McIntosh County Bank v. Dorsey & Whitney, LLP, 745 N.W.2d 538 (Minn. 2008)

Brief Summary
The court held that a party who is not an express client can sue a lawyer for legal malpractice in a business transaction from which the party expected to benefit only if the party was a direct and intended beneficiary of the lawyer's services or, in other words, if the benefit to that party is a central purpose of the transaction and the lawyer is aware of the client's intent to benefit that party. The court found no such evidence here.

The court also held that a party did not have an implied contractual attorney-client relationship with a lawyer unless the lawyer is aware of that party's identity, the party communicates with the lawyer and the lawyer is on notice that the lawyer is expected to represent that party. The court again found no such evidence here.

Complete Summary
In 1998, the investment banking firm of Miller & Schroeder ("M&S") agreed to make two loans to a casino development company to assist in financing the development and construction of a Native American gaming casino. M&S retained Dorsey & Whitney to assist in documenting the transaction.

Thirty-two banks purchased loan participations from M&S, after the loan transaction closed and after Dorsey & Whitney's legal work was completed. Dorsey & Whitney and M&S did not know the banks' identities during Dorsey & Whitney's representation. Neither M&S nor the banks asked Dorsey & Whitney to represent the banks, and Dorsey & Whitney did not agree to do so. The banks had no communications with Dorsey & Whitney. The banks were neither billed by nor paid Dorsey & Whitney's fees. Dorsey & Whitney's advice was never communicated to the banks and the banks did not rely on the advice.

After the project failed and the banks realized that they would sustain losses, the banks sued Dorsey & Whitney for legal malpractice and other alleged breaches of duty. More specifically, the banks alleged that a particular form of regulatory approval was necessary to protect the banks in this casino financing transaction, and that Dorsey & Whitney had allegedly given incorrect or incomplete advice about the need for this approval.  

The Hennepin County District Court granted summary judgment for Dorsey & Whitney on the ground that the banks lacked standing to sue Dorsey & Whitney for malpractice because they were neither Dorsey & Whitney's clients nor intended third-party beneficiaries entitled to sue. The Minnesota Court of Appeals reversed portions of the district court's summary judgment order, holding that: (i) fact disputes existed whether the "communications and circumstances" evidenced an implied contractual attorney-client relationship between Dorsey & Whitney and the banks; and (ii) the trial court had applied an incorrect standard to determine whether the banks were third-party beneficiaries of Dorsey & Whitney's representation of M&S in the loan transaction.

At issue before the Minnesota Supreme Court were the banks' claims that they had standing to sue Dorsey & Whitney as direct and intended third-party beneficiaries of the attorney-client relationship between M&S and Dorsey & Whitney and, alternatively, that the banks had an implied attorney-client relationship with Dorsey & Whitney. (Although the record before the Minnesota Supreme Court did not suggest that Dorsey & Whitney had given incorrect or incomplete advice on any issue, the Minnesota Supreme Court's decision was not made on this ground.)

With regard to the elements of a legal malpractice case by a non-client against a lawyer, the court   affirmed the rule of law announced in Marker v Greenberg, 313, N.W.2d 4 (Minn. 1981) that in order to have standing to sue, the non-client must show that it was a direct and intended beneficiary of the relationship. In order to prove that it was a direct and intended beneficiary, the non-client must establish that "the transaction has as a central purpose an effect on the third party and the effect is intended as a purpose of the transaction” or, in other words, that the benefit to the non-client was "the end and aim of the transaction" (internal quotations omitted) 745 N.W.2d at 547. In addition, the non-client must show "an attorney's awareness that the client's intent is to make someone a beneficiary". Id. The court found no such evidence on this record since, inter alia, the identity of the banks was not determined until after Dorsey & Whitney had completed its work, the paperwork by which the banks acquired their interests made clear that they were to rely solely upon their own independent investigations of the transaction, no bank communicated at all with Dorsey & Whitney prior to closing, and the banks were, in essence, nothing more than arm's length contracting parties with M&S.  

With regard to implied contractual attorney-client relationships, the court noted that even in such circumstances, an implied in fact contract must be shown and that it is not enough for a party to claim that it had hoped or expected to benefit from the attorney's work. Since, as noted above, the facts here revealed a total lack of contact between the banks and Dorsey & Whitney and a total lack of communication by anyone that Dorsey & Whitney should regard the banks as clients during the drafting process, judgment in Dorsey & Whitney's favor was required.

Significance of the Decision
This decision is extremely important in the limits that it sets on the circumstances in which parties who are not express clients can claim standing to sue attorneys for legal malpractice under the direct and intended beneficiary theory and in the limits that it sets on implied attorney-client relationships. Where, as here, there was no communication whatsoever between the law firm and any of its putative beneficiaries/clients at critical times, the law firm's paperwork disclaimed potential third-party reliance and the law firm's client did not direct the law firm to treat arm's length contracting parties as if they were clients, no viable claim could exist.

Nonetheless, law firms should not take too much comfort from this decision. A firm which paid less care and attention to the boundaries of its work than Dorsey & Whitney did, or whose boundaries were more blurred, might not have fared as well.  

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.

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Third Party Claims for Lawyers: Is There Life After Stoneridge

May 15, 2008, Noon-1:30 pm EST

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Anthony Davis, Partner, Lawyers for the Profession® Practice Group, Hinshaw & Culbertson LLP

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One of the most important (and disturbing) developments in law firm risk management in recent years has been the increased willingness of plaintiff’s lawyers, government agencies, and courts to hold lawyers and law firms culpable for the actions or omissions of their clients. We have seen these so-called “third party claims” in a wide variety of contexts, from securities fraud cases to abusive tax shelter claims to cases involving circumstances of deepening insolvency. In January, the Supreme Court handed down its decision in Stoneridge Investment Partners v. Scientific-Atlanta, a case that affirms the limited ability of plaintiffs in securities fraud cases to reach lawyers and other providers of services to defendant companies.

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Impaired and Poorly Behaving Partners: Managing the Risks

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Tom H. Luetkemeyer, Lawyers for the Profession® Practice Group, Hinshaw & Culbertson LLP
Dr. Larry R. Richard, Vice President and Head of the Leadership & Organization Development Practice Group, Hildebrandt International

Program Overview
Dealing with “problem” partners has always been a challenge for law firm leaders. In recent years, however, it has also become a serious area of risk exposure as state bars, regulatory agencies, clients, and plaintiff’s lawyers have been increasingly willing to charge firms with accountability for the “lack of supervision” often evidenced in such behaviors. In this virtual seminar, you will hear three experts ― two professional responsibility lawyers and one lawyer/psychologist ― describe the nature of these risks and offer some practical advice on dealing with these problems.

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