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Not My Client, Not My Problem. The Duty of Attorney’s to Non-Clients

By: Daniel Quinn

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

        In 2015, the United States Court of Appeals for the Second Circuit found that attorneys at Mayer Brown, LLP had inadvertently terminated certain liens granted by General Motors (“GM”) in favor of J.P. Morgan Chase (“JPM”). GM repaid the Term Loan agreement in full in accordance with the bankruptcy court order and therefore made the retirement plaintiffs and Term Loan members subject to clawback provisions under the Bankruptcy Code.[1] The members of the Term Loan agreement and retirement plaintiffs filed a lawsuit against Mayer Brown, the law firm responsible for the erroneous termination of liens, for negligent misrepresentation and legal malpractice[2] in the United States District Court of Northern District of Illinois.

        This past June, the Illinois District Court dismissed the litigation after finding that although Mayer Brown had harmed the plaintiffs by inadvertently filing termination statements for a loan agreement between their client GM and JPM, Mayer Brown owed no duty to the non-client plaintiffs.[3] According to the court, Mayer Brown only owed a duty to the client who hired them and not to the plaintiffs who were parties to the loan that was cancelled due to the erroneous filing of the Term Loan UCC-3 statement by Mayer Brown.[4]

        In 2008 GM retained Mayer Brown to assist them with the payoff of a Synthetic Lease[5] that GM had entered into in 2001.  Mayer Brown was to prepare closing documents to allow payment on the amount due on the Synthetic Lease.[6] Mayer Brown drafted UCC-3 termination statements for the Synthetic Lease, but inadvertently prepared an additional termination statement for a separate and distinct Term Loan that GM entered into in 2006.[7] These statements were filed with the Delaware Department of State effectively terminating substantially all of the security interest for the Term Loan.[8] Plaintiff’s commenced a lawsuit on the theory that Mayer Brown owed a duty to the Term Loan members based on their representation of GM.[9] The Court focused on whether the purposes for which GM hired Mayer Brown were of such a degree that they created a duty to the non-clients involved in the transaction, i.e., the rest of the lenders of the Term Loan.

        According to the court, a non-client must first establish that a duty exists to have a legally sufficient complaint for either malpractice or negligent misrepresentation against a lawyer.[10] Traditionally, there has been a consensus that no duty exists between a non-client and an attorney.[11] The Illinois Supreme Court, however, concluded in Pelham v Griesheimer[12] that a non-client may establish a duty by proving “that the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party.”

        In this instance, the Illinois court found that the “primary and direct purpose” of hiring Mayer Brown was to “help GM free its property from any encumbrances,”[13] and not to assist the plaintiffs. The evidence did not reflect that GM’s hiring of Mayer Brown was for the purpose of benefitting the lenders of the Term Loan. The court would not allow liability to “extend to an unlimited and unknown number of potential plaintiffs,”[14] and focused on “the primary purpose” of the hiring rather than the multi-factored test of Rozny.[15]

        The Oakland Police decision significantly limits the liability of attorneys. As seen in this case, under the primary purpose test an attorney will be shielded from liability for a mistake so long as the primary purpose of their hiring was not meant to benefit the non-client. The test itself is simple and easy to apply, however, complications may arise because though the initial primary purpose and intent may be for one specific aspect, an attorney’s actions in connection with an agreement may impact a non-client. The test will likely need some restructuring as cases arise in the future. The decision is currently on appeal to the United States Court of Appeals. Until the Seventh Circuit decides the appeal, the primary purpose test will continue to limit liability of attorneys to non-clients focusing purely on the initial purpose and intent of the attorney’s hiring.

 



[1] Oakland Police and Fire Retirement System v. Mayer Brown, LLP, Case No. 15 C 6742        (N.D. Ill. June 22, 2016); 2016 WL 3459714 at *2; See also 11 U.S.C.S. § 544, § 547, § 548. Clawback provisions allow an unsecured creditor to get their property or payment back based on a fraudulent or improper payment. Here, the retirement plaintiffs and Term Loan members were subject to clawback provisions because GM paid the entirety of the loan after erroneously terminating the security interests in that loan. Therefore, creditors to GM could seek payment from the Term Loan members on the payout ordered by Bankruptcy Court.

[2] Id. at *1

[3] Id. at *6

[4] Id.

[5] Id. at *1. “In 2001, General Motors (“GM”) entered into a secured financing agreement (the “Synthetic Lease”) in which it obtained approximately $300 million in financing from a syndicate of lenders.

[6] Id. at *2.

[7] Id. at *1. In 2006, GM borrowed $1.5 billion (“Term Loan”) from a different syndicate of lenders. The security interest for the loan was held by JPMorgan as administrative agent for the Term Loan.

[8] Id. at *2.

[9] Id. at *2.

[10] Id. at *3; See also Pelham v Griesheimer, 92 Ill.2d 13, 18 (1982).

[11] Oakland Police v. Mayer Brown, LLP. Case No. 15 C 6742 at *3; See also Pelham, 92          Ill.2d at 19.

[12] Pelham, 92 Ill.2d at 19.

[13] Oakland Police, Case No. 15 C 6742 at *3.

[14] Id at *6. (quoting Pelham, 92 Ill.2d at 20.)

[15] Id. The court, noting that Rozny had been decided more than ten years before the Illinois Supreme Court made their decision in Pelham observed that the scope of an attorney’s duty has been, since the ruling in Pelham, based on whether the primary purpose and intent of the attorney-client relationship was to benefit or influence the non-client.