by Janis Reinken, Attorney / Director of Risk Management, TLIE
In yet another erosion of the privity rule, the Texas Supreme Court rendered its opinion in McCamish, Martin, Brown & Loeffler v. F. E. Appling Interests, 991 S.W.2d 787 (Tex. 1999), affirming 953 S.W.2d 405 (Tex. App.-Texarkana 1997). In harmony with the Texarkana Court of Appeals decision in Appling, the Fifth Circuit rendered its opinion in First National Bank of Durant v. Trans Terra Corporation, 142 F.3d 802(5th Cir. 1998). Both cases reversed summary judgment rulings favoring the defendant attorneys.
Each opinion relied heavily on Section 552 of the Restatement (Second) of Torts in acknowledging a non-client's negligent misrepresentation cause of action against attorneys. Section 552 provides, in part: "One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information if he fails to exercise reasonable care or competence in obtaining or communicating the information."
The First National Bank of Durant case makes clear that transactional attorneys now have liability exposure for negligent misrepresentations made to a non-client in regard to oil and gas opinions provided for the benefit of a client. However, the Appling case demonstrates that lawyers' vulnerability to third party claims for negligent misrepresentation will not be limited to transactional practice.
The underlying litigation involved a settlement between the Appling parties and Victoria Savings & Loan, and each had counsel of record. The Appling parties required the Directors and their counsel to confirm that the settlement would be binding upon the regulatory authorities. Because Victoria was already subject to regulatory supervision, approval by the State-authorized supervisory agent would have been necessary to effectuate the settlement. It remains to be seen how a jury might react to the negligent misrepresentation cause of action at trial.
Under Section 552, the elements of a non-client's negligent misrepresentation claims will require proof that the attorney: (1) supplied false information for others in their business transactions; (2) pecuniary loss was caused by (3) justifiable reliance upon the information; and (4) the attorney failed to exercise reasonable care or competence in obtaining or communicating the information. The inadvertent or unintended transmittal of inaccurate or false information would not constitute negligent misrepresentation, given the requirement that the information is supplied to a third party on purpose with an expectation of reliance.
Ethically, Rule 2.02 of the Texas Disciplinary Rules of Professional Conduct requires that an attorney not evaluate a matter for the use of a non-client, unless doing so is compatible with the attorney-client relationship and the client has consented after consultation. As indicated in Comment 1, such evaluations would include title opinions requested by a seller of property to the purchaser or for a borrower's benefit with a prospective lender; opinions required by government agencies, such as the legality of registered securities; and in other instances such as the sale of a business. Similarly, a lawyer could be called upon to respond to questions from a client's financial auditor, as contemplated in Comment 7.
Comment 6 to Rule 2.02 stresses that any limits placed on the freedom and extent of the lawyer's investigation and evaluation should be described in the attorney's report. Such restrictions could mean "certain issues or sources may be categorically excluded, or the scope of search may be limited by time constraints or the noncooperation of persons having relevant information." If the client has refused to comply with the terms governing the evaluation to be rendered, Comment 6 would refer the inquiry back to the client's agreement and surrounding circumstances, in which event "the lawyer's obligations are determined by law."
Attorneys and courts may also look to the criteria of Section 73 of the Restatement of the Law (Third): The Law Governing Lawyers (Tentative Draft no. 8, March 21, 1997), regarding the "duty to use care" toward non-clients in certain situations. For instance, liability to a non-client may arise under Section 73(2) when a non-client relies on a lawyer's opinion or other legal services, at the invitation of either the lawyer or the client (with the lawyer's acquiescence). Under Section 73(3), the liability may arise if the lawyer knows that the client's intent and primary objective is that the services will benefit the non-client. When the misrepresentation is knowing rather than negligent, Section 73(4) provides for liability to a non-client when the lawyer represents a trustee, guardian, executor, or fiduciary acting primarily for the non-client, and the lawyer knows of circumstances making it "clear that appropriate action by the lawyer is necessary" to prevent or rectify a client's crime or fraud creating the breach of fiduciary duty, or if the lawyer is assisting or has assisted in the breach.
Similarly, under Texas Disciplinary Rule 4.01(a), "Truthfulness in Statements to Others," it would not be unethical to make a negligent false statement of material fact or law to a third person or to incorporate or affirm such a statement made by another person in the course of representing a client. It would be an ethical violation only if the lawyer knows the misstatement is false and is intended to mislead. Rule 4.01, Comment 2. In that event, the Rules urge the attorney to decline or terminate representation if the client disregards the attorney's counsel to correct or not to commit the crime or fraud. See Rules 1.02, 1.05, and 1.15(a)(1). Rule 1.02 (c) admonishes, "A lawyer shall not assist or counsel a client to engage in conduct that the lawyer knows is criminal or fraudulent."
If the facts regarding a misrepresentation establish an intentional wrong, such as fraud, concealment, conspiracy, or other dishonesty, most professional liability policies would exclude coverage. Such allegations might be coupled with the negligent misrepresentation theory, in which event attorneys could anticipate that the carrier might defend the malpractice suit subject to a reservation of rights.
The most likely battleground in future negligent misrepresentation claims will concern the sufficiency of evidence constituting the failure to exercise "reasonable care or competence in obtaining or communicating the information." Restatement (Second) of Torts, Sec. 552. This underscores the need for attorneys to determine specific ways to exercise such "reasonable care and competence."
When providing opinions or information that a client might -- or will -- reveal to a third party, it is up to the lawyer to define the risks and be comfortable with the level of risk the lawyer is taking and not leave it to interpretation. Here are some claim prevention pointers to consider:
1. If the client expects the attorney to make an independent determination or verification of accuracy of information (e.g., bank funds on deposit at time of death), this should be addressed in the terms of engagement or subsequent timely correspondence.
2. When rendering an opinion or work product for the client, specify that it is for the client's use only and not intended for third parties to rely upon it.
3. When rendering an opinion that the lawyer knows the client intends for release to a third party, the lawyer should:
a) inform the client that the opinion refers to information received from the client (or other sources such as accountant, engineer, etc.) which the lawyer has not independently verified, and if the client learns it is incorrect or incomplete, the client needs to let the attorney know as soon as possible as it might materially affect or change the opinion; and
b) if the entire opinion or report needs to be disclosed by client, the attorney should so specify in order to prevent the client from revealing only part of the opinion or report to the third party; and
c) specifically mention the known third party as the only non-client entitled to rely on the opinion or information contained, as well as any material conditions limiting that reliance; and
d) invite the third party to consult with its own counsel regarding decisions based in reliance upon the information and opinion.
4. Attorneys should be alert to potential claims from non-clients, whether or not they have representation of counsel in the specific matter.
a) Attorneys should continue to exercise the precautions described in Rule 4.02 when another person or party is represented by counsel.
b) Rule 4.03 requires that lawyers dealing with an unrepresented person shall not state or imply that the lawyer is disinterested, and admonishes lawyers to make reasonable efforts to correct any misunderstandings the person has of which the lawyer knows or reasonably should know regarding the lawyer's role.
To some extent, the client's own verification of information required on bankruptcy disclosures, IRS returns, notarized documents, and discovery responses should insulate the attorney from the client's error. Nevertheless, attorneys will remain responsible for assuring the accuracy of their own work product provided on behalf of a client for the reliance of a third party.