Commercial Division Blog

Posted: December 20, 2013 / Categories Commercial, Law Firms and Professional Ethics, Motion to Dismiss; Motion for Judgment on the Pleadings

Legal Malpractice Claim Survives Despite No Allegation of Attorney-Client Relationship

On December 18, 2013, the Second Department issued a decision in Mr. San, LLC v. Zucker & Kwestel, LLP, 2013 NY Slip Op. 08416, holding that, in exceptional circumstances, a legal malpractice claim can survive a motion to dismiss despite the lack of an attorney-client relationship.

The Second Department's opinion was brief:

While the complaint does not allege an attorney-client relationship between the plaintiffs and the defendants, it sets forth a claim which falls within "the narrow exception of fraud, collusion, malicious acts or other special circumstances" under which a cause of action alleging attorney malpractice may be asserted absent a showing of privity.

The trial court's decision appealed from explained the basis for plaintiff's claim:

This is an action for aiding and abetting fraud. Plaintiffs invested substantial amounts of money with Gershon Barkany who held himself out as a financial advisor and real estate investor. Plaintiffs allege that Barkany represented that the money was to be used to fund real estate loans and other investments but Barkany was actually running a Ponzi scheme. Plaintiffs further allege that Barkany presented defendants Zucker & Kwestel LLP and Steven Kwestel as his attorneys in connection with the sham real estate transactions, and the firm accepted wire transfers of plaintiffs' funds into its escrow account.
. . .
Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties, for harm caused by professional negligence, unless there is a relationship sufficiently approaching privity between the attorney and the alleged client. This rule protects attorneys from legal malpractice suits by indeterminate classes of plaintiffs whose interests may be at odds with the interests of the acknowledged client

Since an attorney-client relationship does not depend upon a formal retainer agreement or upon payment of a fee, the court must look to the words and actions of the. The unilateral belief of a plaintiff alone does not confer upon him or her the status of a client

Plaintiffs allege that Barkany presented defendants as his attorneys, rather than the attorneys for the plaintiffs. An attorney for an organization is not the attorney for its members. However, it appears that no company had been formed at the time that plaintiffs made their investment. At the time that plaintiffs invested their funds, their interests seemed aligned with Barkany, at least as to the expected profitabilty of the venture. Moreover, the fact that Kwestel borrowed money from Barkany suggests that there may have been collusion between client and attorney and perhaps even knowledge on Kwestel's part as to Barkany's fraud upon the plaintiff. In these circumstances, the court must give plaintiffs the benefit of the possible favorable inference that an attorney-client relationship arose when defendants accepted plaintiffs' money into their escrow account.

Lawyers should be aware of the rule that makes them potentially liable to parties who are not their clients in exceptional circumstances; it might be better to avoid such situations because of the potential conflict between the fiduciary obligation to a client and the concern for malpractice liability to a non-client.