The Bermuda Triangle of Lawyer - Client - Nonclient
Del O’Roark, Loss Prevention Consultant, Lawyers Mutual Insurance Company of Kentucky
Old concepts die hard, but the idea that a lawyer's liability for negligence is restricted to clients has had its day. Nonclients are suing and recovering with increasing frequency in an expanding number of practice areas. The purpose of this article is to provide an overview of these developments and offer some help on managing this blossoming risk of modern practice.
Lawyers always have been liable to nonclients for intentional torts. In a few specific situations nonclients have a statutory basis to sue lawyers for particular acts (e.g., securities laws, RICO, and more recently the Fair Debt Collection Practices Act). Lawyer malpractice liability for negligence, however, was limited for many years to clients on a privity of contract theory. The requirement of privity between lawyer and client before duties are created remains largely intact in litigation matters and arms length business transactions. The adversarial context of these situations mandates the lawyer's vigorous representation and strict observance of client confidentiality. Simply put, the lawyer owes no duty of reasonable care to a nonclient in these situations.
The push to enlarge lawyer exposure to nonclient claims has been two pronged. The first approach is a nonclient claim based on the lawyer's negligent misrepresentation of facts or information. This theory of liability is not based on an expansion of lawyer malpractice, but is based on common law tort principles. It is most effective in business transactions cases when the lawyer has provided information directly to third parties. Negligent misrepresentation claims are gaining strength based on the number of courts, including the Kentucky Court of Appeals1, citing Section 552 Information Negligently Supplied for the Guidance of Others, Restatement (Second) of Torts. It provides in part:
One who, in the course of his ... profession ... in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
The second prong in the extension of lawyer negligence liability to nonclients is the increasing number of decisions that create duties to nonclients on the basis of lawyer malpractice in spite of the lack of privity.2 These cases fall into three categories:
The practice areas in which malpractice remedies are increasingly granted to nonclients include wills, estate administration, trust administration, real property transactions, business deals, and loans. Malpractice claims by nonclients concerning domestic relations, debtor/creditor matters, organization representation, and criminal defense have not been as successful, but are growing in frequency. Of special concern are malpractice claims resulting from misapplication of nonclient money which is in the lawyer's possession. A lawyer holding nonclient money has a fiduciary duty to the nonclient and may be liable for negligence in disbursing this money.4
I write a "little Kentucky law" because there is not a whole lot to analyze. What there is, however, indicates that we are with the national trend in expanding lawyer liability for negligence to nonclients. In Rose v. Davis, 288 Ky. 674; 157 S.W. 2d 284 (1941), Kentucky's highest court articulated the general rule that "An attorney is not ordinarily liable to third persons for his acts committed in representing a client. It is only where his acts are fraudulent or tortious and result in injury to third persons that he is liable." Kentucky then added the principle that "An attorney may be liable for damage caused by his negligence to a person intended to be benefited by his performance irrespective of any lack of privity..." Hill v. Willmott, Ky.App., 561 S.W. 2d 331(1978).
Most recently the Kentucky Court of Appeals in Seigle v. Jasper, Ky.App., 867 S.W. 2d 476 (1993) endorsed both a negligent misrepresentation theory and "intended to be benefited" malpractice theory for nonclient liability The accused lawyer missed an easement on land when doing a title opinion for a bank considering a loan to the purchaser and was sued by the purchaser. The situation was the usual one where the lawyer is regularly retained by the bank to do title examinations and the purchaser agrees to pay the lawyer's fees through the loan closing costs paid to the bank. Here it was clear the lawyer knew the title opinion would be relied on by the purchaser. The lawyer won at the trial level on a summary judgment motion. The Court of Appeals reversed the summary judgment citing both Section 552 of the Restatement (Second) of Torts and Hill v. Willmott.
In addition to Kentucky case law the Kentucky Rules of Professional Conduct promulgated in 1990 added further emphasis to expanded lawyer responsibility to nonclients. Rule 2.3, Evaluation For Use By Third Persons, is a little noted, but new rule of professional responsibility for Kentucky lawyers. It provides:
Two of the comments to the rule give guidance and alert lawyers to the issue of duties to nonclients:
(1) An evaluation may be performed at the client's direction but for the primary purpose of establishing information for the benefit of third parties; for example, an opinion concerning the title of property rendered at the behest of a vendor for the information of a prospective purchaser, or at the behest of a borrower for the information of a prospective lender. In some situations, the evaluation may be required by a government agency; for example, an opinion concerning the legality of the securities registered for sale under the securities laws. In other instances, the evaluation may be required by a third person, such as a purchaser of a business.
Duty to Third Person
(4) When the evaluation is intended for the information or use of a third person, a legal duty to that person may or may not arise. That legal question is beyond the scope of this Rule. However, since such an evaluation involves a departure from the normal client-lawyer relationship, careful analysis of the situation is required. ... [T]he lawyer should advise the client of the implications of the evaluation, particularly the lawyer's responsibilities to third persons and the duty to disseminate the findings.
Kentucky Rule of Professional Conduct 1.15, Safekeeping Property, makes several references to responsibilities owed to nonclients when a lawyer holds funds. The most important guidance is in Comment 3:
Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.
While it is true that the Rules of Professional conduct are not supposed to establish a standard of care for determining lawyer negligence, you can count on seeing these two rules cited in claims if a nonclient thinks a lawyer was negligent in an opinion letter or when disbursing funds.
What follows are some ideas on how to assess your exposure to negligence liability to nonclients and what to do about it. First, be alert to these risky situations:
Now for some risk management ideas:
Carefully prepare opinion letters by:
If you have a need to look further into the issue of liability to nonclients, the place to start is the ABA/BNA Lawyers' Manual On Professional Conduct, Malpractice, Liability to Nonclients at 301-601. Then go to Chapter 7, Liability To The Nonclient -- Negligence, in 1 Legal Malpractice 3rd (Mallen & Smith). 61 ALR4th has two extensive articles on attorney nonclient negligence liability at pages 464 and 615 with the usual good roll up of case authority. A recent New Jersey case, Petrillo v. Bachenberg, 655 A. 2d 1354(N.J. 1995), is an outstanding recent opinion that includes a comprehensive review of this issue. Whatever you do keep your eye on developments in this area of malpractice. It's moving fast!