How Mediators Can Help Family Business Attorneys Avoid Professional Risk by Playing the Role of Neutral Peacemaker

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As a practice area, representing family businesses offers clear benefits. If sizeable, such enterprises can generate a steady stream of transactional and litigation work. Collaborating closely with the company’s and family’s other advisors such as accountants, insurance brokers and investment professionals can lead to referrals. There is also the opportunity to develop rewarding personal relationships with the principals of the business that may extend across multiple generations.

On the other hand, because a business is a separate legal entity that cannot act except through its human agents, representing family-held enterprises can also present a host of thorny ethical issues. In particular, the interests of the entity and its representatives may at times diverge, in which case ethical rules obligate the entity’s attorney to advise the relevant stakeholders that he or she is the lawyer for the organization, and not for any of its constituents. See, e.g., Model Rules of Professional Conduct, Rule 1.13(f) (“In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”).

Concededly, in the family business context — where the lines between the entity and its owners are often blurred — drawing such a distinction can be uncomfortable. Many family business principals view themselves as the company lawyer’s true client. But once a dispute begins brewing between the entity and individual stakeholders — or between various stakeholders of the entity (such as family members, or an employee and the owners) — it is absolutely vital for a family business lawyer to promptly highlight potential conflicts of interest, and clarify exactly who they represent. A failure to do so can easily lead to ethical violations or malpractice claims if individual stakeholders reasonably believed that the entity’s attorney represented them individually, and then learn to their detriment that their assumption was mistaken.

As discussed below, by serving as neutral intermediaries with a mandate to confer confidentially with each of the parties to a dispute, mediators can help family business attorneys mitigate such risks. But before elaborating on that point, let’s first review a decision with a fact pattern that starkly illustrates the problem: United States v. Int’l Bhd. of Teamsters, 961 F. Supp. 665 (S.D.N.Y.), aff’d, 119 F.3d 210 (2d Cir. 1997).

The Teamsters Decision

In Teamsters, the International Brotherhood of Teamsters (IBT) had entered into a consent decree providing for, among other things, an Election Officer to investigate any allegations of misconduct during IBT elections. In February 1997, after Ron Carey (Carey) was re-elected as IBT President over James Hoffa, Jr. (Hoffa), Hoffa filed a protest with the Election Officer alleging illegal contributions to the entity formed by Carey to promote his re-election, the Campaign to Re-elect Ron Carey (Carey Campaign).

The New York law firm of Cohen Weiss & Simons (CW&S) served as counsel to the Carey Campaign. On March 10, 1997, in connection with their investigation into Hoffa’s allegations, CW&S interviewed the Carey Campaign’s campaign manager, Jere B. Nash III (Nash), concerning the alleged contributions.

During the interview, CW&S advised Nash that the conversation was “attorney-client privileged,” and warned Nash that disclosing the substance of their discussions to third parties outside the Carey Campaign could destroy the privilege. In providing this advice, the attorneys assumed that the privilege they were referring to belonged to their client, the Carey Campaign, and not to Nash. But CW&S never communicated this assumption to Nash, and he believed that CW&S was also representing him individually. During a second conversation with Nash two days later, CW&S again neglected to inform Nash of their view that the attorney-client privilege belonged exclusively to the Carey Campaign, not Nash.

CW&S subsequently advised the Election Officer that their discussions with Nash were relevant to the investigation, and that Carey (as the Carey Campaign’s authorized representative) had waived the Carey Campaign’s attorney-client privilege with respect to those discussions and instructed CW&S to disclose them to the Election Officer.

Meanwhile, six days after their last conversation with Nash, CW&S finally advised Nash to retain his own counsel to represent him in connection with the investigation. Nash responded that he thought CW&S was his counsel. Whereupon CW&S advised Nash for the first time that they represented the Carey Campaign as an entity, but did not represent Nash or any other employees of the Campaign individually.

Nash subsequently retained his own counsel and asserted the attorney-client privilege over all conversations with CW&S. To compel CW&S to disclose those conversations, the Election Officer filed an application with the court for a declaration that Nash possessed no attorney-client privilege with respect to any communications with CW&S.

Opposing the application, Nash argued for a standard permitting an individual to assert the attorney-client privilege over conversations with an entity’s attorneys where the individual had a reasonable belief that his employer’s attorneys were acting on his behalf. The Election Officer advocated for a more stringent theory under which an employee may invoke the attorney-client privilege over communications with corporate counsel only where the evidence establishes that the employee was clearly seeking legal advice in an individual, rather than a corporate, capacity.

The court sided with the Election Officer and ruled that the attorney-client privilege did not protect Nash’s communications with CW&S. In doing so, it noted that Nash’s “reasonable belief” standard would “vastly expand the attorney-client privilege’s applicability by making it available to every employee who purports to have a reasonable belief that his employer’s counsel gave him personal advice.”

The Election Officer Prevailed But Did CW&S Commit an Ethical Violation?

Despite ruling in favor of the Election Officer, however, the court criticized CW&S’s conduct. At the time, Disciplinary Rule 5-109 of the New York Code of Professional Responsibility provided:

When a lawyer employed or retained by an organization is dealing with the organization’s directors, officers, employees, members, shareholders or other constituents, and it appears that the organization’s interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer for the organization and not for any of the constituents.

While observing that CW&S technically complied with the Rule 5-109 by ultimately advising Nash that it did not represent him, the court found that CW&S’s delay in doing so was inexplicable, and that its overall handling of the matter was troubling. It concluded that were it not for the fact that Nash could not assert the attorney-client privilege for reasons independent of CW&S’s conduct, it would refer the firm to the Committee on Grievances for the Southern District of New York.

The Second Circuit’s Advice to Corporate Counsel: When a Conflict Develops Promptly Clarify Exactly Who You Represent

On appeal, the Second Circuit affirmed. United States v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFL-CIO, 119 F.3d 210 (2d Cir. 1997). In doing so, it cited the following five-part test adopted by the Third Circuit in Matter of Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120 (3d Cir. 1986) to determine when an employee may assert a personal privilege with respect to conversations with corporate counsel:

(1) The employee seeking to assert a personal attorney-client privilege with respect to communications with corporate counsel must show that the employee approached counsel for the purpose of seeking legal advice.

(2) The employee must further show that he or she made clear to counsel that the employee was seeking legal advice in the employee’s individual, rather than representative, capacity.

(3) The employee must demonstrate that the corporate counsel, knowing that a possible conflict could arise, nonetheless saw fit to communicate with the employee in the employee’s individual capacity.

(4) The employee must prove that the conversations with corporate counsel were confidential.

(5) The employee must show that the substance of the conversations with corporate counsel did not concern matters within the company or the general affairs of the company.

The Bevill test has been widely adopted. See, e.g., Sovereign Holdings, Inc. v. Deck, No. 4:17-CV-04105-KES, 2018 WL 4441468, at *9 (D.S.D. Sept. 17, 2018).

At the same time, the Second Circuit rejected Nash’s “reasonable belief” approach as “unwise” since it “would provide employees seeking to frustrate internal investigations with an exceedingly powerful weapon, and would stray quite far from the principle that the attorney-client privilege should be ‘strictly confined’.”

The Second Circuit noted in passing, however, that the reasonable belief of an employee remained relevant to the issue of disqualification; “namely, whether corporate counsel should be disqualified from representing an employee’s former employer against the employee where counsel had allegedly established an attorney-client relationship with the employee.”

More significantly, in legal malpractice cases, many jurisdictions hold that the existence of an attorney-client relationship turns on the reasonable belief of the prospective client. See, e.g., Pete v. Anderson, 413 S.W.3d 291, 296 (Ky. 2013) (“an attorney-client relationship may be created as a result of a party’s ‘reasonable belief or expectation,’ based on the attorney’s conduct, that the attorney has endeavored to undertake representation.”); Estate of Nixon v. Barber, 796 S.E.2d 489, 493 (Ga. App. 2017) (“an attorney-client relationship may be found to exist [when] no fee is paid . . . All that is necessary is a ‘reasonable belief’ on the part of the would-be client that he or she was being represented by the attorney. A reasonable belief is one which is reasonably induced by representations or conduct on the part of the attorney.”); Hope v. Renaud Cook Drury Mesaros, P.A., No. 1 CA-CV 13-0641, 2015 WL 505850, at *5 (Ariz. Ct. App. Feb. 5, 2015) (“A purported client’s belief that the lawyer was his or her attorney is crucial to the existence of an attorney-client relationship, so long as that belief is objectively reasonable.”); Consol. Church Fin. Co. v. Geauga Sav. Bank, 2011 WL 1047339, at *3 (Ohio App. 2011) (“The determination of whether an attorney-client relationship was created turns largely on the reasonable belief of the prospective client.”); Levin v. Fidelco Guide Dog Found., Inc., No. CV106008853S, 2011 WL 3891490, at *3 (Conn. Super. Ct. Aug. 4, 2011) (“Whether in fact an attorney-client relationship or fiduciary relationship existed between the parties, or whether the plaintiff possessed a reasonable belief that such a relationship existed between the parties, at the time of the alleged misconduct is a question of fact, the determination of which is for the trier of fact.”); St. Paul Fire & Marine Ins. Co. v. GAB Robins N. Am., Inc., 999 So. 2d 72, 77 (La. App. 2008) (“The existence of an attorney-client relationship turns largely on the client’s subjective belief that it exists.”).

The upshot is that even if a conversation between an entity’s attorney and an individual stakeholder is not privileged under the stringent Bevill test, the conversation may still give rise to an attorney-client relationship under the more lenient “reasonable belief” standard, and thus provide the foundation for a later disqualification, ethical violation or malpractice claim.

On that note, the Second Circuit in Teamsters concurred in the lower court’s criticism of CW&S, and provided advice for corporate counsel confronting similar circumstances in the future:

Like the district court, we are mindful that the attorneys from CW & S did not do all that they could have done to clarify the conflicts of interest that can and do develop between organizations and their employees, or to clarify that CW&S represented the Campaign alone. The district court found that the attorneys from CW&S violated the spirit, if not the letter, of the New York Code of Professional Responsibility, by failing to clarify that they did not represent Nash until five days after they had consulted their own outside counsel on the matter, and one day after they had received Nash’s consent to disclose the conversations to Carey. That decision, of course, is not at issue here, nor do the arguably less-than-exemplary actions of CW&S lead us to change our interpretation of the law of attorney-client privilege. Nonetheless, we join the district court in reiterating that attorneys in all cases are required to clarify exactly whom they represent, and to highlight potential conflicts of interest to all concerned as early as possible.

How Mediation Can Help Mitigate Professional Risk

The key takeaway from Teamsters for family business attorneys is this: if a dispute develops between the business and an individual stakeholder such as an employee — or between different stakeholders such as family members — corporate counsel needs to promptly highlight potential conflicts of interest, and clarify exactly who they represent. Such disclosure and transparency will prevent individual stakeholders from forming the belief that corporate counsel represents them individually.

It is in such contexts that a mediator can play a vital role in helping a family business attorney mitigate the risk of ethical violations or malpractice claims and otherwise avoid getting stuck in the middle of a brewing dispute. As a mutually trusted neutral, a mediator is entitled to confer confidentially with all of the parties to the dispute without running afoul of ethical rules. Further, by building trust and rapport with both sides, a mediator can elicit information on interests and concerns that both parties might have otherwise been unwilling to disclose in direct negotiations out of fear that its candor would be exploited by the other side. Armed with such information, the mediator can look for bargaining zones that offer a path to resolution.

Of course, that is not to say that corporate counsel can never serve as a peacemaker in the context of family business disputes. Some disagreements may be entirely amicable with only small differences of opinions separating the two sides. Still, before undertaking any serious effort to resolve a dispute that has even a small potential to spiral into litigation, an attorney needs to obtain informed written consent from all sides following disclosure of the risks (such as limits on the privileged nature of any conversations; see, e.g., MacKenzie-Childs LLC v. MacKenzie-Childs, 262 F.R.D. 241, 249 (W.D.N.Y. 2009) (while two parties who share a common legal interest may share legal advice with counsel concerning their mutual interest without effecting a waiver of the privilege as to the outside world, neither may assert the privilege against the other if their interests become adverse)).

Even then, mere knowledge of such risks, as well as perhaps concerns about where an attorney’s loyalties lie, may ultimately inhibit one or both of the parties from making the sort of full disclosure of interests and concerns that is necessary for an intermediary to fashion a workable compromise. Mediation may thus represent the optimal alternative for an attorney looking to resolve a family business dispute before it escalates into litigation while simultaneously mitigating his or her own professional risks.