In July 2010, the U.S. Bankruptcy Court for the District of New Mexico declined to dismiss a cause of action by a chapter 7 trustee against a lawyer who had submitted an offer from a third party to purchase estate property, leaving for trial whether the lawyer may be held personally liable on the contract. The opinion in Gonzales v. Miller (In re Texas Reds, Inc.)[1] relies on traditional common-law principles of agency as expressed in the Restatement (Third) of Agency as to the liability of an agent for an undisclosed principal. The opinion expands the list of concerns for lawyers representing clients in bankruptcy outside the traditional constraints of the Rules of Professional Conduct (“ERs”) and the court’s ability to sanction under Bankruptcy Rule 9011 or otherwise.
In this case, a lawyer represented Mr. Gill in his bankruptcy. During the case, the lawyer submitted an offer by a third party, Ms. Miller, to the chapter 7 trustee for the purchase of restaurant equipment, inventory and other restaurant assets for $50,000. Although the bankruptcy court approved the sale, it ultimately failed to close. The trustee subsequently resold the assets for $20,000, incurring a loss of $30,000 plus attorneys’ fees. Along with the claim for losses, the trustee also sought to enforce an interim lease arrangement and sought $2,500 in unpaid rent.
The trustee’s factual theory was that the purported buyer was the daughter of the Gill, who was the real party in interest. The trustee asserted that Miller never intended to buy the assets and that the lawyer was or should have been aware of this fact.
The court eventually found that the lawyer would have been acting as an agent for an undisclosed principal—that is, Mr. Gill. Under common law and the Restatement (Third) of Agency § 6.02, an agent is contractually liable to a contract with a third party where acting on behalf of an unidentified principal, unless the agent and the third party agree otherwise. Similarly, an agent is liable on a contract made on behalf of an undisclosed principal under Restatement § 6.03, or on a contract made where the lawyer knows or has reason to know that the purported principal either does not exist or lacks contractual capacity.[2] The liability of the agent in the case of an unidentified principal exists even though the counterparty knows that the agent is acting on behalf of a third party. Some cases describe this type of principal as a “partially disclosed principal.”
If the lawyer had presented the offer on behalf of his client, Gill, the lawyer would not have been liable as the agent for a disclosed principal.[3] Arguably, if the lawyer could demonstrate either that Miller was the one making the offer or that he was unaware that she was a straw party for her father, the principal would not be “unidentified.”
The bankruptcy court rejected a cause of action that the lawyer conspired with the unidentified principal to defraud the court. The court limited the scope of a cause of action for fraud on the court to relief from an order, as opposed to an affirmative cause of action for damages. The court also rejected a cause of action for civil conspiracy.
A lawyer presenting an offer to purchase assets in a bankruptcy case must carefully consider the applicable law, including the lawyer’s obligation of honesty under ERs 3.3 and 4.1, the liability for fraud and otherwise under 28 U.S.C. § 152 and the well-known limitations of Bankruptcy Rule 9011. A party interested in purchasing assets in a bankruptcy case often does not want to be identified, or intends to act as nominee for the true, ultimate buyer. Such an offer carries with it the additional burden of disclosing the reality of the buyer. This decision of the New Mexico bankruptcy court and the Restatement (Third) of Agency should be consulted so that a lawyer making such an offer does not inadvertently become personally obligated in the transaction. If the facts of the trustee’s allegations in this case were true, perhaps the lawyer could have avoided liability by letting Miller make an offer directly to the trustee, without involving himself in circumstances from which the trustee could argue an agency relationship was implied or created. The inclusion of language such as “as nominee” likely would not represent an agreement that the agent is not liable on the contract where the buyer was either not real or not really making an offer.
If the contract instead contained a provision specifically disclaiming any liability of the lawyer for the transaction, that provision could satisfy the limitation of Restatement § 6.02 with respect to the parties “agreeing otherwise” with respect to the liability of the agent. Drafting such a provision could interject sensitive discussions such as limitations on the lawyer’s exculpation, such as acts in bad faith or intentional misconduct.