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8 • 2018

The Liability of an Attorney or CPA Acting as a Resident Agent

All states require that business entities, whether domestic or foreign, registered to do business in the state maintain a registered agent in the state to accept service of process on behalf of the entity.[1] In this context, “process” refers to the legal documents, usually a summons and complaint, used to commence a lawsuit against the entity.[2] Attorneys and CPAs are among those who may agree to act as an entity’s resident agent for service of process. But what sort of risk is an attorney or CPA running in agreeing to do so?

The obvious risk is the potential liability for failing to forward to the entity the process served on the attorney or CPA as registered agent, resulting in a default judgment being entered against the entity. A registered agent acts as a fiduciary with respect to matters within the scope of the agency, which in this context would include, at the very least, a duty to receive the legal documents served on the registered agent and to transmit them to the entity being sued.[3] If the attorney or CPA fails to transmit the documents to the entity, or the entity fails to receive them from the registered agent for whatever reason, and the entity does not appear in court to contest the lawsuit, then a default judgment may be entered against the entity.[4]

After the default judgment is entered, the entity will soon find out about the lawsuit when the plaintiff initiates efforts to collect on the judgment. At that point, the entity may seek to have the default judgment set aside on various grounds, including “mistake, inadvertence, surprise, or excusable neglect.”[5] But entities have not always succeeded in establishing excusable neglect based on their failure to appear because they did not receive process from their registered agent.[6] It is especially worrisome that some courts have suggested that excusable neglect can never be established based on a “breakdown in communication” between the entity and its registered agent, the risk of which is “one that should be borne by [the entity], not a third-party complainant.”[7] Most courts do not go that far and will instead make a case-by-case determination based on the relevant circumstances of each particular case.

For example, the United States Court of Appeals for the Seventh Circuit has identified at least seven things that can go wrong when documents are sent to the registered agent for service on an entity, including that (1) the documents never reach the registered agent, (2) they reach the agent but are not forwarded to the entity, and (3) the agent transmits the documents to the entity but they are lost in transit.[8] In each of those cases, there could be excusable neglect justifying setting aside a default judgment, but not always. In the second situation, for example, if the registered agent “received the documents but did not send them on, whether the neglect was excusable would depend at least in part on whether [the entity] contracted and paid for a competent service. If it was trying to get by on the cheap, it must bear the consequences.”[9] Similarly, if the

documents were misaddressed by the agent, or properly addressed but lost in transit between the agent and [the entity], whether the neglect is excusable could depend on what kind of service the agent promised to provide. Did [the entity] require the agent to use a service with a tracking number, so that non-delivery could be detected and a replacement copy sent? If [the entity] paid the agent only to send documents by ordinary mail, and not to use a trackable shipment (or electronic delivery to an email account or web site of its lawyers), it must accept responsibility. Amazon uses trackable shipments for $10 movies; businesses … cannot do less in litigation and expect delivery errors to be deemed “excusable neglect.”[10]

All of this shows that establishing excusable neglect is not necessarily a sure thing. Thus, an attorney or CPA who decides to act as a registered agent must be aware that if something does go wrong when receiving or transmitting process, as it surely will at some point if the attorney or CPA regularly acts as a registered agent for clients, then the attorney or CPA is looking, at the very least, at some time and expense in participating in attempting to have the default judgment set aside.

But that expense is nothing compared to the potential liability if the default judgment is not set aside for excusable neglect. In that event, the attorney or CPA may be sued on various theories for failing in her duty as registered agent, including breach of fiduciary duty, negligence, and breach of contract. If the registered agent is found to have breached her duty, her liability will likely be commensurate with the default judgment entered against the entity, which may be substantial.

For example, in one case, a $9.7 million default judgment was entered in state court against an entity that failed to appear after a mix-up involving its prior and successor registered agents. A state appellate court affirmed the trial court’s denial of the entity’s motion for relief from the default judgment.[11] The entity paid the default judgment, then sued the two registered agents for breach of fiduciary duty, breach of contract, and negligence. After the case was removed to federal court, the district court denied one of the registered agent’s motions to dismiss, permitting the claims to go forward against that agent, which later settled the claims.[12] Although the district court granted the other registered agent’s motion to dismiss, the Eighth Circuit reversed in part on appeal, and reinstated the breach-of-fiduciary-duty claim against the second registered agent.[13] As a result, both registered agents were potentially on the hook for the entire amount of the $9.7 million default judgment entered against the entity.

Attorneys and accountants carry malpractice insurance. But whether a particular professional liability insurance policy covers services provided by the attorney or CPA as a registered agent must be determined through a careful examination of the policy’s terms, and even then it may not be obvious. And even if the policy does provide coverage, any claim against the attorney or CPA as registered agent may result in litigation with the insurer concerning the scope of coverage or, at the very least, an increase in the premiums paid by the insured.

In sum, an attorney or CPA, like anyone else who acts as a registered agent, may be held liable on various theories if a default judgment is entered against an entity for which the attorney or CPA agreed to act as registered agent. And even if the attorney or CPA ultimately is not held liable for the default judgment, she still faces the time and expense of one or more of (1) participating in trying to have the default judgment set aside, (2) doing battle with her insurer, and/or (3) defending the entity’s claims against her. Those are all potential costs to be taken into account when an attorney or CPA decides whether to offer to provide registered-agent services to her clients.

[1] For information on resident agents generally, see our article on “Why Every Business is Required to Have a Resident Agent.”

[2] See generally Black’s Law Dictionary, “process” (10th ed. 2014) (“[a] summons or writ, esp. to appear or respond in court”).

[3] See Int’l Envt’l Mgmt., Inc. v. United Corp. Servs., Inc., 858 F.3d 1121, 1125 (8th Cir. 2017).

[4] See id. at 1123 (default judgment awarding more than $9.7 million in damages entered against defendant who failed to appear based on mix-up involving prior and successor registered agents); Fed. R. Civ. P. 55 (governing entry of default and default judgment based on a failure to plead or otherwise defend against a legal action).

[5] Fed. R. Civ. P. 60(b)(1); see also id. R. 55(c) (permitting a default judgment to be set aside under Rule 60(b)).

[6] Compare Nolte v. Rend Lake Resort, Inc., 2017 IL App (5th) 160133-U, 2017 WL 781616 (Ill. App. Ct. Feb. 27, 2017) (affirming trial court’s denial of defendant’s petition for relief from a default judgment, because the defendant could not establish an excusable mistake when it failed to defend the lawsuit, where process and the motion for default judgment had been served on the defendant’s registered agent, who failed to notify the defendant on multiple occasions), with W. Bend Mut. Ins. Co. v. 3RC Mech. & Contracting Servs., LLC, 2014 IL App (1st) 123213, 8 N.E.3d 456 (affirming trial court’s grant of motion to vacate default judgment, even though the summons and complaint were served on the defendant’s attorney/registered agent, where the record suggested that the attorney’s “relationship as defendant’s registered agent was estranged at the time of service” and that the attorney had been replaced by another registered agent).

[7] Precision Erecting, Inc. v. Wokurka, 638 N.E.2d 472, 474 (Ind. Ct. App. 1994), transfer denied (Dec. 8, 1994); see also In re Canopy Fin., Inc., 708 F.3d 934, 935 (7th Cir. 2013) (noting that lower court had denied motion to vacate default judgment under Fed. R. Civ. P. 60(b)(1) at least in part because a litigant is “responsible for the acts of [its] registered agent”).

[8] See In re Canopy Fin., Inc., 708 F.3d at 936.

[9] Id. at 937.

[10] Id.

[11] See Sieg v. Int’l Envt’l Mgmt., Inc., 375 S.W.3d 145 (Mo. Ct. App. 2012).

[12] See Int’l Envt’l Mgmt., Inc. v. United Corp. Servs., Inc., No. 2:12-CV-4305-FJG, 2013 WL 3872184 (W.D. Mo. 2013), aff’d in part & rev’d in part on other grounds, 858 F.3d 1121 (8th Cir. 2017).

[13] See Int’l Envt’l Mgmt., 858 F.3d at 1125-26. The Eighth Circuit might have reinstated the negligence and breach-of-contract claims as well, but the entity waived its challenge on appeal to the dismissal of those claims. Id. at 1126.