Ferguson v. Cramer

CHASANOW, Judge. In the instant case, we are called upon to determine whether a beneficiary under a will may maintain a cause of action for professional malpractice against an attorney retained by the personal representative of the testator’s estate. We recently held that, as a matter of law, a nonclient, testamentary beneficiary could not maintain a cause of action for professional malpractice against the testator’s attorney for negligently drafting the testator’s will or providing negligent estate planning advice where there was a lack of privity between the beneficiary and the attorney. Noble v. Bruce, 349 Md. 730 , 709 A.2d 1264 (1998).

We believe that the Noble decision is ⁷⁶³ controlling and therefore affirm the judgment of the Court of Special Appeals. I. The following facts alleged in the complaint and the exhibits thereto were before the Court of Special Appeals. Petitioners (the beneficiaries) are the heirs of Dennis Webster Eckes. On April 15, 1991, Mr. Eckes died.

The will designated Paula Eckes as the personal representative. 1 On April 24, 1991, Ms. Eckes and Respondent, Steven Cramer, entered into a retainer agreement for Cramer “to represent her in handling and administering” Mr. Eckes’s estate. This agreement, attached to the complaint as an exhibit, named Ms. Eckes as the client. The agreement was entered “for the purpose of representation and all appropriate legal action by the law firm for handling [the] estate of Dennis Eckes.” The agreement provided that Cramer’s fee was to be set by the court and that Ms. Eckes agreed to “pay all reasonable and necessary costs arising during the handling of this claim.” In their complaint, the beneficiaries alleged that “as the only heirs of the Estate of Dennis Webster Eckes, [they] were specifically intended to be the beneficiaries of Cramer’s service as attorney for the estate of Dennis Webster Eckes.” In addition, the beneficiaries claimed that Cramer owed a duty to assist Ms. Eckes in carrying out her duties as the personal representative of the estate and a duty “to exercise that degree of care and diligence in pursuing the administration of the Estate of Dennis Webster Eckes as used by attorneys engaged in the practice of law.” It is further alleged that Cramer breached his duty to the beneficiaries of the estate and that this breach caused both the beneficiaries and the estate to suffer long-term economic loss. The beneficiaries also alleged suffering emotional trauma. ⁷⁶⁴ Specifically, the beneficiaries first asserted that Cramer failed to properly obtain accurate appraisals of the testator’s assets, including the inventory of Mr. Eckes’s business, resulting in an overvaluation of estate assets. 2 The beneficiaries further alleged that Cramer directed the inventory of Mr. Eckes’s business to be appraised at its highest retail value.

This overvaluation in turn resulted in an increase in the value of Mr. Eckes’s gross estate upon which federal and state estate taxes were paid. Once the inventory of Mr. Eckes’s business was sold, the beneficiaries assert that substantial legal and accounting fees were expended to obtain refunds from the federal and state governments, presumably due to an overpayment in estate taxes. In addition, the beneficiaries alleged that Cramer failed to adequately advise Ms. Eckes regarding the administration of the estate and the filing of accurate accountings. Finally, the beneficiaries claimed that Cramer failed to adequately advise Ms. Eckes regarding: 1) the estate’s rights to the payment of trademark and trade-name licensing fees and copyright royalty payments from Edgewater Book Distributors, Inc.; and 2) the estate’s rights to copyright royalty payments from Dr. James Beckett, III under a publisher-author agreement.

The complaint indicates that the beneficiaries retained their own attorney during the administration of Mr. Eckes’s estate and that in March 1993 their counsel contacted Edgewater and demanded payment of the licensing fees and royalties. The beneficiaries filed their complaint against Cramer and his law firm, Bodie, Nagle, Dalina, Smith & Hobbs (the Respondents) on December 9, 1994. The Respondents later filed a motion to dismiss. On July 8, 1996, the Circuit Court for Anne Arundel County granted the Respondents’ motion, ruling that the third-party beneficiary exception to the strict privity rule did not apply and that there was no privity between the beneficiaries and Cramer.

On appeal, the Court ⁷⁶⁵ of Special Appeals in a reported opinion affirmed the trial court’s judgment. Ferguson v. Cramer, 116 Md.App. 99 , 695 A.2d 603 (1997). We granted the beneficiaries’ petition for writ of certiorari on November 17,1997.

II

The beneficiaries argue that Ms. Eckes, as the personal representative for Mr. Eckes’s estate, hired Cramer with the specific intent to directly benefit the beneficiaries, and thus the beneficiaries have standing to sue Cramer under the third-party beneficiary exception to the strict privity rule as set forth in our decisions in Flaherty v. Weinberg, 303 Md. 116 , 492 A.2d 618 (1985) and Prescott v. Coppage, 266 Md. 562 , 296 A.2d 150 (1972). In a decision rendered prior to our opinion in Noble , the Court of Special Appeals held in the case sub judice that the third-party beneficiary exception to the strict privity rule did not apply under the circumstances and that the beneficiaries did not have standing to bring a malpractice action against Cramer because no attorney-client relationship existed between the beneficiaries and Cramer. See Ferguson, 116 Md.App. at 112-13 , 695 A.2d at 609 . We agree.

In Noble , we examined whether a nonclient, testamentary beneficiary could maintain a cause of action against the testator’s attorney for malpractice arising out of will drafting or estate planning. 349 Md. at 733 , 709 A.2d at 1266 . We noted that Maryland as a general rule adheres to the strict privity rule in attorney malpractice cases and that, where the risk created by negligent conduct is one of economic loss and not death or serious personal injury, the attorney owes no tort duty to the beneficiaries absent privity or its equivalent. See Noble, 349 Md. at 738 , 709 A.2d at 1268 . In order to state a cause of action for malpractice against an attorney, the first element that a plaintiff must allege and prove is the existence of a duty between the plaintiff and the defendant; specifically, the plaintiff must allege and prove the ⁷⁶⁶ attorney’s employment. 3 Flaherty, 303 Md. at 128 , 492 A.2d at 624 .

This Court, however, has recognized the third-party beneficiary exception as a limited exception to the strict privity rule. See Flaherty, 303 Md. at 131 , 492 A.2d at 625-26 . In order for the third-party beneficiary exception to apply, this Court explained that the nonclient “must allege and prove that the intent of the client to benefit the nonclient was a direct purpose of the transaction or relationship. In this regard, the test, for third party recovery is whether the intent to benefit actually existed, not whether there could have been an intent to benefit the third party.” Flaherty, 303 Md. at 130-31 , 492 A.2d at 625 .

After examining the various approaches taken by jurisdictions regarding attorney liability to nonclients, 4 we held in Noble that the third-party beneficiary exception did not apply because the direct purpose and intent of the testator/client in executing a will was not necessarily to benefit the beneficiaries named in the will. 349 Md. at 753-754 , 709 A.2d at 1276 . Thus, under the traditional rule of strict privity, the beneficiaries could not maintain a malpractice action against the attorneys because no employment relationship existed between the beneficiaries and the attorneys. Noble, 349 Md. at 754 , 709 A.2d at 1276 . This Court reasoned that there were compelling policy reasons for the application of the strict privity rule including: 1) the protection of the integrity and solemnity of wills; and 2) the protection of the attorney-client relationship.

Noble, 349 Md. at 756 , 709 A.2d at 1277 . We believe that the Noble decision ⁷⁶⁷ is controlling, and thus, the third-party beneficiary exception does not apply in the instant case. The application of the third-party beneficiary exception in an attorney malpractice case dates back to 1972. See Prescott, supra.

In Prescott , Coppage as the receiver for Security Financial Insurance Corporation (Security), a creditor of Maryland Thrift Savings and Loan Company (Maryland Thrift), sued Medley, the court-appointed receiver for Maryland Thrift. 266 Md. at 565 , 296 A.2d at 152 . One of Medley’s duties set forth in the court order appointing him was “‘to take possession of [Maryland Thrift’s] assets and property and hold or dispose of them under the direction, supervision and further order’” of the court. Prescott, 266 Md. at 574 , 296 A.2d at 156 . Coppage also sued Prescott who was specially appointed by the court as counsel “to aid [Medley] in the performance of his duties as receiver.” Id.

Coppage alleged that Medley and Prescott improperly distributed Maryland Thrift’s assets to lower priority creditors instead of paying the balance due on Security’s priority claim in the amount of $40,000. Prescott, 266 Md. at 565 , 296 A.2d at 151 . This Court stated that, in order to determine who is a creditor beneficiary, courts should consider the following as controlling factors: “the intention of the parties to recognize a person or class as a primary party in interest as expressed in the language of the instrument and consideration of the surrounding circumstances as reflecting upon the parties’ intention .... ” Prescott, 266 Md. at 574 , 296 A.2d at 156 . This Court further noted that the court order appointing Medley as the receiver clearly indicated that all of Maryland Thrift’s creditors were third-party beneficiaries and that the court order appointing Prescott “by necessary implication bound him to those creditor beneficiaries.” Id.

Thus, as court-appointed counsel, Prescott owed a duty to the court as well as to any beneficiaries the court intended to benefit. We held that the acceptance by Medley and Prescott of the duties entailed in the court order created conditions that gave Cop-page standing to sue Prescott as a third-party creditor beneficiary. Id. ⁷⁶⁸ The beneficiaries claim that the legal relationships in the instant case are virtually identical to those in Prescott . Specifically, the beneficiaries assert in their brief that they are third-party beneficiaries because the court-appointed “personal representative (fiduciary) hired ...

Cramer (attorney) with an actual intent to directly benefit the heirs (beneficiar[ies]) by aiding the personal representative in the performance of her duties.” We, however, believe Prescott is distinguishable because the instant case does not involve a receivership. Prescott involved a receivership for which a receiver was specifically appointed by the court for the purpose of taking possession of Maryland Thrift’s assets and holding or disposing of them for the benefit of the creditor beneficiaries, and the receiver’s attorney was specifically appointed by the court in order to aid the receiver in the performance of his duties. See Prescott, 266 Md. at 574 , 296 A.2d at 156 . In a receivership proceeding, property taken “is in the custody of the court and the receivers are merely the agents of the court to hold it and manage it” for the benefit of parties in interest, including creditors.

Mathias v. Segaloff, 187 Md. 690, 696-97 , 51 A.2d 654, 657 (1947). “The title is subject to the authority of the court to direct the receivers to make some disposition of the property. Until the court does so act, the receivers have no authority to abandon any property or give it back to the debtor. So long as they are not discharged ..., they still have control over it.” Mathias, 187 Md. at 697 , 51 A.2d at 657 . By contrast, in the administration of an estate, the court is not as involved.

In performing his or her duties, a personal representative may act “without application to, the approval of, or ratification by the court.” Maryland Code (1974, 1991 Repl.Vol., 1997 Supp.), Estates & Trusts Article, § 7-401(a). 5 In addition, the duty of the receiver differs from that of the personal representative. See Melba Inv. Atl. v. Mimi Selig Homes, 44 Md.App. 234, 235, 238 , 407 A.2d 808, 808, 810 (1979)(noting that a receiver’s role is to protect the interests of ⁷⁶⁹ all creditors, not just the petitioning creditor). Unlike a receiver, who owes a specific duty to all creditors, a personal representative is a fiduciary and “[h]e is under a general duty to settle and distribute the estate of the decedent in accordance with the terms of the will and the estates of decedents law as expeditiously and with as little sacrifice of value as is reasonable under the circumstances.

He shall use the authority conferred upon him by the estates of decedents law, by the terms of the will, by orders in proceedings to which he is a party, and by the equitable principles generally applicable to fiduciaries, fairly considering the interests of all interested persons and creditors.” § 7-101(a). As one court has explained, the primary goal of the personal representative is “to serve the interests of the estate, not to promote the objectives of one group of legatees over the interests of conflicting claimants.” Goldberg v. Frye, 217 Cal.App.3d 1258 , 266 Cal.Rptr. 483, 489 (1990). Thus, in administering the estate in accordance with the will, a personal representative has a general duty to consider the interests of all interested persons and creditors, including beneficiaries, and is not merely an agent of the court. Moreover, it cannot be said in the instant case that the intent of the personal representative was to benefit the beneficiaries of the estate and that such an intent was the direct purpose of Ms. Eckes’s hiring an attorney to assist her in handling Mr. Eckes’s estate.

In performing his or her duties, a personal representative is permitted, under § 7-401(a), to “exercise all of the power or authority conferred upon him by statute or in the will, without application to, the approval of, or ratification by the court. Except as validly limited by the will or by an order of court, a personal representative may ... exercise the powers enumerated in this section.” Specifically, § 7-401(w) permits a personal representative to employ “persons with special skills,” such as an attorney, to advise or assist the personal representative in performing his or her administration duties. 6 By its express terms, § 7-401 (w)’s ⁷⁷⁰ purpose appears to be to permit the personal representative to seek the advice of an attorney in performing his or her duties rather than to provide representation to creditors and beneficiaries of the estate. Thus, where a personal representative hires an attorney to assist him or her in handling the estate, as in the instant case, the direct purpose in hiring the attorney is not to benefit the beneficiaries. As the Court of Special Appeals noted, any benefit to the beneficiaries from the personal representative’s attorney is merely incidental.

Ferguson, 116 Md.App. at 109 , 695 A.2d at 608 . Such incidental benefit is not sufficient to impose a duty upon an attorney. See Flaherty, 303 Md. at 131 n. 6, 492 A.2d at 625 n. 6. In cases such as the instant case,' the attorney owes a duty solely to his or her client, the personal representative.

See Walton v. Davy, 86 Md.App. 275, 285 , 586 A.2d 760, 765 (noting that,