A jury tagged Alston & Bird yesterday with a legal malpractice verdict arising out of allegations that one of its partners failed to properly advise and protect a small, family-owned limited liability company, when its manager looted the business of nearly $1.5 million in excess compensation and overvalued shares in the company. The jury took only a few hours to reach a verdict, which, to trial attorneys, typically means the jury didn’t have to think much about responsibility and went right to damages.
Alston & Bird represented the business, but were taking direction from the manager, who was the eldest sibling in the family that owned the business. That manager it seems was paying himself more than what his services were worth, which often is a way that majority owners mask looting a small business. This can also lead to claims by minority owners that they are being “oppressed” by the majority owner, especially when they are frozen out after speaking out about what seems like excess compensation.
With small, family owned businesses, many attorneys have long time relationships with the company, and the family, and may lose track of who the client really is. The client is the entity, not any single member or owner. If a majority owner is taking excessive compensation, this case is a wakeup call to those small business lawyers to protect and advise the company.
Not an easy task. Conflict of interest rules come up, loyalty, and a myriad of other issues must be addressed.
When a minority owner complains about the majority owner doing things such as taking excessive salary, bonuses or draws, the entity’s lawyer should then look at each of these issues. The attorney may then have to take steps to protect the business. With LLCs, the attorney may have to advice the business to expel the member, something you can read about here. This verdict may even carry over to CPAs. Arguably CPAs probably have access to more of the type of information such as compensation and financials that might be a red flag to a majority owner looting the business.