Opinion ID: 2746382
Heading Depth: 2
Heading Rank: 1

Heading: Privity Under Existing Law

Text: In dismissing Appellant's claims, the circuit court essentially found Appellant was not in privity with Respondents and therefore failed to establish a viable cause of action.  'Privity' denotes [a] mutual or successive relationship to the same rights of property. Thompson v. Hudgens, 161 S.C. 450, 462, 159 S.E. 807, 812 (1931) (citation omitted); see also Black's Law Dictionary 1394 (10th ed. 2014) (defining privity as [t]he connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property); mutuality of interests). South Carolina courts have equated privity with standing. See Maners v. Lexington Cnty. Sav. & Loan Ass'n, 275 S.C. 31, 33-34, 267 S.E.2d 422, 423 (1980) (affirming the trial judge's determination that appellant had no standing to allege [her claim] because she was not in privity with respondent). An early case by the United States Supreme Court adopted the concept of privity from an English decision, Winterbottom v. Wright, 152 Eng. Rep. 402 (Exch.) (1842), and applied it to hold an attorney was not liable to a bank that relied on his erroneous certification that his client had good title to land. See Nat'l Sav. Bank v. Ward, 100 U.S. 195, 205-07 (1879) (discussing Winterbottom's limitation of recovery in another context to those having privity of contract). The Supreme Court noted there were exceptions, however, for instances of fraud, collusion, and like circumstances. Id. at 205-06. Privity for legal malpractice has traditionally been established by the existence of an attorney-client relationship. See generally Rydde v. Morris, 381 S.C. 643, 650, 675 S.E.2d 431, 435 (2009) (stating existing law [] imposes a privity requirement as a condition to maintaining a legal malpractice claim in South Carolina). A plaintiff in a legal malpractice action must establish four elements: (1) the existence of an attorney-client relationship, (2) a breach of duty by the attorney, (3) damage to the client, and (4) proximate causation of the client's damages by the breach. RFT Mgmt. Co. v. Tinsley & Adams L.L.P., 399 S.C. 322, 331, 732 S.E.2d 166, 170 (2012). Appellant contends the current appeal presents an opportunity not available in prior cases for South Carolina to join the vast majority of states allowing intended third-party beneficiaries to bring claims against the lawyer who prepared the defective will or estate planning document. See Chastain v. Hiltabidle, 381 S.C. 508, 673 S.E.2d 826 (Ct. App. 2009) (stating whether a duty exists in regard to an alleged wrong is a question of law for the court). Appellant argues a lawyer's negligence in preparing an estate or testamentary document impacts three potential classes of plaintiffs: (1) the client, (2) the decedent's estate, and (3) the intended beneficiaries. As she aptly states: [O]f the three possible plaintiffs, only the beneficiaries have the motivation and sufficient damages to bring a malpractice claim. The client is deceased and the estate lacks a cause of action or damages or both. Indeed, because the beneficiaries were supposed to be the beneficial owners of estate assets, only the beneficiaries suffer directly due to the lawyer's negligence. If no cause of action is available to the beneficiaries, the negligent drafting lawyer is effectively immune from liability. Therefore, only the beneficiaries suffer the loss caused by the lawyer's negligence. In the 1950s, after observing the problems created by the traditional privity requirement, jurisdictions in the United States began abandoning strict privity as an absolute bar to claims for legal malpractice. A majority of jurisdictions now recognize a cause of action by a third-party beneficiary of a will or estate planning document against the lawyer whose drafting error defeats or diminishes the client's intent, although they have done so using a variety of tests and formulations, whether in tort, contract, or both. Max N. Pickelsimer, Comment, Attorney Malpractice in Will Drafting: Will South Carolina Expand Privity to Impose a Duty to Intended Beneficiaries of a Will?, 58 S.C. L. Rev. 581, 581-86 (2007) (discussing the origin and evolution of privity in the United States); see also Joan Teshima, Annotation, Attorney's Liability, to One Other Than Immediate Client, for Negligence in Connection with Legal Duties, 61 A.L.R.4th 615 (1988 & Supp. 2014) (collecting cases considering the legal theories for imposing civil liability upon an attorney for damages to a nonclient directly caused by the attorney's professional negligence). The jurisdictions that have eased the strict privity requirement typically use one of the following three approaches to determine whether the intended beneficiary of a will has standing to bring an action for legal malpractice: (1) the balancing of factors test, which originated in California; (2) 'the Florida-Iowa rule[']; and (3) breach of contract based on a third-party beneficiary contract theory. Pickelsimer, supra, at 586 (footnotes omitted). B. Theories for Imposing Liability in Tort or Contract (1) Balancing of Factors Test In an influential decision emanating from California in 1958, the rule on privity in legal malpractice actions began to evolve throughout the United States. In Biakanja v. Irving, 320 P.2d 16 (Cal. 1958), the court held that where the defendant negligently prepared an invalid will, the beneficiary could recover for her loss in tort even though she was not in privity with the defendant. Although the defendant in that case was a notary public and not an attorney, the court also overruled prior cases involving attorneys. The holding in Biakanja was formally extended to attorneys a few years later in Lucas v. Hamm, 364 P.2d 685 (Cal. 1961). In Lucas, the court allowed recovery both in tort and as a third-party beneficiary to a contract. In discussing whether to impose tort liability, the Lucas court reiterated all but one of the factors it originally delineated in Biakanja and stated, [T]he determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury, and the policy of preventing future harm. Id. at 687 (citing Biakanja, 320 P.2d at 19). Applying these factors, the court reasoned that one of the main purposes which the transaction between defendant and the testator intended to accomplish was to provide for the transfer of property to plaintiffs; the damage to plaintiffs in the event of invalidity of the bequest was clearly foreseeable; it became certain, upon the death of the testator without change of the will, that plaintiffs would have received the intended benefits but for the asserted negligence of defendant; and if persons such as plaintiffs are not permitted to recover for the loss resulting from negligence of the draftsman, no one would be able to do so, and the policy of prevent[ing] future harm would be impaired. Id. at 688. The court then noted since the defendant in this case was an attorney, it must consider an additional factor not present in Biakanja, namely, whether the recognition of liability to beneficiaries of wills negligently drawn by attorneys would impose an undue burden on the profession. Id. The court found although in some situations liability could be large and unpredictable, this was also true for any attorney's liability to his client, and the extension of liability to beneficiaries injured by a negligently drawn will does not place an undue burden on the profession, particularly when taking into consideration that the opposite conclusion would cause the innocent beneficiary to bear the entire loss of the attorney's professional negligence. Id. Other jurisdictions have engaged in a similar or modified balancing of factors analysis to generally determine whether an attorney should be liable to a third party in the absence of strict privity. See e.g., Fickett v. Super. Ct., 558 P.2d 988, 990 (Ariz. Ct. App. 1976) (citing Biakanja and Lucas and stating [w]e are of the opinion that the better view is that the determination of whether, in a specific case, the attorney will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors . . . .); Pizel v. Zuspann, 795 P.2d 42, 51 (Kan. 1990) (We find the California cases persuasive. We conclude that an attorney may be liable to parties not in privity based upon the balancing test developed by the California courts.); Donahue v. Shughart, Thomson & Kilroy, P.C., 900 S.W.2d 624, 629 (Mo. 1995) (en banc) ([T]he question of legal duty of attorneys to non-clients will be determined by weighing the factors in the modified balancing test.). (2) The Florida-Iowa Rule In the event this Court joins the majority of jurisdictions allowing a third party beneficiary to seek recovery for the improper drafting of a will or estate planning document, Respondents and the amicus urge this Court to adopt an alternative theory of recovery known as the Florida-Iowa Rule. It provides: An attorney preparing a will has a duty not only to the testatorclient, but also to the testator's intended beneficiaries, who may maintain a legal malpractice action against the attorney on theories of either tort (negligence) or contract (third-party beneficiaries). However, liability to the testamentary beneficiary can arise only if, due to the attorney's professional negligence, the testamentary intent, as expressed in the will, is frustrated, and the beneficiary's legacy is lost or diminished as a direct result of that negligence. DeMaris v. Asti, 426 So. 2d 1153, 1154 (Fla. Dist. Ct. App. 1983) (citations omitted); see also Schreiner v. Scoville, 410 N.W.2d 679, 683 (Iowa 1987) ([W]e hold a cause of action ordinarily will arise only when as a direct result of the lawyer's professional negligence the testator's intent as expressed in the testamentary instruments is frustrated in whole or in part and the beneficiary's interest in the estate is either lost, diminished, or unrealized.). A few other jurisdictions have also adopted this theory. See, e.g., Mieras v. DeBona, 550 N.W.2d 202 (Mich. 1996) (stating the beneficiary named in a will may bring a tortbased action for negligence in drafting the will, but the court will not look to extrinsic evidence). Respondents' desire, in the absence of this Court's retention of strict privity, is to promote the Florida-Iowa Rule because its essential feature, the imposition of a ban on all extrinsic evidence, obviously makes it more difficult for a plaintiff to establish a claim. See Joan Teshima, Annotation, What Constitutes Negligence Sufficient to Render Attorney Liable to Person Other Than Immediate Client, 61 A.L.R.4th 464, 480 (1988) (Some courts have ruled in this situation that evidence extrinsic to the will cannot be admitted to prove the testator's intent, thus making it impossible, or virtually so, for a thwarted beneficiary to prove his case against an attorney.). Appellant understandably opposes this theory. As she correctly asserts: The fundamental flaw in the Florida-Iowa [R]ule is that it focuses on the testamentary documents prepared by the lawyer rather than the source of the beneficiary's claim, which is not the allegedly defective will or trust document, but instead is the client-lawyer agreement that was intended to satisfy the client's testamentary intent. The proper approach in cases like this one where latent ambiguities exist in the will, trust agreement, or estate plan would be to allow the admission of extrinsic evidence to establish the client's intent as is generally allowed in a typical will contest. The Florida-Iowa Rule is actually based on a California case, Ventura County Humane Society v. Holloway, 115 Cal. Rptr. 464, 468 (Ct. App. 1974), which held the plaintiff had standing under the balancing of factors test articulated in Biakanja and Lucas, but in doing so, the court stated [a]n attorney may be held liable to the testamentary beneficiaries only . . . [i]f due to the attorney's professional negligence the testamentary intent expressed in the will is frustrated and the beneficiaries clearly designated by the testator lose their legacy as a direct result of such negligence. See Pickelsimer, supra, at 589 (discussing the genesis of the Florida-Iowa Rule). Appellant's argument for rejecting the Florida-Iowa Rule and its prohibition on extrinsic evidence finds support from the fact that a California district court has specifically observed that other courts applying the Rule have read Ventura too broadly because extrinsic evidence was not at issue in Ventura, and the case does not stand for the proposition that inquiries should be limited to the testamentary document to the exclusion of all other evidence. Creighton Univ. v. Kleinfeld, 919 F. Supp. 1421, 1425 n.5 (E.D. Cal. 1995). To the contrary, extrinsic evidence is often vital to proving an attorney's drafting error. Id. For these reasons, we reject the Florida-Iowa Rule and hold extrinsic evidence is not barred, as it is often essential to the pursuit of a claim. See Jewish Hosp. of St. Louis, Mo. v. Boatmen's Nat'l Bank of Belleville, 633 N.E.2d 1267, 1273-76 (Ill. App. Ct. 1994) (holding an attorney who drafted a will owed a duty in contract or tort to the remainder beneficiaries of a testamentary trust; under either theory, the non-client beneficiary must demonstrate that they are in the nature of a third-party intended beneficiary of the relationship between the attorney and the client, and evidence of intention is derived from a consideration of all of the circumstances surrounding the parties at the time of the execution of the will). (3) Third-Party Beneficiary of Contract Theory Another theory recognized for recovery is based on a third-party beneficiary approach. South Carolina law already generally recognizes a breach of contract claim for a third-party beneficiary of a contract and we find this principle is appropriate here. Generally, one not in privity of contract with another cannot maintain an action against him in breach of contract, and any damage resulting from the breach of a contract between the defendant and a third-party is not, as such, recoverable by the plaintiff. Windsor Green Owners Ass'n v. Allied Signal, Inc., 362 S.C. 12, 17, 605 S.E.2d 750, 752 (Ct. App. 2004) (citation omitted). However, if a contract is made for the benefit of a third person, that person may enforce the contract if the contracting parties intended to create a direct, rather than an incidental or consequential, benefit to such third person. Id. (citation omitted). Courts in other jurisdictions have expressly extended this principle to frustrated third-party beneficiaries of estate instruments, although some have done so as a breach of contract action while others have used the third-party beneficiary principle as a basis to allow recovery in negligence. Some jurisdictions have recognized that a plaintiff may choose to proceed in contract, tort, or both. See, e.g., Lucas, 364 P.2d at 689 & n.2; Stowe v. Smith, 441 A.2d 81, 84 (Conn. 1981); Blair v. Ing, 21 P.3d 452, 464 (Haw. 2001). In Lucas, in addition to allowing tort recovery, the California court found that intended beneficiaries of a will who lose their testamentary rights because of failure of the attorney who drew the will to properly fulfill his obligations under his contract with the testator may recover as third-party beneficiaries. 364 P.2d at 689. The court stated, Obviously the main purpose of a contract for the drafting of a will is to accomplish the future transfer of the estate of the testator to the beneficiaries named in the will, and therefore it seems improper to hold . . . that the testator intended only 'remotely' to benefit those persons. Id. at 688. The court found this main purpose and intent can be effectuated, in the event of a breach by the attorney, only by giving the beneficiaries a right of action, [so] we should recognize, as a matter of policy, that they are entitled to recover as third-party beneficiaries. Id. at 689. Moreover, the court noted the general rule is where a case sounds in both tort and contract, the plaintiff will ordinarily have freedom of election between the two actions. Id. at 689 n.2. We find this reasoning sound and adopt it here. We also find persuasive Guy v. Liederbach, 459 A.2d 744, 746 (Pa. 1983) to the extent that the Pennsylvania court stated it would allow recovery as to named beneficiaries: [W]hile important policies require privity (an attorney-client or analogous professional relationship, or a specific undertaking) to maintain an action in negligence for professional malpractice, a named legatee of a will may bring suit as an intended third party beneficiary of the contract between the attorney and the testator for the drafting of a will which specifically names the legatee as a recipient of all or part of the estate. The court found the grant of standing to a narrow class of third-party beneficiaries was appropriate based on the Restatement (Second) of Contracts § 302 (1979), where the intent to benefit the plaintiff is clear and the promisee (testator) is unable to enforce the contract, as named legatees would otherwise have no recourse for failed legacies that resulted from attorney malpractice. Id. at 747. Recognizing a cause of action is not a radical departure from the existing law of legal malpractice that requires a lawyer-client relationship, which is equated with privity and standing. Where a client hires an attorney to carry out his intent for estate planning and to provide for his beneficiaries, there is an attorney-client relationship that forms the basis for the attorney's duty to carry out the client's intent. This intent in estate planning is directly and inescapably for the benefit of the third-party beneficiaries. Thus, imposing an avenue for recourse in the beneficiary, where the client is deceased, is effectively enforcing the client's intent, and the third party is in privity with the attorney. It is the breach of the attorney's duty to the client that is the actionable conduct in these cases. See Dennis J. Horan & George W. Spellmire, Jr., Attorney Malpractice: Prevention and Defense 2-1 to 2-5 (1989) (discussing directly intended beneficiaries of the attorney-client relationship); see also Gaar v. N. Myrtle Beach Realty Co., 287 S.C. 525, 529, 339 S.E.2d 887, 889 (Ct. App. 1986) (In his professional capacity the attorney is not liable, except to his client and those in privity with his client, for injury allegedly arising out of the performance of his professional activities. (emphasis added)); Thompson v. Hudgens, 161 S.C. 450, 463, 159 S.E. 807, 812 (1931) (Generally speaking, the heir is in privity with his ancestor . . . .). In these circumstances, retaining strict privity in a legal malpractice action for negligence committed in preparing will or estate documents would serve to improperly immunize this particular subset of attorneys from liability for their professional negligence. Joining the majority of states that have recognized causes of action is the just result. This does not impose an undue burden on estate planning attorneys as it merely puts them in the same position as most other legal professionals by making them responsible for their professional negligence to the same extent as attorneys practicing in other areas. In sum, today we affirmatively recognize causes of action both in tort and in contract by a third-party beneficiary of an existing will or estate planning document against a lawyer whose drafting error defeats or diminishes the client's intent. The focus of a will or estate document is, inherently, on third-party beneficiaries. That being the case, the action typically does not arise until the client is deceased. See Stowe, 441 A.2d at 83 (stating merely drafting and executing a will creates no vested right in the legatee until the death of the testatrix); Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 36:12, at 1288 (2014) (Since litigation concerning errors in the preparation of a will necessarily arrives after the client's death, the plaintiff usually is an allegedly injured or omitted beneficiary . . . .). Specifically as to tort actions, the balancing test propounded by the California courts provides a valuable framework in evaluating the considerations that support adoption of a cause of action. See Donahue, 900 S.W.2d at 627 (That balancing test has been cited with approval by most jurisdictions which have considered the issue. (citing Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 7.11, at 383 (3d ed. 1983)). As discussed previously, we reject the Florida-Iowa Rule for its narrow application and ban on extrinsic evidence. As to contract actions for third-party beneficiaries, we find the reasoning in Lucas and Guy particularly persuasive, and we adopt Guy's limitation on recovery to persons who are named in the estate planning document or otherwise identified in the instrument by their status (e.g., my children and grandchildren, my wife's children). One court that still retains strict privity, but struggled greatly in doing so, is