Dismissal Of Suit Against WilmerHale Reversed: Operating Agreement Created Obligations To Frozen Out Minority Members

The Massachusetts Supreme Judicial Court reversed the dismissal of claims brought against Wilmer Hale and others

Minority members of a Massachusetts limited liability company seek to hold the company’s attorneys liable for their involvement in an alleged “freeze-out” orchestrated by and on behalf of the majority members. According to the minority members, the majority members secretly retained the attorneys, one of whom is the daughter of a majority member, to, at least ostensibly, represent the closely held company. The attorneys then worked behind the scenes to assist the majority in merging the company with and into a newly created Delaware limited liability company, all for the purpose of eliminating significant protections afforded minority members under the Massachusetts company’s operating agreement. By the time the attorneys’ involvement came to light, the majority members had unfettered control of the resulting entity, with a new operating agreement that extinguished the minority’s rights to, among other things, participate in management, access the company’s records, and prevent dilution of their interests. The minority members, the plaintiffs in this action, responded by asserting claims against the attorneys and their respective law firms for breach of fiduciary duty, aiding and abetting tortious conduct,civil conspiracy, and violation of G. L. c. 93A. The matter now comes before this court for de novo review after a judge of the Superior Court, acting on motions filed by the defendants, dismissed the plaintiffs’ claims against the attorneys and their law firms for failure to state a claim upon which relief can be granted. See Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974). For the reasons discussed below, we reverse the portion of the judgment dismissing those claims.

The court

the determination of whether a fiduciary duty exists is largely fact specific. And the factual inquiry here is particularly complicated due to the alleged covert nature of counsel’s actions. On the one hand, there are no allegations in the complaint of any personal history or interaction between counsel for the company and the minority members, but on the other, the complaint does allege that counsel should have communicated with the minority members, particularly given the terms of the ATT-MA agreement providing strong protections of minority rights. Instead of communicating with minority members about the proposed actions, counsel allegedly took purposeful steps to conceal their activities undermining the ATT-MA agreement. Given the protections contained in the ATT-MA agreement, the minority members should have been able to repose trust and confidence that any counsel hired by the company would have communicated and consulted with them prior to undoing those protections…In light of those allegations, we cannot conclude, as a matter of law, that company counsel did not owe a fiduciary duty to the minority members because of the lack of a prior relationship and interaction.

Further, the potential conflict did not negate the fiduciary obligations as a matter of law.

Chief Justice Kafker authored the opinion. (Mike Frisch)