we resolve Estate planning and family business disputes
Conflict is a common feature of the estate planning and family business succession process. Attorneys practicing in these areas frequently encounter disputes over a multitude of issues. For example, disagreements may develop between family members over:
As discussed below, mediators are uniquely positioned to help family members quietly resolve estate planning and family business disputes in a manner that avoids the enormous cost and disruption of litigation and preserves family relationships that might otherwise have been ruined by an extended court battle. Mediators also mitigate professional risks that attorneys might otherwise face if they attempted to resolve estate planning disputes on their own without the assistance of a mediator.
Estate Planning and Family Business Disputes Pose Ethical Issues and Malpractice Risk for Attorneys
Joint representation of family members in connection with estate planning and business succession is common. And it may work well and pose no ethical issues when the relationship between family members is amicable and cooperative.
But when disputes between family members begin brewing, estate planning and family business attorneys need to tread carefully. See Comment 27 to Rule 1.7 of the New York Rules of Professional Conduct (highlighting estate planning as an area of the law in which disqualifying conflicts commonly arise).
A particularly relevant guideline in this context is Rule 1.7(a) of the Model Rules of Professional Conduct which provides that, absent informed consent:
"[A] lawyer shall not represent a client if the representation involves a . . . significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person. . ."
Rule 1.7(a)(1) of the New York Rules of Professional Conduct states the principle more directly, providing that, absent informed consent:
"A lawyer shall not represent a client if a reasonable lawyer would conclude that . . . the representation will involve the lawyer in representing differing interests."
Thus, if a dispute develops between family members, an attorney should not (and often cannot) continue to jointly represent them in an effort to resolve the dispute. As Comment 29A to Rule 1.7 of the New York Rules of Professional Conduct states:
"In considering whether to represent multiple clients in the same matter, a lawyer should be mindful that if the common representation fails because the potentially adverse interests cannot be reconciled, the result can be additional cost, embarrassment and recrimination. Ordinarily, absent the informed consent of all clients, the lawyer will be forced to withdraw from representing all of the clients if the common representation fails . . . In some situations, the risk of failure is so great that multiple representation is plainly impossible. For example, a lawyer cannot undertake common representation of clients where contentious litigation or negotiations between them are imminent or contemplated. . . Generally, if the relationship between the parties has already assumed antagonism, it is unlikely that the clients’ interests can be adequately served by common representation."
What if an estate planning or family business dispute is not imminently headed for litigation, and family members consent to a joint representation by an attorney to try and resolve the dispute? Even then, as noted, the consent must be informed, and this means advising family members that joint representation creates limits on confidentiality and the attorney-client privilege (see, e.g., Comments 27, 30 and 31 to Rule 1.7 of the New York Professional Rules of Conduct).
The key issue here is that, in a joint representation, the attorney owes a duty of loyalty to each family member. This means each family member has both the right to be informed of any information that might affect his or her interests, and the right to expect that the attorney will use that information to the family member's benefit. Therefore, to obtain the informed consent required to undertake a joint representation, an attorney must advise all family members that any information shared by one family member relating to the representation may not be kept secret from other family members.
An attorney must also advise jointly represented family members that the attorney-client privilege will not protect communications related to the joint representation from disclosure to any of the other jointly represented family members in any future litigation. Accordingly, even if confidences communicated by one family member to the attorney are not initially disclosed to other family members, if litigation later ensues, those communications will not be privileged as against other family members.
Once family members become aware of these limitations in connection with a joint representation, it inevitably chills candor. That is, the knowledge that any confidences shared with the attorney must be disclosed to all family members, and will not be privileged in any future proceeding, deters individual family members from fully disclosing their needs, interests and concerns to the attorney. The attorney is thus deprived of critical information that might be used to craft compromises to resolve a dispute.
Attorneys should also consider that most estate planning and family business disputes involve complex family dynamics and relationships. Emotions such as anger and feelings of betrayal frequently run high. Attorneys who undertake joint representations of family members under such circumstances risk exposing themselves to accusations from disgruntled family members that the attorney favored the interests of one family member over the interests of others, notwithstanding the attorney's best efforts to remain neutral. Such accusations often lead to malpractice suits. See Mandalis v. Wentzel, et al., 2019 WL 3227106 (Ill. App. June 12, 2019).
In the family business context, attorneys representing entities must advise the entity’s stakeholders that they do not represent them individually. But that reality may not align with the expectations of individual equity holders who may hold a "reasonable belief" that the attorney is or was representing him or her. This mistaken but "reasonable" belief can lead to malpractice claims if the equity holder perceives that the company attorney acted against such equity holder's interests. See Mandalis v. Wentzel, et al., 2019 WL 3227106 (Ill. App. June 12, 2019). Cf. United States v. Int’l Bhd. of Teamsters, 961 F. Supp. 665 (S.D.N.Y.), aff’d, 119 F.3d 210 (2d Cir. 1997).
How Mediators Add Value to the Estate Planning Process
Bringing a mediator into the estate planning or family business succession process provides attorneys with a highly effective means to clarify the needs and interests of all family members in a manner that facilitates resolution of any disputes.
The mediator has no conflicts of interest since he or she does not represent anyone, has no allegiance to any individual, and does not provide legal advice. Accordingly, there are no constraints on the mediator’s ability to speak in confidence with each family member, and uncover their hidden concerns, interests and needs. The confidentiality of such conversations will be protected against disclosure by agreement, and in most cases by applicable law as well.
The confidentiality protections afforded by mediation virtually eliminate the risk of candor, leaving family members free to speak openly with the mediator without fear that the details of their conversations will be disclosed to others without their consent. Uniquely positioned to obtain accurate and complete information from all parties, and provide parties with an opportunity to vent and feel validated, the mediator can clear up misunderstandings, facilitate the healing of longstanding resentments, promote dialogue and collaboration, and work cooperatively with all family members. Like putting together the pieces of a puzzle, the mediator develops a comprehensive picture of the family’s situation and a holistic approach for addressing any conflicts. The results of the mediation process can then be used by attorneys to develop appropriate legal structures and prepare all of the necessary documents.
To the extent that certain family members have high conflict personalities, mediators are trained to regulate their emotions when dealing with such individuals. They consciously avoid taking difficult behavior personally, and can redirect the mindset of high conflict individuals away from blaming towards problem solving.
There is little question that litigation can wreck family relationships, perhaps permanently. The tendency for pleadings and motion papers to paint the other side in the worst light will inevitably lead to mudslinging that ends the possibility of reconciliation even after the lawsuit concludes. This is perhaps the most tragic aspect of litigation between family members.
In contrast, by providing opportunities for dialogue, collaboration and problem solving, mediation fosters positive feelings and emotions that help preserve and even strengthen family relationships.
The cost of a mediator is a drop in the bucket compared to the legal fees that family members will incur if an estate planning or business succession dispute escalates into litigation. A court fight that last several years, and involves substantial assets, can easily cost hundreds of thousands or even millions of dollars in legal fees and other expenses.
Moreover, aside from out of pocket cost, family members involved in litigation are often shocked by the severe disruption posed by litigation discovery, which imposes an obligation to collect, process, review and produce vast amounts of electronic documents (including what may be highly embarrassing emails and text messages) from multiple sources (including personal devices). Family members will also likely need to devote substantial time to prepare for, travel to, and testify at depositions (as well as at trial, if the case doesn't settle beforehand).
Litigation also distracts family members from running the family business. Lack of attention to the business may cause revenues and profits to fall, employee morale to suffer, and customers to switch to competitors.
In comparison to litigation, the costs and burdens of mediation are miniscule. Even then, to encourage mediation of estate planning and family business disputes, Merge Mediation Group shares the risk of mediation with parties so that half the mediator's fees are refunded if the mediation fails.
No family wants to air their dirty laundry in public. But since litigation is public record, embarrassing family secrets are likely to emerge in court papers. And if the family is prominent socially or politically, the media is likely to report on the case in an unflattering manner.
In contrast, mediation offers an opportunity to privately and quietly resolve estate planning and family business disputes free from the prying eyes of the press.
Estate Planning Scenarios Where Mediation Can Prove Valuable
As a checklist, mediation may prove especially useful in the following scenarios, especially where the estate is sizeable:
Read Our White Paper
For our white paper on the value that mediators can bring to the estate planning and family business succession process, including case studies, please download our white paper, "How Mediators Can Add Value to the Estate Planning Process by Preventing Family Disputes From Escalating into Litigation."