Brian Reynolds v. Henderson & Lyman

Court of Appeals for the Seventh Circuit
903 F.3d 693 (2018)

ELI5:

Sections

Rule of Law:

Under Illinois law, an attorney representing a business entity owes a duty of care only to the entity, not to its individual officers or owners, unless the attorney was retained for the specific primary purpose of benefitting that third-party individual.

Facts:

Brian Reynolds co-owned and managed several Limited Liability Companies (LLCs).
The law firm Henderson & Lyman (H&L) served as legal counsel for these LLCs.
Reynolds communicated with H&L in his capacity as a managing member regarding the LLCs' affairs.
Reynolds drafted financial statements for the companies relying on advice provided by H&L.
Reynolds alleges that H&L provided negligent legal advice regarding the financial statements.
Following this advice, Reynolds personally violated federal disclosure laws.
Reynolds admitted he never asked H&L to represent him personally.
H&L never indicated to Reynolds that they were representing him individually.

Procedural Posture:

Reynolds filed a malpractice lawsuit against Henderson & Lyman in the United States District Court for the Northern District of Illinois.
The District Court granted summary judgment in favor of Henderson & Lyman.
Reynolds appealed the summary judgment ruling to the United States Court of Appeals for the Seventh Circuit.

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Issue:

Does an attorney representing a limited liability company owe a duty of care to the company's individual managing member sufficient to support a personal malpractice claim when no express personal attorney-client relationship exists?

Opinions:

Majority - Wood

No, the court held that representing a business entity does not create a duty of care toward the entity's individual officers or owners. The court reasoned that under Illinois law, a malpractice claim requires an attorney-client relationship, which is a voluntary contractual arrangement. While H&L represented the LLCs, this did not extend to Reynolds personally. The court rejected the argument that Reynolds was a third-party beneficiary, noting that Illinois law only recognizes such a duty if the primary purpose of the representation was to benefit the third party. The court emphasized that the primary purpose of a business retainer is to benefit the entity, not its officers. Furthermore, the court dismissed Reynolds's procedural argument that a jury should decide the existence of a duty, clarifying that under federal procedural law, the existence of a duty is a question of law for the judge to decide.

Analysis:

This decision reinforces the strict legal distinction between a corporate entity and its individual owners regarding legal representation. It upholds the principle that corporate counsel's duty is exclusive to the organization to prevent conflicts of interest that would arise if counsel also owed duties to individual officers. The ruling also clarifies the application of the Erie doctrine in federal diversity cases, establishing that while state law defines substantive duties, federal law dictates that judges, not juries, determine whether a duty exists. Practically, this bars corporate officers from piggybacking on their company's legal counsel for personal liability protection.

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