Attorneys may be prepared for, or at the very least are aware of the risk of, claims raised by current or former clients. Generally, the first element in any malpractice claim is the existence of an attorney-client relationship. The Restatement (Third) of the Law Governing Lawyers provides that an attorney-client relationship arises when, “a person manifests to a lawyer the person’s intent that the lawyer provide legal services for the person; and either (a) the lawyer manifests to the person consent to do so; or (b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services.” That seems straightforward enough, right? Nope! While in many malpractice cases it is clear whether the parties established an attorney-client relationship, it is not often so clear. Consider the following example.
In Abraham Leser v. Multi Capital Group, LLC, the New York Supreme Court found that the absence of an attorney client relationship negated a real estate investor’s malpractice claim. The lawsuit arose from the plaintiff’s claim that that he was tricked into signing loan documents which left him liable for $53 million after the loans defaulted. The plaintiff alleged that a non-party broker employed by the defendant recruited him to “sponsor” two residential construction projects and act as the “public persona” for the project due to underwriting purposes. The plaintiff was set to earn 20% of any profits and was allegedly assured that he was not subject to any personal guaranties.
The plaintiff alleges that the broker engaged law firm Buchanan Ingersoll to form several entities to purchase the projects. When the defendant obtained two loans to finance the transaction, it asked the plaintiff to execute the transactional documents in his capacity as a signatory for the newly formed entities. The plaintiff alleges that he was assured that Buchanan Ingersoll would carefully review any documents prior to his signing “to ensure that all parties involved were adequately protected and to make sure that this deal would not be a liability to [him].”
As chance would have it, the executed documents bound the plaintiff as a guarantor for the loans, which rendered him personally on the hook. When the loans defaulted, the bank sought repayment from the plaintiff and he initiated a malpractice claim.
Buchanan Ingersoll sought dismissal of the plaintiff’s claims due to lack of privity. According to the court, the plaintiff essentially asserted that the law firm’s failure to warn him about the personal guaranties constituted a breach of its duty to exercise reasonable knowledge and skill in representing him. The court looked to the facts that the plaintiff never had any contact with the law firm, and admitted he was not aware of the law firm’s identity until after he had signed the loan documents. The court concluded that “even if [the defendants] told [plaintiff] that its unidentified attorneys would review the loan documents for his benefit and that he need not hire his own attorney, such representations could not give rise to an attorney-client relationship.”
This case serves as a reminder that the existence of an attorney-client relationship is not always clear and the determination is often fact intensive. As the court above noted, “while third parties may be interested in the actions by another’s attorney and even benefit therefrom, that circumstance does not give rise to a duty on the part of the attorney to that third party.” Therefore, clearly documenting and establishing the scope of any representation at the outset can help to eliminate questions of fact and uncertainty when it comes to potential malpractice claims.