Defense Of Legal Malpractice Claims Asserted By Non-Clients, DD 12/07

Defense Digest

Recently, we have been retained to defend several suits in which parties have brought claims against their adversaries' counsel. These matters have arisen out of real estate transactions, commercial transactions, and litigated matters. This article reviews applicable law concerning the attorney's duty to non-clients and also provides a review of certain cases in which we have obtained dismissals.

In New Jersey there are limited circumstances under which non-clients can bring a claim against attorneys who do not represent them. In Banco Popular N.A. v. Gandi, 184 N.J. 161 (2005), the New Jersey Supreme Court further limited the circumstances upon which non-clients could bring such a claim. That is, the Banco Popular Court, in a claim of creditor fraud, ruled that attorneys could only be liable to a lender under circumstances where they make a misrepresentation in an opinion letter relied upon by the lender, or in a circumstance where there is an actual conspiracy between the attorney and the borrower to defraud the lender. Whether an attorney owes a legal duty to another is a question of law for the court.

Two key elements must be proven by the plaintiff in order to sustain a cause of action against adversary counsel for legal malpractice. First, the plaintiff must show that a misrepresentation was made and, second, that the plaintiff reasonably relied upon the representation made by the attorney in the subject transaction. These two elements require an analysis of the initial pleadings to be certain that both of the required elements have been pled. If not, the action may be dismissed with a Motion to Dismiss in Lieu of Filing an Answer to the Complaint. Alternatively, if plaintiff's counsel does plead these two elements in the Complaint, discovery must be done to disprove these elements and to posture the case for a Motion for Summary Judgment as soon as possible.

The necessity of demonstrating reasonable reliance was underscored by the Supreme Court in Petrillo v. Bachenberg, 139 N.J. 472 (1995). In Petrillo, the Supreme Court determined that a transactional attorney had a duty to a non-client in a narrow circumstance. That "limited" circumstance arose because an attorney made an affirmative representation upon which the non-client reasonably relied. As the court stated:

Our holding goes no further than to state the [the transactional attorney] had a duty not to misrepresent negligently the contents of a material document on which he knew others would rely to their financial detriment.

In reaching this conclusion, the Court reasoned that an attorney "may owe a duty to non-clients when the attorneys know, or should know, that non-clients will rely on the attorneys' representations and the non-clients are not too remote from the attorneys to be entitled to protection." As authority for this proposition, the Court quoted from the proposed Restatement of the Law Governing Lawyers. In the comments to the same section cited in Petrillo, the Restatement provides:

Opposing Parties. A lawyer representing a party in litigation has no duty of care to the opposing party under this section and hence no liability for lack of care, except in unusual situations such as when a litigant is provided an opinion letter from opposing counsel as part of a settlement . . . [T]he opposing party is protected by the rules and procedures of the adversary system and, usually, by counsel.

See, Restatement of the Law Governing Lawyers §51 cmt.b (1998).

We recently obtained dismissal of a case by way of a Motion to Dismiss the plaintiff's complaint in a matter in which the plaintiff, a purchaser of real estate, originally sued the sellers based upon misrepresentations concerning the physical condition of the property. The sellers, in turn, sued their own attorney, represented by our firm, as well as their real estate agent and the buyer's real estate agent. Acknowledging that there was no misrepresentation nor reasonable reliance, our clients obtained a Stipulation of Dismissal from the sellers, their client in the underlying matter (where privity did exist). However, our clients were then sued by the real estate agent for the buyer. The Superior Court of New Jersey granted a Motion to Dismiss the matter on the pleadings since the buyer's real estate agent could not prove that any material misrepresentation was made by our client, the seller's attorney, to the buyer or counsel and certainly could not prove the essential element of detrimental reliance. This is an example of obtaining dismissal of the matter in its initial pleading stages when the requisite elements are simply not pled by adversary counsel.

Our firm also obtained dismissal of a matter at the summary judgment stage in a matter involving a sale of a property in a New Jersey shore town in which our client represented the seller of the subject property. The plaintiff in that matter asserted that he wished to purchase a shore home that was zoned as a two-family dwelling so that he could live in one portion of the home and rent the other. The plaintiff purchased the home and learned after the purchase was completed that the property was zoned as a one-family dwelling. The sellers of the property had operated the property as a two-family rental property during the time in which they owned it.

The plaintiff contended that our client committed legal malpractice when his attorney forwarded a letter to our client during the attorney review process and asked him to confirm that the home, in fact, was a two-family dwelling. Our client never provided a response to the letter, ostensibly because confirmation of a property zoning status is the responsibility of a buyer's attorney. The buyer's attorney did no due diligence to confirm the current zoning status of the property prior to permitting the plaintiff to proceed with the sale.

Plaintiff's counsel in that matter did plead, in an Amended Complaint, that a material misrepresentation was made by our client under the theory that he tacitly implied that the property was a two-family dwelling by not correcting plaintiff's counsel on his understanding. The plaintiff further pled that he detrimentally relied upon the alleged representation made by our client in the process. Summary judgment was entered early in this matter, after we immediately deposed the plaintiff and determined that he had no conversations directly with our client during the transactional practice and relied upon his attorney to complete the transaction in a timely and accurate fashion. Furthermore, our client was deposed and testified that he made no representations whatsoever concerning the zoning status of the subject property.

Claims by non-clients against attorneys can be defended, in most cases, in a timely, efficient and cost-effective fashion by closely scrutinizing the initial pleadings and, if appropriate, filing a Motion to Dismiss for failure to state a claim. In some cases, it will be necessary to make a record on which a Summary Judgment Motion can be filed. However, early identification of this issue can save the substantial expense of protracted discovery, including the depositions of ancillary witnesses, as well as lengthy and costly expert discovery if the issue is identified and addressed with appropriate motion practice early in the litigation.

* Art is an associate in our Cherry Hill, New Jersey, office. He can be reached at (856) 414-6316 or afwheeler@mdwcg.com.