McElhaney on Litigation
The Tangled Web
Lawyers Who Aren’t Careful About Where They’re Going Can Wind Up in a Trap
Posted Sep 29, 2005 1:38 AM CST
By James W. McElhaney
Mail call!” said Angus, putting a cup of dark mountain roast coffee and a cranberry walnut scone on my desk. “Your fee for telling me what you think is behind this letter.”
I started on the coffee and scone first, just to keep Angus from taking them back in case he didn’t like my answer. Then I read.
Whatever happened to the attorney-client privilege?
My oldest client, Farley McClintock, passed away a few months ago, and suddenly I’m beset with all kinds of crazy claims against me arising out of problems with Farley’s corporation, his estate, his estranged wife and his unhappy girlfriend. I expect the Internal Revenue Service will get into the act before long.
I began representing Farley 25 years ago when he started a small upholstery shop that did remarkably well, eventually growing into a large operation.
I was with him from the beginning. When Farley decided to incorporate, I did that for him, and ever since I’ve handled all of his legal matters, like contracts, leases and even labor disputes.
Right from the start, the company was McClintock’s corporate alter ego. It owned his house, bought his cars, paid his country club dues, covered the cost of his clothes, food and entertainment, and paid all of my fees, no matter what kind of work I did for him. Ten years ago, Farley got married and gave 20 percent of the stock in his corporation to his wife, Margo, as a wedding present. Margo was the only other shareholder and left all of the details of running the business to Farley.
Unfortunately, the marriage didn’t go well, and after five unhappy years, Margo and Farley separated. Farley tried to buy Margo out of the company, but she insisted on hanging on to her 20 percent of the stock.
That’s when unknown to me at the time Farley started skimming some of the profits out of the company (with the aid of some creative accounting by his bookkeeper). Then about a year ago, Farley was diagnosed with a serious illness, and he asked me to help him put his affairs in order, including everything to do with his business. And that’s when Farley told me he had already skimmed more than $5 million out of the corporation’s profits.
Even though I advised against it, he told me he was going to keep on skimming so he could afford to give a $1 million birthday check to his girlfriend, Misty. Of course, those were confidential communications.
Meanwhile, Margo and Misty were as happy as clams. Margo continued to get substantial corporate dividends, and Farley paid for Misty’s penthouse in addition to giving her a generous “allowance.”
Neither one had any idea that Farley was terminally ill.
But I knew. And one day about six months before he died, Farley walked into my office and said, “Counselor, I’ve decided what I’m going to do with all of my money. I’m going to take it with me!
“While I look fine and feel fine, the docs tell me I’ve got less than half a year left—and then one day I’ll just be gone.
“So instead of sitting around and worrying about it, I’m going out with a bang instead of a whimper. With a little creative borrowing, I’ve put together $18 million in spendable assets. That gives me $3 million a month—$100,000 a day—to have the biggest bash I can. I’m going to play in every part of the world I’ve always wanted to see, do everything I’ve ever wanted to do.”
Five months later, Farley collapsed and died while trying to fly to Patagonia in a balloon. Within weeks, Misty’s lawyer started sniffing around my office, making some kind of claim that Misty had relied to her detriment on Farley’s promise of a $1 million birthday present. This lawyer wanted to take my deposition, saying there was no attorney-client privilege because I represented the corporation and not Farley, so anything he told me was fair game.
When Margo’s lawyers got hold of the corporate books, they filed a claim against Farley’s estate. They want to take my deposition, too, saying that since Farley died, I no longer have a client to protect.
What do you think?
Blameless in Baltimore
I looked up. “He really doesn’t understand how deeply tangled he is in his dead client’s web, does he?” I said. “Maybe because he’s in shock over losing his most important client.”
“Maybe his only client,” said Angus. “And he certainly isn’t thinking clearly.” “If he were,” I said, “he would have signed his letter ‘Bumbling in Baltimore’ instead of ‘Blameless.’ ”
“It’s a classic example of the kind of mess that thousands of lawyers get into every year,” said Angus. “And the heart of the problem is the basic conflict of interests. As Larry Fox of Philadelphia says, ‘Any lawyer who tries to represent both the CEO and the corporation has to be extremely careful.’ ”
“You can see how easy it was for Bumbling to walk into the minefield,” I said. “First he represented Farley. Then he set up the corporation and did all of its work. So both Farley and Bumbling thought of the corporation as an extension of Farley, which for practical—but not legal—purposes it was.”
“Right,” said Angus. “But as soon as Margo became a 20 percent owner of what had been just Farley’s corporation, the potential for trouble multiplied.”
“Who do you suppose did the legal work for the transfer of stock to Margo?” I said. “Probably Bumbling,” said Angus. “And if he had made a provision for Farley to buy back the stock in the event of a divorce or separation, that might have avoided some serious problems.”
“But he didn’t,” I said, “because his mindset was that he still had only one client.” “Bumbling better hope there’s enough money left in the corporation and Farley’s estate to make Margo whole,” said Angus.
“Why?” I said.
“Remember the savings and loan collapse?” said Angus. “Well, before the bottom fell out, Lincoln Savings and Loan had a prominent national law firm evaluate its practices to see if it was violating any federal regulations. The law firm came back with a report that detailed all the things the company was doing wrong.
“The problem was, the law firm reported to management and not to the shareholders. “ ‘That kept the shareholders from protecting themselves until it was too late,’ said the lawyers for the corporation Congress had set up to locate assets of the failed savings and loans.
“ ‘Wrong,’ said the law firm. ‘We had no duty to report to the shareholders.’
“ ‘Sorry,’ said the lawyers pursuing savings and loan assets, ‘but you were working for the whole corporation—not just management.’
“And the law firm settled the case for $53 million—only about half of which was covered by insurance.”
“Which makes me wonder how much malpractice insurance Bumbling has,” I said. “This $18 million Farley cobbled together is no trifle—not to mention what he was skimming.”
“And whether Bumbling even has insurance,” Angus said.
This May Hurt
“And if he has insurance, whether it will cover this risk,” I said. “Deliberately helping one shareholder cheat another doesn’t exactly sound like an ordinary ‘error or omission’ to me.”
“Meanwhile, Bumbling seems to think the attorney client privilege covers a client’s statement about committing a crime or a fraud in the future,” Angus said.
“And since it doesn’t, Farley’s statements might help prove Misty’s case, if she’s got one,” I said. “So, do you think it’s time to call Bumbling and break the news?” “No way,” said Angus. “I wouldn’t trust him with a verbal communication, even if I recorded it. He’s going to get a certified letter, return receipt requested, explaining that he needs to notify his insurance at once and get a lawyer—but that we will not represent him.”
“Pretty tough, don’t you think?” I said.
“That’s part of being a lawyer,” said Angus. “It’s not all coffee and scones.”
James W. McElhaney is the Baker and Hostetler Distinguished Scholar in Trial Practice at Case Western Reserve University School of Law in Cleveland and the Joseph C. Hutcheson Distinguished Lecturer in Trial Advocacy at South Texas College of Law in Houston. He is a senior editor and columnist for Litigation, the journal of the ABA Section of Litigation.