Banking and Business Monthly – July 2017

DO ATTORNEYS FOR A BORROWER OWE A LEGAL DUTY TO A LENDER?

On June 28, 2017, the 7th Circuit Court of Appeals decided Oakland Police & Fire Ret. Sys. v. Brown, No. 16-2983, 2017 U.S. App. LEXIS 11522 (7th Cir., June 28, 2017). In doing so, it determined that attorneys for a borrower owe no legal duty to a lender unless the primary purpose of the attorneys’ actions is to influence or benefit the lender as a non-client third party.

The plaintiffs in the case were a consortium of lenders who were represented by JP Morgan Chase Bank, who entered into a Term Loan Agreement with General Motors in 2006. Under the agreement, JP Morgan would serve as the plaintiffs’ and other lenders’ agent and hold the security interests the agreement created. Simpson Thatcher & Bartlett LLP represented JP Morgan in the transaction, and Mayer Brown LLP represented General Motors. The dispute arose when a clerical error by a Mayer Brown paralegal released collateral that secured the loan under the Term Loan Agreement. The mistake cost the plaintiffs, who were secured lenders, $1.5 billion. The plaintiffs then brought suit, not against JP Morgan’s counsel, but against Mayer Brown for the mistake, alleging Mayer Brown committed legal malpractice and negligent misrepresentation. Specifically, the plaintiffs asserted that Mayer Brown owed them a duty of care, which was violated when Mayer Brown mistakenly terminated the security interest. The district court dismissed the case, ruling that the attorney-client relationship did not extend to non-client third parties, and, therefore, Mayer Brown owed no duty to the plaintiffs. The plaintiffs appealed, and the case was heard in the Court of Appeals before Judges Posner, Manion, and Hamilton.

The issue presented was whether the facts of this case satisfied the primary purpose test, which is the exception to the general rule governing attorney-client relationships in the 7th Circuit and Illinois. Generally, an attorney owes a professional duty only to the attorney’s client, not to third parties. But the primary purpose test extends an attorney’s duty to third party non-clients when “the intent of the client to benefit the non-client third party was the primary or direct purpose of the transaction or relationship.” Pelham v. Griesheimer, 440 N.E.2d 96, 99 (Ill. 1982). Additionally, “in cases of an adversarial nature,” a duty is created on the part of the attorney to a non-client when there is a clear indication that the representation by the attorney is intended to directly confer a benefit upon the non-client. Id. at 100. Despite the plaintiffs’ arguments to the contrary, the three-judge panel sided with Mayer Brown, holding that the facts of this case did not present one of the “limited circumstances” in which the exception to the Pelham Rule applies. Accordingly, Judge Hamilton, who authored the opinion, held that it was not Mayer Brown’s primary purpose to benefit or influence JP Morgan; rather, Mayer Brown was representing the best interests of its own client, General Motors. The 7th Circuit affirmed the case’s dismissal.

If you would like to speak with the author, he can be contacted at (847) 705-7555 and smigala@lavellelaw.com. Steven A. Migala is a partner at Lavelle Law and possesses over 20 years of providing excellent representation to banks, businesses and individuals in a variety of matters.