(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued September 26, 1994 -- Decided March 29, 1995
POLLOCK, J. writing for a majority of the Court.
The Supreme Court granted certification in this matter to address whether the attorney for the seller
of real estate owes a duty to a potential buyer.
In 1987, Rohrer Construction (Rohrer) owned a tract of undeveloped land in Union Township,
Hunterdon County. Rohrer hired Heritage Consulting Engineers (Heritage) to perform percolation tests on
the property. Percolation tests reveal, among other things, the suitability of soil for a septic system. For
municipal approval of a septic system, Union Township requires two successful percolation tests. In
September and October of 1987, Heritage provided Rohrer and Bruce Herrigel, Rohrer's attorney, with
copies of two reports: the first report revealed that of twenty-two tests, only one had been successful; the
second report revealed that out of eight tests, only one had been successful.
Rohrer listed the property with a local real estate broker, Bachenberg & Bachenberg, Inc. In
October 1988, William G. Bachenberg, Jr. (Bachenberg) asked Herrigel for information concerning that
listing. Herrigel sent Bachenberg a two-page document consisting of one page from each of the two
Heritage reports. Read together, these two pages appeared to describe a single series of seven tests, two of
which were successful. This report, which had been prepared by Herrigel and subsequently called the
"composite report," did not explain that the property had in fact only passed two of thirty percolation tests.
This composite report became part of Bachenberg's sales packet.
Rohrer was unable to sell the property and as a result of its financial difficulties, Bachenberg and a
partner, John Matthews, were able to purchase the property at a sheriff's sale in December 1988. In June
1989, Lisa Petrillo sought to purchase the property. Herrigel was hired to represent Bachenberg in that sale.
During contract negotiations, Herrigel did not inform Petrillo or her attorney of the complete Heritage
reports. However, as part of the contract, Petrillo was given time to conduct independent percolation tests
as well as the ability to rescind the contract if those tests were unsatisfactory.
In August 1989, Petrillo hired an engineering firm, Canger & Cassera (Canger), to conduct soil tests
and site planning. Based on the composite report, Canger recommended that preliminary site-plan work be
conducted simultaneously with the soil testing by the subcontractor. The six soil tests that were conducted
yielded unsuccessful results, leading the subcontractor to conclude that the site was inadequate for a septic
system. Thereafter, Canger ceased work on the site plan and, on August 22, 1989, Petrillo notified
Bachenberg that the contract was void.
In response, Bachenberg contracted with Heritage to design a satisfactory septic system. Heritage
designed a system that was approved by the Hunterdon County Board of Health. Petrillo refused to accept
the design. She sued Bachenberg, Matthews and Herrigel for return of her $16,000 down payment and for
the costs of her engineering fees. In her complaint, Petrillo alleged, among other things, negligent
misrepresentation by Herrigel in that his failure to provide the complete Heritage reports violated a duty he
owed to her and that the breach of that duty caused her to incur engineering expenses she would not have
incurred had she been apprised of all the facts.
At the close of Petrillo's case, the trial judge dismissed the claim against Herrigel, concluding that
Herrigel did not owe a duty to Petrillo. The Appellate Division reversed, finding that an attorney for a seller
has a duty not to provide misleading information to potential buyers who the attorney knows, or should
know, will rely on that information.
HELD: Under the circumstances of this case, the seller's attorney had a duty not to misrepresent negligently
the contents of a material document on which he knew or should have known a potential buyer
might rely to his or her financial detriment.
1. Whether an attorney owes a duty to a non-client, third party depends on balancing the attorney's
duty to represent his or her client's vigorously with the duty not to provide misleading information on which
third parties foreseeably will rely. A lawyer's duty is limited to situations in which the lawyer intended or
should have foreseen that the third party would rely on the lawyer's work. Thus, an attorney may owe a duty
of care to a non-client when the attorney knows, or should know that the client will rely on the attorney's
representations and when the client is not too remote from the attorney to be entitled to protection. The
imposition of such a duty comports with general principles of tort law. (pp. 8-18)
2. The objective purpose of documents prepared by a lawyer, and the extent to which others
foreseeably may rely on them, determines the scope of a lawyer's duty. In this case, Herrigel extracted
information from existing percolation-test reports, created the composite report, and delivered that report to
a real estate broker. There was nothing in or accompanying Herrigel's report that would inform the reader
that the report was not complete or accurate. When he delivered that report to Bachenberg, Herrigel knew,
or should have known, that Bachenberg might give it to a prospective purchaser like Petrillo. Herrigel's
continuing involvement permits two inferences: that the objective purpose of the report was to induce a
prospective purchaser to buy the property; and that he knew that Bachenberg intended to use the report for
that purpose. (pp. 18-20)
3. By providing his composite report to Bachenberg and subsequently representing Bachenberg in the
Petrillo sale, Herrigel assumed a duty to Petrillo to provide reliable information in respect of the percolation
tests. Because Herrigel did nothing to limit the objective purpose of the composite report, he should have
foreseen that Petrillo, as a prospective purchaser, would rely on the facts set forth in the report in deciding
whether to sign the contract of sale and to proceed with engineering and site-plan work. Given Petrillo's
concern about percolation, Herrigel's duty includes the obligation to provide information concerning both
successful and unsuccessful percolation tests. (pp. 20-22)
4. The Court disagrees with the dissent that Petrillo is too remote from Herrigel and that recognizing a
duty extending from Herrigel to Petrillo will affect the type, price and accessibility of legal services. (pp. 22-24)
Judgment of the Appellate Division is AFFIRMED.
JUSTICE STEIN, concurring, writes separately to emphasize his view that the Court's decision
effects no material change in the liability of lawyers or other professionals to third parties.
JUSTICE GARIBALDI, dissenting, is of the view that the majority imposes on an attorney a duty of
care to a non-client that is broader than that imposed under the proposed Restatement of the Law
Governing Lawyers § 73, under the Restatement (Second) of Torts § 552, and under New Jersey case law.
Such an extension will lead to defensive lawyering, and will make legal services more cumbersome, more
costly, and less accessible to clients. According to Justice Garibaldi, Herrigel owed no duty to Petrillo; the
composite report was not a legal opinion; Herrigel did not provide legal services to Petrillo; and Petrillo
admitted that she did not rely on Herrigel's report.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, O'HERN, and STEIN join in JUSTICE
POLLOCK'S opinion. JUSTICE STEIN has also filed a separate concurring opinion. JUSTICE
GARIBALDI has filed a separate dissenting opinion. JUSTICE COLEMAN did not participate.
SUPREME COURT OF NEW JERSEY
A-
8 September Term 1994
LISA PETRILLO,
Plaintiff-Respondent,
v.
WILLIAM G. BACHENBERG, JR.;
WILLIAM G. BACHENBERG, JR.,
TRUSTEE, "THE TRUST", a
fictitious name; BACHENBERG &
BACHENBERG, INC., and JOHN A.
MATTHEWS,
Defendants,
and
BRUCE D. HERRIGEL,
Defendant-Appellant.
Argued September 26, 1994 -- Decided March 29, 1995
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
263 N.J. Super. 472 (1993).
Robert DeChellis argued the cause for
appellant.
Bertram J. Latzer argued the cause for
respondent.
George W. Canellis argued the cause for
amicus curiae, New Jersey State Bar
Association (Mr. Canellis, attorney; Raymond
A. Noble, on the brief).
The opinion of the Court was delivered by
POLLOCK, J.
The issue is whether under the circumstances of this case
the attorney for the seller of real estate owes a duty to a
potential buyer. Plaintiff, Lisa Petrillo, alleges that because
of the negligence of defendant Bruce Herrigel, an attorney, she
received a misleading copy of a percolation-test report that
induced her to sign a contract to purchase property. At the
close of plaintiff's case, the Law Division concluded that
Herrigel did not owe a duty to plaintiff to provide a complete
and accurate report. The Appellate Division reversed,
263 N.J.
Super. 472 (1993). It determined that an attorney for a seller
has a duty not to provide misleading information to potential
buyers who the attorney knows, or should know, will rely on the
information. We granted Herrigel's petition for certification,
134 N.J. 566 (1993), to determine whether he owed such a duty to
plaintiff. We now affirm the judgment of the Appellate Division.
In 1987, Rohrer Construction (Rohrer) owned a 1.3-acre tract of undeveloped land in Union Township, Hunterdon County. Herrigel represented Rohrer in the sale of the property. Rohrer hired Heritage Consulting Engineers (Heritage) to perform percolation tests concerning a contract of sale to Land Resources Corporation (Land Resources). Percolation tests reveal, among other things, the suitability of soil for a septic system. Union Township requires two successful percolation tests for municipal approval of a septic system.
In September and October 1987, Heritage provided Rohrer and
Herrigel with copies of reports describing two series of
percolation tests. The first report, dated September 24, 1987,
revealed that of twenty-two tests, only one had been successful.
A November 3, 1987, report showed that of eight tests conducted
in October, one had been successful.
Rohrer's contract with Land Resources failed. Subsequently,
Rohrer listed the property with a local real estate broker,
Bachenberg & Bachenberg, Inc. In October 1988, William G.
Bachenberg, Jr. (Bachenberg) of Bachenberg & Bachenberg, Inc.
asked Herrigel for information concerning the listing. Herrigel
told Bachenberg that "he had some perc results," and sent him a
two-page document consisting of one page from each of the two
Heritage reports. The first page was page one from the September
24, 1987, report; it reflected one successful test and five
unsuccessful tests. The second page was culled from the November
3, 1987, report; it listed one successful and one unsuccessful
test. Read together, the two pages appear to describe a single
series of seven tests, two of which were successful. In fact,
the property had passed only two of thirty percolation tests.
The document, subsequently described as the "composite report,"
became part of Bachenberg's sales packet.
Herrigel admits that he possessed both Heritage reports and that he delivered the composite report to Bachenberg. Although Herrigel does not deny that he prepared the composite report, his
petition for certification states: "However, there was no
evidence given during plaintiff's proofs that Mr. Herrigel had in
fact prepared the erroneous two-page report."
Rohrer, which apparently was experiencing financial
problems, could not sell the property. In December 1988,
Bachenberg and a partner, John Matthews, bought the property at a
sheriff's sale for $70,000. In January 1989, Bachenberg
discussed with Rohrer the 1987 engineering reports. Rohrer
declined to provide those reports to Bachenberg because
Bachenberg would not reimburse Rohrer for Heritage's engineering
fees.
Bachenberg listed the property for sale at $160,000. In
February 1989, Petrillo expressed an interest in purchasing the
property to build and operate a child day-care facility. That
month, at their first meeting, Bachenberg gave Petrillo a sales
packet, which included the composite report.
In June 1989, Petrillo agreed to pay Bachenberg his asking price. Herrigel represented Bachenberg in negotiating the terms of the contract with Petrillo's attorney. Nothing in the record indicates that Herrigel informed Petrillo's attorney of the test results that had been omitted from the composite report. At the insistence of Petrillo's attorney, the contract provided Petrillo with forty-five days to conduct independent soil and water tests, including percolation tests. The contract provided further that
Petrillo could rescind if the percolation tests were not
satisfactory to her.
In August 1989, Petrillo hired an engineering firm, Canger &
Cassera, to conduct soil tests and site planning. Based on the
composite report, Canger & Cassera recommended that they start
site-planning work simultaneously with the conduct of percolation
tests by a sub-contractor, PMK, Ferris & Perricone (PMK). PMK
conducted six percolation tests, all of which failed.
Consequently, PMK concluded that the site was inadequate for a
septic system. Canger & Cassera stopped working on the
preliminary site plan. On August 22, 1989, Petrillo notified
Bachenberg that the contract was null and void.
In response, Bachenberg contracted with Heritage to design a
septic system that would satisfy the municipality. Heritage
designed the system, which the Hunterdon County Board of Health
approved. Petrillo, however, refused to accept the design, and
requested permission to conduct additional percolation tests.
Bachenberg denied her request. During the course of their
negotiations, Herrigel sent Petrillo the complete copies of the
September 24 and November 3 Heritage reports.
The parties could not settle their differences. Bachenberg refused to return Petrillo's $16,000 down payment, claiming that she had breached the contract. Petrillo sued Bachenberg, Matthews, and Herrigel for the return of the down payment and for
the costs of her engineering fees. Her complaint alleged claims
sounding in breach of contract, fraud, concealment, negligent
misrepresentation, and conspiracy.
In the complaint, Petrillo alleged, among other things, that
Herrigel's failure to provide the complete Heritage reports
violated a duty that he owed to her. She claimed further that
the violation had caused her to incur engineering expenses that
she would not have incurred if she had known all the facts.
Specifically, she contended that if she had known that the
property had passed only two of thirty percolation tests, she
would not have signed the contract or hired Canger & Cassera and
PMK.
At the close of plaintiff's case, the trial court dismissed
Petrillo's complaint against Herrigel. The court concluded that
Petrillo had not alleged facts sufficient to support a duty
extending from Herrigel to her. It stated:
There are no facts dealing with any
responsibility or duty that Mr. Herrigel had.
He had no knowledge of what Mr. Bachenberg
gave, if anything, to Miss Petrillo, and on
Miss Petrillo's cross-examination she
essentially said she never intended to rely
on anything Mr. Herrigel provided or failed
to provide and never hired Mr. Herrigel. Mr.
Herrigel never gave direct information to
her. Mr. Herrigel never refused to answer
any questions put to him.
Taking the mechanical function that I must apply, I find that there is no evidence that I have before me dealing with any
responsibility or any breach of any duty
committed by Mr. Herrigel in this
transaction.
The court also dismissed Petrillo's claims against
Bachenberg and Matthews for concealment. On the remaining
claims, the jury determined in answer to specific interrogatories
that Petrillo, based on PMK's unsuccessful percolation-test
results, could have terminated her contract with Bachenberg. The
jury also found that she had not terminated the contract.
Finally, the jury determined that Petrillo had breached the
contract by not seeking site-plan approvals after Heritage had
designed a suitable septic system, and that Bachenberg was
entitled to keep the $16,000 deposit.
The Appellate Division reversed the dismissal of Petrillo's
fraud claim against Bachenberg. It also reversed the judgment
entered on the verdict against Petrillo because of improper jury
instructions regarding her waiver of her right to terminate the
contract. Those issues are not before us.
Before us, however, is the Appellate Division's reversal of the dismissal of Petrillo's claims against Herrigel for negligent misrepresentation. The Appellate Division determined that a seller's attorney owes a duty to a non-client buyer "who the attorney knows or should know would rely on the attorney in his or her professional capacity." 263 N.J. Super. at 483. It stated that "a buyer of real estate has a cause of action against
an attorney for the seller who provides misleading information
concerning the subject of the transaction." Id. at 487. The
court concluded that a jury could have found that when Herrigel
gave Bachenberg the composite report, Herrigel should have known
that Bachenberg would provide the report to a prospective
purchaser, such as Petrillo, who would rely on the report in
deciding whether to purchase the property. Ibid.
As a claim against an attorney for negligence resulting in economic loss, Petrillo's claim against Herrigel is essentially one for economic negligence. Formerly, the doctrine of privity limited such claims by non-clients against attorneys and other professionals. Jay M. Feinman, Economic Negligence: Liability of Professionals and Businesses to Third Parties for Economic Loss 29 (1995). More recently, other doctrines have replaced privity as a means of limiting a professional's duty to a non-client. See, e.g., Biakanja v. Irving, 320 P.2d 16 (Cal. 1958) (adopting a "balance of factors" test).
The determination of the existence of a duty is a question of law for the court. Wang v. Allstate Ins. Co., 125 N.J. 2, 15 (1991); Strachan v. John F. Kennedy Memorial Hosp., 109 N.J. 523, 529 (1988). Whether an attorney owes a duty to a non-client third party depends on balancing the attorney's duty to represent clients vigorously, Rules of Professional Conduct, Rule 1.3 (1993), with the duty not to provide misleading information on
which third parties foreseeably will rely, Rules of Professional
Conduct, Rule 4.1 (1993). See also Restatement of the Law
Governing Lawyers § 73 comment b (Tentative Draft No. 7, 1994)
(discussing rationale for imposing duty to non-clients); Stephen
Gillers, Regulation of Lawyers 656-64 (3rd ed. 1992) (discussing
duty to non-clients); Geoffrey C. Hazard, Jr. & W. William Hodes,
The Law of Lawyering § 1.1:203, § 2.3:102 (2d ed. 1990) (same).
Because this matter arises on the grant of defendant Herrigel's
motion to dismiss, we accord Petrillo the benefit of all
favorable inferences that may be drawn from her proofs. R. 4:37-2(b); Bozza v. Vornado, Inc.,
42 N.J. 355, 357 (1964).
Although we have not previously addressed the issue of attorney liability to third parties, the Appellate Division has recognized that attorneys may owe a limited duty in favor of specific non-clients. In Stewart v. Sbarro, 142 N.J. Super. 581, 585, certif. denied, 72 N.J. 459 (1976), an attorney for the buyers of a corporation agreed to obtain the buyers' signatures on a bond and mortgage indemnifying the sellers against liability for existing corporate debt. The attorney failed to obtain the required signatures. As a result, the debt was unsecured, rather than secured. Id. at 586-87. When the buyers filed a bankruptcy petition, the sellers sued their own attorney, the buyers, and the buyers' attorney for the unpaid debt. The Appellate Division determined that the buyers' attorney could be liable in negligence for breaching a duty to the sellers. Id. at 593. It reasoned than when an attorney should foresee that a third party
may rely on the attorney's promise to act, a duty attaches.
Ibid.
Similarly, in Albright v. Burns,
206 N.J. Super. 625 (1986),
the Appellate Division held that an attorney was liable to a
decedent's estate when the attorney knowingly facilitated
improper transactions involving the holder of the decedent's
power of attorney. The court stated that "a member of the bar
owes a fiduciary duty to persons, though not strictly clients,
who he knows or should know rely on him in his professional
capacity." Id. at 632-33.
More recently, in R.J. Longo Construction Co. v. Schragger, 218 N.J. Super. 206 (1987), the Appellate Division considered a case involving township attorneys who had prepared bid documents for a sewer-construction contract. The attorneys had failed to obtain certain easements mentioned in the bid package. Id. at 207-08. Consequently, the successful bidder, plaintiff, R.J. Longo Construction Co. (Longo), which had begun construction on notice to proceed from the town, was forced to stop work. As a result, Longo suffered losses and sued the attorneys. Id. at 208. The trial court dismissed the claims against the township attorneys because of the absence of privity. Ibid. The Appellate Division reversed. It held that Longo was an intended third-party beneficiary of the defendant attorneys' employment contracts with the township. Id. at 210. The court determined that the attorneys owed the contractor a fiduciary duty and that
they were liable for the foreseeable consequences of their
negligent misrepresentations on which plaintiff reasonably and
foreseeably relied. Id. at 209-10.
Other jurisdictions similarly have relaxed traditional privity requirements when an attorney induces specific non-clients to rely on the attorney's representations. For example, in Greycas, Inc. v. Proud, 826 F.2d 1560, 1561-62 (7th Cir. 1987), cert. denied, 484 U.S. 1043, 108 S. Ct. 775, 98 L. Ed.2d 862 (1988), Greycas, a finance company, agreed to lend funds to an Illinois borrower if the borrower provided an attorney's opinion letter stating that the borrower's collateral was not subject to prior liens. The borrower asked an attorney, his brother-in-law, to prepare the needed opinion letter. Id. at 1562. The attorney prepared the letter based solely on the borrower's representations and submitted it to Greycas, which promptly issued the funds. Ibid. After the borrower defaulted, Greycas learned that most of the borrower's collateral was subject to superior liens and that the loan was largely unsecured. Ibid. Greycas sued the attorney for negligent misrepresentation. The court concluded under Illinois law that the attorney owed Greycas a duty not to negligently misrepresent the status of the borrower's collateral notwithstanding the lack of privity. Id. at 1564-65; see also Horizon Financial, F.A. v. Hansen, 791 F. Supp. 1561, 1573-75 (N.D. Ga. 1992) (holding under Pennsylvania law that attorney for borrower has duty to lender bank to whom attorney issued opinion letters expressly for bank's
benefit); Mehaffy, Rider, Windholz & Wilson v. Central Bank
Denver N.A., ___ P.2d ___, ___ (Colo. January 30, 1995) ("by
issuing legal opinion letters for the purpose of inducing
[reliance], the attorneys may be liable . . . for negligent
misrepresentation"); McEvoy v. Helikson,
562 P.2d 540, 543 (Or.
1977) (holding that attorney for ex-wife owed duty to former
husband when attorney undertook to enforce court order obligating
him to hold ex-wife's passport unless she relinquished custody of
children); Trask v. Butler,
872 P.2d 1080, 1084 (Wash. 1994)
(stating that "[t]he intent to benefit the plaintiff is the first
and threshold inquiry" in determining existence of duty to
non-clients).
The New York Court of Appeals has likewise held that an
attorney may owe a duty to specific non-clients who rely on the
attorney's representations. See Prudential Insurance Co. of
America v. Dewey Ballantine, Bushby, Palmer & Wood,
605 N.E.2d 318 (N.Y. 1992). In Prudential, a lender sued a borrower's
attorney for negligently preparing an opinion letter that was
provided to the lender as a condition to a debt restructuring.
An attorney could be liable to a non-client for negligent
misrepresentation, the court conceded, if the nature of the
relationship between the attorney and the non-client was "so
close as to approach that of privity." Id. at 320. The court
stated the criteria for finding a duty:
(1) an awareness by the maker of the
statement that it is to be used for a
particular purpose; (2) reliance by a known
party on the statement in furtherance of that
purpose; and (3) some conduct by the maker of
the statement linking it to the relying party
and evincing its understanding of that
reliance.
[Id. at 321-22 (citing Credit Alliance Corp.
v. Arthur Anderson & Co.,
483 N.E.2d 110
(N.Y. 1985)).]
The court concluded that the attorney knew that the lender would
rely on the opinion letter and intended to induce that reliance.
Id. at 322. See also Vereins-und Westbank, AG v. Carter,
691 F.
Supp. 704, 708-16 (S.D.N.Y. 1988) (holding under New York law
that lawyer owes duty to non-clients to whom lawyer furnishes
legal opinion on behalf of client).
Thus, when courts relax the privity requirement, they typically limit a lawyer's duty to situations in which the lawyer intended or should have foreseen that the third-party would rely on the lawyer's work. See Feinman, supra, at 131-34. For example, a lawyer reasonably should foresee that third parties will rely on an opinion letter issued in connection with a securities offering. See Norman v. Brown, Todd & Heyburn, 693 F. Supp. 1259, 1265 (D. Mass. 1988) ("As a general matter, tax opinion letters are drafted so that someone can rely upon them."). The purpose of a legal opinion letter is to induce reliance by others. If an attorney foresees or should foresee that reliance, the resulting duty of care can extend to
non-client third parties. In re Reexplore, Inc. Sec. Litig.,
685 F. Supp. 1132, 1146 (N.D. Cal. 1988). See also Norman, supra,
693 F. Supp. at 1265 (holding that Massachusetts law imposes duty
when reliance is reasonably foreseeable). But see Austin v.
Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36, 38, 40-41 (D.
Mass. 1993) (holding that Massachusetts law imposes no duty
unless attorneys have actual knowledge of specific third-party
reliance); Alpert v. Shea Gould Climenko & Casey,
559 N.Y.S.2d 312, 315-16 (App. Div. 1990) (denying existence of fiduciary duty
in absence of evidence that lawyers actually knew and understood
that non-client investors would rely on tax-opinion letters
issued in connection with tax-shelter offering).
In other contexts, courts have imposed a duty on an attorney who prepares an instrument with the intent that third parties will rely on it. Thus, in Molecular Technology Corp. v. Valentine, 925 F.2d 910, 915-17 (1991), the Sixth Circuit Court of Appeals determined that a lawyer who prepared a private offering statement for his client's corporate debentures owed a duty of care to potential investors whom the attorney knew, or should have known, would rely on the statement. The court held that Michigan law "imposes a duty in favor of all those third parties who defendant knows will rely on the information and to third parties who defendant should reasonably foresee will rely on the information." Id. at 916. But see In re Rospatch Sec. Litig., 760 F. Supp. 1239, 1261 (W.D. Mich. 1991) (distinguishing Molecular Technology, which involved closely-held corporation,
from cases involving securities offerings of large, publicly-held
corporations).
Likewise, in Century 21 Deep South Properties, Ltd. v.
Corson,
612 So.2d 359 (Miss. 1992), a buyer of real property
sued alleging negligence of the attorney for the seller, who had
conducted a title search on which the buyer had detrimentally
relied. The Mississippi Supreme Court held that "an attorney
performing title work will be liable to reasonably foreseeable
persons who, for a proper business purpose, detrimentally rely on
the attorney's work." Id. at 374.
Similarly, section 73 of the proposed Restatement of the Law
Governing Lawyers, supra, pertaining to "duty to certain
non-clients," provides:
For the purposes of liability . . ., a lawyer
owes a duty to use care . . .:
(2) To a non-client when and to the extent
that the lawyer or (with the lawyer's
acquiescence) the lawyer's client invites the
non-client to rely on the lawyer's opinion or
provision of other legal services, the non-client so relies, and the non-client is not,
under applicable law, too remote from the
lawyer to be entitled to protection.
We also recognize that attorneys may owe a duty of care to non-clients when the attorneys know, or should know, that non-clients will rely on the attorney's representations and that the non-clients are not too remote from the attorneys to be entitled
to protection. The Restatement's requirement that the lawyer
invite or acquiesce in the non-client's reliance comports with
our formulation that the lawyer know, or should know, of that
reliance. No matter how expressed, the point is to cabin the
lawyer's duty, so the resulting obligation is fair to both
lawyers and the public.
The imposition on attorneys of defined liability to third parties comports with general principles of tort law. In effect, section 552 of the Restatement (Second) of Torts (1977) imposes pecuniary liability for negligent misrepresentation when an attorney "supplies false information for the guidance of others in their business transactions, . . . if he fails to exercise reasonable care or competence in obtaining or communicating the information. The same section limits liability
to loss suffered
(a) by the person or one of a
limited group of persons for whose
benefit and guidance he intends to
supply the information or knows
that the recipient intends to
supply it; and
(b) through reliance upon it in a
transaction that he intends the
information to influence or knows
that the recipient so intends or in
a substantially similar
transaction.
Applying section 552, we have determined that shareholders who acquired a corporation's stock in a merger could maintain a
negligence action against a certified public accountant who
negligently had prepared financial statements of the merging
corporation. See H. Rosenblum, Inc. v. Adler,
93 N.J. 324
(1983). Because investors foreseeably may rely on certified
financial statements, we held that the accountant's duty extended
to those investors despite the absence of privity between them.
See id. at 352-53.
Mindful of the danger of potentially-unlimited liability,
however, we limited the accountant's liability, stating that the
investors
would have to establish that they received
the audited statements from the company
pursuant to a proper company purpose, that
they, in accordance with that purpose, relied
on the statements and that the misstatements
therein were due to the auditor's negligence
and were a proximate cause of the
[investor's] damage.
On March 17, Governor Christine Todd Whitman signed into law
Senate Bill No. 826, which limits accountant's liability to third
parties for the accountant's negligent acts. Senate Commerce
Committee Statement to S. No. 826. The bill, however, does not
affect the application of section 552 to other professionals,
such as attorneys.
The Appellate Division already has extended our holding in
Rosenblum to situations involving an attorney and third parties
who foreseeably rely on the attorney's opinion or other legal
services. Zendell v. Newport Oil Corp.,
226 N.J. Super. 431
(1988). In Zendell, the plaintiffs invested in unregistered
limited partnerships organized to engage in gas and oil
exploration. The attorneys assisted in organizing and selling
the partnership interests. Id. at 438. When the partnership
failed, the plaintiffs sought rescission, alleging violations of
federal and state securities-registration requirements. Id. at
435. Specifically, the plaintiffs alleged that the attorneys had
been negligent by "allowing an offering of unregistered
securities . . . ." Id. at 439. Reversing a summary judgment
for the attorneys, the Appellate Division held that
"[p]laintiff's negligence claim against [the attorneys] . . . is
cognizable under Rosenblum." Ibid. Thus, like certified public
accountants or other professionals involved in commercial
transactions, a lawyer's duty may run to third parties who
foreseeably rely on the lawyer's opinion or other legal services.
The objective purpose of documents such as opinion letters, title reports, or offering statements, and the extent to which others foreseeably may rely on them, determines the scope of a lawyer's duty in preparing such documents. Rosenblum, supra, 93 N.J. at 352-53. As the court observed in Norman, supra, 693 F. Supp. at 1265, the objective purpose of a tax-opinion letter
issued in connection with a public offering is to induce
potential investors to rely on the letter's characterization of
the investment's tax consequences.
Here, Herrigel did not prepare an opinion letter. Giving
Petrillo the benefit of all reasonable inferences, however, we
infer that Herrigel extracted information from existing
percolation-test reports, created the composite report, and
delivered the report to a real estate broker. Our initial
inquiry, as with an opinion letter or comparable document, is to
ascertain the purpose of the report.
Although Herrigel may have intended that the composite
report would demonstrate only that the property had passed two
percolation tests, his subjective intent may not define the
objective meaning of the report. The roles and relationships of
the parties color our assessment. In making that assessment, we
cannot ignore the fact that Herrigel is an attorney who, in
connection with his client's efforts to sell the property,
provided the report to a real estate broker. We infer that when
he delivered the report to Bachenberg, Herrigel knew, or should
have known, that Bachenberg might deliver it to a prospective
purchaser, such as Petrillo. Herrigel did nothing to restrict a
prospective purchaser's foreseeable use of the report. In
neither the report, a covering letter, nor a disclaimer did
Herrigel even hint that the report was anything but complete and
accurate.
Significantly, Herrigel's involvement continued after he
delivered the report to Bachenberg. After Bachenberg purchased
the property, Herrigel acted as his lawyer and negotiated the
terms of the contract for the sale of commercial property to
Petrillo. Although compiling an engineering report to help a
client sell real estate may not be part of a lawyer's stock-in
trade, representing the seller of real estate is a traditional
legal service. By representing Bachenberg on the sale to
Petrillo, Herrigel confirmed the continuity of his involvement as
a lawyer. On these facts, Herrigel's continuing involvement
permits the inference that the objective purpose of the report
was to induce a prospective purchaser to buy the property. His
involvement supports the further inference that Herrigel knew
that Bachenberg intended to use the report for that purpose.
Furthermore, a purchaser reading the composite report
reasonably could conclude that the property had passed two of
seven, not two of thirty, percolation tests. Based on that
conclusion, a purchaser reasonably could decide to sign a
purchase contract, although the purchaser would not have signed
the contract if he or she had seen the complete set of
percolation reports. So viewed, Herrigel should have foreseen
that Petrillo would rely on the total number of percolation tests
in deciding whether to sign the purchase contract. In sum, a
jury reasonably could infer that the composite report
misrepresented material facts.
By providing the composite report to Bachenberg and
subsequently representing him in the sale, Herrigel assumed a
duty to Petrillo to provide reliable information regarding the
percolation tests. Herrigel controlled the risk that the
composite report would mislead a purchaser. Fairness suggests
that he should bear the risk of loss resulting from the delivery
of a misleading report. We further conclude that Herrigel should
have foreseen that a prospective purchaser would rely on the
composite report in deciding whether to sign the contract and
proceed with engineering and site work.
Herrigel easily could have limited his liability. Most simply, he could have sent complete copies of both reports to Bachenberg. Alternatively, Herrigel could have sent a letter to Bachenberg stating that the property had passed two successful percolation tests as required by Union Township. Or he could have stated either in a letter to Bachenberg or in the composite report that the report evidenced only that the property had yielded two successful percolation tests and that no one should rely on the report for any other purpose. Because Herrigel did nothing to limit the objective purpose of the composite report, he should have foreseen that Petrillo, as a prospective purchaser, would rely on the facts set forth in the report. Accordingly, Herrigel's duty extends to Petrillo. Given Petrillo's concern about percolation, a concern she expressed in the contract, Herrigel's duty includes the obligation to provide
information about unsuccessful, as well as successful,
percolation tests.
Our decision to affirm the reversal of the judgment of
dismissal for Herrigel does not mean that a jury may not return a
verdict in his favor. A jury might find that Petrillo was
interested only in the fact that the property had passed two
percolation tests. Alternatively it could find that the omission
of the undisclosed test results was neither material nor
misleading. We do not resolve these or other factual issues that
may arise on remand. We decide only that a jury should have the
opportunity to determine the issue of the effect of Herrigel's
alleged negligent misrepresentation.
Our dissenting colleague accepts both our fundamental legal
analysis and our conclusion that a jury could find Herrigel to
have been negligent. The dissent, however, concludes as a matter
of law that Herrigel could not have foreseen that Petrillo would
have relied on the composite report when contracting to purchase
the property from Bachenberg. Only by ignoring Herrigel's
continuous involvement with Bachenberg may the dissent sustain
its conclusion.
Contrary to the dissent, a jury reasonably could conclude
that when he delivered the report to Bachenberg, Herrigel should
have foreseen that Bachenberg, in trying to sell the property,
would deliver it to a prospective purchaser. A jury could reach
that conclusion notwithstanding the change in Bachenberg's role
from agent to principal. As both realtor and investor,
Bachenberg's goal was to sell the property. A jury could find
that Herrigel should have foreseen that Bachenberg would transmit
the composite report to a prospective purchaser, such as
Petrillo. Given Herrigel's continuing relationship with
Bachenberg, the four-month lapse between Herrigel's delivery of
the report to Bachenberg and Bachenberg's delivery to Petrillo is
not so great as to render Petrillo's receipt of the report
unforeseeable as a matter of law. Neither is the potential class
of recipients of the report so vast that we expose Herrigel to
boundless risk by recognizing that he owed a duty to Petrillo.
Nor is Herrigel, linked by his relationship with Bachenberg, so
remote from Petrillo that we can conclude as a matter of law that
the chain of events "makes her too remote from Herrigel for him
to have foreseen harm to her." Post at ___ (slip op. at 12).
We further disagree with the dissent's unsupported conjecture that recognizing a duty extending from Herrigel to Petrillo will make lawyers less accessible and more defensive. Nor will the duty lead to legal services that are more cumbersome and costly. Post at ___ (slip op. at 1). Recognition of that duty, however, may protect innocent third parties from negligent misrepresentations by lawyers. The recognized duty hardly constitutes lawyers as "guarantors of the accuracy of surveys or other similar experts' reports that they merely transmit." Post at ___ (slip op. at 10). We do not hold that Herrigel guaranteed
the accuracy of the tests. Our holding goes no further than to
state that Herrigel had a duty not to misrepresent negligently
the contents of a material document on which he knew others would
rely to their financial detriment. In many situations, lawyers,
like people generally, may not have a duty to act, but when they
act, like other people, they should act carefully.
The judgment of the Appellate Division is affirmed.
Chief Justice Wilentz and Justices Handler, O'Hern, and
Stein join in this opinion. Justice Stein has also filed a
separate concurring opinion. Justice Garibaldi has filed a
separate dissenting opinion. Justice Coleman did not
participate.
SUPREME COURT OF NEW JERSEY
A-
8 September Term 1994
LISA PETRILLO,
Plaintiff-Respondent,
v.
WILLIAM G. BACHENBERG, JR.;
WILLIAM G. BACHENBERG, JR.,
TRUSTEE, "THE TRUST", a
fictitious name; BACHENBERG &
BACHENBERG, INC., and JOHN A.
MATTHEWS,
Defendants,
and
BRUCE D. HERRIGEL,
Defendant-Appellant.
STEIN, J., concurring.
I join the Court's opinion and write separately only to
emphasize that in my view the Court's decision effects no
material change in the liability of lawyers or other
professionals to third parties. Accordingly, the calamitous
consequences forecast by our dissenting colleague vastly
overstate the effect of our holding and ignore its exceptional
factual predicate.
The context in which the case arose emphasizes the limited
contours of the Court's holding. Defendant Herrigel, while
representing a former owner of the property in question,
prepared a composite of various percolation tests and transmitted
the composite report to William G. Bachenberg, Jr. (Bachenberg)
who later acquired the property. Concededly, the composite
report did not accurately reflect the results of all of the
percolation tests that had been done on the property.
Subsequently, when Bachenberg began negotiating the contract
to sell the property to plaintiff Petrillo, Herrigel was engaged
to represent Bachenberg. Among the materials that Bachenberg
furnished Petrillo was the composite percolation report. As the
majority points out, "nothing in the record indicates that
Herrigel informed Petrillo's attorney of the test results that
had been omitted from the composite report." Ante at ___ (slip
op. at 4).
Under those specific circumstances, the Court concludes that
"by providing the composite report to Bachenberg and subsequently
representing him in the sale, Herrigel assumed a duty to Petrillo
to provide reliable information regarding the percolation test."
Ante at ___ (slip op. at 21). It will come as no surprise to
the bar that the Court has decided that a properly instructed
jury could conclude that Herrigel should have foreseen that the
composite report would have been delivered to Petrillo and that
she would have relied on it to her detriment. Because of the
rather uncommon factual basis on which the Court's decision
rests, the likelihood that it will have a significant impact on
the professional liability of lawyers to third parties is minimal
indeed.
SUPREME COURT OF NEW JERSEY
A-
8 September Term l994
LISA PETRILLO,
Plaintiff-Respondent,
v.
WILLIAM G. BACHENBERG, JR.;
WILLIAM G. BACHENBERG, JR.,
TRUSTEE, "THE TRUST," a
fictitious name; BACHENBERG &
BACHENBERG, INC., and JOHN A.
MATTHEWS,
Defendants,
and
BRUCE D. HERRIGEL,
Defendant-Appellant.
GARIBALDI, J., dissenting.
The majority imposes on an attorney a duty of care to a non-client broader than that imposed on an attorney under the
proposed Restatement of the Law Governing Lawyers § 73 (Tentative
Draft No. 7, l994), under the Restatement (Second) of Torts § 552
(1977), and under our case law, including Rosenblum v. Adler,
93 N.J. 324 (1983). Such an extension will lead to defensive
lawyering; will make legal services more cumbersome, more costly,
and less accessible to clients.
I agree with the proposed Restatement of the Law Governing
Lawyers § 73, pertaining to "duty to certain non-clients," that
provides:
For the purposes of liability . . ., a lawyer
owes a duty to use care . . .:
(2) To a non-client when and to the extent
that the lawyer or (with the lawyer's
acquiescence) the lawyer's client invites the
non-client to rely on the lawyer's opinion or
provision of other legal services, the non-client so relies, and the non-client is not,
under applicable law, too remote from the
lawyer to be entitled to protection.
[Restatement of the Law Governing
Lawyers § 73 (Tentative Draft No.
7, l994).]
Comments b and c to section 73 disclose the limited
circumstances in which an attorney's duty to a non-client arises.
Making lawyers liable to non-clients,
moreover, could tend to discourage lawyers
from vigorous representation. Hence, a duty
of care to non-clients arises only in the
limited circumstances described in the
Section and must be applied in light of those
conflicting concerns.
. . . .
Similarly, a lawyer representing a client in
an arm's-length business transaction does not
owe a duty of care to opposing non-clients,
except in the exceptional circumstances
described in this Section.
Comment e to section 73 describes the type of case in which
an attorney may owe a duty to a non-client:
The lawyer's client typically benefits from the non-client's reliance, for example, because provision of the opinion was required in order to comply with a contractual obligation of the client, and the client cannot properly object to recognition of such
a claim on the ground that it conflicts with
duties the lawyer owed to the client.
. . . .
Clients or lawyers may invite non-clients to rely on a lawyer's legal opinion
or services. . . . For example, a sales
contract may provide that the seller's lawyer
will provide the buyer with an opinion letter
stating that, upon investigation, the lawyer
found no security interests encumbering the
property being sold. . . . Often, a non-client will require such an opinion letter as
a condition for transacting with a lawyer's
client. A lawyer's opinion may state the
results of a lawyer's investigation and
analysis of facts as well as the lawyer's
legal conclusions.
. . . .
In some circumstances, reliance by many
unspecified persons may be invited, as when a
lawyer writes an opinion letter concerning a
securities offering that is reasonably relied
on by purchasers.
I agree with the majority that "[t]he purpose of the legal
opinion letter is to induce reliance by others. If an attorney
foresees or should foresee that reliance, the resulting duty of
care can extend to non-client third parties." Ante at ___ (slip
op. at l3-14). See Zendell v. Newport Oil Corp.,
226 N.J. Super. 43l (App. Div. l988) (holding that attorneys who had assisted in
organizing and presenting for sale unregistered limited
partnerships are liable to plaintiffs who invested in the
unsuccessful partnerships); Greycas, Inc. v. Proud, 826 F.2d l560
(7th Cir. l987), cert. denied, 484 U.S. l043, l
08 S. Ct. 775,
98 L. Ed.2d 862 (l988) (finding that attorney who prepared opinion
letter stating that borrower's collateral was not subject to
prior liens owed Greycas, the creditor who relied on that opinion
letter, a duty not to misrepresent negligently the status of
borrower's collateral); Horizon Financial, F.A. v. Hansen, 79l F.
Supp. l56l, l573-75 (N.D. Ga. l992) (concluding that, under
Pennsylvania law, attorney for borrower has duty to lender bank
to whom attorney issued opinion letters expressly for bank's
benefit); Mehaffy, Rider, Windholz & Wilson v. Central Bank
Denver N.A., ___ P.2d ___ (Colo. January 30, l995) (holding that
"by issuing legal opinion letters for the purpose of inducing
[reliance], the attorneys may be liable . . . for negligent
misrepresentation"); Prudential Insurance Co. of America v. Dewey
Ballantine, Bushby, Palmer & Wood,
605 N.E.2d 3l8 (N.Y. l992)
(holding borrower's attorney liable to lender for negligently
preparing opinion letter that was provided to lender as condition
to debt restructuring). See also cases cited by majority, ante
at ___ (slip op. at l4).
An attorney who undertakes a specific task for a non-client
who the attorney knows will rely on that specific task also owes
a duty of care to that non-client. As Comment e to section 73 of
the proposed Restatement of the Law Governing Lawyers, supra,
states:
When a non-client is invited to rely on a lawyer's services, rather than on the lawyer's opinions, the analysis is similar.
For example, if the seller's lawyer at a
real-estate closing offers to record the deed
for the buyer, the lawyer is subject to
liability to the buyer for negligence in
doing so, even if the buyer did not thereby
become a client of the lawyer and the lawyer,
for example, owes the buyer no duty of
confidentiality.
[Restatement of the Law Governing
Lawyers § 73, supra, comment e.]
Our courts have already recognized this sort of duty to non-clients. See R.J. Longo Construction Co. v. Schragger, 2l
8 N.J.
Super. 206 (App. Div. l987) (holding that township attorneys who
had failed to obtain certain easements mentioned in sewer-construction contract's bid package, and who had thus forced the
contractor to stop construction and suffer losses, were liable
for foreseeable consequences of their negligent
misrepresentations on which constractor had reasonably and
foreseeably relied); Stewart v. Sbarro, l
42 N.J. Super. 58l
(App. Div. l976), certif. denied,
72 N.J. 459 (l976) (holding
that buyers' attorney who agreed to obtain buyers' signatures on
a bond and mortgage indemnifying sellers against liability for
existing corporate debt, but who failed to obtain those required
signatures, was liable in negligence for breaching a duty to
sellers).
Like the majority, I rely on Rosenblum, supra, 93 N.J. at
324. In Rosenblum, we applied section 552 of the Restatement
(Second) of Torts, supra, which limits liability for negligent
misrepresentation to "the person or one of a limited group of
persons for whose benefit and guidance" information is supplied.
Id. at 338. Those limitations were imposed so that accountants
would not be subject to unlimited liabilities.
Yet this case is easily distinguishable from any of the
previously cited cases, supra at ___ (slip op. at 3-4), and
clearly is distinguishable from the standards set forth in
section 73 of the proposed Restatement of the Law Governing
Lawyers, supra. This case does not concern a lawyer's legal
opinion or the performance of any legal services. Nor does this
case concern a non-client for whom an attorney has undertaken a
specific legal task. Rather, this case is about an attorney's
error in not continuing to follow the whereabouts of a report of
a consulting engineering company that was incorrectly collated in
his office and sent to the real estate agent of his then-client,
but that ended up in the hands of a subsequent non-client, from a
subsequent seller of the same property.
A brief recitation of the facts demonstrates what an overbroad, virtually unlimited duty of care for remote non-clients the Court has imposed on attorneys. Herrigel was the lawyer for Rohrer Construction (Rohrer). Rohrer wanted to sell the property at issue. While representing Rohrer, Herrigel sent a report of Heritage Consulting Engineers (Heritage) to Rohrer's then-real estate agent William A. Bachenberg, Jr. (Bachenberg). That report had been erroneously collated in Herrigel's office.
Rohrer failed to sell the property. Bachenberg later purchased
the property at a sheriff's sale. Bachenberg then decided to
sell the property. At his first meeting with Lisa Petrillo
(Petrillo), Bachenberg gave the miscompiled report to Petrillo.
This was done solely by Bachenberg. As the trial court stated
when it held that Herrigel had no duty to Petrillo, "He had no
knowledge of what Mr. Bachenberg gave, if anything, to Miss
Petrillo, . . .".
Thus Rohrer was the client whom Herrigel was representing
when he purportedly gave the two-page report to Bachenberg,
Rohrer's realtor. Petrillo was never Rohrer's prospective buyer;
she was solely Bachenberg's prospective buyer. By the time
Petrillo expressed interest in the property, Bachenberg was no
longer the realtor but the seller.
Under section 73 of the proposed Restatement of the Law
Governing Lawyers, supra, Herrigel has no duty to Petrillo.
Herrigel did not give Petrillo a "legal opinion" or provide
"other legal services" to her. Indeed, the negligence charged to
Herrigel is not related to either his legal opinion or other
legal services.
Nor is Herrigel liable under Rosenblum. In that case we
held that for the third-party investors to recover from an
accountant, the investors
would have to establish that they received
the audited statements from the company
pursuant to a proper company purpose, that
they, in accordance with that purpose, relied
on the statements and that the misstatements
therein were due to the auditor's negligence
and were a proximate cause of the
[investor's] damage.
Applying Rosenblum, Petrillo would have had to receive the
information from and for the benefit of Rohrer. Petrillo had no
connection with Rohrer. She did not receive the report from
Rohrer, nor was her reliance in furtherance of Rohrer's business
purposes. It was an unforeseeable turn of events that accounted
for her receipt of the report from Rohrer's former realtor,
Bachenberg. While Bachenberg was the party to whom the two-page
report was originally given, it was given to Bachenberg in
Bachenberg's capacity as realtor for Rohrer, Herrigel's client.
When Herrigel gave Bachenberg the report, it was to assist
Bachenberg in the sale of the property on behalf of Rohrer; it
was unforeseeable at that time that Bachenberg would later
purchase the property and give the two-page report to his own
prospective client.
As Rosenblum makes clear, a remote party is not entitled to
recover from an attorney who could not have foreseen the harm to
the non-client. Even if Petrillo had relied on the report, her
reliance in that later transaction with a different owner makes
her too remote for Herrigel to have foreseen harm to her.
Foreseeability of harm to a non-client is one of the factors the
Stewart court considered in balancing an attorney's liability to
a non-client; the other factors are
the extent to which the transaction was
intended to affect the plaintiff, the
foreseeability of harm to him, the degree of
certainty that the plaintiff suffered injury,
the closeness of the connection between the
defendant's conduct and the injury suffered,
the moral blame attached to the defendant's
conduct, and the policy of preventing future
harm.
[Stewart v. Sbarro, supra, l42 N.J. Super. at
593 (quoting Donald v. Garry, l
9 Cal. App.3d 769, 77l-72, 97 Cal. Rptr. l9l, l92 (Cal.
Dist. Ct. App. l97l) (quotations omitted)).]
Nor is Herrigel liable under Stewart. Herrigel had no duty
to Petrillo. There was no intent to affect Petrillo. She was
not a party to the transaction for which Herrigel sent the report
to Bachenberg. She was not a purchaser from Rohrer. Moreover,
Petrillo suffered no injury as a result of Herrigel's action.
Post at ___ (slip op. at ll-l3).
Nor was there the requisite closeness of connection between
Herrigel's conduct and Petrillo's alleged injury. Certainly no
moral blame attaches to the erroneous collating of a report by an
attorney or someone in his office. Petrillo is not claiming that
Herrigel committed an act of fraud. I agree with the Appellate
Division "that any claimed misconduct by Herrigel was far too
ambiguous or speculative to rise to the level of dishonesty
contemplated by the foregoing Rules of Professional Conduct."
263 N.J. Super. 472, 483 (l993) (referring t