Opinion ID: 888148
Heading Depth: 3
Heading Rank: 2

Heading: Third-Party Relationship between Addy and Redies

Text: ¶39 In addressing the issue of whether its defense in the underlying suit was a reasonable basis in law for contesting Redies' claims, ALPS relies heavily on language in Watkins Trust v. Lacosta, 2004 MT 144, 321 Mont. 432, 92 P.3d 620. Specifically, ALPS points out that in Watkins Trust, we noted that [t]he duty owed [by an attorney] to a nonclient beneficiary is a matter of first impression in Montana. Watkins Trust, ¶ 21 (emphasis added) (citing Rhode v. Adams, 1998 MT 73, ¶¶ 12-13, 288 Mont. 278, ¶¶ 12-13, 957 P.2d 1124, ¶¶ 12-13). According to ALPS, based on this language, the scope of Addy's legal duty was undecided . . . until Watkins Trust was decided on June 8, 2004; thus, contesting Redies' claims on the ground that Addy owed no legal duty to Redies was reasonable as a matter of law. ¶40 Yet, when ALPS was investigating and negotiating Redies' claims in 2001 and 2002, the foregoing first impression language of Watkins Trust did not yet exist. The reasonableness of ALPS's decision to contest Redies' claims on the ground that Addy owed her no duty must be evaluated within the context of our then-existing precedents, not something we said in a later decision. See Graf v. Continental Western Ins. Co., 2004 MT 105, ¶ 17, 321 Mont. 65, ¶ 17, 89 P.3d 22, ¶ 17 (The [Unfair Trade Practices Act] standards focus on what the insurer knows at a particular point in timebefore trial, during the investigative settlement stage.). ¶41 Likewise, just because the scope of Addy's duty may have been undecided in 2001 and 2002, it does not necessarily follow that ALPS's decision to contest Redies' claims against Addy was reasonable. It seems that in ALPS's view, a legal theory for contesting a claim is reasonable per se so long as this Court has not yet explicitly rejected iteven if the theory has been called into serious question by then-existing precedents. We reject this interpretation of the statutory scheme, which turns reasonableness on its head and runs contrary to the public policy of Montana to encourage settlement and avoid unnecessary litigation, see Watters, ¶ 57. To be sure, a tort defendant and his or her insurer should, as ALPS submits, be able to test the scope and boundaries of legal duties, remedies, and defenses; but, at the same time, an insurer should not be immune from liability under § 33-18-242(1), MCA, as Redies points out, simply because this Court had not yet explicitly rejected the legal proposition on which the insurer relied in the underlying action. This is precisely the point of evaluating the reasonableness of the insurer's proffered defense. Cf. Graf, ¶¶ 16-18 (rejecting the proposition that a defense verdict in the underlying action provides, as a matter of law, a reasonable basis defense to a subsequent Unfair Trade Practices Act (UTPA) claim, since such a rule would promote the claim settlement abuses the UTPA was designed to detere.g., by encouraging insurers to obtain defense verdicts in the underlying suit at any cost). ¶42 In this regard, although Watkins Trust was the first instance in which we explicitly held that an attorney owed a duty to a nonclient third partyspecifically, we held that a drafting attorney owes a duty to nonclient beneficiaries named in the drafted instrument, see Watkins Trust, ¶¶ 21-22our decision was not the watershed event suggested by ALPS and the District Court. Rather, our holding was an extension of existing precedents. Indeed, we observed that a finding of duty is consistent with existing Montana law. This Court has noted that a multi-factor balancing test adopted in other jurisdictions may be appropriate in deciding the duty owed by attorneys to nonclients in estate planning. Rhode, ¶ 17. Additionally, we have recognized liability to nonclients in other professional contexts. See, e.g., Thayer v. Hicks (1990), 243 Mont. 138, 793 P.2d 784 (accounting firm liable to nonclient); Jim's Excavating Serv. v. HKM Assoc. (1994), 265 Mont. 494, 878 P.2d 248 (professional engineer liable to nonclient); Turner v. Kerin & Assoc. (1997), 283 Mont. 117, 938 P.2d 1368 (professional engineer liable to nonclient). Watkins Trust, ¶ 22 (emphasis added). ¶43 Accordingly, the determinative question is whether this progression in our case law toward holding an attorney liable to certain nonclients had, by the time Redies stated her claims against Addy, reached the point at which ALPS's assertion that he owed her no duty no longer constituted a reasonable basis in law for contesting her claim. ¶44 The starting point for answering this question is Rhode, in which we signaled that an attorney may owe a duty to nonclients in some contexts. Specifically, after noting that we had not before discussed whether an attorney owes a duty to third persons to exercise care in the performance of services for his or her client, Rhode, ¶ 12, we went on to state that such a duty may arise in some contexts, but not where the attorney is representing a client in adversarial proceedings (as was the case in Rhode ), Rhode, ¶ 17. We further indicated that a multi-factor balancing test, such as that set out in [ Trask v. Butler, 872 P.2d 1080, 1083 (Wash. 1994)], may be effective when used to address the duties of attorneys in transactional matters or estate planning and probate practice. Rhode, ¶ 17. Thus, as of our decision in Rhode in 1998, it was clear that an attorney may owe a duty to nonclients in some nonadversarial contexts and that the Trask multi-factor balancing test may be effective for ascertaining the existence of such a duty. ¶45 Redies suggests that the question of whether an attorney owes a duty to nonclients was not as unsettled as the foregoing language in Rhode implies. She argues that [l]ong before any claim was asserted against Mr. Addy, this Court had effectively discarded the outdated `privity of contract' concept. In support of this proposition, she directs our attention to the three other cases identified in ¶ 22 of Watkins Trust namely, Thayer, Jim's Excavating, and Turner in which we recognized the existence of a duty to nonclients in a number of professional contexts. ¶46 In Thayer, we addressed the extent to which an accountant owes a duty of care to third parties with whom he is not in privity. After discussing three different approaches by which courts determine the extent of an accountant's duty of care to nonclients, Thayer, 243 Mont. at 144-46, 793 P.2d at 788-89, we held that an accountant may owe a duty of care to third parties with whom he is not in privity of contract, but this duty exists only if the accountant actually knows that a specific third party intends to rely upon his work product and only if the reliance is in connection with a particular transaction or transactions of which the accountant is aware when he prepares the work product, Thayer, 243 Mont. at 149, 793 P.2d at 791. ¶47 Next, in Jim's Excavating, we addressed whether an engineering firm could be held liable to a contractor with whom it was not in contractual privity. HKM, the engineering firm, argued that an engineer only has a duty to the party with whom it has contracted. Jim's Excavating, 265 Mont. at 502, 878 P.2d at 252. We rejected this contention, noting that HKM's argument ignores the established law in Montana abolishing the requirement of privity of contract to maintain an action in tort. Jim's Excavating, 265 Mont. at 502, 878 P.2d at 253 (citing Hawthorne v. Kober Const. Co., Inc., 196 Mont. 519, 640 P.2d 467 (1982), and Tynes v. Bankers Life Co., 224 Mont. 350, 730 P.2d 1115 (1986)). We went on to hold that a third party contractor may successfully recover for purely economic loss against a project engineer or architect when the design professional knew or should have foreseen that the particular plaintiff or an identifiable class of plaintiffs were at risk in relying on the information supplied. Jim's Excavating, 265 Mont. at 506, 878 P.2d at 255. ¶48 Finally, in Turner, we considered whether one who succeeds to a mortgagee's security interest in real property could state a cause of action against a third party for damages to that property which impair his or her security interest. Based on a passage from Prosser, The Law of Torts § 93 (4th ed., West 1971), which we had also relied on in Jim's Excavating, we reasoned that by contracting with the owners to perform engineering work on the property, Kerin placed itself in a relation toward any party who held a security interest in the property that the law imposed upon him an obligation, sounding in tort and not in contract, to act in such a way that the security interest would not be injured. Turner, 283 Mont. at 126, 938 P.2d at 1374. Accordingly, we held that a person who, subsequent to the damage to the property, acquires a pre-existing security interest in the property can maintain a cause of action for impairment of that security interest to the extent of the outstanding debt. Turner, 283 Mont. at 127, 938 P.2d at 1374. ¶49 Relying on these cases, Redies asserts that this Court abolished the old `privity of contract' requirement that formed the basis of ALPS' `no privity' defense. Similarly, Justice Nelson's Dissent points out that this Court called the privity concept into doubt twenty years before ALPS relied on this defense to Redies' claims against Addy. Specifically, we stated in Hawthorne that [w]e view privity to be a concept having proper application in the area of contract law. There seems to be no sound public policy argument for extending its application to tort. Hawthorne, 196 Mont. at 523, 640 P.2d at 469. ¶50 We agree with both Redies and Justice Nelson's Dissent that Hawthorne, Tynes, Thayer, Jim's Excavating, Turner, and Rhode reflected the demise of the privity of contract requirement historically imposed upon a plaintiff seeking to hold a defendant liable for professional malpractice. Indeed, we indicated in Jim's Excavating that this requirement had been abolish[ed]. See Jim's Excavating, 265 Mont. at 502, 878 P.2d at 253 (referring to the established law in Montana abolishing the requirement of privity of contract to maintain an action in tort). However, none of these cases abolished the requirement that a plaintiff in a professional malpractice action first prove that the defendant owed her a duty of care, as Justice Nelson's Dissent ably demonstrates with respect to attorneys. See ¶¶ 86-87 (citing Carlson v. Morton, 229 Mont. 234, 238, 745 P.2d 1133, 1136 (1987); Lorash v. Epstein, 236 Mont. 21, 24, 767 P.2d 1335, 1337 (1989); Merzlak v. Purcell, 252 Mont. 527, 529, 830 P.2d 1278, 1279 (1992); and Hauschulz v. Michael Law Firm, 2001 MT 160, ¶ 11, 306 Mont. 102, ¶ 11, 30 P.3d 357, ¶ 11). In other words, the mere absence of a privity requirement does not render a professional liable for the negligent performance of a contract to any and all third parties. To the contrary, in recognizing tort liability in the absence of privity, we have concomitantly limited the class of plaintiffs to identifiable third parties (typically, those who are known or are reasonably foreseeable by the professional, see Thayer, 243 Mont. at 149, 793 P.2d at 791; Jim's Excavating, 265 Mont. at 506, 878 P.2d at 255). ¶51 In this regard, Justice Nelson's Dissent points out that by 2001, at least three different approaches existed in our case law for ascertaining the duty of care owed by a professional to third partiesnamely, the rule enunciated by Prosser and applied by this Court in Hawthorne, Tynes, Jim's Excavating, and Turner ; the approach we took in Thayer ; and the Trask multi-factor balancing test set forth in Rhode. See ¶¶ 89-92. Yet, we had not adopted any of these approaches with respect to attorneys specifically. Moreover, we signaled in Rhode that the Trask test, in particular, may be effective for this purpose. Rhode, ¶ 17. ¶52 Thus, the circumstances and extent of any duty owed by an attorney to a nonclient was not nearly as well-defined as Redies and Justice Nelson's Dissent suggest it was during the period in which ALPS contested Redies' claims against Addy. We acknowledged in Rhode that we had never before addressed whether an attorney, specifically, owes a duty to third persons to exercise care in the performance of services for his or her client. Rhode, ¶ 12. And we left this issue unresolved with respect to nonadversarial situations, stating merely that a multi-factor balancing test, such as that set out in Trask, may be effective when used to address the duties of attorneys in transactional matters or estate planning and probate practice. Rhode, ¶ 17 (emphasis added). Given this equivocal language, the question of whether an attorney retained by a conservator owed a duty to the protected person was unsettled in 2001 and 2002. Notably, Redies concedes as much by pointing out that until Watkins Trust, there was no legally conclusive law in Montana establishing that a lawyer retained by a conservator does or does not have a duty to the protected person. We therefore reject the contention that the law in Montana was decidedly against ALPS's position.