Download Do You Know Who Your Client Is? - Illinois Association of Defense

Illinois Association of Defense Trial Counsel
Springfield, Illinois | www.iadtc.org | 800-232-0169
IDC Quarterly | Volume 18, Number 2 (18.2.38)
Professional Liability
By: Martin J. O’Hara
Quinlan & Carroll, Ltd.
Do You Know Who Your Client Is?
Answering That Question Just Became More Difficult
The Illinois Appellate Court First District recently issued a decision that should be of concern to all
attorneys in Illinois, and particularly to attorneys who defend legal malpractice actions. In Board of Managers
of Eleventh Street Loftominium Association v. Wabash Loftominium, L.L.C., 376 Ill. App. 3d 185, 876 N.E.2d
65 (1st Dist. 2007), the court held that an attorney who represents an entity has an attorney-client relationship
not only with that entity, but also with every other entity that has the same management group. Stated simply,
this holding is unprecedented in Illinois case law (although there is precedence in ethical opinions from the
ABA and the ISBA as discussed below), and is contrary to the plain language of Illinois Rule of Professional
Conduct 1.13. Nonetheless, all attorneys and law firms in Illinois must take notice of this decision, and must
modify their client databases accordingly in order to properly perform conflict checks in the future.
Wabash Loftominium involved a complicated fact pattern, but one that can be simplified as follows:
Steven Gouletas, Anthony DiBenedetto, James Schwark, Nicholas V. Gouletas and Nicholas S. Gouletas
(collectively the “Gouletas Group”) were the owners and officers of various entities, including Ambelos
Corporation. From 1999 through 2005, the law firm of Arnstein & Lehr L.L.P. (Arnstein) provided legal
services to the entities that were owned by the Gouletas Group.
In 2004, Board of Mangers of Eleventh Street Loftominium Association filed suit against Wabash
Loftominium, L.L.C. and the Gouletas Group relating to a property located at 111 West Maple Street
(“Wabash Loftominium Litigation”). The lawsuit alleged that the defendants turned over unrepaired common
elements and inadequate capital reserves. Ambelos Corporation indirectly owned 100% of Wabash
Loftominium, L.L.C. Attorney David Sugar filed the lawsuit while he was affiliated with the law firm Michael
Best & Friedrich L.L.P.
Separately, attorney Sugar filed a lawsuit on behalf of Board of Directors of the Gold Coast Galleria
Condominium Association against Galleria Residential, L.L.C. and certain members of the Gouletas Group
(“Galleria Residential Litigation”). Ambelos Corporation indirectly owned Galleria Residential, L.L.C. Like
the Wabash Loftominium Litigation, the suit against Galleria Residential and the individual defendants alleged
that the defendants turned over unrepaired common elements and inadequate capital reserves.
In 2005, attorney Sugar left Michael Best & Friedrich and joined Arnstein. Thereafter, Arnstein was
granted leave to substitute as counsel in the Wabash Loftominium Litigation and the Galleria Residential
Litigation. However, the defendants in both cases moved to disqualify Arnstein, contending that Arnstein
already represented corporations that were managed by the individual defendants. The defendants asserted that
the common representation created a conflict of interest for Arnstein prohibited by Rule 1.7 of the Rules of
Professional Conduct. Arnstein contested the motions to disqualify, arguing that the firm did not represent the
individuals or corporate defendants.
The trial court in the Wabash Loftominium Litigation granted the motion to disqualify Arnstein as counsel
for the defendants. The trial court found that Arnstein had “a long-term, significant relationship with the
Page 1 of 3
Ambelos corporations and was actively representing some of those corporations concurrently or after Arnstein
substituted as counsel in the Loftominium action.” Wabash Loftominium, 376 Ill. App. 3d at 191-92. Although
recognizing that Arnstein did not represent the individual or corporate defendants in the suit, the trial court
found that disqualification was required because “the management group for the existing clients, the
management group for the current corporate defendant, and the current individual defendants were
substantially the same.” Id. Thus, the trial court found that Arnstein was required to obtain the defendants’
permission before it could represent the plaintiff in the Wabash Loftominium litigation. The trial court found
that by failing to do so, Arnstein violated Rule 1.7 and was disqualified from representing the plaintiff in the
litigation.
The trial court in the Galleria Residential Litigation agreed with the “shared management” analysis applied
by the trial court in the Wabash Loftominium Litigation. Therefore, the trial court in the Galleria Residential
litigation likewise disqualified Arnstein from representing the plaintiff in that action. Arnstein thereafter
appealed the disqualification orders in both cases. The appeals were consolidated as they involved the same
legal issues.
On appeal, Arnstein again argued that the disqualification orders were erroneous because corporations are
distinct entities for purposes of conflict of interest analysis, and Arnstein never represented any of the
corporate or individual defendants. Arnstein relied in part upon an Illinois State Bar Association advisory
opinion stating that a lawyer generally may take representation adverse to a subsidiary or affiliate of an
existing corporate client. ISBA Op. No. 95-15 (May 17, 1996).
The Wabash Loftominium court rejected Arnstein’s argument. The court noted that the advisory opinion
further provided that there could be circumstances that would require the lawyer to consider a subsidiary of a
corporate client to be a client of the lawyer as well, such as when the corporate client and subsidiary have the
same management group. Id. The court held that because the evidence established that Arnstein represented
corporate clients that shared the same management group as the corporate defendants in the two suits, Rule 1.7
prohibited Arnstein from representing parties adverse to the corporate defendants.
The Wabash Loftominium court also cited with approval an American Bar Association ethics opinion on
the issue. Wabash Loftominium, 376 Ill. App. 3d at 195. In discussing whether an attorney-client relationship
exists between a corporate attorney and a subsidiary of the corporation, the ABA opinion stated that an
attorney-client relationship might exist if “the lawyer’s relationship with the corporate affiliate may lead the
affiliate reasonably to believe that it is a client of the lawyer. ABA Formal Op. 95-390 (January 25, 1995). In
applying the ABA ethics opinion, the court found that “[t]he particular circumstances of this case would lead
the management group and the Ambelos corporations to reasonably believe they were Arnstein’s existing
clients.” Id. at 195. Accordingly, the Wabash Loftominium court affirmed the disqualification of Arnstein in
both cases, and the Illinois Supreme Court recently denied Arnstein’s petition for leave to appeal. Bd. of
Managers of Eleventh St. Loftominium Ass’n v. Wabash Loftominium, L.L.C., 226 Ill. 2d 580, 879 N.E.2d 929
(2007).
Unquestionably, the Wabash Loftominium decision has no precedent in Illinois law. No court has ever
interpreted Rule 1.7 in the broad manner interpreted by the Wabash Loftominium court. Moreover, Rule 1.13
of the Rules of Professional Conduct, which was not discussed by either the trial court or the appellate court,
states unequivocally and succinctly that an attorney “employed or retained by an organization represents the
organization.” 134 Ill. 2d R. 1.13 (emphasis added). Courts applying Illinois law have thus held that “an
attorney employed by an organization represents an organization, not its individual members, and he is
obligated to proceed in the best interest of the organization.” Arifin v. Matuszewich, 2000 WL 796146, *4
(N.D. Ill. June 20, 2000); see also In re Conticommodity Servs., Inc. Sec. Litig., 1988 WL 96179, *1 (N.D. Ill.
Sept. 9, 1988) (denying motion to disqualify and rejecting argument that attorney for corporation represents the
corporation’s employee as well); U.S. v. Keplinger, 776 F.2d 678, 701 (7th Cir. 1985) (a corporate employee’s
subjective belief that he is individually represented is not sufficient to create such representation).
By holding that an attorney who represents a corporate client also represents the corporate client’s
subsidiaries where there is “shared management” eviscerates the meaning of Rule 1.13. The appellate court has
Page 2 of 3
thus re-written Rule 1.13 to effectively state that an attorney employed or retained by an organization
represents the organization and any subsidiaries that have the same management group. Such an important
change to the ethical rules should probably come from the Illinois Supreme Court, not the appellate court.
Nonetheless, based upon the decision in Wabash Loftominium, law firms in Illinois must change the
manner in which they enter client information into their conflicts system. It is no longer sufficient that the law
firm include in its conflicts system only the name of the corporate client for whom the law firm is performing
services. Instead, law firms must have their corporate clients identify all subsidiaries or affiliates. Firms should
then input the names of each of the subsidiaries and affiliates in their database of clients along with the name
of the corporate client, such that a future conflict check would reveal the identity of the subsidiaries and
affiliates.
Of course, merely because subsidiaries and affiliates of a corporate client are identified in the conflict
database does not necessarily mean that a particular subsidiary or affiliate will be considered a client of the
firm. Rather, including the subsidiaries and affiliates in the database allows the attorney or law firm to perform
the necessary analysis when considering a possible representation adverse to the subsidiary or affiliate. At that
time, the law firm must determine whether an attorney-client relationship actually existed between the law firm
and the particular subsidiary or affiliate. Based upon Wabash Loftominium, the law firm needs to consider it is
reasonable for the subsidiary or affiliate to believe that it has an attorney-client relationship with the law firm
as a result of the law firm’s representation of the corporate client.
There is no question that these will not always be easy determinations to make. In part, that is why Rule
1.13 was effective. Rule 1.13 made clear that the only attorney-client relationship that existed was that between
the lawyer and its organizational client. However, the Wabash Loftominium decision erodes this formerly
straightforward rule, and law firms must act accordingly when performing conflict checks relating to the
potential representation of a party that is adverse to an entity that is affiliated with an existing corporate client.
About the Author
Martin J. O’Hara is a partner with the Chicago firm of Quinlan & Carroll, Ltd. His practice is devoted to litigation, including commercial cases,
and the defense of professionals in malpractice actions. Mr. O’Hara received his B.A. from Illinois State University and J.D. with honors from
John Marshall Law School, in addition to being a member of the Association and the Chicago Bar Association.
Page 3 of 3