Ch. 5 Duties to Nonclients A. Privity of Contract: Traditional Obstacle to Recovery (text ) 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)

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 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 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 §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 (7 th 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 text at 160 The Tax Shelter Opinion Letter 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 1 st 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 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 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 (10 th 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.