Law Firm Must Use Disclaimer to Escape Client's Debt to Litigation-Services Provider

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By Joan C. Rogers  

A law firm is liable for payment of its clients' debts to litigation-services providers unless it disclaims this responsibility when it contracts with the provider on the client's behalf, the Nebraska Supreme Court made clear Jan. 13 (Thomas & Thomas Court Reporters LLC v. Switzer, Neb., No. S-11-029, 1/13/12).

In an opinion by Justice John M. Gerrard, the court embraced the position of the Restatement (Third) of the Law Governing Lawyers on this issue.

It also decided, however, that if the law firm is a limited liability entity its responsibility for paying the services does not extend to the individual lawyer who requested the services.

Court Reporting Services

Thomas & Thomas Court Reporters LLC sued Douglas Switzer and his law firm Hathaway & Switzer LLC, alleging that they owed $5,992 for deposition reporting services provided on behalf of the firm's clients in 2009.

Switzer and his firm claimed that any liability for the court reporting fees rested with the clients on whose behalf the depositions were taken, not with the firm or Switzer individually.

At trial, John Thomas, a principal in the court reporting firm, testified that when a law firm contacts Thomas & Thomas to schedule reporting services for a deposition, the request is entered into billing and scheduling software, which generates a confirmation to be sent back to the law firm. Thomas testified that if a law firm says it will not be responsible for services provided to its clients, Thomas & Thomas will not accept the assignment unless payment is made before the deposition or upon delivery. He admitted, however, that most of the payments from Hathaway Switzer over the years were actually made through checks written by the firm's clients.

The trial court entered judgment against the law firm and Douglas Switzer individually, and they appealed. The supreme court concluded that the law firm was liable to Thomas & Thomas, but that Switzer did not share that liability.

Law Firm Is Like Contractor

Typically an agent for a disclosed principal is not liable on a contract absent some contrary agreement or circumstances showing that the agent expressly or implicitly intended to incur personal responsibility, Gerrard observed.

But even though general agency rules apply to the attorney-client relationship, he added, much more is involved than mere agency. “The attorney, not the client, is responsible for performing the details of litigation,” Gerrard said.

Accordingly, the court continued, Section 30(2)(b) of the Restatement (Third) of the Law Governing Lawyers (2000) provides that unless a lawyer disclaims liability at the time of contracting, the lawyer is liable to third persons on contracts entered into on behalf of a client if “the contract is between the lawyer and a third person who provides goods or services used by lawyers and who, as the lawyer knows or reasonably should know, relies on the lawyer's credit.”

Along with quoting the Restatement, the court cited decisions to this effect from Arkansas, Indiana, Massachusetts, Missouri, Nevada, North Dakota, and Washington. It acknowledged a contrary Illinois ruling.

The Restatement specifically explains in Comment b to Section 30 that even when a client is a disclosed principal, a lawyer is liable for the compensation of a court reporter who reasonably relies upon the lawyer's credit, Gerrard pointed out.

Merely disclosing the client's name does not convey that the client rather than the lawyer is supposed to pay, the court said. It explained that those who provide litigation services are likely to rely on the lawyer's credit because they regularly deal with lawyers, whereas investigating the client's reliability could be costly.

As a practical matter, the court added, an attorney dealing with legal support services providers usually acts less as an agent for the client and more like a general contractor. Accordingly, it is appropriate that the attorney—who has legal knowledge and is familiar with the case and client—should bear the burden of clarifying her intent about payment, the court said.

“And an attorney's liability for (and payment of) expenses of litigation is consistent with our ethical rules,” the court declared. It cited Nebraska Rule of Professional Conduct §501.8(e)(1) (lawyer may advance court costs and litigation expenses with repayment contingent on outcome of matter) and (e) (2) (lawyer representing indigent client may pay court costs and litigation expenses on client's behalf).

The record here did not show that Hathaway Switzer disclaimed liability, the court said. Even if the reporting service's bills were often paid by clients, “absent an express disclaimer at the time of contracting, the attorney is responsible for payment,” Gerrard stated.

Limited Liability Shield

The court also concluded, however, that Switzer could not be held personally liable for the bill.

Citing Nebraska statutes governing LLCs, the court observed that “the individual members and managers of a limited liability company are generally not liable for a debt, obligation, or liability of the company.”

A court will disregard the limited liability shield “only where the company has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act in contravention of the rights of another,” Gerrard wrote. A plaintiff seeking to impose liability on an individual member or manager has the burden of proving that the company's identity should be disregarded to prevent fraud or injustice to the plaintiff, he added.

The record here did not establish that Switzer ever contracted individually with Thomas & Thomas, the court said, “although he was occasionally responsible for ordering its services.” There was no evidence to support a judgment against him in an individual capacity, it found.

Douglas Switzer and Richard P. Hathaway, Omaha, Neb., represented Switzer and their firm. Ronald E. Reagan of Reagan, Melton & Delaney, La Vista, Neb., represented Thomas & Thomas.

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