“I represent only your brother”
In Lahn, the lawyer had represented the plaintiff, her brother and another individual as lenders in a series of private loans to a California-based real estate development corporation. In a 2004 loan-rollover, the lawyer exchanged e-mails with the plaintiff and provided her with an inter-creditor agreement for the proposed transaction.
The lawyer wrote that plaintiff was encouraged “to seek independent counsel to review these and any documents in connection with this matter. Please remember, as it is expressly stated in the Inter Creditor Agreement, we are representing [your brother] in the transaction.” The inter-creditor agreement likewise reiterated that in this transaction, the lawyer was solely representing the brother as lender.
400K down the drain
After the loan closed in 2005, the trust deed was never recorded as to the commercial lots that had been promised as collateral for the loan, leaving plaintiff and the other two lenders unsecured. By that time, plaintiff had loaned $400,000 to the development company.
Three years later, the development company went south, and was unable to repay the loan from plaintiff. Secured lenders foreclosed on the property — but plaintiff’s unsecured loan was effectively uncollectable.
Plaintiff sued the lawyer, asserting that he had negligently represented her in relation to the loan agreement, including failing to advise, investigate and disclose. The trial court granted summary judgment in favor of the lawyer on that claim, although without explaining its reasoning.
“No objective basis”
The court of appeals did a better job, expressly concluding that “there was no objective basis upon which a reasonable fact-finder could conclude that a lawyer-client relationship existed between plaintiff and defendant” in the loan transaction.
Oregon’s courts have seldom concluded that a lawyer has duties to third-party non-clients; so no lawyer-client relationship here spelled no duty to the plaintiff.
Even though the lawyer had represented the plaintiff in other matters, the court wrote, “the uncontested fact remains that he told plaintiff, directly and in writing,” that he solely represented her brother in the transaction, and that she was encouraged to seek independent counsel to review the inter-creditor agreement. The inter-creditor agreement reiterated the same fact.
Further, even if there could be a question of fact on whether the plaintiff subjectively believed that she had a lawyer-client relationship with the defendant lawyer as to the transaction, that belief was not objectively reasonable — because of the documented statements to the contrary.
Document, document, document
Of course, the best way to document the identity of your client is in an engagement letter that leaves no doubt about who you do and do not represent. And here, where an engagement letter was not an option, the savvy lawyer avoided malpractice liability by effectively documenting who his client was not. Take a lesson from Lahn, and be clear on this point.