Will the Real Intended Third-Party Please Stand Up?
Peterson, Paul C., Myers, Ryan P., Defense Counsel Journal
TRADITIONALLY, absent fraud or collusion, the only parties with standing to sue an attorney for malpractice were those in privity of contract with the attorney, that is, the lawyer's clients. (1) However, over the past several decades, the traditional "privity" doctrine has eroded as courts have begun to allow beneficiaries of an attorney's estate-planning services to bring malpractice claims. (2) The modern trend in the estate-planning context is to recognize the existence of an attorney's duty to those outside the attorney-client relationship. Outside the estate-planning context, the legal landscape is less dear.
This article addresses three legal doctrines that have been found to provide non-clients with standing to sue an attorney: the third-party beneficiary rule (outside the context of wills, estates, and trusts), the implications of opinion letters, and the potential exposures that lawyers face to non-clients for fraud, and aiding and abetting the alleged wrongful conduct of their clients.
I. Attorney Malpractice Liability to Non-Clients
In certain contexts, courts have found that a non-client has standing to sue an attorney for malpractice. They have done so under a number of different theories. The first approach is a multi-criteria balancing test, which originated in California. (3) A related approach adopts a contractual third-party beneficiary analysis, which requires that the non-client be a "direct and intended beneficiary" of the attorney's services before the courts will impose a duty. (4) Another approach is contained in the Restatement (Third) of the Law Governing Lawyers Section 51(3); (5) however, this approach has been widely criticized as unworkable. (6)
A more recent trend has been the recognition of an attorney's duty of care to non-clients outside the estate-planning context. With few exceptions, courts recognizing this duty of care have applied some version of the third-party beneficiary theory, requiring that non-clients be "direct and intended beneficiaries" of the transaction for which the client has engaged the attorney's services.
The cases below are some of the most recent and important decisions regarding this issue. They highlight the factual contexts in which courts have recognized, and have refused to recognize, the standing of a non-client in a legal malpractice action.
A. McIntosh County Bank v. Dorsey & Whitney, LLP (7)
McIntosh provides a good starting point from which to survey the contours of this evolving doctrine. The case involved a syndicated lending transaction and asked whether the attorneys for the lead bank in the transaction could be held liable in malpractice to the banks participating in the loan as investing third parties. Plaintiffs, thirty-two banks participating in a syndicated loan transaction originated by lead bank, Miller & Schroeder ("M & S"), collectively sued legal counsel for M & S--Dorsey & Whitney, LLP ("Dorsey")--alleging that it had committed legal malpractice and breached fiduciary duties owed to the participating banks in structuring the loan.
M & S closed two loans to a company (the "Company") formed to develop and manage a casino on the reservation of the St. Regis Mohawk Tribe (the "Tribe") in the State of New York. During Dorsey's preparation of the loan documents, a question arose as to whether National Indian Gaming Commission ("NIGC") approval of some of the documentation was required. Dorsey knew that failure to obtain NIGC approval might place the participating banks' interest in the collateral at risk, but advised M & S that NIGC approval was not required. Dorsey failed to advise M & S of the risks to closing without NIGC approval. M & S would not have closed the loans if it had known the risk of closing without NIGC approval. The loans closed without approval from the NIGC. M & S then sold most of the participation interests in the loans to plaintiffs. …