Nebraska Appeals Court Rules Closely Held Corporation Owners Can Sue Company's Lawyers for Malpractice

Steve Sickler and Cathy Mettenbrink built a specialty retail coffee business in Nebraska and decided to franchise it. They hired attorney Jeffrey Orr to handle the legal work, and with Orr's help they formed a corporation, Baristas and Friends, Inc., to serve as the franchise vehicle. Orr drafted franchise disclosure statements that turned out to violate both federal law and Iowa law.

When problems surfaced with the documents, Orr's firm brought in attorney Robert Kirby of Croker, Huck, Kasher, DeWitt, Anderson and Gonderinger, L.L.C. to review them. Kirby identified a long list of compliance failures, but he relayed his findings only to Orr's firm -- he never communicated directly with Sickler or Mettenbrink. The defective disclosures led to private litigation and an FTC enforcement action. Their business collapsed.

Sickler and Mettenbrink filed a legal malpractice suit against Kirby and the Croker Huck firm. The defendants argued they owed no duty to the individual owners because they represented only the corporate entity, not the principals personally. The Buffalo County District Court agreed and entered summary judgment for the defendants.

Richard J. Rensch and Sean P. Rensch of Rensch and Rensch Law appealed. They argued that where a corporation is closely held and the owners' personal finances are so intertwined with the entity's that the two cannot be separated, the individual owners are intended third-party beneficiaries of the attorney-client relationship. Under the Nebraska Supreme Court's earlier Perez v. Stern standard, a duty of reasonable care extends to such third parties.

The Nebraska Court of Appeals agreed and reversed summary judgment. The court held that genuine issues of material fact existed as to whether Sickler and Mettenbrink's financial interests were sufficiently integrated with Baristas and Friends that Kirby owed them a personal duty of care. The ruling remanded the case for further proceedings in district court. Bloomberg Law reported the decision on November 23, 2011, noting that the holding created a pathway for closely held corporation owners to bring personal malpractice claims -- a question that had not been squarely addressed under Nebraska law.