New York Attorney Malpractice Blog: Privity, Legal Malpractice and the NYS Court of Appeals

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Privity, Legal Malpractice and the NYS Court of Appeals

Here is an interesting article from Marian C. Rice, Esq., a source we've quoted before [11/15/05]. It discusses a recent NYS Court of Appeals case on privity: the right of a non-client to sue counsel in Legal Malpractice based upon the acts of the non-retained attorney. N.Y. Firm Held Subject to Third-Party Suit By Marian C. Rice, L'Abbate, Balkan, Colavita & Contini, L.L.P. A.G. Capital Funding Partners, L.P. v. State Street Bank and Trust Company, et al. New York State Court of Appeals, November 17, 2005 Based upon "industry custom and practice" evidence that a borrower's counsel assumed a duty to the representative of a secured party, to deliver instruments intended to secure debt totaling $750,000,000, the New York State Court of Appeals has reinstated a third-party action against the borrower's counsel based upon theories of negligence and contribution. In the late 1990s, Loewen Group International ["Loewen"], represented by Thelen Reid ["Thelen"], sought to raise capital by issuing debt securities secured by a single pool of collateral. The agreement, covering a series of secured debt transactions, two of which were at issue in the case, provided that Bankers Trust would act as the Collateral Trustee on the assets securing the debt. For the investors to acquire secured creditor status, the agreement provided that a document called an Additional Secured Indebtedness Registration Statement ["ASIRS"] had to be delivered to Bankers Trust. The agreement expressly obligated State Street, the secured party representative in the pertinent transactions, to deliver the ASIRSs to Bankers Trust, thereby perfecting the investors' security interests. In both transactions, the ASIRSs were not delivered to Bankers Trust and the secured interest remained unperfected. In September 1999, Loewen filed for bankruptcy. During the course of the bankruptcy proceeding, the investors settled their claim against Loewen for an amount allegedly discounted because of uncertainty over whether the debt was
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New York Attorney Malpractice Blog: Privity, Legal Malpractice and the NYS Court of Appeals

secured. As a result, the investors commenced suit against State Street, which served a third-party complaint against the underwriters and Loewen's counsel, Thelen. In the third-party complaint and supplemental expert affidavits, State Street asserted that if it had the duty to deliver the ASIRSs to Bankers Trust, the underwriters and Thelen assumed that duty based upon both the custom and practice in the industry and the conduct of Loewen's counsel in two prior transactions controlled by the same agreement. The trial court dismissed all claims except for contribution and negligence. The Appellate Division dismissed the remaining negligence and contribution claims holding that since State Street assumed the obligation to deliver the ASIRS in its contract with Bankers Trust, State Street could not controvert the plain meaning of the agreement with contradictory evidence of custom or industry practice.1 The Court of Appeals affirmed the dismissal of the legal malpractice and negligence misrepresentation claims against Thelen holding that the absence of privity or a relationship so close as to approach privity precluded the negligent misrepresentation claim, while the attorney malpractice claim could not be stated by a non-client in the absence of privity unless State Street set forth a claim of fraud, collusion, malicious acts or other special circumstances. However, the Court held that State Street stated a claim for negligence against Thelen, as well as the underwriters: "The industry custom as set forth in the supplemental evidentiary materials coupled with the parties' conduct, supports a claim that the third-party defendants together or in part assumed that duty. The pleadings allege that the third-party defendants did not act reasonably in relation to such duty." Citing cases not involving professional defendants, the Court adopted State Street's argument that "evidence of industry practice and standards is admissible to establish a duty of care" and that "a course of conduct that induces reliance, as alleged here, may implicate a duty of care." The Court of Appeals similarly upheld the contribution claim against Thelen rationalizing that since the negligence claim survived the motion to dismiss, the contribution claim "predicated on a breach of duty to plaintiff or defendant/third-party plaintiff" remains viable. The dissent agreed that while State Street may have relied upon the underwriters to deliver the ASIRS to the proper destination, there was nothing in the record to support the allegation that Thelen, as Loewen's counsel, assumed a duty to deliver the ASIRSs.

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New York Attorney Malpractice Blog: Privity, Legal Malpractice and the NYS Court of Appeals

The courts in New York have long held that the existence of direct privity or a "relationship so close as to approach that of privity" 2 was a prerequisite to the assertion of a claim against an attorney for either legal malpractice or negligent misrepresentation and that a non-client may not sue for professional negligence "absent fraud, collusion, malicious acts or other special circumstances." 3 In the A.G. Capital decision, the Court of Appeals acknowledges the propriety of both these principles of law and yet apparently carves out an exception enabling a non-client to articulate a claim against an adversary's counsel by alleging that counsel "assumed the duty" that the non-client may have owed and that counsel "did not act reasonably in relation to such duty." While it may not have been the Court of Appeals' intent in reinstating the third-party action against the Thelen law firm, the A.G. Capital decision potentially exposes attorneys to claims by non-clients in many different factual settings. 1) 10 A.D.3d 291, 781 N.Y.S.2d 88 (1st Dep't 2004). 2) Prudential Ins. Co. v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 382, 590 N.Y.S.2d 831, 833 (1992). 3) Chinello v. Nixon Hargrave Devans & Doyle, 15 A.D.3d 894, 788 N.Y.S.2d 750 (4th Dep't 2005); Rovello v. Klein, 304 A.D.2d 638, 638, 757 N.Y.S.2d 496 (2nd Dep't 2003), lv. denied 100 N.Y.2d 509, 766 N.Y.S.2d 163, 798 N.E.2d 347

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