Can I Represent a Non-Existent Entity? Pt. 2: Jesse v. Danforth

Jul 20, 2022
David C. Tingstad, Edmonds Lawyer

Last week, I discussed a hypothetical situation in which ‘X number of individuals approach me to form an LLC for their business (i.e., the entity does not exist yet)’ and the three possible approaches to the subsequent question, “who is my client?” You can find that post here. This week, I will further explore one of those three approaches whereby I represent the entity to be formed. Washington State has yet to affirm this approach, but the Wisconsin Supreme court has assented, with other jurisdictions following suit. In Jesse, a medical malpractice case, the Wisconsin Supreme court walks through their rationale for the “entity to be formed” approach, and what that entails. See Jesse v. Danforth, 169 Wis.2d 229, 485 N.W.2d 63, 66-67 (1992).

The Facts – Jesse v. Danforth

In 1985, defendants Danforth and Ullrich approached attorney Douglas Flygt (“Flygt”), an attorney at DeWitt LLP, to form an S-Corp named MRIGM for the purpose of purchasing and operating an MRI machine. Following incorporation, Flygt continued as MRIGM’s corporate counsel. Danforth and Ullrich (among others) were shareholders in MRIGM, and Danforth was the president.

In 1988, plaintiffs Jesse and Reinecke retained attorney Eric Farnsworth, an attorney at the same firm, DeWitt LLP, to represent them in a medical malpractice action against Danforth and Ullrich, resulting from a negligent CAT scan from Neurodiagnostic Associates, the machine for which was owned by Ullrich. The issue was whether a conflict of interest exists such that DeWitt should be disqualified from representing Reinecke in the medical malpractice action against Danforth and Ullrich when DeWitt formed MRIGM and continued as its corporate counsel.

Who Is the Client? – Jesse v. Danforth

Unquestionably, DeWitt represented Reinecke this malpractice action. But did DeWitt represent Danforth and Ullrich? DeWitt incorporated MRIGM – of which defendant Danforth and Ullrich were shareholders and Danforth was the president – and continued to represent MRIGM as corporate counsel. Danforth and Ullrich argued “due to Flygt’s pre-incorporation representation… and due to other advice provided to Drs. Danforth and Ullrich by Flygt…, DeWitt’s representation of Reinecke is “directly adverse” to DeWitt’s representation of Danforth and Ullrich … and therefore a conflict of interest exists disqualifying the DeWitt firm from representing plaintiffs.” Id.

The Wisconsin Supreme court disagreed. DeWitt represented the entity to be formed (MRIGM), it didn’t represent either of the defendants. “[U]nder the “entity rule,” as expressed by Wisconsin’s ethics rule similar to Washington’s RPC 1.13, “where a firm represents a corporate organization, the organization, not the shareholders, is the lawyer’s client.” The court explained “the clear purpose of the entity rule was to enhance the corporate lawyer’s ability to represent the best interests of the corporation without automatically having the additional and potentially conflicting burden of representing the corporation’s constituents.” Id at 239.

So… What’s The Rule?

The Jesse court provided the following guidelines: “where (1) a person retains a lawyer for the purpose of organizing an entity and (2) the lawyer’s involvement with that person is directly related to that incorporation and (3) such entity is eventually incorporated, the entity rule applies retroactively such that the lawyer’s pre-incorporation involvement with the person is deemed to be representation of the entity, not the person” (emphasis added). The court went a step further and stated “[t]his standard also applies to privileged communications …. Thus, where the above standard is met, communications between the retroactive constituent and the corporation are protected …. And, it is the corporate entity, not the retroactive constituent, that holds the privilege.” This tracks with Comment 1.13 which states in part: “When one of the constituents of an organizational client communicates with the organization’s lawyer in that person’s organizational capacity, the communication is protected by Rule 1.6.” See also Bobbitt v. Victorian House, Inc., 545 F.Supp. 1124 (N.D.Ill.1982).” Jesse, 169 Wis.2d at 241.

Accordingly, the Wisconsin Supreme court held that the DeWitt firm should not be disqualified from representing Reinecke in their action against Danforth and Ullrich. Id at 235.

Considerations

The entity rule essentially provides that the lawyer’s client is, retroactively, the entity that was formed.  As a matter of best practice to avoid conflicts of interest, lawyers should set forth in writing the identity of the client at the outset of the representation.  Additionally, advance waivers of conflicts of interest should also be considered.  While a definitive statement from Washington courts has not yet been provided, the Jesse case is persuasive authority for the proposition that a lawyer can represent a non-existing entity. For any questions related to the ethics of representation, contact info@beresfordlaw.com or give me a call at 425-776-4100.

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