Court Declines to Expand Attorney Duty of Care to Non-Clients
By Kristin L. Jordan, Litigation News Contributing Editor – October 13, 2016

The U.S. Court of Appeals for the Second Circuit issued a decision making it more difficult for plaintiffs pursuing malpractice claims against lawyers that the plaintiffs did not retain. The appellate court held attorneys owe no duty of care to non-clients that are not intended beneficiaries of an attorney-client relationship. This case highlights attorneys' increasing avoidance of the foreseeability of reliance analysis in legal malpractice lawsuits.

The Underlying Transaction
The defendant law firm in Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP released the wrong security interest while handling a loan closing. The firm represented General Motors (GM) on the payoff of the "synthetic lease," a $300 million loan from a syndicate of lenders secured by twelve GM properties. JP Morgan was a significant lender and administrative agent for the synthetic lease. GM retained the defendant firm to prepare documents for the payoff of the remaining $150 million of the synthetic lease, of which $55 million would go to JP Morgan as a lender.

The defendant firm filed the necessary UCC statements to terminate the lenders' security interest on the synthetic lease. Unfortunately, that filing also erroneously terminated the security interests of a different group of lenders on a second, unrelated $1.5 billion loan to GM, the "term loan." GM's subsequent Chapter 11 bankruptcy proceedings revealed the error. Initially, the bankruptcy court ordered GM to repay the term loan in full, and JP Morgan distributed the proceeds to the plaintiffs and other term loan lenders. The appellate court reversed the bankruptcy court, however, holding the term loan security interest had been terminated by the erroneous filing.

No Duty of Care Where Attorney-Client Relationship Is Not Intended to Benefit a Non-Client Plaintiff
The plaintiffs filed a putative class action suit against the defendant firm on behalf the term loan lenders alleging negligent misrepresentation and legal malpractice. The defendant moved to dismiss on the grounds it did not owe the plaintiffs a duty of care. The plaintiffs opposed, arguing factual questions regarding the defendant's representation of JP Morgan in other matters, including the term loan, prevented dismissal at the pleadings stage.

The district court granted the motion with prejudice. In its analysis, the court considered whether "the primary purpose and intent of the attorney-client relationship itself was to benefit the third party," the standard for imposing an attorney duty to a non-client in Illinois. It declined to consider the defendant firm's attorney-client relationships with JP Morgan in other matters, finding them irrelevant to GM's intent in hiring the defendant to handle the synthetic lease payoff.

The court also rejected the plaintiffs' arguments that GM hired the defendant firm to influence JP Morgan to approve or execute the synthetic lease termination documents. It noted GM and JP Morgan had a "common interest" in the proper closing of the synthetic lease, as JP Morgan was to retain $55 million as its share under the contract as a participant in the lease. Thus, there was no need to influence JP Morgan in effectuating the payoff, the terms of which had been negotiated seven years earlier.

In the absence of any allegations that the firm was hired to influence JP Morgan, the district court found GM's primary intent in retaining the defendant firm was to ensure the proper termination of the lenders' security interests regarding the synthetic lease payoff. The court declined to extend a duty of care to the plaintiffs based on the firm's work for JP Morgan in other, unrelated matters, finding that theory of liability to be "too expansive" and at odds with "the Illinois Supreme Court's concern that 'liability for negligence not extend to an unlimited and unknown number of potential plaintiffs.'" The court also reiterated that the foreseeability of the plaintiffs' reliance was irrelevant in assessing an attorney's duty of care to a non-client, particularly since, in this case, "the class of persons to whom defendant would owe a duty under plaintiffs' theory of liability encompasses every principal for whom JP Morgan acts as an agent."

Section Leaders Weigh In
The court properly applied the intent standard, according to ABA Section of Litigation leaders. "The idea of legal duties arising between an attorney and a non-client warrants a very cautious approach," remarks Kent A. Lambert, New Orleans, LA, member of the Section of Litigation's Council. "Intent and knowing acceptance seem especially critical," when determining if an attorney-client relationship exists, Lambert adds.

While some jurisdictions apply foreseeability of reliance to negligent misrepresentation theories, the Illinois standard is fair, Lambert continued. The idea of "extending the unique protections and obligations inherent in the lawyer-client relationship without clear intent and express consent on all sides is troubling," Lambert explains.

"The fact that no communication occurred between the law firm and the plaintiffs is significant to the court's decision," agrees Scott E. Reiser, Roseland, NJ, cochair of the Section's Ethics & Professionalism Committee. "Also notable is the law firm was the only named defendant in the lawsuit," according to Reiser. "As to why the plaintiffs did not name JP Morgan or their attorneys as defendants, that strategy may be the result of a business decision or arrangement between those parties that we do not know about," suggests Lambert.

Keywords: legal ethics, legal malpractice, negligent misrepresentation, attorney-client relationship, duty of care

 
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