Commercial Division Blog

Posted: June 7, 2014 / Categories Commercial, Law Firms and Professional Ethics

Attorney has no Liability to Third Parties for Negligence in Performing Legal Services for Client

On May 20, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Goldin v. Tag Virgin Islands Inc., 2014 NY Slip Op. 31308(U), dismissing an attorney malpractice claim where there was no attorney-client relationship between the plaintiffs and the defendant attorney.

In Goldin, the plaintiffs were the beneficiaries or co-trustees of an investment fund that was allegedly defrauded by an investment advisory firm and its principals ("TAG"). The complaint included a malpractice claim against an attorney (Feiner) who represented TAG in drafting certain convertible notes that plaintiffs claim "were a fiction designed by the TAG Defendants and Feiner to defraud the Plaintiffs." The court dismissed the malpractice claim, inter alia, on the grounds that "a cause of action for legal malpractice cannot be stated in the absence of an attorney-client relationship," noting that Feiner was not representing the plaintiffs, but, to the contrary, a counterparty (TAG) in preparing the notes. The court rejected the plaintiffs' attempt to fit their claim within two narrow exceptions to that fundamental rule:

While conceding that they were not Feiner's clients, and were not in privity with him, Plaintiffs nevertheless argue that a malpractice claim may lie since the harm caused to Plaintiffs was the result of the attorney's fraud. However, the fraud alleged by Plaintiffs is the alleged malpractice committed by Feiner. Thus, Plaintiffs present the circular argument that a malpractice claim is stated because a near-privity relationship exists and the fraud giving rise to that near-privity relationship exists because Feiner committed malpractice. This argument does not state the fraud, collusion, malicious acts or other special circumstances necessary in order to maintain an attorney malpractice claim absent privity.

Finally, Plaintiffs contend that even in the absence of fraud allegations, they still state a claim for attorney malpractice since Feiner was representing their interests when drafting the notes at issue. However, this theory of liability has been rejected by the First Department. In Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615, 616-17 (1st Dep't 2011), the Court dismissed a legal malpractice claim, concluding that the parties had no attorney-client relationship. In Fortress, attorney Marc Dreier proposed to plaintiffs that they participate in short-term note program to finance real estate purchase where the borrower would be Dreier's clients and Dreier was the guarantor. Plaintiff asked Dreier and his client to get an opinion letter from independent counsel before entering into transaction. Plaintiff later sued the independent counsel, arguing that it relied on counsel's legal opinion that certain loan documents were duly executed and that the loan was a valid and binding obligation. The First Department rejected Plaintiff's legal malpractice claim, concluding that Plaintiff had no attorney-client relationship with counsel, even though "plaintiffs were meant to benefit by defendant's actions." The Court stated that "while plaintiffs were meant to benefit by defendant[-attorney]'s actions on behalf of [client] Solow Realty, that circumstance does not give rise to a duty to plaintiffs on the part of the attorney." Id. at 616. The same holds true here. To hold otherwise potentially would render any transactional attorney liable for legal malpractice to all parties to a contract that he or she drafted where the contract somehow inured to the other parties' benefit.

The parties to a complex commercial transaction may be injured by errors made by other parties' attorneys. However, as this decision demonstrates, subject to very narrow exceptions, a claim for attorney malpractice does not lie absent an attorney-client relationship.