Crossland Sav. FSB v. Rockwood Ins. Co.

• Decision Date: 12 April 1988
• Docket Number: No. 86 Civ. 2438 (PNL).,86 Civ. 2438 (PNL).
• Citation: 692 F. Supp. 1510
• Parties: CROSSLAND SAVINGS FSB, Plaintiff, v. ROCKWOOD INSURANCE COMPANY, Defendant. ROCKWOOD INSURANCE COMPANY, Third-Party Plaintiff, v. INTERDISCOUNT, LTD., Jeffrey E. Carter, J.E. Carter Energy and Development Corporation, W. Austin Barsalou and Barsalou and Associates, P.C., Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

692 F. Supp. 1510

CROSSLAND SAVINGS FSB, Plaintiff, v. ROCKWOOD INSURANCE COMPANY, Defendant.

ROCKWOOD INSURANCE COMPANY, Third-Party Plaintiff, v. INTERDISCOUNT, LTD., Jeffrey E. Carter, J.E. Carter Energy and Development Corporation, W. Austin Barsalou and Barsalou and Associates, P.C., Third-Party Defendants.

No. 86 Civ. 2438 (PNL).

United States District Court, S.D. New York.

April 12, 1988.

Roger Curran, Rose, Schmidt, Hasley & Di Salle, Philadelphia, Pa., Rosenman & Colin, New York City, for defendant and third-party plaintiff Rockwood Ins. Co.

Jay G. Safer, Thomas G. Rohback, Ellen August, Le Boeuf, Lamb, Leiby & Mac Rae, New York City, for third-party defendants W. Austin Barsalou and Barsalou and Associates, P.C.

MEMORANDUM AND ORDER

LEVAL, District Judge.

Third-party defendants, W. Austin Barsalou ("Barsalou") and Barsalou and Associates, P.C. ("Barsalou P.C."), move for partial summary judgment dismissing third-party claims brought by Rockwood Insurance Company ("Rockwood") as its first Cause of Action.

BACKGROUND

This dispute arises out of a 1984 investment program in the form of a limited partnership. The program was structured as follows: in 1984 InterDiscount Ltd. ("IDL") made a loan to Westwind 1984 Acquisition and Development Program ("Westwind 84"), an oil and gas limited partnership. As an inducement to make the loan, IDL received a Note Pledge Agreement from Westwind 84 which granted IDL a security interest in Investor Notes executed by each of the limited partners of Westwind 84 and which obligated Westwind 84 to obtain surety bonds guaranteeing payment of the Investor Notes. Rockwood issued 21 Surety Bonds securing the repayment of the Investor Notes in which IDL had a security interest. On or about January 1985, IDL assigned to CrossLand Savings FSB ("CrossLand") all its rights in the Note Pledge Agreement and the Investor Notes. Rockwood amended its Surety Bonds to substitute CrossLand for IDL as beneficiary.

CrossLand brought this action against Rockwood on the Surety Bonds. The complaint alleges that Westwind 84 has defaulted on its obligations under the Note Pledge Agreement, that the Investor Notes have not been paid, and that Rockwood has failed to perform its obligations as surety. Rockwood then brought a third-party action for indemnity. Rockwood's third-party complaint claims that Barsalou and Barsalou P.C. (collectively "the Barsalou defendants"), as counsel for Westwind 84, along with Jeffrey E. Carter and J.E. Carter Energy and Development Corp., the promoters of Westwind 84, fraudulently induced Rockwood to issue the Surety Bonds by false representations that the limited partners of Westwind 84 had made 20% cash contributions. It alleges that the same false representations were made by the Barsalou defendants in a Certificate of Limited Partnership filed with the Texas Secretary of State, the Limited Partnership Placement Memorandum, and the opinion letter issued by the Barsalou defendants as to the legal status of the limited partnership. It alleges further that the Barsalou defendants prepared numerous other false documents intended to deceive Rockwood. Those are the claims which the Barsalou defendants seek to dismiss.

In an affidavit submitted by Rockwood in opposition to the motion, Richard Gerulat, who acted as a broker for the Carter defendants in finding an insurer for Westwind 84, avers that the Barsalou defendants were aware that Rockwood would be the surety for Westwind 84 and that Gerulat asked Barsalou for an opinion letter about Westwind 84 for Rockwood. There are no averments that Barsalou provided that letter to Rockwood or that, if it did, the letter was prepared specifically for Rockwood.

Upon these allegations, Rockwood predicates claims against the Barsalou defendants for professional malpractice, fraud, and violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.

The First Cause of Action, the target of the Barsalou defendants' motion for summary judgment, alleges that the Barsalous committed professional malpractice as attorneys by failing to exercise professional care to ensure the accuracy of the information they provided to Rockwood with knowledge it would rely on such information.

DISCUSSION

This case presents the issue whether an attorney can be held liable for negligence toward a third party who is not in a relationship of contractual privity with the attorney but who is expected nonetheless to rely on the attorney's statement. The Barsalou defendants argue that the absence of any contractual relationship between them and Rockwood is fatal to Rockwood's cause of action for negligence. Rockwood counters that its relationship with the Barsalou defendants is sufficiently close to privity to entitle it to bring an action for negligence.

1. Choice of Law

As an initial matter, I must determine the law to be applied to this claim. The Barsalou defendants contend that Texas law should be applied to the issue of the scope of liability of a Texas lawyer for professional negligence in performing legal work for a Texas client in Texas. Alternatively, they argue that New York law should be applied because the parties entered into the loan agreement in New York and repayment of the loan was to be made in New York. Rockwood argues that Pennsylvania law should be applied because that state as the state of Rockwood's principal place of business has the greatest interest in the transaction.

Applying the choice of law rules of New York, see Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), I conclude that New York law should be applied to this matter. New York courts apply a governmental interest or grouping of contacts analysis in determining the law to be applied in a tort action, see Schultz v. Boy Scouts of America, 65 N.Y.2d 189, 196, 491 N.Y.S.2d 90, 96, 480 N.E.2d 679, 683 (1985); the substantive tort law of the state which has the "most significant relationship with the occurrence and with the parties" is applied. Babcock v. Jackson, 12 N.Y.2d 473, 484, 240 N.Y.S.2d 743, 752, 191 N.E.2d 279 (1963). Where interest analysis does not point clearly to the application of another state's law, the law of the place where the tort occurred prevails. See Mikropul Corp. v. Desimone & Chaplin-Airtech, Inc., 599 F.Supp. 940, 942-43 (S.D.N.Y. 1984); Bing v. Halstead, 495 F.Supp. 517, 520 (S.D.N.Y. 1980); Neumeier v. Kuehner, 31 N.Y.2d 121, 128, 286 N.E.2d 454, 335 N.Y.S.2d 64 (1972). In particular, where the tort is one of misrepresentation, the substantive law of the state in which the misrepresentation is made and the parties have taken action in reliance thereon is applicable. Restatement (Second) Conflict of Laws § 148 (1981).

New York law should be applied here. The transaction at the heart of this case — the loan agreement made to Westwind 84 — was negotiated and consummated in New York. See Fort Howard Paper Co. v. William D. Witter, Inc., 787 F.2d 784, 795 (2d Cir.1986) (New York has greatest interest in alleged fraud because of its concern with transaction underlying fraud). Both CrossLand and IDL have their principal places of business and offices in New York. Finally and most important, the third-party complaint alleges that the Barsalou defendants made the alleged misrepresentation through documents that they provided to Rockwood in New York (Third Party Complaint ¶¶ 27-28) and that they were present at the closing of the transaction in New York. (Id. ¶ 29.) The misrepresentations allegedly made in New York were thus acted upon in New York when Rockwood closed the transaction there. See Furniture Consultants, Inc. v. Datatel Minicomputer Co., slip op., 85 Civ. 8518 (RCC) (July 10, 1986) available on WESTLAW, 1986 WL 7792.

Although Texas does have some interest in the regulation of professionals licensed to practice in that state, see Mikropul Corp. v. DeSimone & Chaplin-Airtech, Inc., 599 F.Supp. 940, 942-43 (S.D.N.Y. 1984), I find that the interests of New York in regulating conduct within its borders outweighs those of Texas. See Machleder v. Diaz, 801 F.2d 46, 52 (2d Cir.1986), cert. denied, 479 U.S. 1088, 107 S.Ct. 1294, 94 L.Ed.2d 150 (1987); Fort Howard Paper Co. v. William D. Witter, Inc., 787 F.2d 784, 795 (2d Cir.1986); Schultz v. Boy Scouts of America, Inc., 65 N.Y.2d 189, 196, 491 N.Y.S.2d 743, 752, 191 N.E.2d 279 (1985). The interest that Pennsylvania has in this transaction — as the state in which Rockwood resides and has its principal place of business — is insufficient to override New York's interest in the regulation of conduct within its borders. New York courts do not apply the law of the plaintiff's state of residence when most of the relevant events occur elsewhere. See Cameron v. G & H Steel Service, Inc., 494 F.Supp. 171, 173 (E.D.N.Y.1980); Hotaling v. Smith, 63 A.D.2d 219, 406 N.Y.S.2d 627 (2d Dept.1978). I thus conclude that New York law should be applied to Rockwood's claim for negligence.

2. The Barsalou Defendants' Duty to Rockwood

The Barsalou defendants ask the Court to grant them summary judgment on the uncontroverted fact that there was no contractual privity between them and Rockwood. Rockwood argues that it is entitled to bring an action against Barsalou because (i) Rockwood's relationship with Barsalou approached privity, (ii) Barsalou knew that Rockwood would rely on his advice, (iii) Rockwood was a third-party beneficiary to Carter's contract with Barsalou, and (iv) Rockwood is subrogated to CrossLand's claims against Barsalou. I conclude that the First Cause of Action for negligence must be dismissed.

Prior to the New York Court of Appeal's decision in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 483 N.E.2d 110, 493 N.Y.S.2d 435 (1985), the law in New York provided that an attorney could not be held liable for professional negligence in favor of one with whom the attorney was not in contractual...