Two important principles governing corporate entities are: (1) the entity is legally distinct from its owners; and (2) the entity’s property and assets belong to the entity, not its owners.

These themes are underappreciated, and frequently arise in many different contexts.

As one example, in an opinion recently published by California’s Second Appellate District — Engel v. Pech — the court held that a malpractice claim against an attorney based on his representation of a partnership was owned by the partnership, not the partnership’s individual partners.

Facts: attorney represents partnership in litigation; individual partner later sues attorney for malpractice

An accounting limited liability partnership, Engel & Engel, LLP (“the LLP), retained an attorney, Richard Pech, to represent the LLP in litigation against Wells Fargo.  While the retainer agreement was signed by both the LLP and one of its partners, Jason Engel (“Engel”), in his individual capacity, the agreement specified that the scope of Pech’s work was limited to representation of the LLP in the litigation.  Engel, individually, was not a party to the litigation.

After the LLP terminated Pech’s representation, Engel (not the LLP) sued Pech for malpractice relating to his work on the case against Wells Fargo.  More than two months later — after the LLP’s statute of limitations on any malpractice claim against Pech had lapsed — Engel amended his complaint to add the LLP as a second plaintiff.

Pech filed a demurrer challenging the amended complaint on the grounds that the LLP’s malpractice claim was time-barred, and that Engel’s malpractice claim was legally defective because only the LLP, as Pech’s sole client in the Wells Fargo litigation, had standing to sue.

Trial court: demurrer sustained; case dismissed

The trial court sustained Pech’s demurrer and dismissed Engel’s case.

Engel appealed.

Court of Appeal: affirmed; only the partnership owns the malpractice claim

The Court of Appeal affirmed.

The court first confirmed that the LLP’s malpractice claim against Pech was time-barred, and that Engel’s amendment adding the LLP — after the LLP’s statute of limitations had expired — did not “relate back” to the date the original complaint was filed.  While amended complaints normally relate back to the date the original complaint was filed as long as they rest on the same general set of facts and involve the same injury, amendments adding a new plaintiff are scrutinized more closely.  The new plaintiff must seek to enforce “the same right” as the initial plaintiff.

Here, the court held that: “the malpractice claims brought by the LLP do not relate back to the timely filing of the malpractice claims brought by Engel because Pech’s legal liability or obligation to the LLP is different and distinct from his legal liability or obligation to Engel.”  (Internal quotes omitted.)  Because the retainer agreement specified that Pech’s work was limited to representing the LLP in the Wells Fargo litigation, Pech’s liability to the LLP was distinct from any liability to Engel.

The court next addressed whether Engel could individually pursue his malpractice claim against Pech.  The court held that as a matter of law, only the LLP — not Engel — could have suffered damages attributable to Pech’s alleged malpractice.  Again, Pech’s scope of work was limited to representing the LLP in the litigation against Wells Fargo, and “only the LLP was a party to that litigation; Engel never was.”  Emphasizing the recurring theme noted at the beginning of this blog post, the court concluded:

[B]ecause the LLP’s potentially viable claims for malpractice are a type of property, and because property acquired by a limited liability partnership is property of the partnership and not of the partners individually, the LLP’s malpractice claims belong solely to the LLP, and not to Engel.

(Internal quotes and cites omitted.)

Lesson

The Engel opinion highlights a recurring theme in partnership and LLC law — the entity is legally distinct from its owners, and the entity’s assets (including malpractice claims against the entity’s attorney) belong to the entity, not the individual owners.