Prudential Ins. Co. of America v. Dewey, Ballantine, Bushby, Palmer & Wood

• Decision Date: 19 November 1992
• Citation: 590 N.Y.S.2d 831,80 N.Y.2d 377,605 N.E.2d 318
• Court: New York Court of Appeals Court of Appeals
• Parties: , 605 N.E.2d 318, 61 USLW 2374 PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant, v. DEWEY, BALLANTINE, BUSHBY, PALMER & WOOD et al., Defendants, and Gilmartin, Poster & Shafto, Respondent.

Page 831

590 N.Y.S.2d 831

80 N.Y.2d 377, 605 N.E.2d 318, 61 USLW 2374

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant, v. DEWEY, BALLANTINE, BUSHBY, PALMER & WOOD et al., Defendants, and Gilmartin, Poster & Shafto, Respondent.

Court of Appeals of New York.

Nov. 19, 1992.

[605 N.E.2d 319] [80 N.Y.2d 378] Howrey & Simon (William E. Wallace, III, Thomas A. Isaacson and Gary L. Ivens, of counsel), of the District of Columbia Bar, admitted pro hac vice, and Hertzog, Calamari & Gleason, New York City (Peter S. Calamari, of counsel), for appellant.

[80 N.Y.2d 379] Bower & Gardner, New York City (Nancy Ledy-Gurren and Deborah Bass, of counsel), for respondent.

OPINION OF THE COURT

TITONE, Judge.

Pursuant to its client's instructions, defendant law firm furnished to plaintiff third party an opinion letter that assertedly contained false assurances. While a law firm supplying such a letter may have a duty running to the third parties, the record in this case does not support the conclusion that the assertion in the opinion letter caused plaintiff's loss. We thus conclude that summary judgment was properly awarded to this defendant.

I

The relevant facts are essentially undisputed and can be briefly summarized. In early 1986, United States Lines (U.S. Lines), a major shipping concern, informed the Prudential Insurance Company of America (Prudential) and certain of its other key creditors that it was anticipating difficulty in meeting its debt obligations. Prudential thereafter agreed to a restructuring of a $92,885,000 debt that U.S. Lines owed it in connection with a 1978 loan. At the time, that debt was secured by a first preferred fleet mortgage on certain vessels owned by U.S. Lines.

In order to implement the debt restructuring, Prudential and U.S. Lines executed an amendment to the financing and security agreement that they had entered into when the 1978 loan was made. Section 4 of that amendment set forth various conditions to Prudential's agreeing to the restructuring, including a requirement that Prudential receive "[t]he favorable opinion of Messrs. Gilmartin, Poster & Shafto [Gilmartin], counsel to [U.S. Lines], to such effect as shall be satisfactory to Prudential."

In fulfillment of that requirement, Gilmartin, at the specific direction of U.S. Lines, thereafter drafted and delivered an opinion letter to Prudential. The opinion letter contained an assurance that the mortgage documents that were to be recorded in connection with the debt restructuring, and which, incidentally, had been prepared by other counsel, represented "legal, valid and binding" obligations of U.S. Lines. Moreover, according to Gilmartin's letter, neither Federal nor State law would interfere "with the practical realization of the benefits of the security intended to be provided" by those documents. Prudential ultimately accepted Gilmartin's opinion letter as satisfactory, and permitted the recording of those mortgage documents. Prudential later learned that one of the recorded documents erroneously stated the outstanding balance of the first preferred fleet mortgage securing the debt as $92,885, rather than the correct sum of $92,885,000. As a result, Prudential suffered significant losses when U.S. Lines subsequently filed for bankruptcy. Those losses ultimately included 17.5% of the net proceeds ($11,400,000) from a foreclosure sale of five of the ships involved in the first preferred fleet mortgage, which percentage Prudential had agreed to pay U.S. Lines in settlement of their dispute at the time the validity of the mortgage was in doubt. The claimed losses also included the related Federal court litigation costs associated with defending the mortgage (see, Prudential Ins. Co. v. S.S. Am. Lancer, 870 F.2d 867 [2d Cir.1989].

Prudential thereafter commenced this action against Gilmartin, contending that the law firm's opinion letter had falsely assured it that the mortgage documents in question would fully protect its existing $92,885,000 security interest. Although Prudential acknowledged that it was not actually in privity with Gilmartin, it nevertheless contended that the relationship between them was sufficiently close so as to support a cause of action in negligence. Alternatively, it maintained that Gilmartin could be held liable to it, in contract, on a third-party beneficiary theory.

Following joinder of issue, Gilmartin moved for summary judgment on both causes of action. After reviewing the various submissions of the parties, the Supreme Court, New York County, granted Gilmartin's motion. The court reasoned that the law firm's relationship with Prudential was, under the circumstances, too attenuated to give rise to any duty of care running from Gilmartin to Prudential. Similarly, the court found that, at the very most, Prudential was an incidental beneficiary of Gilmartin's agreement with U.S. Lines relating to the preparation of the opinion letter. Prudential thus lacked the standing of an intended beneficiary to bring suit on any misstatements in the letter which may have caused its losses. On appeal, the Appellate Division affirmed the grant of summary judgment to Gilmartin 170 A.D.2d 108, 573 N.Y.S.2d 981. That Court then granted Prudential leave to appeal to this Court pursuant to CPLR 5602(b), certifying the following question of law: "Was the order of this Court, which modified the order of the Supreme Court, properly made?"

II

Initially, it must be stressed that attorneys, like other professionals, may be held liable for economic injury arising from negligent representation. Although the defendants in many of the prior cases addressing this issue have been accountants, there is no reason to arbitrarily limit the potentially liable defendants to that class of professionals (see, Ossining Union Free School Dist. v. Anderson LaRocca Anderson, 73 N.Y.2d 417, 424, 541 N.Y.S.2d 335, 539 N.E.2d 91). Indeed, liability was imposed on engineering consultants in Ossining (supra), and in Ultramares Corp. v. Touche, 255 N.Y. 170, 188, 174 N.E. 441 and Glanzer v. Shepard, 233 N.Y. 236, 240, 135 N.E. 275, it was suggested that in the right circumstances pecuniary recovery might be had from lawyers. We now conclude that in circumstances such as these, a theoretical basis for liability against legal professionals can be presented.

Gilmartin contends that Canons 4 and 5 of the Code of Professional Responsibility, regarding the preservation of client loyalty and client confidences, argue against imposing liability on attorneys in these circumstances. However, where, as here, the negligent acts, i.e., the creation of an opinion letter and the transmission of that letter to a third party for the party's own use, were carried out by the lawyer at the client's express direction, the ethical considerations of Canons 4 and 5 are insufficient reason to insulate attorneys from liability (see, Crossland Sav. v. Rockwood Ins. Co., 700 F.Supp. 1274, 1282-1283; Vereins-Und Westbank, AG. v. Carter, 691 F.Supp. 704, 715-716).

III

Having concluded that legal professionals are not immune from liability in these cases, we turn now to the question whether liability may attach in the present circumstances. This Court has long held that before a party may recover in tort for pecuniary loss sustained as a result of another's negligent misrepresentations there must be a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity (see, e.g., Ossining Union Free School Dist. v. Anderson LaRocca Anderson, supra, 73 N.Y.2d at 424, 541 N.Y.S.2d 335, 539 N.E.2d 91; Credit Alliance Corp. v. Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110; Ultramares Corp. v. Touche, supra; Glanzer v. Shepard, supra). Such a requirement is necessary in order to provide fair and manageable bounds to what otherwise could prove to be limitless liability (see Ossining Union Free School Dist. v. Anderson LaRocca Anderson, supra, 73 N.Y.2d at 421, 541 N.Y.S.2d 335, 539 N.E.2d 91).

Since Prudential concedes that it was not in direct privity with Gilmartin, we must determine whether the relationship between Prudential and Gilmartin was sufficiently close to support liability. For that purpose, we must look first to the substantial body of decisional law delineating the boundaries of liability to parties not in privity. In Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275, supra a bean seller retained public weighers and directed them to furnish one copy of the weight certificate to a particular prospective buyer. The certificate was inaccurate and, as a result, the buyer suffered a loss. In language that is as applicable now as it was then, this Court concluded that the law imposed a duty on the weighers in favor of the buyer, despite the absence of privity between them, because the representations at issue had been made "for the very purpose of inducing action" on the part of the buyer id., at 239, 135 N.E. 275. In other words, the buyer's use of the certificates was "not an indirect or collateral consequence" of the action of the weighers. Rather, it was a consequence which, to the weighers' knowledge, was the "end and aim of the transaction" id., at 238-239, 135 N.E. 275.

By contrast, in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441, supra, where accountants had prepared a certified balance sheet for their client and provided some 32 copies to be exhibited generally to "banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion" id., at 173-174, 174 N.E. 441, the accountants were not liable to third parties who may have relied on the financial information to their detriment. That was so because the accountants' report was primarily intended as a convenient instrument for the client's use in developing its business and only "incidentally or collaterally" was it expected to assist those to whom the client "might exhibit it...