan, was contradicted by Schlissel’s affidavit, and thus raised an issue of fact not resolvable on a motion to dismiss.
Second, under Rule 1.9 of the Rules of Professional Conduct, Van Epps was required to get Schlissel’s "informed consent, confirmed in writing," before he could terminate any pre-existing attorney-client relationship with Schlissel while continuing to represent Wasan’s interests adverse to Schlissel. According to Justice Demarest,
[t]he cursory "consent" signed by [Schlissel] does not evidence the requisite informed consent to overcome the edict of the Rule. There is no claim that Van Epps met with [Schlissel] or specifically advised her of the conflict of interest implicated in the proposed representation of Wasan alone.
Justice Demarest accordingly denied Van Epps’ dismissal motion, finding that Schlissel’s complaint "sufficiently alleges that Van Epps represented conflicting interests at the time [Schlissel] signed the corporate documents" and damages resulting from "alleged misconduct by [Van Epps] by his alleged simultaneous representation of adverse interests." Justice Demarest also was careful to note that the "court makes no determination concerning the merits of [Schlissel’s] claims, as the motion to dismiss was addressed solely to the sufficiency of her pleadings and affidavits."
New York’s highest court, in Matter of Kelly v. Greason, 23 NY2d 368, 375 (1968), opined that an attorney-fiduciary "is charged with a high degree of undivided loyalty to his client." In an earlier decision by Justice Demarest, which she cites in Schlissel, she expanded on that principle in the conflicts setting as follows:
An attorney has a fiduciary obligation to bring to his or her client’s attention all relevant considerations when recommending a course of conduct. An attorney who fails to disclose a conflicting representation or circumstance that causes him or her to represent a client with diminished rigor, breaches his or her fiduciary duty to his or her client. (Macnish-Lenox, LLC v. Simpson, 17 Misc 3d 1118 [A], 2007 WL 3086028, *7, 2007 NY Slip Op 52055 [U] [Sup Ct Kings County 2007])
It is not at all unusual for business partners to prefer using a single attorney to set up a new business entity and prepare owner agreements. The level of trust between the partners typically is high at the outset, and the cost of multiple attorneys may be prohibitive. The partners also may be unaware of the conflicting interests involved in putting together a shareholders’ agreement. Schlissel is a strong reminder to attorneys who take on such assignment, as the only attorney on the scene, that they should explicitly and unambiguously document who it is they do and don’t represent, that if they do undertake joint representation they should carefully explain the potential conflicts and make a record of the same, and that they should obtain the written acknowledgment of any non-represented owner before they undertake legal services that, absent such acknowledgment, could reasonably be perceived as acting on behalf of all.