Opinion ID: 2071023
Heading Depth: 2
Heading Rank: 3

Heading: The Third-Party Beneficiary Theory

Text: Maryland courts applied the strict privity rule in attorney malpractice cases without exception until 1972 when this Court recognized the third-party beneficiary theory in an attorney malpractice case, Prescott v. Coppage, 266 Md. 562, 296 A.2d 150 (1972). In Prescott, Coppage was the receiver for Security Financial Insurance Corporation (Security), a creditor of Maryland Thrift Savings and Loan Company (Maryland Thrift). Coppage sued Medley, the court-appointed receiver for Maryland Thrift, as well as Prescott who was counsel specially appointed by the court `to aid [Medley] in the performance of his duties as receiver.' 266 Md. at 565, 574, 296 A.2d at 152, 156. Although it is unclear whether Coppage brought suit under a tort theory or a contract theory, the subject matter of the suit was a $40,000 debt owed to Security by Maryland Thrift. Coppage alleged that Medley and Prescott improperly distributed Maryland Thrift's assets to lower priority creditors instead of paying the balance due on Security's priority claim. Prescott, 266 Md. at 565, 296 A.2d at 151. In determining who is a creditor beneficiary, this Court noted that the intention of the parties to recognize a person or class as a primary party in interest as expressed in the language of the instrument and consideration of the surrounding circumstances as reflecting upon the parties' intention[ ] are controlling factors. Prescott, 266 Md. at 574, 296 A.2d at 156. This Court further noted that the judicial order appointing Medley as receiver made clear that all creditors of Maryland Thrift were third-party beneficiaries and that the court order appointing Prescott by necessary implication bound him to those creditor beneficiaries. Id. Thus, because Prescott was appointed by the court and not retained by Maryland Thrift or Medley, Prescott owed a duty to the court as well as to any beneficiaries the court intended to benefit. This Court then held that the acceptance of the duties by Medley and Prescott entailed in the court order created conditions that gave Coppage standing to sue Prescott as a third-party creditor beneficiary. Id. This Court last addressed an issue of attorney liability to nonclients for professional malpractice in the Flaherty case which involved a lawsuit by mortgagors against an attorney on theories of negligence, breach of warranty, and negligent misrepresentation. 303 Md. at 134, 492 A.2d at 627. The Flahertys purchased a home that First Federal Savings and Loan Association (First Federal) financed. Flaherty, 303 Md. at 132, 492 A.2d at 626. First Federal retained the firm Weinberg, Michel and Sterns (Weinberg) to represent it at settlement, but the Flahertys did not retain counsel for themselves. Id. At settlement, Weinberg assured the Flahertys that they were purchasing the property described in the contract of sale, a representation that the Flahertys subsequently discovered to be inaccurate. Flaherty, 303 Md. at 132-33, 492 A.2d at 626. The Flahertys' second amended complaint alleged that `[t]he hiring of [Weinberg] was intended to benefit the lender as well as the purchasers in that both had identical interests in the property. The plaintiffs were intended, either expressly or impliedly, to benefit from the defendant attorneys' undertaking in this matter.' Flaherty, 303 Md. at 138-39, 492 A.2d at 629 (brackets in original). Noting that the third-party beneficiary theory is the sole exception in Maryland to the strict privity rule, this Court explained that the gravamen of an attorney malpractice action is the negligent breach of a contractual duty. Flaherty, 303 Md. at 130, 134, 492 A.2d at 625, 627. Although the third-party beneficiary exception is `peculiarly applicable' to contract actions, its scope has a broader range. In our view, the scope of duty concept in negligence actions, Clagett v. Dacy[, 47 Md.App. 23, 28, 420 A.2d 1285, 1289 (1980) ], may be analogized to the third party beneficiary concept in the context of attorney malpractice cases. Flaherty, 303 Md. at 130, 492 A.2d at 625. Thus, regardless of whether a tort theory or a contract theory is pled, a plaintiff in an attorney malpractice action must first allege and prove the existence of a duty between the plaintiff and the defendant. [6] Flaherty, 303 Md. at 134, 492 A.2d at 627. In order to establish a duty owed by the attorney to the nonclient, the nonclient must allege and prove that the intent of the client to benefit the nonclient was a direct purpose of the transaction or relationship. In this regard, the test for third party recovery is whether the intent to benefit actually existed, not whether there could have been an intent to benefit the third party. (Emphasis added). Flaherty, 303 Md. at 130-31, 492 A.2d at 625. In other words, an incidental benefit to a nonclient will not impose a duty upon an attorney. Flaherty, 303 Md. at 131 n. 6, 492 A.2d at 625 n. 6. Once a duty to the nonclient is established, he or she then must allege and prove the remaining elements of a negligence cause of action in order to recover against the attorney in negligence. Flaherty, 303 Md. at 131, 492 A.2d at 625. This Court reasoned that the third-party beneficiary exception is narrow in scope, and [p]roperly applied, this exception will not expose the attorney to endless litigation brought by those who might conceivably derive some indirect benefit from the contractual performance of the attorney and his client. Flaherty, 303 Md. at 131, 492 A.2d at 625-26. In addition, in adversarial proceedings, this exception is limited by the Maryland Rules of Professional Conduct, imposing a duty on lawyers to represent clients zealously and generally prohibiting the representation of conflicting interests in a transaction. Flaherty, 303 Md. at 131, 492 A.2d at 626. Turning to the facts of the case, this Court held that the Flahertys could not maintain a cause of action in negligence because they did not employ Weinberg. Flaherty, 303 Md. at 134, 492 A.2d at 627. In addition, the Flahertys could not maintain a cause of action for breach of express or implied warranties because they did not allege a contractual relationship with Weinberg, nor did they point to any statute that extended such warranties to them under the circumstances of the case. Flaherty, 303 Md. at 135, 492 A.2d at 627. Like the negligence and breach of warranty claims, this Court stated that the attorney must owe a duty to the nonclient in order for the nonclient to recover under a negligent misrepresentation theory. Id. We concluded that the Flahertys did allege as a fact that First Federal intended the Flahertys to benefit directly from Weinberg's services as an attorney. Flaherty, 303 Md. at 139, 492 A.2d at 629-30. Thus, this Court held that this allegation was sufficient to survive Weinberg's motion to dismiss even though it would be difficult for the Flahertys to ultimately prove that a direct purpose of the relationship between them and First Federal was to benefit the Flahertys. Id. In reaching our decision, we noted that the fact that the Flahertys did not retain separate counsel was inconclusive as to whether First Federal intended to benefit the Flahertys... [or] whether that intent was the primary purpose of the transaction or relationship. Flaherty, 303 Md. at 137, 492 A.2d at 628. This Court also recognized that conflicts of interest may arise where an attorney represents both the mortgagor and mortgagee, but concluded that the Flahertys had asserted facts in their complaint that raised an inference that no conflict existed between their interests and First Federal's interests. Flaherty, 303 Md. at 138, 492 A.2d at 629. Other jurisdictions have taken similar positions as this Court did in Flaherty that, in order for an attorney to owe a duty to a nonclient, the nonclient must show that the intent of the client to benefit the nonclient was a direct purpose of the transaction or relationship. See, e.g., Jewish Hosp. v. Boatmen's Nat. Bank, 261 Ill.App.3d 750, 199 Ill.Dec. 276, 284, 633 N.E.2d 1267, 1275 (noting that the nonclient must prove that the primary purpose and intent of the attorney-client relationship was to benefit or influence the nonclient), appeal denied, 157 Ill.2d 503, 205 Ill.Dec. 165, 642 N.E.2d 1282 (1994); see also Needham v. Hamilton, 459 A.2d 1060, 1062 (D.C.1983) (holding that a direct and intended beneficiary of a will may maintain a legal malpractice action against the attorney who drafted will); Schreiner v. Scoville, 410 N.W.2d 679, 682 (Iowa 1987) (noting that an attorney owes a duty of care only to the direct, intended, and specifically identifiable beneficiaries of the testator as expressed in the testator's testamentary instruments). In the Noble case, the Court of Special Appeals stated that the Flaherty rule is generally applicable to all third party beneficiary/attorney malpractice claims. Although the Noble beneficiaries alleged in their complaint that they were the intended beneficiaries of the contract between the Longs and Bruce, the intermediate appellate court concluded that such a claim on its own did not satisfy the elements of a cause of action for attorney malpractice. The intermediate appellate court stated that additional elements set forth in Kirgan, and later reiterated in Layman v. Layman, 84 Md.App. 183, 190, 578 A.2d 314, 317 (1990), were required. Specifically, a testamentary beneficiary (or one claiming to be an intended beneficiary) has no cause of action against the testator's attorney for alleged negligence in drafting the will when, as in this case, the will is valid, the testamentary intent as expressed in the will has been carried out, and there is no concession of error by the attorney. (Emphasis in original). Kirgan, 60 Md.App. at 12-13, 478 A.2d at 718-19. Similarly, the trial court in Fauntleroy applied the Kirgan test in reaching its decision. In Kirgan, Mary Kirgan alleged that her friend, Clarence M. Plitt (the testator), had told her that he would change his will in her favor. Kirgan, 60 Md.App. at 4, 478 A.2d at 714. Kirgan had referred the testator to her attorney. Id. When Plitt died, his bequest to Kirgan left her approximately $7000 worth of furniture and other chattels. Id. The will bequeathed the rest of the estate valued at approximately $5 million to a charitable trust and designated Kirgan and First National Bank of Maryland as co-trustees. Id. Kirgan filed suit against the attorney alleging, inter alia, negligence in the preparation of the testator's will in failing to provide for Kirgan in the will as the testator intended and negligence under a third-party beneficiary contract theory. Kirgan, 60 Md.App. at 5, 478 A.2d at 715. Because of the circumstances of the case, the Court of Special Appeals left open the general question of whether a testamentary beneficiary can maintain a legal malpractice action in Maryland against the testator's attorney for negligence in preparing a will or in supervising its execution, or whether an action of that nature should be in contract or tort. Kirgan, 60 Md.App. at 12, 478 A.2d at 718. The Court of Special Appeals held that, under the circumstances of the case, Kirgan had no cause of action against the testator's attorney for alleged negligence in drafting the will ... when the will was valid, the testamentary intent as expressed in the will ha[d] been carried out, and there [was] no concession of error by the attorney. Kirgan, 60 Md.App. at 12, 478 A.2d at 718-19. The intermediate appellate court noted that under Maryland Code, Estates & Trusts Article, § 4-102 a will is required to be in writing, signed by the testator, and attested and signed in the testator's presence by two or more credible witnesses. Kirgan, 60 Md. App. at 12-13, 478 A.2d at 719. In order to protect the solemnity of a will, the intermediate appellate court further reasoned that, where the language of a will is plain and unambiguous, extrinsic evidence is not admissible to show that the testator's intention was different from that which the will discloses, because evidence intended to alter the language of a will would violate that statute. Id. Other jurisdictions that prohibit the admission of extrinsic evidence have explained that the rationale for this limitation is to protect the integrity and solemnity of the will as well as the testator's express intent. Schreiner, 410 N.W.2d at 683. In addition, if extrinsic evidence is admitted to explain the testator's intent, the risk of misinterpretation increases dramatically. Furthermore, admitting extrinsic evidence heightens the tendency to manufacture false evidence that cannot be rebutted due to the unavailability of the testator. Espinosa v. Sparber, Shevin, et al., 612 So.2d 1378, 1379, 1380 (Fla.1993). The will is a legal document that affords people a clear opportunity to express the way in which they desire to have their property distributed upon death. Id. As a policy matter, one court concluded that it is in the public's best interest to protect attorneys from potentially unlimited liability to third parties whose interests may interfere with the attorney's ability to fulfill the duties of undivided loyalty and advocacy owed to his or her client. Glover v. Southard, 894 P.2d 21, 24 (Colo.Ct.App.1994).