Shimko v. Guenther
2007 WL 2964355, 2007 U.S. App. LEXIS 23924, 505 F.3d 987 (2007)
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Rule of Law:
A law firm that owes a fiduciary duty of care to a client cannot claim it reasonably believed the client was a general partner for the purpose of holding the client liable for the limited partnership's debts, as the firm is chargeable with knowledge of the client's actual status as a limited partner.
Facts:
- Milton Guenther was a limited partner in two Arizona limited partnerships, the Comprehensive Outpatient Rehabilitation Facility entities ('CORF entities'), and was officially listed as such in the partnerships' organic documents.
- Despite his status, Guenther actively participated in controlling the business, serving as head of field operations and lecturing at marketing seminars.
- Between 2001 and 2003, numerous clients threatened or filed lawsuits against the CORF entities and their individual partners, including Guenther, primarily alleging fraud.
- The CORF entities and the individual partners hired the law firm Shimko & Piscitelli ('Shimko') to provide legal defense and to advise the partners on their potential personal liability.
- Shimko provided legal services from October 2002 to April 2003.
- Neither the CORF entities nor the individual partners, including Guenther, paid Shimko for its services during this period.
Procedural Posture:
- Shimko & Piscitelli ('Shimko') filed suit against Milton and Kathi Guenther and other partners in federal district court, seeking payment for legal fees.
- After a one-day bench trial, the district court found in favor of Shimko.
- The district court held that Guenther, by participating in the control of the business, was liable as a general partner for the full $359,668.00 in legal fees owed by the partnerships because it was reasonable for Shimko to believe he was a general partner.
- The Guenthers filed a motion for reconsideration and/or a new trial, which the district court denied.
- The Guenthers (Appellants) appealed the district court's judgment to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Under Arizona's limited partnership statute (A.R.S. § 29-319), is a law firm's belief that its client, a limited partner, is a general partner 'reasonable' when the law firm owes that client a fiduciary duty of care that includes ascertaining the client's actual partnership status?
Opinions:
Majority - Judge Milan D. Smith, Jr.
No. A law firm's belief that its limited-partner client is a general partner is not reasonable under A.R.S. § 29-319 because the firm's fiduciary duty of care charges it with knowledge of its client's true legal status. The statute allows a limited partner who participates in control of the business to be held liable for partnership debts, but only to persons who 'reasonably believing... that the limited partner is a general partner.' While the court did not dispute the factual finding that Guenther participated in the control of the CORF entities, it held that Shimko is not an ordinary creditor. As legal counsel to Guenther, Shimko owed him a fiduciary duty of care, which required competent representation. A competent lawyer hired to advise on personal liability arising from a limited partnership should have reviewed the partnership's organic documents, which would have revealed Guenther's status as a limited partner. Therefore, Shimko is chargeable with the knowledge of the documents' contents, regardless of whether it actually reviewed them. A law firm cannot breach its professional duty to a client and then use that failure to its own financial advantage.
Analysis:
This decision carves out a significant exception to the 'control rule' in limited partnership law, specifically for creditors who are also fiduciaries to the limited partner. It establishes that a lawyer's professional duty of care supersedes their ability to rely on a client's conduct to form a 'reasonable belief' about their partnership status. The ruling effectively imputes knowledge of a client's formal legal status to their attorney, making it nearly impossible for a law firm to hold a client liable for partnership debts under this theory. This reinforces the strength of the attorney-client fiduciary relationship and prevents attorneys from profiting from their own failure to conduct basic due diligence.
