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Sept. 21 — A lawyer who’s also the former lover of home improvement magnate John R. Menard Jr. won’t get a share of his fortune, the Wisconsin Court of Appeals held Sept. 20 ( Sands v. Menard , 2016 BL 308677, Wis. Ct. App., No. 2012AP2377, 9/20/16 ).
The lawyer-slash-girlfriend ignored ethics rules governing lawyer-client business deals, defeating her claim to an equity stake in his businesses, the court said.
For lawyers, the decision highlights the importance of complying with strict client-protective safeguards when entering into agreements to receive an ownership interest in a corporate client as payment for legal services.
The decision will also comfort entrepreneurs who become romantically entangled with corporate counsel. Even when an intimate relationship develops, a lawyer who ignores the rule on lawyer-client deals can’t enforce a claimed business transaction with the client, Judge Lisa K. Stark made clear.
Menard’s estimated net worth is $11.6 billion, according to Bloomberg Billionaires, where he appears in the #93 spot on the list of the world’s richest people. His biggest asset is his majority share in Menard Inc., which owns the third-largest home-improvement chain in the U.S. with 294 stores in 14 central U.S. states.
It had revenue of $10.2 billion in 2015, according to the National Retail Federation. Menard also owns thoroughbred horses, and his son Paul races for a NASCAR team that the company co-sponsors, according to Bloomberg.
Debra K. Sands claimed she cohabited with Menard from 1998 until 2006, and performed work that boosted the value of his companies without being fully paid for it. She also said Menard repeatedly promised to give her ownership interests in his businesses as compensation for her services.
Menard admitted the two were engaged but denied they ever lived together, and said he never promised her a stake in his enterprises.
The court held that Sands’s noncompliance with Rule 1.8(a) of the Wisconsin Rules of Professional Conduct for Attorneys bars her equitable “unjust enrichment” claim.
The rule prohibits a lawyer from entering into a business transaction with a client or acquiring an ownership interest adverse to a client unless the lawyer complies with certain requirements such as disclosing the terms of the deal in writing and getting the client’s written consent.
Rule 1.8(a) applies to transactions in which an attorney seeks an ownership interest in the client’s business as compensation for legal services, the court said.
Sands’ failure to comply with the rule gave her “unclean hands” that block recovery on her claim for unjust enrichment, the court said. “There is no exception to Rule 1.8(a) for attorneys who cohabitate with their clients,” it said.
Moreover, the court ruled that Sands didn’t allege an enforceable claim against Menard for breach of contract. She didn’t identify the amount or value of the ownership stake he allegedly agreed to give her, or even the entities in which he agreed to give her an ownership interest, it said.
The court also held that Menard Inc. can’t go forward on its counterclaim asserting that Sands breached her fiduciary duties while acting as its outside counsel in a transaction involving the formation of MH Private Equity Fund. The company asserted that Sands tried to obtain a 20 percent ownership interest in the fund, disclosed confidential information so the transaction would close and accepted certain payments in the deal without disclosing them.
The court held that the fiduciary breach claim wasn’t timely filed. Menard Inc. had enough information to discover the claim within the statutory time limit if it had used reasonable diligence, it found.
Gray Plant Moody and the Spence Law Firm LLC represented Sands. Freeborn & Peters LLP represented John Menard and Menard Inc.
Copyright © 2016 American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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