Bovee v. Gravel

Bovee v. Gravel (2001-347); 174 Vt. 486; 811 A.2d 137

[Filed 13-Aug-2002]

                                 ENTRY ORDER

                      SUPREME COURT DOCKET NO. 2001-347

                               MAY TERM, 2002


  Maureen Bovee, et al.	               }	APPEALED FROM: 
                                       }    
                                       }
       v.	                       }	Caledonia Superior Court
                                       }
  John C. Gravel, Esq., et al.	       }
                                       }	DOCKET NO. 358-11-00 Cacv

                                                Trial Judge: Alan W. Cheever

             In the above-entitled cause, the Clerk will enter:

       Plaintiffs shareholders of Lyndonville Savings Bank & Trust Company
  appeal from a superior court judgment dismissing their complaint against
  defendants, the attorneys and law firms that represented the bank in a
  lawsuit against two of the plaintiffs, Evelyn and Roger Lussier. 
  Plaintiffs contend the trial court erroneously: (1) ruled that they lack
  standing; (2) violated their constitutional rights to equal protection and
  due process; and (3) found facts contrary to the allegations in the
  complaint.  We affirm.

       This case is one of several resulting from the recent troubles of
  Lyndonville Savings Bank.  In December 1993, plaintiff Roger Lussier was
  convicted in federal district court on a variety of criminal charges,
  including bank fraud, money laundering, and receipt of illegal commissions,
  committed during his tenure as the bank's president and chairman of the
  board.  See United States v. Lussier, 71 F.3d 456 (2d Cir. 1995) (affirming
  conviction); United States v. Lussier, 104 F.3d 32 (2d Cir. 1997)
  (affirming district court's dismissal of post-judgment motion to rescind
  restitution order); United States v. Lussier, 219 F.3d 217 (2d Cir. 2000)
  (affirming district court's denial of motion for new trial based on newly
  discovered evidence).  Lussier was sentenced to a prison term of forty-six
  months, a fine of $100,000, and ordered to pay restitution of over
  $426,000.
   
       In September 1995, following Roger Lussier's conviction, the bank
  filed a civil suit in federal district court against Roger Lussier and his
  wife Evelyn, seeking immediate payment of the restitution award, damages
  based on Roger Lussier's status as an officer and director of a bank in the
  Federal Reserve System, and recovery under several state law theories,
  including breach of fiduciary duty and fraudulent conveyance of certain
  bank shares to Evelyn Lussier.  In February 1996, the district court
  dismissed Evelyn Lussier as a defendant based on her agreement with the
  bank to reverse the allegedly fraudulent conveyance by returning the stock
  to its pre-transfer status.  In July 1997, the bank abandoned that portion
  of the complaint based on Roger Lussier's status as 

 

  a federal bank officer because the bank was not a member of the Federal
  Reserve.  Trial proceeded on the remaining claims, resulting in a judgment
  for the bank on the state law claims totaling over $8 million.  The
  district court denied a subsequent motion to set aside the judgment for
  lack of subject matter jurisdiction, but the Second Circuit Court of
  Appeals reversed, holding that federal law did not entitle the bank to seek
  a separate civil judgment on the restitution award, and that - since the
  bank had abandoned its claim based on Federal Reserve membership - the
  district court lacked pendent jurisdiction over the state law claims. 
  Lyndonville Sav. Bank & Trust Co. v. Lussier, 211 F.3d 697, 703-05 (2d Cir.
  2000).

       In June 2000, following dismissal of the federal action, the bank
  filed a new civil suit against Roger Lussier in Caledonia Superior Court,
  seeking, inter alia, an attachment of the bank shares transferred back to
  Roger as part of the agreement dismissing Evelyn Lussier from the federal
  action.  The trial court granted Evelyn Lussier's motion to intervene in
  the new lawsuit, noting that her earlier agreement reversing the transfer
  of stock in return for her dismissal from the federal action was void due
  to the district court's lack of subject matter jurisdiction.

       Shortly thereafter, plaintiffs - comprised of various bank
  shareholders including Roger and Evelyn Lussier - filed this action against
  the attorneys and law firms that had represented the bank in the federal
  lawsuit against the Lussiers. (FN1)  The complaint alleged that defendants had
  erroneously advised the bank concerning the adequacy of insurance coverage
  for defense costs and losses associated with the various lawsuits involving
  the bank; failed to advise the bank to prosecute bad faith actions against
  its various insurance companies; and filed the federal lawsuit against
  Roger and Evelyn Lussier knowing that there was no reasonable basis for the
  assertion of federal jurisdiction or the fraudulent conveyance claim. 
  Based on these allegations, the complaint stated a single cause of action
  for negligence, asserting that "a reasonably prudent attorney" in
  defendants' circumstances would have investigated whether: (1) there was a
  reasonable factual basis in the federal suit for the assertion of federal
  jurisdiction; (2) there was a reasonable factual basis for the fraudulent
  conveyance claim; (3) there was a conflict of interest in defendants'
  filing the state court action against Roger Lussier; (4) there was a
  reasonable basis for reissuing the disputed stock in Roger Lussier's name
  alone without regard to the property interests of Evelyn Lussier; and (5)
  plaintiffs were entitled to information concerning the costs incurred in
  prosecuting the civil actions against Roger Lussier.
   
       Defendants moved to dismiss the complaint, asserting that they had no
  attorney-client relationship with plaintiffs, and that plaintiffs therefore
  lacked standing to bring an action for professional malpractice based on
  their representation of the bank.  The trial court agreed, granted 

 

  the motion to dismiss, and entered judgment for defendants.  Plaintiffs'
  subsequent motion for reconsideration was denied.  This appeal followed.

       The longstanding common law rule is that an attorney owes a duty of
  care only to the client, not to third parties who claim to have been
  damaged by the attorney's negligent representation.  See Savings Bank v.
  Ward, 100 U.S. 195, 200 (1879) ("Beyond all doubt, the general rule is that
  the obligation of the attorney is to his client and not to a third party");
  Clagett v. Dacy, 420 A.2d 1285, 1287 (Md. Ct. Spec. App. 1980) ("The
  traditional rule, in Maryland and elsewhere, is that an attorney's duty of
  diligence and care flows only to his direct client/employer, and that,
  whether in an action of contract or tort, only that client/employer can
  recover against him for a breach of that duty."); see generally Annot.,
  Attorney's Liability to One Other Than Immediate Client, for Negligence in
  Connection With Legal Duties, 61 A.L.R.4th 615, 624 (1988) (collecting
  cases).

       Because in Vermont, as elsewhere, a corporation is a legal entity
  distinct from its shareholders, Jack C. Keir, Inc. v. Robinson & Keir
  P'ship, 151 Vt. 358, 360, 560 A.2d 957, 958 (1989), it is also the general
  rule that an attorney representing a corporation owes a duty of care solely
  to the corporation, not to its separate shareholders, officers or
  directors.  See, e.g., Delta Automatic Sys., Inc. v. Bingham, 974 P.2d 1174, 1178 (N.M. Ct. App. 1998) (in representing corporation, attorneys
  "did not owe [shareholders] any special duty above and beyond their duties
  to the corporation"); In re Banks, 584 P.2d 284, 289 (Or. 1978) (corporate
  attorney's "duty of loyalty is to the corporation and not to its officers,
  directors or any particular group of shareholders"); Bowen v. Smith, 838 P.2d 186, 189 (Wyo. 1992) (representation of corporation did not create
  attorney-client relationship with shareholders); see generally 3 R. Mallen
  & J. Smith, Legal Malpractice § 25.9 at 771-74 (5th ed. 2000) (discussing
  rule that only corporation may sue attorney for professional negligence).

       The requirement of attorney-client privity to maintain a malpractice
  action "ensure[s] that attorneys may in all cases zealously represent their
  clients without the threat of suit from third parties compromising that
  representation."  Barcelo v. Elliott, 923 S.W.2d 575, 578-79 (Tex. 1996);
  see also Orr v. Shepard, 524 N.E.2d 1105, 1108 (Ill. App. Ct. 1988)
  ("Public policy mandates that when an attorney acts in his professional
  capacity, he must be free to advise his client without fear of personal
  liability to third persons and nonclients if the advice later proves to be
  incorrect."); Brody v. Ruby, 267 N.W.2d 902, 906 (Iowa 1978) ("abandonment
  of the privity requirement would place a potentially unlimited burden on
  lawyers"); see generally Comment, Limits on the Privity and Assignment of
  Legal Malpractice Claims, 59 U. Chi. L. Rev. 1533, 1539 (1992) (discussing
  interests in maintaining and relaxing privity requirement).  In the
  corporate context, the privity rule serves to focus the attorney on the
  corporate client's interests, rather than the diverse needs and interests
  of the corporate shareholders, and avoids potentially unlimited liability
  to dissenting shareholders. See Gamboa v. Shaw, 956 S.W.2d 662, 665 (Tex.
  App. 1997) ("deviation [from privity requirement] would result in attorneys
  owing a duty to each shareholder of any corporation they represent,"
  leading to "almost unlimited liability").
   
       To be sure, a number of courts have relaxed the privity rule in
  limited circumstances - most often in the estate-planning context - where
  it can be shown that the client's purpose in retaining the