Jesse Ex Rel. Reinecke v. Danforth
485 N.W.2d 63, 169 Wis. 2d 229, 1992 Wisc. LEXIS 320 (1992)
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Rule of Law:
When a lawyer is retained by individuals for the purpose of organizing a corporate entity, and that entity is subsequently incorporated, the lawyer's client is the entity, not the individuals. This 'entity rule' applies retroactively to the pre-incorporation phase.
Facts:
- Drs. Danforth and Ullrich were partners in Neurodiagnostic Associates, an entity providing medical services.
- In 1985, a group of twenty-three physicians, including Drs. Danforth and Ullrich, retained Attorney Douglas Flygt of the DeWitt law firm to create a corporate entity.
- The purpose of the entity was to purchase and operate a magnetic resonance imaging (MRI) machine.
- Flygt incorporated MRI Associates of Greater Milwaukee (MRIGM) in 1986, with the twenty-three physicians as shareholders and Dr. Danforth as president. DeWitt continued as MRIGM's corporate counsel.
- In 1988, Jean Jesse hired Attorney Eric Farnsworth, also from the DeWitt firm, to represent her in a medical malpractice action against Drs. Danforth and Ullrich.
- The malpractice suit alleged that the doctors were negligent for failing to obtain a high-quality CAT scan and that they had a financial incentive to use a CAT scanner owned by Dr. Ullrich and leased to their partnership.
Procedural Posture:
- Jean Jesse (plaintiff) sued Drs. Danforth and Ullrich (defendants) in the Circuit Court for Milwaukee County, a trial court.
- The defendants filed motions to disqualify the plaintiff's law firm, DeWitt, alleging a conflict of interest.
- The circuit court denied the defendants' motions.
- The defendants (appellants) appealed the non-final order to the court of appeals, an intermediate appellate court.
- The court of appeals reversed the circuit court's order, finding a conflict existed and disqualifying the DeWitt firm.
- The plaintiffs (petitioners) petitioned the Wisconsin Supreme Court for review.
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Issue:
Does a conflict of interest exist requiring the disqualification of a law firm from a medical malpractice suit against two doctors, when the same firm also provides corporate counsel to an entity in which those doctors are shareholders and were involved in its formation?
Opinions:
Majority - Day, J.
No. No conflict of interest exists that would require disqualification. A lawyer retained to form a corporate entity represents the entity itself, not its individual constituents, under the 'entity rule' codified in SCR 20:1.13. This rule applies retroactively to the pre-incorporation activities, meaning DeWitt's client was always MRIGM, the corporation, not Drs. Danforth and Ullrich individually. Therefore, DeWitt's representation of Jesse against the doctors is not 'directly adverse' to a current client. The court reasons that the purpose of the entity rule is to allow a corporate lawyer to represent the best interests of the corporation without the conflicting burden of representing its shareholders. The court established a guideline that if a lawyer's involvement with a person is directly related to organizing an entity that is eventually incorporated, the representation is deemed to be of the entity. Furthermore, any potential harm to MRIGM from the malpractice suit against its shareholders, such as reputational damage or loss of shareholders, is too speculative to be considered 'directly adverse.'
Analysis:
This decision solidifies the 'entity rule' in corporate representation, particularly clarifying its application to the pre-incorporation phase. By establishing a rule of retroactive application, the court provides a clear framework for determining client identity in the context of business formation. This precedent protects law firms from imputed disqualification in situations where they represent an entity and are later retained in a matter adverse to one of the entity's individual founders in an unrelated matter. It reinforces the principle that a lawyer's duty is to the corporate entity as a whole, distinct from the personal interests of its shareholders.
