Vanderhoof v. Cleary

Vanderhoof v. Cleary  (97-514); 168 Vt. 555; 725 A.2d 917

[Filed 24-Dec-1998]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of  Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.


                                 No. 97-514


Ronald J. & Eva M. Vanderhoof	                  Supreme Court

                                                  On Appeal from
     v.		                                  Franklin Superior Court

James H. & Judith S. Cleary, Gear &	          November Term, 1998
Davis, Inc. and Christopher Davis, Esq.


David A. Jenkins, J.

       Stuart M. Bennett, Shelburne, for Plaintiffs-Appellants

       Thomas F. Heilmann of Heilmann, Ekman & Associates, Inc., Burlington,
  for  Defendant-Appellee


PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.


       SKOGLUND, J.  The question presented is whether a shareholder of a law
  firm organized  under the Vermont Professional Corporation Act, 11 V.S.A.
  Ch. 3, is vicariously liable for the acts  or omissions of another
  shareholder of the firm.  Plaintiffs sued defendant Davis for damages 
  arising out of an allegedly defective title search done by an attorney in
  defendant's law firm.(FN1)  The  Franklin Superior Court granted Davis's
  summary judgment motion, and this appeal followed.   We affirm.  	

       The relevant facts as developed in the summary judgment record are not
  in dispute.   Defendant Davis and Allen F. Gear created a professional
  corporation in 1982 under the Vermont  Professional Corporation Act.  Both
  Davis and Gear were shareholders of the corporation.  Gear  died in 1991,
  and in 1994 the Vermont Secretary of State issued a certificate of
  dissolution of the  

  

  corporation (then known as Gear, Davis & Kehoe).   

       Plaintiffs began the present action in February 1996 against Gear &
  Davis Inc. and  defendant Davis individually, alleging that a title opinion
  produced by Gear in 1989 in connection  with the purchase of an apartment
  house in Fairfax failed to mention that state and local permits  were
  required for the multi-family apartment but had not been obtained, an
  omission that  subsequently resulted in substantial financial harm to
  plaintiffs.  The title opinion was signed  "Gear & Davis, Inc. by Allen F.
  Gear, Esquire."  Plaintiffs concede that they dealt almost  exclusively
  with Gear, who signed the title search for the subject property.  

       Defendant moved for summary judgment on grounds that plaintiffs' claim
  against him was  purely one for vicarious liability, since he was not
  involved in the allegedly defective title search.   Relying on the Vermont
  Professional Corporation Act, defendant argued that the Act protects a 
  shareholder of a professional corporation from personal liability for
  negligence committed by  another shareholder.  The court granted
  defendant's motion, and the present appeal followed.   

       Pursuant to 11 V.S.A. § 803, professional corporations enjoy the
  powers and privileges --  and are subject to the duties, restrictions and
  liabilities -- of other corporations, except where  inconsistent with the
  letter and purpose of the Professional Corporation Act.  The general
  purpose  of the Professional Corporation Act is set forth in 11 V.S.A. §
  813 as:  

     	making available to professional persons the benefits of the 
        corporate form for the business aspects of their practices, while 
        preserving the established professional aspects of the personal 
        relationship between the professional person and those he [or she] 
        serves.

  Under the Vermont Business Corporation Act, 11A V.S.A. §§ 1.01 - 20.1, a
  "shareholder of a  corporation is not personally liable for the acts or
  debts of the corporation except that he or she  may become personally
  liable by reason of his or her own acts or conduct."  11A V.S.A. §
  6.22.(b).

       Plaintiffs agree that their claim against defendant is limited to a
  theory of vicarious  liability, but they argue that the Professional
  Corporation Act must be construed in light of 

  

  Vermont's Code of Professional Responsibility, specifically Ethical
  Consideration (EC) 6-6, which  states: 

          A lawyer should not seek, by contract or other means, to 
     limit his individual liability to his client for his malpractice.  A 
     lawyer who handles the affairs of his client properly has no need to 
     attempt to limit his liability for his professional activities and one 
     who does not handle the affairs of his client properly should not be 
     permitted to do so.  A lawyer who is a stockholder in or is associated 
     with a professional legal corporation may, however, limit his liability 
     for malpractice of his associates in the corporation, but only to the 
     extent permitted by law.   

  EC 6-6 (emphasis supplied).  Plaintiffs read the EC 6-6 as a direct
  limitation on the protection  from vicarious liability afforded lawyers
  practicing law as a professional corporation under the  Professional
  Corporation Act.    

       Plaintiffs' argument fails.  We begin by noting that there is nothing
  inconsistent with the  protection from liability for shareholders in a
  corporation found in 11A V.S.A. § 6.22(b) and the  letter or purpose of the
  Professional Corporation Act.  Nor does the Professional Corporation Act 
  contain any provision that alters or affects the rights and privileges
  granted to a shareholder of a  corporation under the Vermont Business
  Corporation Act.(FN2)   Therefore, the protection found in  11A V.S.A. §
  6.22.(b) is available to shareholders in corporations incorporated under
  the Vermont  Professional Corporation Act.

       To support their contention that the Professional Corporation Act must
  be analyzed within  the context of the Code of Professional Responsibility
  and EC 6-6, plaintiffs rely on First Bank &  Trust Co. v. Zagoria, 302 S.E.2d 674 (Ga. 1983), wherein the Georgia Supreme Court found   individual
  lawyers in a professional corporation liable for the issuance of checks
  without sufficient  

  

  funds in connection with a real estate closing.  They acknowledge that this
  case has been  overruled.  See Henderson v. HSI Fin. Servs., Inc., 471 S.E.2d 885, 885-86 (Ga. 1996).  In Zagoria  the court based its holding on
  the court's authority to regulate the practice of law, and stated that  the
  case was not one that required it to interpret the statutes providing for
  the creation and  operation of professional corporations.  302 S.E.2d  at
  675.  The Zagoria court concluded that the  "legislature has the clear
  right to enact technical rules for the creation and operation of 
  professional corporations, but it cannot constitutionally cross the gulf
  separating the branches of  government by imposing regulations upon the
  practice of law."  Id.  While the court acknowledged  that Georgia's EC 6-6
  (at the time, identical to Vermont's EC 6-6) could be read to authorize a 
  limitation of liability for malpractice of associates by contract or
  arrangement with the clients of  the professional corporation, it held that
  the section was not a self-executing rule that  automatically insulated
  each shareholder from liability for the malpractice of another.  Id. at
  676.   Finding nothing in the record to indicate that the attorney and the
  clients of the firm entered into a  contract or arrangement for limitation
  of liability, the court held the attorney liable.  Id.

       Plaintiffs seek to breathe life into Zagoria by pointing out that the
  Henderson holding  followed an amendment of the last clause of Georgia's EC
  6-6.  The amendment to Georgia's EC  6-6 replaced the phrase "but only to
  the extent provided by law" with the phrase "as authorized by  Rule
  1-203(4)," a specific Georgia Bar rule allowing attorneys to practice law
  in various  organizational forms, including professional corporations
  defined by Georgia statutes.  This  amendment does not distinguish Zagoria
  from Henderson because it merely adds greater  specificity without changing
  the clause substantively.

       Of greater moment is  Henderson's analytical premise that the
  Legislature has the power to  determine the right and ability of corporate
  shareholders to be protected from personal liability for  the obligations
  of such corporations and for the acts of other shareholders.  As the court
  in  Henderson stated:

     Although this court defines whether lawyers may practice their profession 

  

     in a partnership, professional corporation, or other group structure, the 
     relevant statutes govern whether a particular structural form provides its 
     members with exemptions from personal liability.

  Henderson, 471 S.E.2d  at 886.

       Just as the Georgia Bar's Rules and Regulations specifically approve
  the professional  corporation as an appropriate form of organization for
  lawyers, our rules define "law firm" to  include a professional legal
  corporation.  Code of Professional Responsibility, Definitions (2).  We 
  agree with the Henderson court and look to the statutorily defined limits
  on liability for  shareholders in corporations to decide this issue.  EC
  6-6 does not modify the statutes governing  professional corporations nor
  is it contrary to the text or the underlying purpose of the Professional 
  Corporation Act.  Rather, EC 6-6 states that "[a] lawyer should not seek,
  by contract or other  means, to limit his [or her] individual liability to
  his client for his [or her] malpractice," implying -- and thereafter
  confirming -- that seeking to limit his [or her] liability for the
  malpractice of  associates in a professional legal corporation, thus
  avoiding vicarious liability, is proper "to the  extent permitted by law." 
  The latter phrase brings us back to the Professional Corporation Act, 
  which neither augments nor limits the applicability of EC 6-6.  See
  generally Swanson & Lange v.  Miner, 159 Vt. 327, 333, 623 A.2d 976,  979
  (1992) (in action to recover legal fees, two specific  ethical
  considerations within Code did not impose heightened burden of proof on
  plaintiffs).

       Finally, plaintiffs rely on a formal ethics opinion issued by the
  Committee on Professional  Ethics of the American Bar Association, which
  states in relevant part as follows: 

    The comments above [concerning professional responsibility for 
    legal services provided by a law firm] make it clear that it is possible 
    for lawyers to engage in the practice of law under a form of 
    organization that imposes limited liability without violating any of 
    the Canons of Ethics if the following safeguards are observed: 

     1.  The lawyer or lawyers rendering the legal services to the 
     client must be personally responsible to the client.    

     2.  Restrictions on liability as to other lawyers in the 
     organization must be made apparent to the client.  

  

  ABA Comm. on Professional Ethics, Formal Op. 303 (1961).  They contend that
  the ABA opinion  establishes a precondition to enjoyment of the benefits of
  the Professional Business Corporation  Act, and argue that, unless a lawyer
  "[makes] apparent to the client" restrictions on his or her  liability for
  the negligence of other firm attorneys, vicarious liability will be applied
  to hold all  members of the firm liable for the negligent injury caused by
  any member.  

       An ABA ethics opinion is not binding on this Court.  Even if it were,
  it is undisputed that at  all relevant times, the firm of Gear & Davis held
  itself out as a professional corporation.  There is  no provision in the
  Professional Corporation Act stating that the protection of § 6.22(b) of
  the  Business Corporation Act will apply only if the shareholder personally
  and specifically calls the  clients' attention to the provisions of the
  Act.

       Affirmed.

                               FOR THE COURT:



                               _______________________________________
                               Associate Justice

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                                  Footnotes

FN1.  The complaint initially included the corporation and James and Judith
  Cleary as defendants, but they were later dismissed  by stipulation.

FN2. The only provision of the Professional Corporation Act that
  relates to liability issues is found in § 808, which addresses the 
  liability of "persons employed by the [professional] corporation arising
  out of professional services."  11 V.S.A. § 808 (emphasis  added). 
  Plaintiffs do not make any claim against defendant that his liability stems
  from his employment by the law firm or that  his liability arises out of
  the rendition of professional services.  They ground their claim on
  vicarious liability for the alleged  negligence of others.