Roberts v. Fearey ( 1999 )

986 P.2d 690 (1999) 162 Or. App. 546

Harley C. ROBERTS, Jr., successor trustee of the C.A. Dillinger Marital Trust and C.A. Dillinger Residual Trust, Appellant,
v.
Ross A. FEAREY, Respondent. and
Hiliary H. Turner, Defendant.

(9612-09796; CA A99747)

Court of Appeals of Oregon.

Argued and Submitted July 1, 1998. Decided September 15, 1999.

Kevin O'Connell, Portland, argued the cause for appellant. With him on the briefs was Kevin O'Connell, P.C.

Jonathan M. Radmacher, Portland, argued the cause for respondent. With him on the brief was McEwen, Gisvold, Rankin, Carter & Streinz, LLP.

Before De MUNIZ, Presiding Judge, and HASELTON and LINDER, Judges.

LINDER, J.

The issue before us is whether a trustee's attorney can be liable to the beneficiaries of the trust for legal malpractice. Plaintiff appeals from summary judgment entered in defendant's favor and argues that the trial court should have applied the general foreseeability test for negligence and should not have taken a "policy approach" to declining to recognize a basis for malpractice liability under the circumstances of this case. We hold that defendant did not owe a duty to protect the beneficiaries from their economic losses and therefore is not liable as a matter of law. Accordingly, we affirm.

On review of summary judgment, we state the evidence in the light most favorable to plaintiff, as the nonmoving party. Jones v. General Motors Corp., 325 Or. 404, 420, 939 P.2d 608 (1997). Hiliary Turner, the trustee of the Dillinger Trusts, hired defendant Ross Fearey to act as his attorney in the administration of two trusts. While serving as trustee, Turner used trust funds for several questionable loans to Keerin, Inc., a corporation of which Turner was a shareholder. The notes were not repaid, resulting in a substantial depletion of the trust corpora. The probate court removed Turner as trustee, initiated surcharge proceedings against him, and appointed plaintiff Harley Roberts as successor trustee for both trusts. Plaintiff then brought this malpractice action against defendant on behalf of the trusts and the beneficiaries.^[1] Plaintiff alleged that defendant was aware of Turner's loan transactions and failed to investigate the loans, to take action to stop Turner from breaching his fiduciary obligations, and to disclose Turner's conduct to the beneficiaries.

The parties' dispute centers on the applicable test for determining to whom an attorney is liable for malpractice. Plaintiff argues that a "special relationship" exists between a trustee's attorney and the beneficiaries because a trustee's attorney owes a duty of care to the trustee and because the trustee owes a heightened duty to the beneficiaries. Alternatively, plaintiff argues that defendant's liability should be determined under general foreseeability principles. See generally Fazzolari v. Portland School Dist. No. 1J, 303 Or. 1, 17, 734 P.2d 1326 (1987). In response, defendant contends that one cannot be liable for negligently causing a purely economic loss to another, unless the negligent actor has a special relationship with the injured party. See Onita Pacific Corp. v. Trustees of Bronson, 315 Or. 149, 159, 843 P.2d 890 (1992). Defendant relies on Currey v. Butcher, 37 Or. 380, 61 P. 631 (1900), and its progeny for the proposition that an attorney owes a duty only to those with whom he or she is in "privity." Defendant asserts that, because he did not maintain an attorney-client relationship with either the trusts or the beneficiaries, he did not have a special relationship with them and therefore owed no duty to protect them from economic losses.

We begin by outlining the development of Oregon negligence law and its application to legal malpractice. Oregon courts have rejected the traditional proximate cause and duty approaches to determining the scope of liability in negligence actions. See generally Fazzolari, 303 Or. at 4-8, 11-17, 734 P.2d 1326 (discussing the rise and fall of "proximate cause" and "no duty" analyses). Ordinarily, a general duty of care is presumed, and the analysis examines only whether a defendant's conduct "unreasonably created a foreseeable risk to a protected interest of the kind of harm that befell the plaintiff." See Fazzolari, 303 Or. at 17, 734 P.2d 1326. "Duty" ordinarily becomes an issue only when "the parties invoke a status, a relationship, or a particular standard of conduct that creates, defines, or limits the defendant's duty[.]" Id.

Duty also becomes an issue, however, when the plaintiff pleads damages based on purely economic losses. Oregon adheres to the traditional rule that "one ordinarily is not liable for negligently causing a stranger's purely economic loss without injuring his person or property," on the theory that people generally do not have a duty to protect others from such losses. Hale v. Groce, 304 Or. 281, 284, 744 P.2d 1289 (1987). As a consequence, to recover purely economic losses, a plaintiff must plead some source of duty outside of the common law of negligence. Id. Such a duty arises only in attorney-client, architect-client, agent-principal, and similar relationships where the professional owes a duty of care to further the economic interests of the "client." Onita, 315 Or. at 159-61, 843 P.2d 890. In Hale, decided after Fazzolari, the court reiterated that a particular source for the duty to protect from economic losses is required even if economic losses are a foreseeable consequence of a defendant's conduct. See Hale, 304 Or. at 284, 744 P.2d 1289; Onita, 315 Or. at 165-66 n. 13, 843 P.2d 890 (noting that Fazzolari does not dictate a different result from that required under Hale); Allstate Ins. Co. v. Tenant Screening Services, Inc., 140 Or.App. 41, 47-50, 914 P.2d 16 (1996) (discussing the distinction between Onita and Fazzolari). Thus, a plaintiff must first show the existence of a special relationship in which the defendant had some obligation to pursue the plaintiff's economic interests. Conway v. Pacific University, 324 Or. 231, 237, 924 P.2d 818 (1996). Only then does Fazzolari's foreseeability analysis come into play.

That approach, translated into the legal malpractice arena, accords with the general rule that an attorney can be liable for malpractice only to those with whom he or she is in privity. Said conversely, an attorney ordinarily is not liable to those outside of the attorney-client relationship because there is no obligation to protect anyone outside of the attorney-client relationship from economic losses. See Currey, 37 Or. at 385, 61 P. 631 (stating the general "privity" rule); Lee v. Nash, 65 Or.App. 538, 543, 671 P.2d 703 (1983), rev. den. 296 Or. 253, 675 P.2d 491 (1984) (reiterating same); Hale, 304 Or. at 284, 744 P.2d 1289 (outlining the development of both the Currey rule and the "economic losses" rule). The rationale is pragmatic: the indirect economic consequence of an attorney's conduct are too far-reaching and indefinite. See generally 4 Harper, James and Gray, The Law of Torts § 25.18A, 622-23 (2d ed 1986).

Here, the trial court declined to apply traditional negligence analysis (i.e., foreseeability) and instead concluded that a successor trustee should not be allowed to sue a former trustee's attorney for negligence, "even in a situation where the interests of the trustee and beneficiaries are not in conflict." The trial court explained that "allowing any such right of action will greatly impair the ability of any attorney for any trustee to give the attorney's trustee-client the kind of independent legal advice that the profession must be able to provide in such situations." In so doing, the trial court anticipated that Oregon appellate courts, if presented with the issue, would adopt a "policy approach" similar to the multi-factor test used in Trask v. Butler, 123 Wash.2d 835, 872 P.2d 1080 (1994).^[2]

Although some states have adopted formal, policy-based balancing tests, Oregon courts have thus far declined to adopt a particular test for determining when a case should be taken out of the general privity rule. In Metzker v. Slocum, 272 Or. 313, 316-17, 537 P.2d 74 (1975), the Supreme Court reviewed balancing tests used in other jurisdictions but neither adopted nor rejected them. Instead, the court resolved that case on the basis that the plaintiff's injury was "too tenuous to fit into the pattern of adjudicated cases which allow third parties to bring an action despite lack of privity" and observed that "a much more certain, direct, and foreseeable connection between the lawyer's negligence and the third party's injury" would have to exist before it would be inclined to relax the privity requirement in a later case. Metzker, 272 Or. at 317, 537 P.2d 74; see also Lee, 65 Or.App. at 545, 671 P.2d 703 (distinguishing Metzker by concluding that the connection between the defendant's breach and injury was "sufficiently certain, direct and foreseeable").

Oregon courts have instead extended the attorney's duty to third parties on a case-by-case basis and have found a "duty" to nonclients in only three cases: (1) in Lee, 65 Or.App. at 545, 671 P.2d 703, where the attorney purported to act as the plaintiff's attorney by filing a motion on behalf of the plaintiff; (2) in Hale, 304 Or. at 286-87, 744 P.2d 1289, where the plaintiff was the "intended" third-party beneficiary of the attorney's relationship with a client; and (3) in McEvoy v. Helikson, 277 Or. 781, 785-87, 562 P.2d 540 (1977), where the attorney stipulated to perform a service for the opposing party. Although Oregon has not formally adopted a discrete test, the cases in this area focus on whether there is a de facto relationship between the defendant and the injured nonclient of a nature that justifies imposing a special duty on the defendant to protect the nonclient against economic losses.

With that backdrop, we turn to the case before us. Plaintiff brought this action on behalf of the trusts and the trust beneficiaries. The threshold question here is: Is there an attorney-client relationship between defendant and the trusts or defendant and the trust beneficiaries? If the answer to the first question is no, then we ask: Are there other circumstances that indicate the existence of a special (or de facto) relationship that justifies imposing a duty on defendant to pursue the economic interests of the trusts or the trust beneficiaries?

In the context of an attorney's ethical obligations, the Oregon State Bar has taken the stance that an attorney retained by a fiduciary represents only the fiduciary. OSB Legal Ethics Op No 1991-119 (attorney represents trustee, not beneficiaries) and No 1991-62 (although personal representative owes fiduciary duty to estate and beneficiaries, attorney for personal representative is the personal representative's attorney only). That view accords with the weight of authority in other jurisdictions. See, e.g., Goldberg v. Frye, 217 Cal. App. 3d 1258, 1268, 266 Cal. Rptr. 483, 488 (1990) (attorney for administrator of estate represents the administrator, not estate); Hopkins v. Akins, 637 A.2d 424, 428 n. 10 (D.C.App.1993) (the same rule applies even if the estate pays attorney fees); Ferguson v. Cramer, 349 Md. 760, 709 A.2d 1279, 1284 (1998) (same); Thompson v. Vinson & Elkins, 859 S.W.2d 617, 623 (Tex.App. 1993) (neither trust nor estate is a legal entity and neither can be represented by counsel); Mallen and Smith, Legal Malpractice § 31.4, 85-88 (4th ed 1996) (using cases involving will fiduciaries to illustrate that the same rule applies to a trust fiduciary). It also aligns with the Oregon Supreme Court's view on the ethical responsibilities of an attorney to his or her fiduciary. See In re Phelps, 306 Or. 508, 517, 760 P.2d 1331 (1988) (recognizing that the personal representative is the attorney's client, when applying the ethical rule governing misappropriation of "client" funds); see also ORS 128.009(3)(x) (granting a trustee the power to employ an attorney "to advise or assist the trustee in the performance of administrative duties").^[3] We agree with the Bar's position and find the rationale persuasive. Accordingly, we hold that, when an attorney undertakes to represent a fiduciary, he or she represents only the fiduciary and does not, at the same time, maintain an attorney-client relationship with those to whom the fiduciary-client owes a duty.

We therefore turn to the second question—whether the trustee's attorney nonetheless owes a duty to pursue the economic interests of the trusts and trust beneficiaries. We note first that this case is not like any of the other cases in which we have found sufficient circumstances to overlook the privity requirement. This is not a case, as in Lee, where the attorney blurred the lines of representation by acting on behalf of the trusts or the beneficiaries. Defendant here adamantly denies ever having agreed to represent or having purported to represent the trusts or beneficiaries, and plaintiff does not contend otherwise. Nor does plaintiff argue liability on an intended third-party beneficiary theory.^[4]

Plaintiff asserts instead that an attorney's duty to the trustee should "extend" to the trusts and the trust beneficiaries due to the trustee's heightened duty as a fiduciary. Plaintiff emphasizes that, in the trustee-beneficiary relationship, the interests are closely aligned—i.e., the trustee and the beneficiaries have the common goal of protecting the beneficiaries' economic interests. In other words, according to plaintiff, because defendant owed a duty to Turner, who owed a duty to the trusts and its beneficiaries, defendant as a matter of law also owes a duty to the trusts and its beneficiaries.

We decline to extend liability that far, as a per se rule. To be sure, the trustee's attorney will advise the trustee to make decisions that have the effect of benefitting the trusts and, more indirectly, the beneficiaries' economic interests. Under the special relationship rule announced in Onita, the trustee's attorney may be, in that sense, acting "at least in part" to further the economic interests of the trusts and the beneficiaries. See Ammons v. Jackson County, 119 Or.App. 181, 184, 850 P.2d 376, rev. den. 318 Or. 24, 862 P.2d 1304 (1993) (discussing that, in those relationships giving rise to a duty of care to protect against economic losses, a common thread is that the professional is acting "at least in part" to further the economic interests of another). That consideration factors into whether we will recognize a special relationship, but it does not establish the existence of one as a matter of law.

To hold that an attorney's duty of care runs not only to the fiduciary-client, but also to those to whom the fiduciary's duties run, would be particularly problematic in this context. A trustee's attorney is charged with the task of advising the trustee on issues ranging from the trustee's fiduciary obligations to how to manage conflicts in the beneficiaries' personal objectives. The attorney cannot simultaneously advise the trustee and serve the economic interests of each beneficiary without risking conflicts of interest. See Spinner v. Nutt, 417 Mass. 549, 553-54, 631 N.E.2d 542, 545 (1994) (no duty to beneficiaries; recognizing "potential for conflict"); Ferguson, 709 A.2d at 1284 (same; duty owed solely to personal representative as attorney's client); Goldberger v. Kaplan, Strangis and Kaplan, 534 N.W.2d 734, 739 (Minn.App.1995) (same); Hopkins, 637 A.2d at 428 (same; discussing potential adversarial relationship between executor and beneficiary). That risk is greatest where, as here, the trustee has been removed. When a trustee is removed or resigns, the former trustee may have claims against the trust—e.g., reimbursement of attorney fees—while the trust or its beneficiaries also may have claims against the former trustee—e.g., for breach of fiduciary duty or for a surcharge. In that situation, the attorney cannot continue to pursue the economic interests of both. See In re Morris, 326 Or. 493, 503-504, 953 P.2d 387 (1998) (continuing to represent former personal representative after agreeing to represent successor created a current client conflict of interest where attorney pursued former personal representative's claim against the estate for attorney fees). Thus, to adopt plaintiff's position would likely paint the trustee's attorney into a corner of conflicts.

We recognize that, in many cases, the potential for conflict may never become an actual conflict. We decline, however, to view the attorney's duty through an after-the-fact lens. We agree with the trial court's conclusion that extending the attorney's duties beyond the trustee will interfere with the attorney's ability to use his or her independent judgment in advising the trustee. See Mallen and Smith, Legal Malpractice § 31.4 at 85. Thus, the potential for adversarial relationships, not just adversarial relationships in fact, must weigh into the calculus in determining whether a duty exists to those outside of the attorney-client relationship. For those reasons, we are not persuaded by the contrary authority^[5] and note that the weight of authority appears to be in accord with our view. Id.

Our conclusion does not necessarily foreclose redress for a trust or its beneficiaries. Instead, the emphasis remains where it more properly belongs: upon the trustee's judgments, choices, and actions. See Trask, 123 Wash.2d at 843-44, 872 P.2d at 1085. Successor trustees may still sue their breaching predecessors, and if the breaching trustees received inadequate legal services, they in turn may sue their attorneys for malpractice. See id. (noting the same in the context of personal representatives). Also, if the trustee's attorney knowingly aids or assists the trustee in commission of the breach of fiduciary duty, the successor trustee may also bring a claim for vicarious liability against the former trustee's attorney. Granewich v. Harding, 329 Or. 47, 56 n. 5, 985 P.2d 788 (1999); see also OSB Legal Ethics Op No 1991-119 (attorneys may not ethically assist fiduciary in any wrongdoing); ORS 128.031 (third party not liable for assisting a trustee unless the third party knowingly participates in the breach of the trustee's fiduciary duty).

Here, plaintiff alleged only passive conduct—namely, that defendant was aware of Turner's loans and failed to advise him against making the loans. That allegation does not state a claim for aiding another in the breach of a fiduciary duty. Nor does it demonstrate sufficient circumstances to take this case out of the privity requirement. We therefore conclude that defendant owed no duty to protect the trusts or the beneficiaries from economic losses.

Because we conclude that no duty of care existed under these circumstances, we have no occasion to examine whether the harm was generally foreseeable. "Foreseeability alone is not a sufficient basis to permit the recovery of economic losses on a theory of negligence." Onita, 315 Or. at 165, 843 P.2d 890.

Affirmed.

NOTES

[1] Plaintiff also brought an action against Turner for breach of fiduciary duty. That claim was dismissed on Turner's motion because the surcharge action was still pending before the probate court.

[2] In Trask, the Washington Supreme Court adopted a "modified" multi-factor balancing test for determining whether an attorney owes a duty of care to a nonclient. The court determines first whether there is an "intent to benefit" the plaintiff, considering the following:

"(1) the extent to which the transaction was intended to benefit the plaintiff;

"(2) the foreseeability of harm to the plaintiff;

"(3) the degree of certainty that the plaintiff suffered injury;

"(4) the closeness of the connection between the defendant's conduct and the injury;

"(5) the policy of preventing future harm; and

"(6) the extent to which the profession would be unduly burdened by a finding of liability."

123 Wash.2d at 843, 872 P.2d at 1084.

[3] Plaintiff urges us to adopt the rationale of Moeller v. Superior Court (Sanwa Bank), 16 Cal. 4th 1124, 69 Cal. Rptr. 2d 317, 947 P.2d 279 (1997), in which the California Supreme Court construed a statute similar to ORS 128.009(3)(x), which grants the trustee the power to employ an attorney "to advise or assist the trustee." In Moeller, the court held that, with respect to confidential communications made regarding matters of the trust's administration, the attorney-client privilege passes from a predecessor trustee to a successor trustee. 69 Cal. Rptr. 2d 317, 947 P.2d at 285. Moeller, however, addressed the parties' relationships for purposes of the evidence code, not for purposes of malpractice liability. It is therefore not on point. In any event, for reasons we identify in this opinion, we disagree with the California court's decision to the extent it could be understood to require the same analysis for purposes of malpractice liability.

We have found only one case holding that an attorney hired by the trustee represents the estate and not the trustee. See Steinway v. Bolden, 185 Mich.App. 234, 460 N.W.2d 306 (1990). That decision, however, was based on a Michigan probate code provision that authorizes personal representatives to employ counsel for service on "behalf of the estate." That provision created an attorney-client relationship with the "estate." ORS 128.009(3)(x) is not similarly phrased. Steinway, therefore, is significantly distinguishable.

[4] In his answer to the complaint, defendant admits that he also represented the settlor prior to his death. In a proper case, liability to third parties conceivably might arise based on the settlor's privity with an attorney—e.g., a plaintiff might be able to argue successfully that the trust beneficiaries were intended by the settlor to be third-party beneficiaries of the attorney-client relationship between the attorney and the settlor. See Hale, 304 Or. at 284-87, 744 P.2d 1289 (allowing third-party beneficiary claim against testator's attorney). Here, however, the complaint does not allege that either the trusts or the beneficiaries were intended third-party beneficiaries of the agreement between defendant and Turner. In fact, defendant concedes that neither the trusts nor the beneficiaries are third-party beneficiaries in the contractual sense. Moreover, the record is silent as to the scope and purpose of the representation, and neither party treats it as significant to our analysis.

[5] For contrary authority, see, e.g., Morales v. Field, 99 Cal. App. 3d 307, 316, 160 Cal. Rptr. 239, 244 (1979) (trustee's attorney owes duty to beneficiary and "assumes a relationship with the beneficiary akin to that between trustee and beneficiary"); Charleson v. Hardesty, 108 Nev. 878, 839 P.2d 1303 (1992) (adopting the reasoning in Morales); but see Goldberg, 217 Cal.App.3d at 1268-69, 266 Cal. Rptr. at 489 (a later California case concluding, without citation to Morales, that the estate's beneficiaries are only incidental beneficiaries of the attorney-administrator relationship). In Morales, the attorneys for the trustee and executor blurred the attorney-client relationships by telling the beneficiary that she need not take any action on her part, promising to keep her advised should anything unusual arise, and reassuring her that her interests would be protected. 99 Cal. App. 3d at 311-12, 160 Cal.Rptr. at 241. Thus, Morales was a privity-like situation similar to Lee and is, for that reason, distinguishable.