Clagett v. Dacy

OPINION BY: WILNER

Appellants were the high bidders at a foreclosure sale, but because the attorneys conducting the sale failed to follow the proper procedures, the sale was set aside. This occurred twice. Ultimately, the debtor discharged the loan, thus "redeeming" his land, and appellants lost the opportunity to acquire the property and make a profit on its resale. They sued the attorneys in the Circuit Court for Prince George's County to recover their loss, alleging that the attorneys in question owed them, as bidders, a duty to use care and diligence and to conduct the sale "properly and carefully." By sustaining the attorneys' demurrer without leave to amend, the court concluded that no such duty existed -- at least not one from which an action for damages will arise; and, by affirming that order, we shall indicate our concurrence with the court's conclusion.

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The only departure from the direct privity requirement on the part of the Court of Appeals came in Prescott v. Coppage, a unique case. The dispute there was between the receiver of a defunct deposit insurance company (Coppage) and the receiver of a defunct savings and loan association (Medley) that owed the insurance company certain monies. The insurance company receiver, Coppage, among other things, sued Prescott, a court-appointed special counsel to Medley, contending that due to his erroneous advice, Medley had improperly paid sums from his receivership estate to the association's depositors rather than to Coppage, who enjoyed a higher priority status. Prescott defended the action against him on a number of grounds, among which was lack of privity.

The Court of Appeals, reversing a defendant's judgment, concluded that Coppage had standing, as a third party beneficiary, to recover. Its reasoning was essentially as follows: all creditors of the defunct association (including Coppage) were third party beneficiaries of the receivership, and thus of Medley's activities as receiver; Prescott's court-imposed duty as special counsel was to "aid [Medley] in the performance of his duties as receiver"; thus, the creditors were also specific third party beneficiaries of Prescott's discharge of that duty and could sue to recover losses if it was discharged improperly.

Although the case has a most unusual factual setting, it does seem to suggest a modest relaxation of the strict privity requirement to the extent of allowing a true third party beneficiary to sue an attorney as he could sue any other defaulting or tortious party to a contract made for his benefit. This extension is not unique to Maryland.

It is, however, a limited one with a special utility. It is most often seen and applied in actions based on drafting errors in wills and other such documents or on erroneous title reports -- errors that, by their very nature, will likely have a long or delayed effect and will most probably impact upon persons other than the attorney's immediate employer, although it has been applied in other contexts as well.

The Coppage Court made clear that only those persons who qualify under the normal rules for determining third party beneficiaries will be afforded the privileged status vis a vis attorney defendants; i.e., creditor beneficiaries. This would seem to limit the extension to actions based upon contract, to which the third party beneficiary theory is peculiarly applicable, and would not supply a basis for permitting third parties to sue attorneys on a pure negligence theory -- violation of some general duty arising in the absence of an underlying contractual attorney-client relationship.

In Donald v. Garry, supra, the California court utilized the concept expressed in Restatement of Torts 2d, § 324A, to support a third party action, concluding that "[a]n attorney may be liable for damage caused by his negligence to a person intended to be benefited by his performance irrespective of any lack of privity of contract between the attorney and the party to be benefited." The context of this, as noted above, was an action by the true creditor against the collection agency attorney, and the court was careful to mention that "the transaction in which the respondent's negligence occurred was intended primarily for the benefit of [the creditor]. Respondent was retained to collect an account due him."

We do not see § 324A, which speaks specifically of liability for "physical harm" to a third party, as a proper basis of liability in the type of case before us. The California courts appear to have relaxed the traditional privity requirement more than most other courts, and certainly more than the Maryland courts have to date. They have, indeed, created a balancing process, as an alternative to the strict privity or third party beneficiary requirements, in which a number of other factors are considered. But even California has placed some limits on its relaxed "intended beneficiary" theory where the claimant was in an adverse or conflicting position vis a vis the attorney's direct client.

Whether the action is based upon a contract (express or implied), to which the traditional rules relating to third party beneficiaries may apply, or more on a theory of negligence -- the violation of a duty not founded exclusively upon contract -- there still must be shown (i.e., alleged and shown) that the plaintiff, if not the direct employer/client of the defendant attorney, is a person or part of a class of persons specifically intended to be the beneficiary of the attorney's undertaking.

It will, moreover, take more than general conclusory allegations to satisfy that requirement. Attorneys are not quite the free agents as some others are in the world of commerce. There are well-recognized limitations, judicially imposed and enforced, upon how they may conduct themselves, and who they may, and may not, represent in certain situations. Except in very limited circumstances, they may not represent or act for conflicting interests in a transaction; their manifest duty of loyalty to their employer/client forbids it.

These limitations, predominant but not necessarily exclusive with attorneys, must, of necessity, be taken into account when dealing with actions founded upon an implied duty owed by an attorney to a person who is not his direct employer/client, or upon an employment relationship alleged to arise by implication rather than by express agreement. Thus, the duties or obligations inherent in an attorney-client relationship will not be presumed to flow to a third party and will not be presumed to arise by implication when the effect of such a presumption would be tantamount to a prohibited or improbable employment, absent the clearest exposition of facts from which such an employment may be fairly and rationally inferred.

When judged against these principles, it becomes clear that the Declaration at issue here has failed to state a cause of action. It does not sufficiently allege a proper standing on the part of appellants to sue the appellee attorneys; nor, from what is alleged, could it do so. Appellees were engaged to represent the mortgagee (deed of trust beneficiary), not the bidders, whose interest would likely be in conflict with that of the mortgagee. The mortgagee's economic interest, and legal obligation, is to secure the highest possible price for the property, whereas the bidders' goal is to pay as little as possible. It is evident, in that circumstance, that an attorney could not lawfully represent both the mortgagee and the bidder in the transaction; and it will not be lightly presumed or inferred that appellees did so.

Nor may the prohibited employment be inferred from an allegation that appellees' fees would ultimately be paid from the proceeds of sale. The mere fact that those fees, along with the other costs of the proceeding, may be taken from the purchase price paid by the successful bidder does not mean that the purchaser is actually paying the fees. Quite the contrary. The debtor/mortgagor ultimately pays the fees and all other costs, for he gets only the net surplus (if any) available after all such fees and costs are discharged. The bidder pays only for the property, not the cost of selling it; and he is not, therefore, the client (express or implied) of the attorney engaged to sell the property.

Judgment affirmed; appellants to pay the costs.