Flaherty v. Weinberg

COLE, Judge. The question presented in this case is whether an attorney is liable to a nonclient for professional malpractice. Because we recognize that liability may attach in certain limited circumstances and because we last examined this issue over a decade ago, see Prescott v. Coppage, 266 Md. 562 , 296 A.2d 150 (1972), and because of the significant increase in case law and professional literature on attorney liability to third parties, 1 we find it useful to review the present state of the law on this subject before stating our answer. I A majority of American courts evidently continue to adhere to the view expressed in a 105-year-old Supreme Court decision holding that absent fraud, collusion, or privity of contract, an attorney is not liable to a third party for professional malpractice. 2 National Savings Bank v. ¹²² Ward, 100 U.S. 195 , 25 L.Ed. 621 (1880) (6-3 decision).

In that case, a negligence action was instituted against an attorney by a third party lender who had relied on the attorney’s certification of title in making a loan secured by land purportedly owned by the prospective borrower. The attorney certified the client’s title as good even though the client had previously sold the property. After this certification, the client obtained brokers to negotiate a $3,500 loan. The borrower signed a note payable to the brokers and designated the brokers as trustees in a trust deed.

The brokers secured a loan from the lender and used the certificate of title and trust deed as collateral. When the borrower failed to pay the note at maturity, the lender discovered that the attorney, with whom it had no contract or communication, had negligently certified that his client had good record title. Referring to a line of English cases, see, e.g., Winterbottom v. Wright, 10 Messon & Welsby 109, 152 Eng.Rep. 402 (1842), the Supreme Court held that the attorney was not liable to the lender because of the absence of privity. Although the attorney should have discovered the sale through the exercise of reasonable care, the Court stated that a third party could recover against the attorney only in cases involving fraud or collusion. 3 National Savings Bank v. Ward, supra, 100 U.S. at 205-06 , 25 L.Ed. at 625 .

But see id. at 207-08, 25 L.Ed. at 625-26 (Waite, C.J., dissenting) (attorneys’ liability to third parties should be based on the foreseeability that a third party would rely on the attorneys’- work). ¹²³ Despite National Savings Bank and its progeny, the rule of strict contractual privity has been relaxed in modern jurisprudence. Beginning with an 1852 decision by the Court of Appeals of New York, American courts expressed a willingness to depart from the strict contractual privity rule. See Thomas v. Winchester, 6 N.Y. 397, 407-10 (1852) (ultimate consumer could sue manufacturer who negligently mislabeled a bottle of poison, although the consumer bought the bottle from a druggist). Subsequent decisions have confirmed that, in the words of Chief Judge (later Justice) Cardozo, “[t]he assault upon the citadel of privity is proceeding in these days apace.” Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 180 , 174 N.E. 441, 445 (1931); see Glanzer v. Shepard, 233 N.Y. 236 , 135 N.E. 275 (1922) (Cardozo, J.) (privity of contract not required in cases involving economic loss caused by negligent services); MacPherson v. Buick Motor Co., 217 N.Y. 382 , 111 N.E. 1050 (1916) (Cardozo, J.) (privity of contract not required in cases where the manufacturers’ negligence caused physical injury to a third party).

Consistent with the erosion of the strict privity requirement in the above areas, a growing number of jurisdictions have made inroads into this requirement in attorney malpractice cases by employing one of two basic conceptual models: (1) the balancing of factors theory, or (2) the third party beneficiary theory. 4 ¹²⁴ The Supreme Court of California was the first court to depart from the strict contractual privity rule of National Savings Bank . The California court formulated the balancing of factors theory in Biakanja v. Irving, 49 Cal.2d 647 , 320 P.2d 16 (1958), refined it in the context of attorney malpractice in Lucas v. Hamm, 56 Cal.2d 583 , 364 P.2d 685 , 15 Cal.Rptr. 821 (1961), cert. denied, 368 U.S. 987 , 82 S.Ct. 603 , 7 L.Ed.2d 525 (1962), and applied it in Heyer v. Flaig, 70 Cal.2d 223 , 449 P.2d 161 , 74 Cal.Rptr. 225 (1969). See also Bucquet v. Livingston, 57 Cal.App.3d 914 , 129 Cal. Rptr. 514 (1976) (applying factors); Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57 Cal.App.3d 104 , 128 Cal.Rptr. 901 (1976) (same).

Under this policy-based approach, the court balances the following factors in determining whether to impose a duty on attorneys not in privity with third parties: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm. 5 Although several jurisdictions have approved the Lucas balancing test to determine whether an attorney owes a duty to a third party, see, e.g., ¹²⁵ Bird v. Rothman, 128 Ariz. 599 , 627 P.2d 1097 (Ct.App.1981); Fic kett v. Superior Court of Pima County, 27 Ariz.App. 793 , 558 P.2d 988 (1976); Licata v. Spector, 26 Conn.App. 378 , 225 A.2d 28 (1966); McAbee v. Edwards, 340 So.2d 1167 (Fla.Dist.Ct.App.1976); Jenkins v. Wheeler, 69 N.C.App. 140 , 316 S.E.2d 354 (quoting United Leasing Corp. v. Miller, 45 N.C.App. 404, 406-07 , 263 S.E.2d 313, 318 , review denied, 300 N.C. 374 , 267 S.E.2d 685 (1980)), review denied, 311 N.C. 758 , 321 S.E.2d 136 (1984); Auric v. Continental Casualty Co., 111 Wis.2d 507 , 331 N.W.2d 325 (1983), it has not met with universal acceptance. Some courts have eschewed chat approach as too broad, see Pelham v. Griesheimer, 92 Ill.2d 13, 22 , 64 Ill.Dec. 544, 548 , 440 N.E.2d 96, 100 (1982), or so “unworkable” that it “has led to ad hoc determinations and inconsistent results[.]” Guy v. Liederbach, 501 Pa. 47, 57 , 459 A.2d 744, 749 (1983). The second conceptual model used in malpractice cases involving attorney liability to third parties is the third party beneficiary contract theory. In general terms, a third party beneficiary contract arises when two parties enter into an agreement with the intent to confer a direct benefit on a third party, allowing the third party to sue on the contract despite the lack of privity.

Several jurisdictions, including Illinois and Pennsylvania, have adopted this particular approach. See, e.g., Ogle v. Fuiten, 102 Ill.2d 356 , 80 Ill.Dec. 772 , 466 N.E.2d 224 (1984); York v. Stiefel, 99 Ill.2d 312 , 76 Ill.Dec. 88 , 458 N.E.2d 488 (1984); Pelham v. Griesheimer, supra; Guy v. Liederbach, supra. It is evident from the brief review above that the present state of the law governing attorney liability to nonclients is far from settled. Although some commentators suggest that the weight of authority supports the strict privity rule, most nonetheless agree that the trend is against this requirement.

See, e.g., D. Meiselman, Attorney Malpractice: Law and Procedure § 6:6, at 105 (1980); Lawyers ’ Manual on Professional Conduct (ABA/BNA) 71:1101 (1984); An-not., 45 A.L.R.3d 1181 (1972). According to a treatise in the area of attorney malpractice: ¹²⁶ There is an abundance of authority for the proposition that only the client can sue the attorney for a negligent act or omission, and its corollary, that the attorney owes no duty to a person other than his client. Relying upon annotations and commentators, some courts have stated that a strict privity requirement is a majority rule. Such comments may reflect the holdings and dictum of the majority of the decisions under particular facts, but do not accurately characterize the state of the law in the United States.

The vast majority of such decisions concern factual situations where no jurisdiction would permit the plaintiff to bring a suit for negligence. Many reported decisions concern claims of opponents in litigation, yet no jurisdiction has found a duty by an attorney to an adverse party. Similar contentions by a client’s divorced spouse or children have also been uniformly rejected. Other limitations include the rejection of a duty to a buyer by a seller’s attorney or to another attorney who referred the case.

One way to measure the strength of the privity rule is to examine those decisions concerning claims by a would-be beneficiary of a will. With the sole exception of New York, jurisdictions have permitted a cause of action. On the other hand, errors relating to certification of title to real property allegedly done for the benefit of the plaintiff have generally been rejected. Another indication of the strength of the privity rule is the trend of the more recent decisions.

Suffice it to say that the vast majority of modern decisions favored expanding privity beyond the confines of the attorney-client relationship. R. Mallen & V. Levit, Legal Malpractice § 79, at 152-54 (2d ed. 1981) (footnotes omitted). II A. The evolution of the law in Maryland governing attorney liability to third parties has essentially paralleled the nation ¹²⁷ al development. For instance, in 1940 this Court adopted the traditional privity rule that an attorney owes a duty to his client or employer, and therefore only that client or employer can recover against him for that breach.

Wlodarek v. Thrift, 178 Md. 453 , 13 A.2d 774 (1940). In that case, an attorney (Thrift) was employed in 1925 by a contract purchaser to examine land titles. The attorney advised the purchaser that the title was good and merchantable. In reliance, the seller and purchaser concluded the settlement.

The property later devolved to persons other than the attorney’s client. When it was discovered that the attorney’s opinion was incorrect and a title defect appeared, the question arose as to whether the successor in title could recover from the attorney. In answering this question in the negative, the Wlodarek Court held that the attorney’s duty did not extend to the successors in title: It seems generally accepted that the liability of the defendants as attorneys to examine and pass upon a title to land is founded in contract and not in tort, and, therefore, does not, as a general rule, extend beyond the person by whom they were so employed. So, when the party with whom the contract is made is the purchaser, and he causes the title to the land, after paying the purchase money, to be conveyed by the vendor to his nominee, the subsequent loss and injury sustained by such nominee and his successors in the title, by reason of any defect in or absence of title, may not be recovered of the attorneys by such third parties as damages.

Id. at 468 , 13 A.2d at 781 (emphasis supplied). Shortly after the Wlodarek decision, this Court again determined that the strict privity requirement barred a cause of action by a nonclient against an attorney. Kendall v. Rogers, 181 Md. 606 , 31 A.2d 312 (1943). Factually, a purchaser of a Kent County farm retained an attorney to correct a defect in title that predated the vendor’s acquisition of the property.

The attorney, however, erroneously informed the vendor that the covenant of special warranty in the deed obligated the vendor to correct the defect. The ¹²⁸ vendor spent over $3,200 to cure the defective title. After the vendor learned that he was under no legal obligation to cure the title defect, he sued the purchaser’s attorney. The trial court sustained the attorney’s demurrer, and the plaintiffs appealed.

On appeal, the Kendall Court framed the issue as whether the attorney was employed to represent the plaintiffs as their attorney in the matter. Id. at 612 , 31 A.2d at 315 . In analyzing this issue, the Court adopted the tripartite test contained in Maryland Casualty Co. v. Price, 231 Fed. 397, 401 (4th Cir.1916). Under this test a plaintiff must prove the following elements to recover against an attorney in negligence: (1) the attorney’s employment; (2) his neglect of a reasonable duty; and (3) loss to the client proximately caused by that neglect of duty.

In a unanimous opinion, the Kendall Court found that the plaintiff did not state a cause of action because there was no attorney-client relationship between the parties: “The attorney is liable for his negligence in certifying to a title to his immediate employer only, and not to the latter’s assigns or any third person, between whom and the attorney there is no privity.” Shearman and Red-field on Negligence, Revised Edition, 3d Vol., page 1485. We are of opinion that the facts set out in this declaration are not sufficient in law to establish the relationship of client and attorney between the plaintiffs and defendant in this case. Kendall v. Rogers, supra, 181 Md. at 613 , 31 A.2d at 315 (emphasis supplied). Our predecessors reiterated these principles in Reamer v. Kessler, 233 Md. 311 , 196 A.2d 896 (1964), which involved an attorney who had negligently certified that certain mortgagors had good title to machinery purportedly covered by their respective mortgages.

Although the attorney in Reamer did not appeal from the finding of negligence or from liability, except as to certain amounts, the Court reaffirmed that liability for malpractice is primarily contractual in nature. ¹²⁹ These cases demonstrate that Maryland followed the strict privity rule without deviation until 1972. Beginning with our 1972 decision in Prescott v. Coppage, supra, however, Maryland appellate courts began to explore and determine the contours of the third party beneficiary theory of recovery in the context of attorney liability to nonclients. See Kirgan v. Parks, 60 Md.App. 1 , 478 A.2d 713 , cert. denied, 301 Md. 639 , 484 A.2d 274 (1984); Clagett v. Dacy, 47 Md.App. 23 , 420 A.2d 1285 (1980). An examination of these cases readily reveals that this theory does not supplant entirely the strict privity rule, but instead operates as a limited exception to that rule.

Prescott involved the receiver of a savings and loan association (Medley) who owed certain monies to the receiver of a deposit insurance company (Coppage). Coppage sued the court appointed special counsel for Medley (Prescott), alleging that his erroneous advice had led Medley to pay sums from his receivership estate to the association’s depositors rather than to Coppage, whose claim had priority. In writing for a unanimous court, Judge Menchine (specially assigned) reasoned that all creditors of the savings and loan association were third party beneficiaries of the receivership. Because Prescott was under a duty to aid the receiver in the performance of his duties, the creditors, including Coppage, were third party beneficiaries of Prescott’s performance of his court appointed duties.

As a result, Coppage, as third party beneficiary, could sue to recover losses caused by Prescott’s improper performance of those duties. Six years later, the Court of Special Appeals analyzed Prescott’s third party beneficiary theory in Clagett v. Dacy, supra. In that case, the third parties were the high bidders at a foreclosure sale, but because the attorneys failed to conduct the sale properly, the sale was set aside—twice. Eventually, the debtor redeemed the property by discharging his loan, leading the bidders to sue the attorneys.

The bidders alleged that the attorneys owed them a duty to use care and diligence and to conduct the sale properly and ¹³⁰ carefully. The trial court, however, concluded that the attorneys did not owe a duty to the bidders. In affirming the trial court’s judgment, the Clagett court, speaking through Judge Wilner, observed that Prescott “seem[s] to suggest a modest relaxation of the strict privity requirement to the extent of allowing a true third party beneficiary to sue an attorney as he could sue any other defaulting or tortious party to a contract made for his benefit.” Id. at 27, 420 A.2d at 1288 . The Clagett court interpreted Prescott as making clear that the traditional rules governing whether one is a third party beneficiary are controlling: that the person must be “part of a class of persons specifically intended to be the beneficiary of the .attorney’s undertaking.” Id. at 29, 420 A.2d at 1289 .

In the most recent Maryland appellate decision to raise the third party beneficiary theory in the attorney malpractice context, the Court of Special Appeals remarked that it is “a definite maybe” whether a testamentary beneficiary has standing to sue the attorney who drafted the testator’s will. See Kirgan v. Parks, supra. On the facts presented in that case, however, the court rejected the beneficiary’s cause of action because the asserted testamentary intention was not apparent on the face of the will. B. Based on our review of the above cases, we think it clear that Maryland, as a generál rule, adheres to the strict privity rule in attorney malpractice cases.

The sole exception that we have recognized to this rule is the third party beneficiary theory. Although this exception is “peculiarly applicable” to contract actions, Clagett v. Dacy, supra, 47 Md.App. at 28 , 420 A.2d at 1289 , its scope has a broader range. In our view, the scope of duty concept in negligence actions may be analogized to the third party beneficiary concept in the context of attorney malpractice cases. Thus, to establish a duty owed by the attorney to the nonclient the latter must allege and prove that the intent of the client to benefit the nonclient was a direct purpose of the transaction ¹³¹ 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. If the third party alleges and proves the remaining elements of a negligence cause of action, he can recover against the attorney in negligence. This Court essentially adopted this test in Prescott v. Coppage, supra, and it generally comports with the position taken by several other courts of last resort. See Pelham v. Griesheimer, supra; Guy v. Liederbach, supra; see also Note, Attorneys’ Liability to Third Parties for Malpractice: The Growing Acceptance of Liability in the Absence of Privity, 21 Washburn L.J. 48 , 59 (1981) (“The intent of the client to benefit the third party must be the primary or direct purpose of the transaction”) (emphasis supplied; footnote omitted). 6 The foregoing suggests that the third party beneficiary exception has a rather narrow scope.

Properly applied, this exception will not expose the attorney to endless litigation brought by those who might conceivably derive some indirect benefit from the contractual performance of the attorney and his client. Moreover, this exception should have limited application in adversarial proceedings because our Code of Professional Responsibility requires that a lawyer represent his client zealously within the bounds of the law (Canon 7) and that the lawyer ordinarily not represent or act for conflicting interests in a transaction (Canon 5; EC 5-1, 5-14, 5-15, 5-19, 5-22; DR 5-105). See also Clagett v. Dacy, supra, 47 Md.App. at 30 , 420 A.2d at 1290 (discussing professional responsibility of attorneys in context of attor ¹³² ney liability to third persons); 11: 25 Md. Reg. 3 -54 (containing Report of the Select Committee of the Court of Appeals of Maryland to Study the ABA Model Rules of Professional Conduct). With these considerations in mind, we now turn to the facts of this case.

Ill In August 1977 Robert and Sally Flaherty (the Flahertys) entered into a contract of sale for the purchase of a home in Frederick County for $63,000. To finance their purchase the Flahertys secured a $55,000 mortgage loan from the First Federal Savings and Loan Association of Hagerstown, Maryland (First Federal). After First Federal had approved the loan and after the purchase price of the property as well as the mortgage amount had been established, First Federal retained the law firm of Weinberg, Michel and Sterns (Weinberg) to represent it at settlement of the purchase of the property. The Flahertys did not retain separate counsel, a fact of which Weinberg was aware.

At settlement, Weinberg