Court Holds That Attorney Did Not Have An Attorney-Client Relationship With A Company’s Directors And Shareholders

by Winstead PC

In Pennington v. Fields, the majority of shareholders of a closely held business forced the buy-out of the minority shareholder and litigation ensued. No. 05-17-00321-CV, 2018 Tex. App. LEXIS 6601 (Tex. App.—Dallas August 21, 2018, no pet. history). Later, the minority shareholder sued the majority shareholder’s attorney and alleged that he committed legal malpractice by, among other things, negligently advising the majority to engage in oppression and breaches of fiduciary duties and that he failed to advise the minority shareholder to protect his interests against the misconduct of the majority. The attorney filed a motion for summary judgment, alleging that he owed the minority shareholder no fiduciary duty because he never represented him, which the trial court granted. The plaintiff appealed.

Regarding the existence of the attorney-client relationship, the court of appeals stated:

The existence of a duty is an element of a legal malpractice claim. The attorney—client relationship is a contractual relationship that arises from a lawyer’s agreement to render professional services to a client. The agreement may sometimes be implied from the parties’ conduct. But whether an agreement is express or implied, there must be evidence that both parties intended to create an attorney—client relationship. One party’s subjective belief is insufficient to raise a question of fact to defeat summary judgment.

Id. (internal citations omitted). The plaintiff cited to two engagement letters between the company and the attorney, which referenced doing legal services “as required by the board of directors,” of which the plaintiff was one at the time. The court of appeals held:

These two agreements do not raise a fact issue regarding the existence of an attorney—client relationship between Pennington and Collins. Both agreements are between Advantage and Collins. A corporation is a legal entity separate and apart from the people who compose it, making it distinct from its stockholders, officers, and directors. Thus, rendering legal services to a corporation does not by itself create privity between the attorney and the corporation’s officers, directors, or shareholders. We disagree with Pennington’s argument that Collins was “clearly engaged to represent Advantage’s shareholders,” including Pennington. Pennington was not named in nor did he sign the agreement. The agreement was clearly between Collins and Advantage. Evidence of an agreement between Collins and Advantage is no evidence of an attorney—client relationship between Collins and one of Advantage’s directors or shareholders.


The plaintiff then contended that there was an implied agreement for legal representation. The court stated:

Although an attorney—client relationship may be implied from the actions of the parties, the parties must manifest an intention to create an attorney—client relationship. Whether there was a meeting of the minds must be based on an objective standard, examining what the parties did and said and not their alleged subjective states of mind… Both sides discuss the case of MacFarlane v. Nelson from the Third Court of Appeals. In that case, the court of appeals noted that when a lawyer represents a small entity with extensive common ownership and management, difficulties can arise in determining the existence of an attorney—client relationship. MacFarlane v. Nelson, No. 03-04-00488-CV, 2005 Tex. App. LEXIS 7681, 2005 WL 2240949, at *4 (Tex. App.—Austin Sept. 15, 2005, pet. denied) (mem. op.). The opinion listed several factors to consider in determining whether a lawyer for the entity also represents an individual owner: (1) whether the lawyer affirmatively assumed the duty of individual representation; (2) whether the owner had independent representation; (3) whether the lawyer previously represented the owner on a personal basis; (4) and whether the evidence demonstrates the owner’s reliance on or expectations of the lawyer’s separate representation. Id. An attorney—client relationship is not created with the individual owner simply because the owner discusses matters with the lawyer that are relevant to both the owner’s and the entity’s interests. Id.

Id. The plaintiff asserted that those factors weighed in favor of a finding that an attorney-client relationship existed, but the court disagreed:

Pennington met Collins on the day he was removed as Advantage’s president. Thus, Collins had not previously represented Pennington. Although Pennington did not have independent representation at that time, he retained his own legal counsel shortly after the June 27 meeting. Pennington asserts he believed Collins was “advising him and representing his interests” because Collins represented to Pennington that Pennington’s interests were not adverse to Fields’s and Phillips’s. He contends Collins admitted he was representing all three directors. To demonstrate this, he relies on Collins’s deposition testimony. In his deposition, Collins was asked if he thought he was helping Pennington. Collins stated he was trying to “find a solution for all of the parties to work together” and if it worked out, it would have helped Pennington. His goal was to help his clients, who were Fields and Phillips and later Advantage. Pennington’s summary judgment evidence does not show that Collins affirmatively assumed a duty to represent Pennington individually. Evidence Pennington had a subjective belief that Collins was representing him is insufficient. Whether there was a meeting of the minds about representation must be based on an objective standard, and there is no objective evidence Collins intended to create an attorney—client relationship with Pennington. An attorney—client relationship was not created between Collins and Pennington simply because Collins discussed matters with Pennington that were relevant to both Pennington’s and Advantage’s interests.

Id. The court held that the evidence did not raise a fact issue regarding the existence of an attorney-client relationship and affirmed the summary judgment motions.

Interesting Note: This case raises an important issue for attorneys who represent closely held businesses and the owners and operators of those businesses. The parties should be careful to properly document who the client is and the scope of the representation. Otherwise, there may be confusion as to whom the attorney owes fiduciary duties.

Certainly, an attorney can represent more than one party; in fact, that is very common. For example, a law firm may represent a shareholder and the company in an asset sale transaction. More commonly, a law firm may represent both spouses in the sale of real property, the leasing of minerals, or in estate planning. See, e.g., Estate of Arlitt v. Paterson, 995 S.W.2d 713, 720–721 (Tex. App.—San Antonio 1999, pet. denied) (an attorney may represent a couple as joint estate planning clients, in which case the attorney will owe a duty to both clients). So, a reasonably prudent attorney should identify who he or she represents and clarify that he or she does not represent a party when the attorney first communicates with a party regarding a legal matter. See Tex. R. Disc. C. 4.03 (“In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.”). Though not dispositive, a “trier of fact may consider the construction of a relevant rule of professional conduct that is designed for the protection of persons in the claimant’s position as evidence of the standard of care and breach of the standard.” William V. Dorsaneo, Texas Litigation Guide, § 322.02 (Citing Restatement (Third) of Law Governing Lawyers § 52, Comment f).

The downside to an attorney is that an attorney may inadvertently create an attorney-client relationship and be held to fiduciary duties that are not anticipated. To have an attorney-client relationship, there does not have to be a formal agreement. “While it is generally a relationship created by contract, an attorney-client relationship can be implied based on the conduct of the parties.” Sotello v. Stewart, 281 S.W.3d 76, 80-81 (Tex. App.—El Paso 2008, pet. denied) (citing Sutton v. Estate of McCormick, 47 S.W.3d 179, 182 (Tex. App.—Corpus Christi 2001, no pet.) and Mellon Service Co. v. Touche Ross & Co., 17 S.W.3d 432, 437 (Tex. App.—Houston [1st Dist.] 2000, no pet.)). “The attorney-client relationship may be implied if the parties by their conduct manifest an intent to create such a relationship.” Daves v. Commission For Lawyer Discipline, 952 S.W.2d 573, 577 (Tex. App.—Amarillo 1997, pet. denied). For the relationship to be established, “the parties must explicitly or by their conduct manifest an intention to create it. To determine whether there was a meeting of the minds, we use an objective standard examining what the parties said and did and do not look at their subjective states of mind.” Roberts v. Healey, 991 S.W.2d 873, 880 (Tex. App.–Houston [14th Dist.] 1999, pet. denied). “More specifically, an attorney-client relationship can be implied from the attorney’s gratuitous rendition of professional services.” Sotello v. Stewart, 281 S.W.3d at 80-81 (citing Perez v. Kirk & Carrigan, 822 S.W.2d 261, 265 (Tex. App.—Corpus Christi 1991, writ denied)).

It should also be noted that an attorney may be liable for not informing a party that it is not representing the party. Querner v. Rindfuss, 966 S.W.2d 661, 667-68 (Tex. App.—San Antonio 1998, writ denied) (recognizing that an attorney’s advice may give rise to an informal fiduciary duty even when no formal attorney-client relationship is formed). The Querner court stated:

Although an attorney hired by an executor generally represents the executor and not the beneficiary, an attorney for an executor may undertake to perform legal services as attorney for one or more beneficiaries. An attorney-client relationship may develop between the attorney retained by the executor and the beneficiaries either expressly or impliedly. Even absent an attorney-client relationship, an attorney may be held negligent for failing to advise a party that he is not representing the party. ‘If circumstances lead a party to believe that they are represented by an attorney,’ the attorney may be held liable for such a failure to advise.

Id.; see also Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.—Houston [14th Dist.] 1997, pet. denied); Burnap v. Linnartz, 914 S.W.2d 142, 148 (Tex. App.—San Antonio 1995, writ denied).

So, to avoid confusion, the attorney should always have a written engagement letter that expressly identifies the client or clients, the attorney is not representing any other party not expressly mentioned, the scope of the engagement, and when the engagement will be terminated. Further, if appropriate, the attorney should follow up and orally tell those that he or she is not representing, but with whom the attorney often communicates, that he or she is not representing them and is only representing his or her client(s). Further, individuals should also seek clarification and ask an attorney who the attorney represents and whether the individual should retain his or her own attorney. Everyone should strive to be on the same page regarding who is the attorney and who is the client. This important issue may also impact who may claim the attorney-client privilege regarding communications.

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