Manager Appoints an Attorney to Represent the LLC in the Manager's Lawsuit Against the LLC

The Democrats and the Republicans strive to control the appointment of federal judges because they believe that the choice of judge may be outcome-determinative in important cases. Apparently it was similar thinking that led two LLC managing members to each appoint an attorney to represent the LLC in settling a claim that one of the two members had against the LLC. This resulted in the two lawyers each claiming to represent the LLC and each asking the court to disqualify the other. Razin v. A Milestone, LLC, No. 2D10-5233, 2011 Fla. App. LEXIS 12309 (Fla. Dist. Ct. App. Aug. 5, 2011).

Background. Sheldon Razin and Ashwini Bahl, the two 50-50 managing members, organized the LLC to own and operate a shopping center. Razin loaned $1 million to the LLC. The loan was not repaid by the due date, and Razin filed a lawsuit against the LLC to collect the debt.

Razin called a meeting of the two managers shortly before the complaint was filed. Bahl did not attend, and Razin voted at the meeting to authorize the hiring of attorney Todd Norman to represent the LLC in Razin’s lawsuit. Bahl objected to Razin’s action in selecting the LLC’s attorney, but Razin based his authority on the LLC’s operating agreement.

Operating Agreement. Article VII, Section 1 of their operating agreement states: “Notwithstanding any other provision of this Agreement, during the period that any portion of the Razin loan is outstanding, in the event of a disagreement between the Managers regarding any matter affecting the Company, the decision of Razin shall control with respect to such matter ….”

Razin and the LLC (represented by Norman) then entered into settlement negotiations to resolve the debt-collection lawsuit, and prepared a written settlement agreement that was contingent on court approval. Bahl was not idle and retained attorney Michael McDermott, who filed an answer in the lawsuit on behalf of the LLC, raising defenses and asserting a counterclaim against Razin for breaching the operating agreement.

Mutual Disqualifications. Norman then filed a motion to disqualify McDermott, and McDermott filed a motion to disqualify Norman. The trial court held a hearing and ruled that a majority of the managers was required to appoint legal counsel and that therefore neither Norman nor McDermott was validly appointed to represent the LLC. The court appointed a custodian to select and retain legal counsel for the LLC, and to take other steps as necessary to break tie votes between Razin and Bahl. Razin and Bahl could not agree on who should be custodian, so the court selected and appointed one. Razin and Bahl both appealed the trial court’s orders.

The Court’s Analysis. The District Court of Appeal found that the operating agreement “clearly indicates that as long as the Razin loan remains outstanding, Razin had controlling authority over any decision affecting Milestone in the event of a disagreement.” Razin, 2011 Fla. App. LEXIS 12309, at *8. It was undisputed that the loan was outstanding and that Razin was a manager. The court found that the provision was unambiguous and that the parties were bound by it.

Duty of Loyalty. Bahl contended that, notwithstanding the control provision in the operating agreement, Razin had a conflict of interest in retaining counsel to represent the LLC in its defense of Razin’s suit. The court found otherwise, reasoning as follows.

The Florida LLC Act establishes an LLC manager’s or member’s duty of loyalty, and in this case the LLC’s operating agreement neither restricted nor enlarged the mangers’ duty of loyalty. Id. at *10. The Act states: “Subject to s. 608.4226, the duty of loyalty is limited to: … 2. Refraining from dealing with the limited liability company in the conduct or winding up of the limited liability company business as or on behalf of a party having an interest adverse to the limited liability company.” Fla. Stat. § 608.4225(1)(a). Razin was not dealing with the LLC when he hired Norman to represent it. Rather, he was acting on its behalf to hire an unaffiliated service provider. The statutory duty of loyalty was not implicated.

The court recognized that Razin’s retention of counsel for the LLC was furthering his own interest, since it was a step in the process of realizing on the debt from the LLC. That alone does not violate the duty of loyalty, because Section 608.4225(1)(d) provides that “[a] manager or managing member does not violate a duty or obligation under this chapter or under the articles of organization or operating agreement merely because the manager’s or managing member’s conduct furthers such manager’s or managing member’s own interest.”

The Florida LLC Act recognizes that it is often appropriate for an LLC manager to enter into a transaction with the LLC. The Act’s statement of the duty of loyalty is subject to Section 608.4226, and that section permits transactions between an LLC and its member or manager if there is full disclosure and a vote of the members or managers, or if the contract or transaction is “fair and reasonable as to the limited liability company at the time it is authorized.” So even if Razin’s retention of an attorney for the LLC constituted a conflict of interest, the court upheld it on the ground that it was “fair and reasonable.” There was nothing in the record to indicate that Norman was working to protect Razin’s interests. 2011 Fla. App. LEXIS 12309, at *11-12.

The court concluded that Razin’s appointment of Norman as LLC counsel did not run afoul of Razin’s duty of loyalty to the LLC. After considering and upholding the adequacy of Razin’s notice to Bahl of the managers’ meeting, the court upheld Razin’s appointment of Norman and found that Bahl lacked authority to appoint McDermott.

Further Thoughts. On the face of it the result appears straightforward: the attorney appointed by Razin was allowed to represent the LLC, and the attorney appointed by Bahl was disqualified. The trial court’s order appointing a custodian was reversed.

But consider: Razin (on behalf of himself) and Norman (on behalf of his client the LLC) had entered into settlement negotiations and drafted a settlement agreement, to resolve Razin’s claim on his $1 million loan to the LLC. The reference to a settlement suggests that there was some compromise by both the LLC and Razin. In those negotiations, as the court noted, “Norman was hired to represent [the LLC], he had no duty to either Razin or Bahl individually; Norman’s duty ran only to [the LLC].” Id. at *12 n.4 (citing Fla. Rule of Prof’l Conduct 4-1.13).

The court did not discuss Florida Rule of Professional Conduct 4-1.2(a):

[A] lawyer shall abide by a client’s decisions concerning the objectives of representation, and, as required by rule 4-1.4, shall reasonably consult with the client as to the means by which they are to be pursued. . . . A lawyer shall abide by a client’s decision whether to settle a matter.

This rule makes it clear that the attorney is the agent of the client and must consult with the client about the attorney’s task. So, how did attorney Norman determine the objectives of the LLC in the settlement negotiations? How did he consult with the LLC to determine the means by which those objectives were to be pursued? How did his client, the LLC, determine whether to settle the matter?

Norman couldn’t rely on anything Razin told him that purported to be instructions from the LLC. That would be a blatant conflict that Norman couldn’t ignore. The provision in the operating agreement that gives Razin control would not help, since Razin would then in effect be negotiating with himself.

Norman couldn’t rely on instructions from Bahl, either, because the two managers would have to agree in order to authorize action by the LLC. The only way Norman could comply with the Rules of Professional Conduct would be to rely on joint instructions from Bahl and Razin, as managers of the LLC. That seems unlikely, given the parties’ acrimonious relationship.

Set aside the issue of how Norman could represent the LLC and at the same time satisfy his ethical obligations. Razin might purport to resolve the matter by executing a settlement agreement on behalf of the LLC, approved only by him (under the control provision of the operating agreement) and not by Bahl. Under Section 608.4226(1)(c), that would be valid if it is “fair and reasonable as to the limited liability company.” That would likely be a high hurdle to surmount and would presumably have to take into account the merits of the counterclaim that Bahl attempted to assert at the trial court level.

The decision of the Florida District Court of Appeal may be technically correct as far as it goes, but it looks like it is a long way from resolving the dispute between the parties.

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