Lawyers For Closely Held Corporations Must Consider The Privilege’s Ownership

October 9, 2019

Every court agrees that when a lawyer represents a corporation, the entity owns the privilege as the “client.” But that analysis can be difficult in closely held corporations.

In Morristown Heart Consultants, PLLC v. Patel, No. E2018-01590-COA-R9-CV, 2019 Tenn. App. LEXIS 362 (Tenn. Ct. App. July 24, 2019), two doctors owned a PLLC. The doctor who owned 50 percent of the financial rights and 66 percent of the governing rights hired a lawyer to represent the PLLC in advising it about the doctors’ memorandum of understanding and the effect of the other doctor’s suspension by a hospital. The other doctor, with 50 percent financial ownership but only 33 percent of the governing rights, sought access to the lawyer’s files. Although acknowledging that the doctor who hired the lawyer had the majority of governing rights, the court noted that the operating agreement required actions such as retaining counsel to be discussed and voted on at an official PLLC meeting. Although the appellate court also pointed to the “at issue” waiver doctrine, it found no reversible error in the trial court’s granting the 33 percent owner doctor access to the lawyer’s files. Id. at *19-22. The trial court had found that the managing member doctor had not followed the proper procedure for voting on the lawyer’s retention or arranging for the other doctor’s written consent under the Operating Agreement – meaning that PLLC “had not properly authorized” the lawyer’s hiring. Id. at *18-19.

Lawyers representing closely held corporations should assure that their retention by the majority owners complies with the corporate governance documents.