Ch. 5 Duties to Nonclients
A. Privity of Contract: Traditional
Obstacle to Recovery
1. Primacy of Duty to Client
(& Successors in Interest,
e.g., Trustee in B’y,
P.R./Ex’r, Merger or
Assignee of rights/duties)
(text 133-39)
Ch. 5 Duties to Nonclients
A. Privity: Traditional Obstacle
2. Partial Demise of Privity (Exceptions):
a.
Prospective Clients (Rstmt §16)
b.
Tort or Contract or Fiduciary Law:
i. Misrepresentation/Fraud
ii. Intended Beneficiaries (+ foreseeable)
iii. In representing fiduciaries
iv. Malicious prosecution
c. Statutory liability (FDCPA; contrast federal &
state securities law; §10b-5 Central Bank,
only if “primary liability”)
B. Fraud on Nonclients
Rstmt §56: Lawyers generally risk same civil liability
as others under similar circumstances
Fraud/Deceit (claims asserted by nonclients or
clients) Elements:
1. Material misrepresentation
2. Scienter (knowledge of falsity or reckless
disregard for truth)
3. Intent to induce reliance
4. Justifiable reliance
5. Damages
Misrepresentation text at 141-44
• Materiality (defined, Rstmt Torts § 526, to
include both objective & subjective test)
• Usually statement of existing fact (sometimes
statement of intent or opinion)
– Ambiguous statements
– Half-truths & nexus requirement
– False statement of intent
• Nondisclosure (silence) if duty to speak because
of fiduciary relationship; to correct prior
statement now known to be incorrect; facts basic
to transaction or not reasonably discoverable
Fraud: Fact vs. Opinion
• Distinctions between assertions of facts and mere opinion? Intentions?
– Puffing
S/ assertions re attorney qualifications and expertise; time/effort
and value of services?
- Words of qualification (“more or less”; implied statement of fact re
margin of error)
- Implicit statements of fact
• Special circumstances may justify reliance on opinion or prediction
– Value of property, legal significance of document (implicit statements
of fact)
– Statements of law
• Foreign law (outside home jurisdiction)
• Implicit assertion of fact (code/zoning standards)
• Expert opinion
Fraud
• Justifiable Reliance: in fact & reasonable
– Policy: although caveat emptor, law protects
reliance on affirmative misstatement (e.g.,
insurance policy limits; express assurances)
– Not reasonable if obvious danger signal (red flag)
• Damages
– Direct (either “benefit of bargain” or “out of
pocket”
– Consequential (physical, property or reputational
harm; maybe emotional distress)
Problem 5-1 The Scaffolding Rental
Business
text at 151-52
Agreement of Understanding:
Ned, S of Easy Up to receive 15,000 shares
Baron Building
Performance of disclosures required before
closing:
-Baron, through L Linus, balance sheet ($2M net
worth)
- Ned, through L Nancy, “no pending litigation”
C. Deceptive Trade Practices Acts
DTPA: local (state) consumer protection laws; great variations in 1) prohibited
acts; 2) remedies; 3) enforcement powers
Commonly require: “knowingly engaged in deceptive trade practice …”…”in the
course of” …[business or occupation” …[with significant public impact]
Courts in Colorado, Connecticut, New Jersey, Texas, Washington have applied local
DTP laws to lawyers See, e.g., Latham, text at 153 (misrepresentation)
Enforcement powers:
∙ Attorney General or Consumer Protection Agency (broad injunctive & other
enforcement powers, if exercised);
∙ Private right of action (statutory damages, attorneys’ fees)
OK Consumer Protection Act, tit. 15 §§721 et seq.
∙ Enforcement powers: AG; other businesses affected; consumers
∙ Different “prohibited acts” subject to private enforcement actions
∙ To date, no enforcement action against lawyers or nonlawyers relating to
law-related services
N.B. Waiting in the wings: unauthorized practice enforcement actions
D. Negligent Misrepresentation
text pp. 156-161
§552 Info. Negligently Supplied for Guidance of
Others, Rsmt of Torts (2d)
(1) “One who, in the course of” business, prof’n
or other transaction where pecuniary
interest]… “supplies false information for the
guidance of others… is subject to liability for
pecuniary loss” caused by justifiable reliance
IF fails to exercise reasonable care or
competence
§552 (cont’d)
(2) [liability limited to]
(a) & (b) [intended or foreseeable recipients;
intended to influence];
(b) & (c) [liability of one under public duty to provide
reliable information to protected class]
Rstmt LGL §§51-52
§51(2) to a nonclient when and to the extent that…
(a) L or Cl invited reliance, which occurred in fact; and
(b) nonclient not too remote to be entitled to
protection (Palsgraff)
§52 illus. 2, based on Greycas v. Proud, 826 F.2d 1560 (7th
Cir. 1987)…[re client’s private instructions to lawyer]
“Lawyer might have avoided liability to Buyer by declining
to provide the opinion by making clear to Buyer that
Lawyer had relied entirely on Client for information
about liens.”
Problem 5-2
The Tax Shelter Opinion Letter
text at 160
• Did L’s tax shelter opinion letter contain a
misrepresentation?
• Justified reliance by all investors?
• Liability for
–fraud?
–negligent misrepresentation?
• Significance re nonclients (privity or
near-privity)
E. Claims Based on Representation of
Fiduciaries
§51(4) Rstmt LGL
(a) L’s client is T’ee, G’dn, Ex’r, or Fidcuciary
(b) L knows that appropriate action by L
necessary w/r/t matter w/in scope of repre’n
to prevent or rectify the breach of a fiduciary
owed by the client to the nonclient, where (i)
br is a crime or fraud or (ii) L has assisted or is
assisting the breach; [and]
(c) + (d) [qualifiers]
Bonnie HeirofHeir v. L for P.R. of 1st
estate SIMPLIFIED
1983 Diane dies intestate, survived by 2 aunts A&B. Diane’s
good friend Penny, serves as Personal Representative, and
Bob L represents P.R.. While her probate proceeds, A&B
also die intestate. A is survived by son & daughter. B is
survived by 2 daughters.
1992 Final Decree entered; $1/2M available for distribution &
a few oil & gas interests. ½ distributed to A’s estate, but 0
distributed to B’s estate. B’s heirs never received copy of
Decree; ½ $ remained in estate.
2007 Betty, B’s daughter, learns her name is listed as owner of
mineral rights (from Diane’s estate); locates record with
Bob Lawyer’s name; Bob can’t remember much; said IRS
seized all remaining assets to pay overdue taxes.
Betty v. HeirsHeir
Betty hires L to investigate. Diane, the P.R. of Millie’s estate
also says IRS took assets, but had no documentation.
Further investigation showed B and & her family (living in
Cal.) were long estranged from A and A&B’s family of origin.
2009B’s L learns that Bob L revealed Diane, the P.R., had
deceived him; there was no IRS lien; instead she kept the
money and eventually lent Bob $75,000 to buy a house.
In Betty’s litigation against Diane and Bob L, it is revealed that
Bob and Diane were also cousins.
WHAT CLAIMS DOES BETTY HAVE V. DIANE, THE P.R. & BOB L?
F. Funds and Property of Nonclients
Problem 5-3 Disputed Settlement
Proceeds
• Did L violate ABA RPC 1.15? If so, does that give
rise to c/a by Nadia v. L?
• Other legal basis for Nadia to sue L?
– Negligence in handling funds? Was N a client? If so,
was L’s conduct demonstrate a conflict of interest?
– §51(3)? What about §51(4)?
– Fraud? Aiding & abetting fraud?
– Tortious interference with contract?
• What L SHOULD HAVE DONE?
H. Duties to Other Lawyers
Beck v. Wecht (CAL. 2002)
• Difficult facts present question whether one L
[REFERRING LAWYER] may sue another for br of
fiduciary duty on theory that other’s malpractice
reduced or eliminated the fees expected by P L.
• Fee splitting arrangement between referring L,
working L and local counsel. During trial, CLIENTS
told referring and working counsel they wanted
to settle ($6M had been offered before), but
working counsel DID NOT SO!
• DEFENSE VERDICT.
Holding
• No, Referring lawyer could not recover lost fee
because of working lawyer’s malpractice.
Court establishes bright-line rule refusing to
recognize fiduciary duty owed between
associated lawyers. Rationale: Public policy,
to avoid possible conflict of interest that could
deter L from determining the best interests of
the client because of risk of potential liability
to another lawyer.
Litigation Privilege
• “[A]ny statement made during judicial proceedings
pertinent to the issues before the court is absolutely
privileged and may not give rise to [defamation]
liability.” text at 177 Policy: allow zealous advocacy.
• Cautions: litigation privilege is creature of state law
and its application is not uniform.
– E.g., when L goes beyond advocacy, cts may sanction Ls,
uphold defamation damages awarded by jury.
• Quigley v. Rosenthal, 327 F.3d 1044 (10th Cir. 2003)(upheld
damages against civil rights L who defamed members of
homeowners ass’n by labeling them anti-semitic at press
conference during trial)
• L for Anna Nicole Smith allegedly defamed son of her billionaire
deceased husband; matter settled after $multimillion verdict
Litigation Privilege
• May apply to other types of private or public hearings
involving exercise of judicial or quasi-judicial powers, e.g.,
arbitration. Look for qualifications/limits
• May apply to pre-litigation communications, e.g., with L for
opposing party.
• Talking to media: cases split. E.g., Kennedy v. Zimmermann
(IA 1999)(allowed defamation action to proceed against
lawyer who restated allegations in complaint to reporter)
• MESSAGE: CHECK LOCAL LAW BEFORE YOU SPEAK OR
CARRY “SPEAKING EVIDENCE” IN PUBLIC PLACES, e.g., in
halls of court.
• there is no litigation privilege available for transactional
matters.