TELS Attorneys Lisa Shrewsberry and Jonathan Harwood Reaffirm Privity Requirement for Legal Malpractice Claims

March 31, 2007

HAWTHORNE, New York -- TRAUB EGLIN LIEBERMAN STRAUS LLP (TELS) is pleased to announce that in a recent case argued by Lisa Shrewsberry and Jonathan Harwood, which presented novel issues in New York, the privity requirement in legal malpractice claims was upheld. Although the historical rule requires privity of contract in order to assert a claim of professional negligence against an attorney, the modern trend is a relaxation of such rule. In fact the majority of states now allow for a cause of action for professional negligence against an attorney by a non-client, under certain circumstances. New York Courts, however, have generally resisted abandoning the historical rule, and a recent case issued by the Supreme Court of the State of New York, Westchester County, illustrates the continuing reluctance to do so.

The Courts of New York have resisted the modern trend, and have generally held to a
requirement of privity of contract. In 1977, however, the New York Court of Appeals decided White v. Guarente, 43 N.Y.2d 356, 401 N.Y.S.2d 474 (1977), which involved the issue of privity in a professional negligence claim against accountants, rather than attorneys. It was held therein that an accountant could be liable to a third party, despite lack of privity, if such third party was known to the accountant and reasonably relied on his services. Certain decisions by New York Courts issued shortly thereafter applied a relaxed privity standard to claims against attorneys, following the majority trend and in reliance upon White v. Guarente. For example, in Schwartz v. Greenfield, Stein & Weisinger, 90 Misc.2d 882, 396 N.Y.S.2d 582 (1977), it was held that a professional negligence claim could be brought against a borrower’s attorney by the lender in a transaction, despite lack of privity, because the attorney had promised to file and perfect a security agreement for the lender and failed to do so, resulting in the lender’s loss of his security interest. Similarly, in Baer v. Broder, 106 Misc. 2d 929, 436 N.Y.S.2d 693 (1981), aff’d, 86 A.D.2d 881, 447 N.Y.S.2d 538 (2d Dep’t 1982), it was held that a professional negligence claim could be brought against an attorney, who had been retained by the executrix of an estate in such capacity, by such executrix in her personal capacity, despite lack of privity.

In 1981, therefore, it seemed that New York was in accord with the modern trend of relaxed privity requirements, and that an attorney’s exposure to professional negligence claims was going to increase. In 1992, however, the Court of Appeals issued Prudential Insurance Company of America v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 590 N.Y.S.2d 831 (1992), rearg. denied, 81 N.Y.2d 955, 597 N.Y.S.2d 940 (1993). Prudential involved a lawsuit by a lender against the defendant law firm, which had represented the borrower in the loan transaction, and
which erroneously secured the debt in the amount of $92,885, rather than the actual amount borrowed of $92,885,000. Despite strenuous arguments to the contrary, the Court applied a much narrower rule than the modern or “California” balancing rule, which considers several factors, including the foreseeability of harm to plaintiff, the extent of damages, the moral turpitude of the conduct and the likelihood of prevention of future conduct. Rather, Prudential holds that a professional negligence claim against an attorney requires privity or a relationship so close as to approach that of privity, which is demonstrated by direct dealings between the attorney and the thirdparty, a specific agreement between the attorney and the third party to act, a specific promise by the attorney to the third party or an actual provision of documents to the third party. Without this “necessary link,” there is no basis for liability. The New York privity requirement, therefore, was clarified by the Court of Appeals to be much closer to the strict historical rule than to the modern trend, putting to rest the notion that New York was abandoning its restrictive privity rule.

Present day professional liability defense firms continue to rely upon the test set forth in Prudential in seeking the dismissal of professional negligence complaints against their attorney clients by non-clients. The recent case of Velasquez v. DeCaudin (Index No. 03191/2006, Westchester County, September 25, 2006) which was a case of first impression in New York, was closely watched by the professional liability bar because of its unique facts and potential impact upon New York privity requirements. Plaintiff Naida Velasquez was a co-attorney-in-fact along with her brother Jose Velasquez, pursuant to a joint power of attorney granted by their mother. Plaintiff and
her mother resided together in a house owned by her mother, upon which there existed a mortgage in the amount of $270,000. In 2004, the mortgagee had commenced foreclosure proceedings on the house, and plaintiff’s brother made efforts to secure refinancing. Without the knowledge of plaintiff or her mother, plaintiff’s brother ended up selling his mother’s house to defendant Bruno DeCaudin,
in exchange for the right of occupancy for one year and the right to repurchase pursuant to certain financial obligations. Plaintiff’s brother defaulted in his obligations, and plaintiff and her mother were evicted from the house, despite their lack of knowledge of the underlying proceedings. Plaintiff brought suit against various defendants, including the attorney who represented plaintiff’s brother at the closing where the house was sold to defendant DeCaudin, in her capacity as the administratrix of her mother’s estate (who passed away during the underlying proceedings), as the co-attorney-infact of her mother and in her individual capacity.

TELS made a motion to dismiss the complaint on behalf of the attorney who represented plaintiff’s brother at the underlying closing. The motion was based, in pertinent part, on the argument that plaintiff lacked privity with such attorney because he represented plaintiff’s brother, and represented neither plaintiff nor her mother. Plaintiff vehemently opposed such motion, arguing that the power-of-attorney granted by her mother, and pursuant to which the house was sold, required both plaintiff and her brother to act jointly in all matters as co-attorneys-in-fact, and that the attorney,
therefore, could not have only represented her brother in the transaction, and that he therefore also had a duty to plaintiff and her mother. The Court, however, was unpersuaded, and carefully relied upon the Prudential test to reach its determination, as follows:

Under all of the circumstances here presenting, the Court finds that
no such close relationship existed between [the attorney] and plaintiff or the Estate to warrant imposition of liability on such basis; there were no direct dealings between plaintiff and [the attorney], no specific agreement by [the attorney] to do anything for the plaintiffs’ use or according to the plaintiffs’ requirements, no specific promise to provide the plaintiffs with any documents, and no actual providing of documents to the plaintiffs; thus, the “necessary link between the relevant parties simply did not exist and there was no basis for liability” (citing Prudential).

The Court went on to reject plaintiff’s argument that the power of attorney granted by plaintiff’s mother created a de facto attorney-client relationship between the plaintiff’s mother and the attorney. The Court, relying on the similar case of Estate of Keatinge v. Biddle, 789 A.2d 1271 (Maine 2002), held that the mere retention of counsel by the holder of a power-of-attorney does not by itself create an attorney-client relationship between the attorney and the grantor. There must be some other agreement to create a separate attorney-client relationship. The Court, therefore, rejected all claims that the attorney owed a duty to plaintiff, individually, or in her capacity as the representative of her mother’s estate or co-attorney-in-fact, on grounds of lack of privity. This holding clearly demonstrates the continued reluctance of New York Courts to allow the erosion of New York’s strong privity requirements in professional negligence claims against attorneys.

TELS congratulates Ms. Shrewsberry and Mr. Harwood on their successful outcome. For more information on Ms. Shrewsberry, a partner with TELS, please visit:

www.tels.com/profiles/lisashrewsberry/

And for more information on Mr. Harwood, a partner with TELS, please visit:

www.tels.com/profiles/jonathanharwood/