Is Your Client Properly Authorized To Hire Counsel?

A recent court case shows how issues of ownership can be thorny in closely held corporations, and why it’s always prudent to vet a potential client’s corporate governance documents.

Every court agrees that when a lawyer represents a corporation, the entity owns the privilege as the “client.” But that analysis can be difficult in closely held corporations.

In Morristown Heart Consultants, PLLC v. Patel, No. E2018-01590-COA-R9-CV, 2019 Tenn. App. LEXIS 362 (Tenn. Ct. App. July 24, 2019), two doctors owned a PLLC. One of the doctors, who owned 50 percent of the financial rights and 66 percent of the governing rights, hired a lawyer to represent the PLLC in advising it about the doctors’ memorandum of understanding and the effect of the other doctor’s suspension by a hospital. The other doctor, who had 50 percent financial ownership but only 33 percent of the governing rights, sought access to the lawyer’s files.

The court acknowledged that the doctor who hired the lawyer had the majority of governing rights, however, it noted that the operating agreement required actions such as retaining counsel to be discussed and voted on at an official PLLC meeting. Although the appellate court also pointed to the “at issue” waiver doctrine, it found no reversible error in the trial court’s decision to grant the doctor with 33 percent ownership access to the lawyer’s files. Id. at *19-22.

The trial court found that the managing member doctor had not followed the proper procedure for voting on the lawyer’s retention or arranging for the other doctor’s written consent under the operating agreement – meaning that the PLLC “had not properly authorized” the lawyer’s hiring. Id. at *18-19.

To prevent a similar situation, lawyers representing closely held corporations should take steps to ensure that their retention by the majority owners complies with the corporate governance documents.