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Problems Representing Multiple Clients in Real Estate Transactions

Fri, 07/22/2016 - 13:30 -- admin25

by Martin L. Camp

When does an attorney accused of malpractice win? I submit never. Oh you may ultimately prevail in court. The plaintiff might not succeed in a damage action. You might win in a grievance proceeding. But at what cost in time, money, anguish and reputation?

Parties frequently own and develop real estate in entities such as LLCs and Limited Partnerships. Attorneys have to be very careful not to become “Counsel to the Situation.” The risk of grievance and malpractice claims is enhanced when the attorney does not make it clear whom he does and does not represent and what he is and is not engaged to do.

Malpractice claims are generally based upon the tort of negligence. Cosgrove v. Grimes, 774 S.W.2d 662,664 (Tex. 1989). To succeed the plaintiff must show (i) duty; (ii) a breach of the duty; (iii) the breach proximately caused the injury; and (iv) damages. Id at 665. Privity is generally a requirement to show duty (attorney/client relationship). Barcelo v. Elliott, 923 S.W.2d 575,577 (Tex. 1996). When the attorney only represents one party in the transaction and all parties understand whom the attorney is representing, the likelihood of a malpractice claim is minimized.

Non-clients can prevail despite the lack of privity if they can prove that the lawyer should have reasonably expected that the non-client would believe the lawyer was representing him and the lawyer failed to advise of the non-representation. Burnap v. Linnartz, 914 S.W.2d 142, 148-49 (Tex. App.-San Antonio 1995, writ denied).

Let’s look at a fact pattern that could lead to potential malpractice claims or liability if not handled property. John and Jack, as investors, and Bob, a real estate developer, visit attorney Peter. Peter has represented Jack in the past in the sale of some family land. Peter also represents Bob from time to time in his development business. The parties want Peter to draft a limited partnership agreement in which Bob will be the General Partner and John and Jack will be the limited partners. After the partnership is formed, they want Peter to represent the partnership in the purchase of an old hotel they plan to renovate. John and Jack will be asked to personally guarantee the renovation loan.

Whom does or can or should Peter represent in this transaction? This depends upon the actions Peter takes to be certain he is not counsel to the situation. Failing to adequately address this conundrum and simply drafting the partnership agreement opens him up to claims in the future should the parties end up in disputes with each other or third parties.

In the absence of a clearly defined role in this transaction, Peter runs the risk that all the parties will assume he is their lawyer and is representing their interests. And while under limited circumstances and with informed consent it is not impossible to represent parties with potentially adverse interests in a transaction, it is not advisable and it is very difficult to truly give all the disclosures necessary for a party to make an informed consent.

Peter needs to carefully draft his engagement letter. The interests of the General Partner and the Limited Partners are always divergent. Key provisions governing control decisions or buy/sell arrangements in the event parties cannot agree on partnership action can be drafted many ways which can favor one party over the other based upon the financial capability of the parties or their sophistication, etc.

Ideally, Peter needs to be engaged by one of the parties to draft the agreement. It can be the General Partner or one or more of the Limited Partners, but he should not attempt to represent all of the partners. Peter should clearly inform all parties that he cannot be counsel to the situation and that he is representing one party. The engagement letter should provide acknowledgments from the other partners that they understand he is not representing them and that have been informed they should have independent counsel.

Peter can subsequently agree to represent the Partnership, but that engagement letter needs to also be acknowledged by the parties with the understanding that he represents the entity, not any of them individually. And the agreement should also provide that he will withdraw from representing the entity or any of them in the event of a dispute. And if there is a dispute he should withdraw. The risk of litigation against him and his firm is high and the rewards low.

Martin L. Camp is a Professor of Practice and the Assistant Dean for Graduate and International Programs at SMU Dedman School of Law. He is a former Chair of the Real Property Section and can be reached at mlcamp@smu.edu.

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