• Legal Opinion Liability Far From Certain
  • June 8, 2012
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • A New York appellate panel recently dismissed legal malpractice, fraud and negligent misrepresentation actions brought against a law firm in connection with a legal opinion it issued. The legal opinion stated that certain loan documents were duly executed and binding; however it later was discovered the documents were falsified and contained forged signatures.

    In 2005, Marc Drier, an attorney, proposed that Fortress Credit Corporation enter into a loan transaction with his clients, Solow Realty & Development Company, LLC and its affiliated companies (collectively, the “Borrower”), with Drier serving as the guarantor. The parties entered into two loan transactions totaling $60 million to finance the purchase of foreign real estate. In 2008, Drier again proposed a loan transaction, this time for $50 million. For this transaction, Fortress required that the Borrower and Drier obtain an opinion letter from an independent attorney discussing whether the Borrower and Drier “had carried out the necessary formalities to render the loan documents valid and binding on them.” Dechert LLP was retained for this purpose and issued its legal opinion based on information and documents supplied by Drier. The documents the Borrower was required to sign appeared to have been signed by it. Subsequently, Fortress wired $50 million into an attorney trust account at Drier’s firm. Several months later, when Drier was arrested for another fraud scheme, Fortress learned that the Borrower was not aware of and had never been a party to the loan transactions—Drier falsified the documents and forged the Borrower’s signatures.

    Fortress filed suit against Dechert alleging fraud, legal malpractice and negligent misrepresentation. Fortress alleged that it relied on Dechert’s legal opinion “that the loan documents were duly executed and delivered and that the loan was a valid and binding obligation” on the Borrower and Drier.

    With respect to the fraud count, Fortress alleged that Dechert “acted recklessly in failing to confirm that [the Borrower] was in fact involved in the loan transaction.” The court held that this allegation failed to establish the degree of knowledge necessary for a fraud claim, “especially since the factual allegations of this complaint do not establish that [Dechert] made a knowingly false statement or that [it] was a knowing participant in the fraud.” The court held that Fortress’s action for legal malpractice failed because Fortress and Dechert did not have an attorney-client relationship. The court noted that while Fortress was intended to benefit from Dechert’s actions on behalf of the Borrower, “‘that circumstance does not give rise to a duty [to the Lender] on the part of the attorney.’”

    Looking at the negligent misrepresentation cause of action, the court first found the relationship of “near privity” was satisfied. This requirement was satisfied because Fortress alleged that the purpose of the legal opinion was to assist it in deciding whether to enter into the transaction, a purpose which Dechert was aware of and evinced its understanding of, when it addressed the legal opinion letter to Fortress. Nevertheless, the court found this cause of action failed because the complaint did not allege “(a) that [Lender] informed [Dechert] that its obligations were not limited solely to a review of relevant and specified documents or (b) that [Lender] informed [Dechert] that it was to investigate, verify and report on the legitimacy of the transaction.” Without these factual allegations, Fortress could not establish that Dechert breached a duty of care. Additionally, the court noted that Dechert’s statements in the legal opinion were not misrepresentations as the letter was “clearly and unequivocally circumscribed by the qualifications that [Dechert] assumed the genuineness of all signatures and the authenticity of the documents, made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining those facts.”

    This case is cited as Fortress Credit Corp., v. Dechert LLC, No. 08626, 2011 WL 5922969 (N.Y. App. Div. 2011).

    Lerch Early Practice Tip: Law firms are not private detectives, and the issuance of opinion letters with respect to loan transactions will contain qualifications and assumptions as to factual matters that the law firm has no ability of confirming. Lenders must know their borrowers.