NJ: Duties to Third-Parties

Posted on May 13, 2010 by Krishna Shah

O’Brien v. Cleveland, 2010 Bankr. LEXIS 171 (Bankr. D.N.J. Jan. 22, 2010).

Underlying commercial action

Facts: Debtors filed a chapter 13 bankruptcy after falling behind on their mortgage payments. Even after the Chapter 13 filing, however, the debtors were unable to keep up with their payments under the the court ordered plan. Eventually, the first mortgage holder commenced a mortgage foreclosure on the debtors’ home. To avoid a sheriff’s sale of their property, the debtors entered into a mortgage rescue arrangement with Cleveland.

The rescue plan was a scam by Cleveland to defraud the debtors. It required the debtors to transfer title in their property, worth over $800,000, to Cleveland, with an option to buy it back at $650,000. Cleveland was to take out a new mortgage on the property, pay off the debtors’ old mortgage and some other outstanding debts in bankruptcy, and permit the debtors to continue to occupy the house in exchange for a payment of $5,000 per month to be used to service the new mortgage.

Cleveland’s attorney, William E. Gahwyler, Jr., prepared all of the closing documents for this transaction, including the HUD-1 statement. The statement contained a number of misrepresentations, including an incorrect sale price, a misrepresentation of Cleveland’s investment in purchasing the property, and a misrepresentation of the debtors’ proceeds from the sale. Moreover, the transaction was never reported by Gahwyler to the bankruptcy court for approval.

The debtors subsequently learned that Cleveland had mortgaged their property for over $100,000 in excess of the outstanding mortgages for its personal benefit. Likewise, the debtors’ $5,000 monthly payments were not being used to satisfy the debt on the property. Eventually, the lender moved to foreclose on the property, and the debtors filed an adversary complaint against Cleveland and its attorney, Gahwyler, alleging fraud, legal malpractice, conspiracy, and violation of a number of statutes.

Issue: Did Gahwyler owe a duty to the debtors in his capacity as attorney for Cleveland?

Holding: The court held that the debtors were entitled to a judgment against Cleveland based on causes of action arising in fraud, violation of the New Jersey Consumer Fraud Act, Truth in Lending Act, Home Ownership and Equity Protection Act, and New Jersey Home Ownership Security Act of 2002.

The court further held that the lack of an attorney-client relationship between the debtors and Gahwyler was no bar to obtaining relief against him:

Mr. Gahwyler should have withdrawn from representing Mr. Cleveland as soon as the nature of the transaction became known to him…[a]s an attorney, Mr. Gahwyler had an ethical obligation to prepare an accurate closing statement and should have withdrawn from representing Cleveland rather than create an inaccurate closing statement . . . had Gahwyler fulfilled his ethical responsibilities, Cleveland could not have carried out his plot. Gahwyler’s failure to perform his ethical obligations proximately caused damages to the debtors in the amount of the increased debt encumbering this house.

Lesson: An attorney who knowingly participates in the fraudulent scheme of his client will be held responsible for damages proximately sustained by a third-party as a result of the deceptive conduct.

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NJ: Limitations on Duties to Third-Parties

Posted on March 3, 2010 by Krishna Shah

Estate of Albanese v. Lolio, 393 N.J. Super. 355 (App. Div. 2007).

NJ Underlying Probate Matter

Student Contributor: Natalie Resto

Facts: The decedent was survived by three daughters, all beneficiaries under the decedent’s will. One of the beneficiaries, the executrix, retained the defendant attorney for the probate of the decedent’s estate. The executrix, allegedly upon the advice of the attorney and a financial planner, withdrew funds from the IRA and made equal distributions to the beneficiaries, resulting in a personal income tax burden on the beneficiaries of approximately $298,000 each. All the beneficiaries, including the testatrix, sued the attorney for malpractice claiming that the attorney never outlined options by which the testatrix could pay the estate taxes. The attorney, however, claimed that he advised the testatrix of other options for paying the taxes aside from using funds from the IRA. These conversation, however, were never documented in writing.

Issue: Does an attorney owe a duty to the individual beneficiaries to inform them of the personal tax implications of his advice?

Ruling: The court held that under the retainer agreement, the attorney represented the estate and its executrix, and was obligated to advise her with regard to post-mortem planning, including calculating tax needs. This requirement, however, did not apply to the remainder of the beneficiaries who likely had different, and possibly adverse, interests. As a result, the Court declined to extend the duty an attorney owes to third parties who are beneficiaries of an estate the lawyer represents, or to hold that the attorney has an obligation to consider and advise third-party beneficiaries of the tax consequences of a bequest or legacy.

Lesson: Attorneys have an obligation to define the scope of their representation clearly and unambiguously. Restatement of the Law Governing Lawyers §14 comment f states that “[i]n trusts and estates practice a lawyer may have to clarify with those involved whether a trust, a trustee, its beneficiaries or groupings of some or all of them are clients and similarly whether the client is an executor, an estate, or its beneficiaries.” The attorney will bear liability for the beneficiaries that fall under the scope of his representation as it is set forth in his retainer agreement.

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Duties to Non-Clients

Posted on September 29, 2009 by Ben Wasserman

LaBracio Family Partnership v. 1239 Roosevelt Avenue, Inc.,
340 N.J. Super. 155, 773 A.2d 1209 (App. Div. 2001)

Student Contributor:  Cheryl Neuman

N.J. Underlying real estate transaction


Facts:  Sevdalis was represented by his attorney, Kroop in selling his diner. Zervas, the buyer, was represented by his lawyer, Abazia. There were two mortgages involved in this transaction:
1.    Zervas was supposed to assume the first mortgage to a party named LaBracio, and
2.    Sevdalis was going to take the purchase money mortgage which would be secondary to the LaBracio mortgage.
At the closing, Abazia (buyer’s lawyer) took the deed and Sevdalis’s mortgage and said he was going to record them. He didn’t record them. Subsequently, Zervas physically assaulted Abazia, and took his files, the deed, and mortgage. Abazia told Kroop that the mortgage and deed were never recorded, but Abazia was then fired and Zervas hired a new lawyer, Burger.
Burger also did not record the deed or mortgage, and he gave the documents to his client, Zervas. During this time, Zervas granted mortgages on the property to unrelated mortgagees, thereby giving these new liens priority over the Sevdalis mortgage.  Sevdalis then brought a legal malpractice suit against  Kroop (seller's attorney)  Abazia (buyer's attorneys) and Burger (seller's second attorney).


Issue : Whether Burger was negligent and if so, how should responsibility be allocated between the three lawyers?


Ruling: Burger was negligent and is therefore responsible for 25%, Abazia is responsible for 25%, and Kroop is responsible for 50% of the award. The court used the substantial factor test in determining whether Burger would be held responsible. Since his actions were a substantial factor in causing the injuries, he was indeed responsible.


Lesson: N.J. recognizes the existence of duties owed not only to an attorney’s client but also to third parties, such as  opposing counsel:

 attorneys may owe a duty of care to non-clients, when the attorneys know or should know, that non-clients will rely on the attorneys’ representations and the non-clients are not too remote from the attorneys to be entitled to protection.

LaBracio, 340 N.J. Super. 155, 163. 

The court further said that:

a duty to a non-client third party depends on balancing the attorney’s duty to represent clients vigorously, Rule of Professional Conduct, Rule 1.3 (1993) with the duty not to provide misleading information on which third parties foreseeably will rely, Rule of Professional Conduct, Rule 4.1 (1993).
 

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