In the wake of the recent holiday parties some attorneys may have cause to reflect with concern on conversations they may have had with acquaintances who raised law-related questions. Was an attorney-client relationship formed, and if so, what are the implications?
Many of us vaguely remember encountering variations of this rhetorical question in the hypotheticals we discussed in our law school ethics classes. But it is not merely an academic concern. Every Minnesota attorney in every line of traditional and nontraditional work should understand how easily an attorney-client relationship can be formed under Minnesota law. Forming an attorney-client relationship with someone can have potentially significant implications for your ethical obligations, risk management, and relationships with this and other clients. Moreover, the issue is not one that you can leave at the office. It comes up every time you have a conversation that starts, “So you’re an attorney … ?”
What’s at Stake
The consequences of entering into an attorney-client relationship are numerous and varied. Among the most familiar and basic implications is that the attorney owes the client ethical obligations of competence, diligence, confidentiality.1 Except in an emergency, the Minnesota Rules of Professional Conduct apply the same standard of required attorney competence, regardless of the circumstances under which an attorney-client relationship has been formed or the formality of the representation. The rules require that an attorney possess (or acquire) and utilize the “legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.”2
Triggering these ethical rules has secondary implications for attorneys. For example, a “casual” client who receives an informal opinion and relies on that opinion to their detriment may be disappointed with the outcome of their matter and file an ethics complaint with the Office of Lawyer’s Professional Responsibility. Although most complaints do not result in discipline,3 even a meritless ethics complaint is a headache, expense, and embarrassment that no attorney wants to deal with.
Short of facing an ethics complaint, there are other practical consequences of inadvertently entering into an attorney-client relationship or receiving information from a prospective client. For example, Rule 1.7 prohibits a lawyer from representing a client if that representation would be directly adverse to another client.4 Rule 1.10 imputes conflicts of one attorney to all other attorneys in a firm, so a casual consultation giving rise to an attorney-client relationship (as discussed below) could call into question whether the attorney’s firm is disqualified from representing an existing or future client who is adverse.5 In fact, merely receiving information from a prospective client may disqualify an attorney from continuing to represent an existing client whose interests are “materially adverse to those of [the] prospective client.”6
Another major concern is tort liability. Lawyers should be particularly conscious of the risk of professional liability claims in a depressed economy where parties are financially stressed and looking for solvent targets. One leading insurer of attorneys in Minnesota has experienced a notable increase in the percentage of claims correlating with the downturn in the economy.7
A plaintiff can establish a prima facie case of professional negligence by demonstrating “(1) an attorney-client relationship; (2) acts constituting negligence or breach of contract; (3) that such acts proximately caused the plaintiff’s damages; and (4) that but for the defendant’s conduct, the plaintiff would have obtained a more favorable result in the underlying transaction than the result obtained.”8 Proving a deviation from the standard of care and “but for” causation generally requires expert testimony, and Minnesota’s expert-review statute provides some protection against frivolous malpractice claims.9 But even a meritless malpractice claim by a dissatisfied client can be—like a meritless ethics complaint—inconvenient, expensive, and embarrassing.
There are a variety of other practical consequences to the formation of an attorney-client relationship, many of which have been a source of litigation and ethics investigations. For example, the formation of an attorney-client relationship triggers a notice requirement for certain types of claims under Minnesota’s Civil Damages Act.10 An attorney-client relationship gives rise to common law fiduciary duties concerning loyalty, candor, and confidentiality, and may expose the attorney to claims beyond professional negligence.11 The formation of an attorney-client relationship also restricts and regulates numerous aspects of an attorney’s business and personal relationship with a client, including business dealings, gifts and transfers of property, financial payments, and sexual intimacy.12
In light of these practical considerations, Minnesota attorneys should know when and how they can be deemed to have entered into an attorney-client relationship.
Forming the Relationship
In Minnesota, the existence of an attorney-client relationship may be established under either a contract or a tort theory.13 The Minnesota Supreme Court first articulated this dual-theory approach in 1980 in the leading case, Togstad v. Vesely, Otto, Miller & Keefe. Since that decision, Minnesota’s appellate courts have decided scores of cases addressing the existence of an attorney-client relationship and have applied Togstad in a variety of contexts including professional liability claims, disciplinary matters, and challenges to attorney-client privilege.14 But because the contract and tort theories are flexible and depend on the facts and circumstances of each case, parties continue to regularly litigate whether an attorney-client relationship has been formed.
The contract theory describes the most familiar method of entering into an attorney-client relationship. However, under the basic tenets of contract law, a formal written retainer agreement is not necessary.15 Indeed, the contract theory recognizes an attorney-client relationship where the parties “explicitly or implicitly agree to a contract for legal services.”16 An implicit agreement for representation “can be deduced from the circumstances, relationship, and conduct of the parties.”17 In one case, the Minnesota Supreme Court found an issue of fact as to whether firms retained to represent a company in pension fund litigation also impliedly entered into an attorney-client relationship with the client’s sister company.18
The tort theory is even more flexible, recognizing an attorney-client relationship “when a person seeks and receives legal advice from an attorney in circumstances in which a reasonable person would rely on the advice.”19 It must be “reasonably foreseeable” to the attorney that the alleged client would rely on the advice and that “if such advice was rendered negligently, the individual receiving the advice might be injured thereby.”20 In Togstad, the supreme court held that there were sufficient facts to support the jury’s determination that the attorney entered into an attorney-client relationship with a husband and wife during an initial consultation in which the couple allegedly asked for and received an opinion concerning the viability of a medical malpractice claim.21 Although the attorney testified that he merely expressed that his firm was not interested in their case and suggested that they obtain a second opinion, the court deferred to the jury’s findings and held, “under either theory the evidence shows that a lawyer-client relationship is present here.”22
The Minnesota Court of Appeals, applying the tort theory, found a fact issue as to whether an attorney-client relationship existed between an attorney/real estate broker and an individual seeking assistance in a debt-collection matter where the attorney refused to represent the individual but recommended that the individual sell property to satisfy the debt.23 Similarly, the court of appeals affirmed a jury’s finding that an attorney who had prepared a contract for deed for a buyer and seller of real estate represented both parties when the attorney, acting on behalf of the sellers, later presented to the buyers, who had defaulted on payments, a quitclaim deed and confession of judgment for unpaid real estate taxes and utilities.24 Although the attorney testified that he had told the buyers to retain their own counsel, the court of appeals reasoned that under the totality of the circumstances, “it is difficult to say that [the buyers] could not have formed a reasonable belief that appellant was acting as their attorney.”25
Third-Party Beneficiary Exception
Although an attorney-client relationship is generally prerequisite to establish an attorney’s tort liability for professional negligence, courts have recognized exceptions in cases where there is fraud or improper motive or where a third party is a “direct and intended beneficiary of the attorney’s services.”26 A party is a “direct” beneficiary of a representation if the representation “has as a central purpose an effect on the third party and the effect is intended as a purpose of the transaction.”27 For a benefit to be “intended,” the attorney must be “aware of the client’s intent to benefit the third party.”28
The prototypical situation where the third-party beneficiary exception applies is in the estate-planning context, where the testator’s purpose in hiring an attorney to draft a will is to provide for the testator’s beneficiaries.29 But this exception has been considered in a variety of other contexts, including a shareholder’s claim of malpractice against attorneys retained by the corporation,30 and claims by a group of banks that participated in a loan-pooling arrangement against the firm retained by the lead bank.31
Observations and Practical Tips
The test for entering into an attorney-client relationship is flexible. All attorneys, whether in private practice or nontraditional vocations, need to be conscious of how easily an attorney-client relationship can be formed when discussing legal matters with clients, client representatives, and professional or social acquaintances. This issue is of equal concern to attorneys who represent institutional clients and attorneys who primarily represent individuals. In the latter case, the operative question is, “Have I entered into an attorney-client relationship with this person?” In the former case, the operative question is, “Which of the various persons or entities with whom I have contact do I represent?”
The risk to attorneys is not merely that the attorney will be deemed to have entered into an attorney-client relationship and consequently be disciplined for an ethics violation or held liable in a tort action for an error or omission. The more significant risk, statistically speaking, is that when a would-be client becomes dissatisfied, ambiguity in the attorney’s relationship with the would-be client will lead to a situation that is costly, time-consuming, and embarrassing for the attorney.
Attorneys can manage or mitigate this risk by adopting the simple practice of memorializing communications with potential clients in what has come to be known as a “Togstad letter.” As the Togstad decision demonstrates, verbal disclaimers offered by an attorney when discussing legal matters with potential clients may not suffice to avoid subsequent disagreement over the content of the communications or the status of the parties’ relationship. Sending the potential client a written letter that expressly declines representation may spare the attorney from an ethics or malpractice headache.
The legal community understandably is concerned that the risk posed by this legal landscape increases the cost of legal representation and restricts access to legal services by discouraging attorneys from informally advising and assisting nonclients. Indeed, the Minnesota legal community reacted strongly against Togstad when it was first decided.32 One commentator noted:
How can we expect professional people to serve the public prudently, wisely and fully professionally with that kind of an ax hanging over their heads?
The alternative of course is to load up the firm with vast insurance coverages the cost of which, inevitably, must be passed on to the public in the form of higher fees and to conduct the practice with an exhaustive and costly pursuit of and study into every possible contingency that might develop … a kind of defensive sort of practice in the face of the malpractice suit threat.
And we wonder why professional service costs keep rising.33
Whatever the merits of these concerns, there is no indication that the courts are predisposed to revisit Togstad. Even if changes were on the horizon, the common law evolves slowly, and any adjustments to this legal landscape would occur incrementally over decades. Togstad and its progeny are not going away any time soon, so attorneys should understand how easily they can enter into an attorney-client relationship under this framework.
Peter Gregory is an attorney with the Minneapolis law firm of Bassford Remele, A Professional Association. He focuses his civil litigation practice on the areas of commercial litigation and professional liability.
1 Minn. R. Prof. Conduct 1.1, 1.3, 1.6.
2 Id. at 1.1.
3 Timothy M. Burke, “The Lawyer Discipline System: What’s That?” Bench & Bar of Minn. (July 1999).
4 Minn. R. Prof. Conduct 1.7(1).
5 Id.; Minn. R. Prof. Conduct 1.9.
6 Minn. R. Prof. Conduct 1.18(c).
7 Michelle Lore, “Has the downturn caused legal malpractice claims to spike?” Minnesota Lawyer (02/23/2009).
8 Schmitz v. Rinke, Noonan, Ltd., 783 N.W.2d 733, 738-39 (Minn. App. 2010), review denied (Minn. 09/21/2010).
9 See Minn. Stat. §544.42 (2010); Brown-Wilbert, Inc. v. Copeland Buhl & Co., PLLP, 732 N.W.2d 209, 217 (Minn. 2007).
10 Minn. Stat. §340A.802, subd. 1 (2010); Wood v. Diamonds Sports Bar & Grill, Inc., 654 N.W.2d 704, 707 (Minn. App. 2002).
11 STAR Centers, Inc. v. Faegre & Benson, LLP., 644 N.W.2d 72, 77 (Minn. 2002).
12 Minn. R. Prof. Conduct 1.18(a), (c), (d), (e), (f), (j).
13 Pine Island Farmers Coop v. Erstad & Riemer, PA, 649 N.W.2d 444, 448 (Minn. 2002) (citing Togstad v. Vesely, Otto, Miller & Keefe, 291 N.W.2d 686, 693 (Minn. 1980)).
14 Id.; In re Paul W. Abbott Co., Inc., 767 N.W.2d 14, 18 (Minn. 2009); In re Disciplinary Action Against Perry, 494 N.W.2d 290, 294 (Minn. 1992) (concluding attorney-client relationship existed under tort theory).
15 Admiral Merchants Motor Freight, Inc. v. O’Connor & Hannan, 494 N.W.2d 261, 265 (Minn. 1992).
16 Gramling v. Memorial Blood Ctrs., 601 N.W.2d 457, 459 (Minn. App. 1999) (emphasis added), review denied (Minn. 12/21/1999).
17 McIntosh County Bank v. Dorsey & Whitney, LLP, 745 N.W.2d 538, 549 (Minn. 2008).
18 Admiral Merchants Motor Freight, Inc., 494 N.W.2d at 266.
19 Pine Island Farmers Coop, 649 N.W.2d at 448 (citing Togstad, 291 N.W.2d at 693 n.4).
20 Togstad, 291 N.W.2d at 693 n.4.
21 Id. at 693.
23 Veit v. Anderson, 428 N.W.2d 429, 432 (Minn. App. 1988).
24 Gillespie v. Klun, 406 N.W.2d 547, 556 (Minn. App. 1987).
26 McIntosh County Bank, 745 N.W.2d at 545 (citing Marker v. Greenberg, 313 N.W.2d 4, 5-6 (Minn. 1981)).
27 McIntosh County Bank, 745 N.W.2d at 547. Elsewhere in McIntosh County Bank, the supreme court quoted the language from Marker in which the court stated that a third-party is a direct beneficiary only if client’s “sole purpose” is to benefit the third party. Id. Neither the supreme court nor the court of appeals has had an opportunity since McIntosh County Bank to comment on the significance, if any, of these alternative formulations of the third-party beneficiary test.
28 Id. at 547-48.
30 Holmes v. Winners Ent., Inc., 531 N.W.2d 502, 505 (Minn. App. 1995).
31 McIntosh County Bank, 745 N.W.2d at 541.
32 Michael J. Hoover, “Legal Malpractice in Light of Togstad—Liability for Curbstone Opinions?” Bench & Bar of Minn. (November 1980).
33 Id. (quoting Tilton, “Something Else to Worry About,” West St. Paul Sun (08/06/1980)).