Daily Development for
Wednesday, October 18, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

ATTORNEY/CLIENT; LEGAL OPINIONS; NEGLIGENT MISREPRESENTATION: Attorney may be liable for negligent misrepresentation to recipient of opinion letter is attorney's opinions as to legal issues prove incorrect. Mehaffy, Rider, Windholz & Wilson v. Central Bank of Denver, 892 P.2d 230 (Colo. 1995).

City proposed to issue certain redevelopment project bonds and negotiated with Bank to buy them. A dispute had arisen with respect to the adequacy of the procedure by which the redevelopment area had been created. Litigation had been brought by the local school district attacking the process, and the case had not been finally resolved on appeal. Bank required an opinion of bond counsel, which required an opinion from counsel for the City, that the lawsuit "lacked merit." Both bond counsel and city counsel issued "no merit" opinions.

Subsequently, the Colorado Court of Appeals held that the redevelopment project had not been properly formed. Although a number of Colorado lawyers apparently feel that the appeals court case was wrong, it was not overturned on appeal. Consequently, the bonds were invalid. The Bank sued the lawyers for negligent misrepresentation and malpractice. Apparently suits against the City or other potential defendants were time-barred.

Held: The facts state a cause of action in negligent misrepresentation, and the case is remanded for trial on that basis. There is not, however, a duty to non-clients sounding in malpractice, and the malpractice claim is dismissed.

The law firms had argued vigorously on two points: falsity and reliance.

On the issue of falsity, the law firms argued that their opinions stated only opinions of law, and that, since no one argued that the opinions stated were not in fact the opinions of the law firm at that time, the opinion letters contained no false representations. Without much elaboration, the court responded that the law firms would be correct if the opinion letters contained only statements of law, but the court emphasized that the conclusion that the lawsuit lacked merit is based upon mixed assertions of law and fact.

On the issue of reliance, the law firms emphasized that the bank had itself expressed the opinion that the redevelopment project had been properly approved, and that the Bank therefore could not claim that it had relied upon the opinions of the firms. They pointed to certain "comfort letters" written by the bank. (But the case does not indicate to whom these letters were addressed.) But the court pointed out that the language of the "comfort letters" was somewhat ambiguous. More significantly, the court pointed out that the Bank's conclusions necessarily were influenced by the opinions of the lawyers as well as by other independent investigations. The mere facts that the Bank did not rely exclusivly upon the lawyer's opinions or that the Bank had reached the same conclusion as the lawyers did not prelude a finding, after trial, that the Bank had relied materially upon the lawyer's opinion letters.

The court, however, refused to find that there was a cause of action in malpractice, holding that "[a]ttorney malpractice is a particular type of negligence that is confined to relations in which an attorney client relationship exists between a plaintiff and a defendant." (Id. at 240)

Two judges dissented on both of the majority's points regarding the negligent malpractice claim. These judges argued that to impose liability for negligence toward third parties upon an attorney in a business transaction will interfere with the attorney-client relationship, since the attorney will be caught between the duty to the third party and the more paramount duty of loyalty to the client. They further concluded that, in context, the record demonstrated that the Bank had not relied upon the opinions.

Comment 1: The editor is informed that many Colorado attornies are quite concerned about the impact on the attorney-client relationship that this case engenders. Further, they feel that it demonstrates the absurdity of the current market situation by which lawyers are "pressured" by their clients to "save the deal" by giving legal opinions to resolve uncertainty when in fact the issue is uncertain and all parties know it. The editor has several responses to these concerns:

First, of course, client "pressure" should never be an excuse for dishonest conduct, and misrepresentation of a material fact, including minimization of uncertainty, is dishonesty that should not be shielded from liability no matter how unfair the client or other parties were in insisting on such acts. In the context of municipal bond opinions, particularly, it is well known that third parties not present in the initial negotiations are going to rely upon the fact that reputable lawyers have opined that the legal proceedings were correct. The old adage about hot kitchens applies to lawyers who choose to be involved in such transactions.

Where the lawyer's opinion is made in good faith, of course, it is not dishonest. Good faith may very well have been present here. But there is still the implicit representation that a careful lawyer has done a careful job in evaluating the issue. At trial, the focus should be upon whether this implicit representation is correct. If it is, then there should be no liability. Of course, there is always the chance that the jury will conclude, after hearing from the lawyers and the expert witnesses, that the lawyers were careless in reaching their opinion, even though many lawyers might disagree with that conclusion. But this is the American system as to disputes concerning reasonableness of conduct, and lawyers, particularly, should not be seen to criticize legal rules solely because they vest trust in the judgment of a jury.

Comment 2: The editor would go even further and find malpractice liability to the addressee of the letter. The lawyer undertook a specific duty to render an objective opinion. If the lawyer felt that the duty of loyalty to the client precluded such an opinion, the lawyer should have said so, and insisted that the client obtain the opinion of another lawyer. Of course, this might have resulted in either higher overall legal fees or less money being available to pay the first lawyer's fee. But the facts that good lawyering is expensive and that clients resist paying high legal fees should not have an impact upon the issues of professional ethics here.

The editor is particularly dismayed by the fact that there was no malpractice duty imposed upon bond counsel. Although the special function of the firm designated as "bond counsel" here is not further developed by the court, the typical role of such counsel is specifically to provide an independent, objective analysis of the legality of the proceedings. To suggest that such counsel do not have a duty of care at least to the parties originally acquiring the bonds is to suggest that they have no client at all. The author might go further and recognize a malpractice duty running also to the eventual purchasers of the bonds, since the initial purchasers often are mere conduit underwriters who hold the bonds only very briefly, it at all.

Comment 3: Contrary to the allegations made by the dissent and other lawyers the editor has heard comment on this case, there is no suggestion that attornies should warrant the validity of their conclusions in legal opinions, only that they be reasonably careful in reaching those conclusions. In fact, in the editor's experience, the process of the preparation of legal opinions is a vital and valuable "rock turning" process that often reveals a number of problems and pitfalls that are far better addressed before closing. If counsel did not have the potential exposure that the court imposes here, it is quite possible that the client could further pressure the lawyer to overlook some of these problems, thus leading to an even further "deprofessionalization" of the learned profession of lawyering.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260.

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