Archives for June 2018
By: Arend J. Abel, Attorney
On June 1, the Indiana Court of Appeals addressed the circumstances in which a shareholder in a closely held limited liability company could sue another shareholder for breach of fiduciary duty arising out of alleged mismanagement of the corporation. Ordinarily, such actions must be brought derivatively, but the Court noted that Indiana law provides an exception in some circumstances.
Typically, a claim of corporate mismanagement involves harm to the corporation, and as such must be brought derivatively. However, the policies requiring a derivative action are the protection of third party shareholders and creditors. Under Barth v. Barth, 659 N.E.2d 559 (Ind. 1995), where those policies are not implicated, a derivative action is not required.
Thus, in Bioconvergence, LLC v. Menefree, the Court of Appeals found that a direct action against a majority shareholder in a closely-held limited liability was permissible, or at least non-frivolous, because the only shareholder other than the plaintiff was the defendant, and there were no creditors.
A direct action by a shareholder against a fellow shareholder may be the only effective remedy for a minority shareholder in situations where a majority shareholder is either mismanaging a business or siphoning off funds. A derivative action contains a number of procedural hurdles. Importantly, with derivative actions, the corporation may take over a derivative action, form an independent litigation committee, and on the recommendation of that committee dismiss the action, leaving a minority shareholder without a remedy.
By: Arend J. Abel, Attorney
In April, the Indiana Supreme Court Disciplinary Commission issued its first ever advisory opinion, and it was a doozy. It’s fair to say that the opinion puts the kibosh on the current business “lawyer consultation” models for online giants Legal Zoom and Avvo for a whole host of reasons.
Not content to remain in the realm of automated preparation of legal documents, online companies such as Legal Zoom and Avvo have begun offering consultation with actual lawyers. The lawyers are not, however, employees of the online entities, but “independent” lawyers. The company establishes the fee for the service, which is typically a flat fee charged to the consumer. Say $500 for estate planning advice and preparation of a simple will. The client selects a lawyer from the company’s online database, sets up an appointment and receives the service. In addition, the lawyer pays a “marketing fee” to the company for each matter the lawyer receives.
The Commission’s Opinion
According to the Commission, such an arrangement raises a host of issues under the Indiana Rules of Professional Conduct. First, the Commission concludes, the marketing fee can be viewed as violating the rule that a lawyer may not split legal fees with a non-lawyer, a practice prohibited by Indiana Rule of Professional Conduct 5.4(a). While the Commission’s reasoning is less than clear, it appears that the fact the marketing fee is not payable unless the lawyer earns a fee is the key to seeing the fee as simply part of the overall fee that the consumer pays.
The Commission’s reasoning for its conclusion that the arrangement risks an abdication of the lawyer’s professional independence is more extensive, but less convincing. According to the Commission the abdication occurs because the client’s legal needs are “locked in” without prior consultation, and the lawyer must have a prior consultation with the client to determine the client’s needs. However, nothing in the arrangement appears to prevent a lawyer from consulting with the client (indeed consultations are part of the model) and advising the client whether the services the client selected are sufficient to the client’s needs. The Commission also concludes that the fact the online company sets the fee based on the time the company assumes the service will take to perform amounts to “direct[ing] the length of time lawyer should spend on the representation” such that the attorney may agree to provide legal services that cannot realistically be performed within the allotted time. Again, though, nothing in the arrangement prevents the lawyer from spending the amount of time the lawyer independently deems adequate to get the job done right. Finally, the Commission suggests that a “money back customer satisfaction” guarantee somehow abdicates the lawyer’s independence. The reasoning behind this concern is particularly unclear. Does it mean that individual lawyers can’t offer a money-back guarantees? If it doesn’t, what’s the functional difference, if the “satisfaction” decision is truly in the hands of the consumer? Or is the problem that the company, rather than the lawyer, will decide whether to refund the fee?
The commission also suggests that the arrangement could violate Ind. R. Prof. Cond. 1.2(c), which governs limited scope representations. The rule requires both that the limitations be reasonable, and that the client consent. While the Commission concludes that the “ ‘referral’ business model raises concerns about meeting this obligation,” the opinion does not explain why.
Unlike other passages of the opinion, that portion of the opinion stating that the marketing fee does not qualify as an advertising cost is not couched in conditional language saying the arrangement creates a risk of violation. Rather, the opinion flatly states that the marketing fee “is not reasonable cost of advertising.” That conclusion, if correct, would mean that participation likely violates Rule 7.2(b), which provides that a lawyer “shall not give anything of value to a person for recommending or advertising the lawyer’s services.” Reasonable costs of advertising are an exception from this general prohibition, as are “the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service described in Rule 7.3(d)” Rule 7.3(d) limits qualified referral services to those run by not-for-profit and government entities and bar associations, so for-profit online referral services wouldn’t qualify.
The opinion gives two reasons for its conclusion that the marketing fee is not the reasonable cost of advertising. The fees are typically “tied to the cost of the legal services” rather than the actual cost of advertising the individual lawyer’s services. In addition, because the fee is only paid after the lawyer renders the service, the opinion reasons it is more akin to fee splitting.
Finally, the opinion suggests that advertising by the online companies may falsely inflate the abilities of the lawyers to whom they make referrals, describing lawyers as highly qualified, knowledgeable, or even specialized, but allowing lawyers to take cases without prior experience.
In spite of the fact that much of the opinion is cast in conditional language, saying particular aspects of the arrangement “may risk” violating Indiana’s Rules of Professional Conduct, and the fact that the opinion is “non-binding,” an lawyer would have to be more than reckless to participate in the arrangements described above. It remains to be seen how the online services react, but my prediction is there will be litigation against bar authorities over these issues.
By: David J. Cutshaw, Attorney
In May of 2016, we contrasted the ability of a private citizen to sue a doctor for a violation of the child abuse reporting statute and the right of a doctor to sue a lawyer for an inadvertent disclosure of a doctor’s name in a medical malpractice complaint. Since May of 2016, Indiana Courts have continued to refuse to imply a private right of action for violations of other statutes in the following circumstances:
Doe v. Ind. Dept. of Child Services, 81 N.E. 3d 199 (Ind. 2017): The Indiana Supreme Court refused to infer a private right of action where the identity of a confidential informant who reported child abuse was released by DCS directly to the suspected abuser, resulting in threats to and harassment of the informant and his family. The statute in that case required DCS to keep the identity of the informant confidential. The Indiana Supreme Court held the informant had no legal recourse against DCS, adding more meaning to the no-good-deed-goes-unpunished mantra and creating the danger that other informants will hesitate to report child abuse at his or her own physical peril.
Shirey v. Flenar, 89 N.E. 3d 1102 (Ind. Ct. App. 2017): The Court of Appeals refused to recognize a private right of action when a physician lost or destroyed a patient’s records contrary to the requirements of an Indiana statute that requires the doctor to preserve a patient’s records and produce them to the patient when properly requested. In this case, the patient was unable to sue her doctor who did not produce her medical records for her inability to fully document her personal injury claim due to the lost/destroyed records. Again, doctors can sue lawyers for inadvertently disclosing their involvement in a medical malpractice suit, but a patient cannot sue a doctor under the circumstances in Shirey.