B.L.M., Plaintiff and Appellant, v. SABO & DEITSCH et al., Defendants and Respondents.
A developer appeals from a summary judgment entered against it in its action for damages against a law firm. We affirm.
In April 1989 plaintiff B.L.M., a general partnership, filed an action denominated a “Complaint for Legal Malpractice” against defendants Sabo & Deitsch, a professional corporation, and three individuals, Timothy Sabo, Stephen P. Deitsch, and Christine Youngs. The complaint alleged that in early 1987, B.L.M. had approached the City Council, the Redevelopment Agency and the city staff of the City of Rialto (hereafter sometimes referred to collectively as Rialto) regarding a proposal to construct an apartment project for seniors, “seeking financial assistance in said construction through public financing.” As originally proposed, Rialto would have issued public financing and constructed the project. Under that proposal, construction of the project would have required public bidding as well as payment of prevailing wage. A draft agreement was prepared by Finer, Kim & Stearns, the law firm representing B.L.M., calling for the payment of prevailing wage.
The complaint went on to allege that prior to formal consideration of the proposal by Rialto it was determined by the parties that public bidding and payment of prevailing wage made the project economically infeasible; in addition, Rialto wished the developer to take a greater portion of the risk.
As a result of these considerations B.L.M. proposed a project that would be constructed by B.L.M. and acquired subsequently by Rialto through the issuance of certificates of participation.
In July 1987 the Rialto City Council adopted a resolution in which it accepted the financial proposal, approved the preparation of the agreement, appointed a financial adviser to Rialto, and appointed Sabo & Deitsch as special counsel and bond counsel for the project. The complaint alleges that Sabo & Deitsch specifically stated at that time in conversations with B.L.M. that public bidding and payment of prevailing wage were not required on a project financed in this manner because B.L.M. was to undertake the construction. The complaint states that “As a result of the elimination of the requirement for payment of prevailing wage, the project became economically feasible” and that B.L.M., as well as Rialto, relied on that assurance in proceeding to expend funds to plan and develop the project.
Paragraph 15 of the complaint alleges that “[Sabo & Deitsch], and each of them, hold a duty to [B.L.M.] to use such skill, prudence, and diligence as other members of their profession commonly possess and exercise. As a part of the services, [B.L.M.] agreed to perform on behalf of the City of Rialto/Redevelopment Agency, [Sabo & Deitsch] agreed to perform Special Counsel and Bond Counsel services to the benefit of [B.L.M.] as a third party beneficiary to [B.L.M.'s] contract with the City of Rialto/Redevelopment Agency and as such third party beneficiary, [B.L.M.] was entitled to rely upon the documents prepared and opinions expressed in connection with the project.” [Sic.]
In August 1987 Rialto approved certain management agreements and the development agreement in connection with the financing of the project. On September 1, 1987, a memorandum of understanding (MOU) between B.L.M. and Rialto concerning the financing and development of the project was entered into; the MOU had been “prepared and/or reviewed” by Sabo & Deitsch. The MOU provided that B.L.M. was to obtain conventional interim financing for the project and was to construct the project within 24 months; simultaneously with the closing of the interim financing, Rialto was to cause the sale and delivery of certain certificates of participation, the proceeds of which were to be held in escrow until the construction of the project was complete and a specified occupancy level was reached. At that point, the proceeds were to be used to purchase the completed project from the developer.
On November 3, 1987, a revised MOU was entered into which included a detailed financial analysis of the project. A second revised MOU was adopted by Rialto in February 1988. That MOU contemplated the issuance of certificates of participation by Rialto in the amount of $22,500,000; B.L.M. was entitled to a development fee not to exceed $3,500,000.
On April 28, 1988, Youngs did not attend the closing meeting but instead, by telephone, indicated that Sabo & Deitsch would not let her provide a final opinion of bond counsel because their review had established that payment of prevailing wage was necessary as a condition of validly issuing the certificates of participation.
As a result of the refusal of Sabo & Deitsch to issue the opinion of bond counsel the project could not go forward. B.L.M. alleged in the complaint that it was damaged in the amount of $415,000, the amount it had expended on the project already, and was further damaged in the amount of $3,500,000, representing the lost developer's fee. B.L.M. alleged a failure on the part of Sabo & Deitsch to exercise “reasonable care, skill and diligence in undertaking to perform legal services related to the providing of Special Counsel and Bond Counsel services for the project.” B.L.M. further alleged a duty owed by Sabo & Deitsch to B.L.M. to properly supervise the legal work performed, and breach of that duty. The complaint went on to state that had Sabo & Deitsch “utilized the skill, prudence and diligence as other members of their profession commonly possessed and exercised, [Sabo & Deitsch] would at no time have provided the opinion that prevailing wage was not required and [B.L.M.] therefore would not have relied thereon to their detriment.” B.L.M. then asked for damages in the amount of the money expended as well as the lost developer's fee.1
In October 1992 an arbitrator awarded $3,500,000 to B.L.M. Sabo & Deitsch requested a trial de novo. Following grant of that request Sabo & Deitsch filed their motion for summary judgment, based on the argument that B.L.M. “cannot establish the required duty element in this legal malpractice action, because an attorney-client relationship never existed between plaintiff and defendants.”
In its ruling on the motion the trial court found that the complaint contained “a single cause of action for professional negligence.” The court concluded that Sabo & Deitsch owed no duty to B.L.M. and granted the motion for summary judgment. Judgment was entered in favor of Sabo & Deitsch, and B.L.M. filed this appeal.2
I. Standard of Review
“In reviewing a ruling on a motion for summary judgment, an appellate court (1) ‘identif[ies] the issues framed by the pleadings,’ (2) ‘determine[s] whether the moving party's showing has established facts which negate the opponent's claim and justify a judgment in movant's favor,’ and (3) ‘[w]hen a summary judgment motion prima facie justifies a judgment, ․ determine[s] whether the opposition demonstrates the existence of a triable, material factual issue.’ (AARTS Productions, Inc. v. Crocker National Bank (1986) 179 Cal.App.3d 1061, 1064-1065, 225 Cal.Rptr. 203․)” (Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 1252-1253, 32 Cal.Rptr.2d 223, 876 P.2d 1022.)
II. Cause of Action for Legal Malpractice
Our first task in reviewing a motion for summary judgment is to identify the issues framed by the pleadings. In the present case the complaint itself was called a “Complaint for Legal Malpractice.” Legal malpractice is, of course, a form of negligence. (Laird v. Blacker (1992) 2 Cal.4th 606, 625, 7 Cal.Rptr.2d 550, 828 P.2d 691.)
“The elements of a cause of action in tort for professional negligence are: (1) the duty of the professional to use such skill, prudence, and diligence as other members of [the] profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional's negligence. [Citations.]” (Budd v. Nixen (1971) 6 Cal.3d 195, 200, 98 Cal.Rptr. 849, 491 P.2d 433.)
In its complaint B.L.M. alleged that Sabo & Deitsch owed a duty to B.L.M. “to use such skill, prudence, and diligence as other members of their profession commonly possess and exercise” in performing legal services related to the project, and further alleged that Sabo & Deitsch owed a duty to B.L.M. to properly supervise the legal work performed. The complaint alleged that Sabo & Deitsch failed to exercise due care in the performance of its duty by providing the opinion that prevailing wage would not be required on the project; that B.L.M. reasonably relied to its detriment on that opinion; and that B.L.M. suffered substantial damage as a result of its reliance. Thus, on its face the complaint alleged the elements of a cause of action for legal malpractice.
A. No Liability for Negligence to Non-client
Between the filing of the complaint and the filing of the motion for summary judgment the California Supreme Court issued its opinion in Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745 (hereafter Bily ), an opinion that addressed the extent to which liability for professional malpractice extends to those who are not clients of the professional. Specifically, that court considered “whether and to what extent an accountant's duty of care in the preparation of an independent audit of a client's financial statements extends to persons other than the client.” (Id., at p. 375, 11 Cal.Rptr.2d 51, 834 P.2d 745.)3
The court in Bily first discussed the various approaches that have been adopted in different jurisdictions and under federal securities law toward the problem of auditor liability to third persons. (Bily, supra, 3 Cal.4th at pp. 384-396, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The court then analyzed the traditional elements that have led to imposition of liability for negligence, particularly the factors considered in assessing legal duty and the other factors relevant to the imposition of auditor liability, and concluded that “an auditor's liability for general negligence in the conduct of an audit of its client financial statements is confined to the client, i.e., the person who contracts for or engages the audit services. Other persons may not recover on a pure negligence theory.” (Id., at p. 406, 11 Cal.Rptr.2d 51, 834 P.2d 745, fn. omitted.) B.L.M. has acknowledged in its brief on appeal the holding in Bily that third parties could not recover from an auditor under a general negligence theory.
The trial court in the present case relied on the analysis and the conclusion in Bily to find no duty owed by Sabo & Deitsch to B.L.M. and therefore no liability for negligence.
B. No Liability for Negligence Under Third Party Beneficiary Theory
The court in Bily noted in a footnote that “In theory, there is an additional class of persons who may be the practical and legal equivalent of ‘clients.’ It is possible the audit engagement contract might expressly identify a particular third party or parties so as to make them express third party beneficiaries of the contract.” (Bily, supra, 3 Cal.4th at p. 406, fn. 16, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The court was not required to decide the issue in Bily because “No third party is identified in the engagement contract.” (Ibid.)
On appeal B.L.M. cites the resolution adopted by Rialto on July 7, 1987, which specifically identifies Lawrence Lipps (general partner of B.L.M.) as the developer of the project, as sufficiently identifying B.L.M. so as to make it an express third party beneficiary of the contract between Rialto and Sabo & Deitsch. The July 7, 1987, resolution includes a provision stating, “The City Staff, with the law firm of Sabo & Deitsch, a Professional Corporation, as Special Counsel to the City [of Rialto] and General Counsel to the [Redevelopment] Agency [of the City of Rialto], is hereby authorized and directed to initiate preparation of the documentation for the Projects․” The resolution contains other similar provisions, making it clear that the firm of Sabo & Deitsch was working with the city staff and on behalf of Rialto in working on the project.
B.L.M. argues, however, that the provision in the resolution stating, “The City Council hereby appoints the law firm of Sabo & Deitsch, a Professional Corporation, as Bond Counsel for the Projects,” is sufficient to create some sort of professional relationship between B.L.M. and Sabo & Deitsch because a bond counsel is counsel to the transaction and not to any particular party. Thus, according to B.L.M., “The City was not arm's-length from the developer; the parties were working together to provide needed public housing․ [Sabo's] opinions as to validity were to protect all parties to the transactions.”
Under B.L.M.'s argument Sabo & Deitsch would end up in a completely untenable position: Having been hired by Rialto to work with and advise Rialto and its staff, Sabo & Deitsch would be subject to potential liability should that advice include something detrimental to B.L.M. According to this theory, it would appear that any time the parties to a contract are named in the contract, and a law firm is named in the contract as representing one of the parties, the law firm would owe a professional duty of care to all the other parties named in the contract as well. We reject this approach as being unworkable and undermining the very nature of the attorney-client relationship.
The mere fact that B.L.M. stood to benefit from the successful completion of the project does not render B.L.M. a third party beneficiary of the employment agreement between Rialto and Sabo & Deitsch. In order to show a duty was owed to a third party beneficiary of a legal services agreement the third party must show that “that was the intention of the purchaser of the legal services-the party in privity,” and that “imposition of the duty carries out the prime purpose of the contract for services.” (Johnson v. Superior Court (1995) 38 Cal.App.4th 463, 472, 45 Cal.Rptr.2d 312.)4 No such showing was made here.
Other cases have applied a similar rule. In Donald v. Garry (1971) 19 Cal.App.3d 769, 97 Cal.Rptr. 191, the court reversed an order sustaining the demurrer of an attorney who had been hired by a collection company to collect a debt owed to a creditor. The collection action had been dismissed because of the attorney's lack of diligent prosecution, and the creditor filed suit against the attorney. The appellate court found a duty was owed by the attorney to the creditor, even though the attorney's client was the collection company and not the creditor, noting, “the transaction in which [the attorney's] negligence occurred was intended primarily for the benefit of [the creditor]. [The attorney] was retained to collect an account due him.” (Id., at p. 772, 97 Cal.Rptr. 191.)
In Home Budget Loans, Inc. v. Jacoby & Meyers Law Offices (1989) 207 Cal.App.3d 1277, 255 Cal.Rptr. 483, the trial court sustained the demurrer of defendant law firm in an action brought against it by Home Budget Loans, Inc. (HBL), a mortgage broker. “As a condition of arranging a loan for one Ada Austin, HBL required that she consult with an attorney, have the attorney review the loan documentation and provide a written verification to HBL that the attorney had explained the terms of the loan transaction to Austin and that she understood those terms and wished to proceed with the loan.” (Id., at p. 1281, 255 Cal.Rptr. 483.) Austin retained a lawyer from defendant law firm. The lawyer reviewed the proposed loan transaction with Austin then wrote a letter to HBL representing that Austin understood the terms of the transaction and wished to proceed. These representations were false. In reliance on these representations HBL disbursed the proceeds of the loan, and was subsequently sued by Austin. HBL filed a cross-complaint against defendant law firm. (Id., at p. 1282, 255 Cal.Rptr. 483.) The appellate court reversed the order sustaining the demurrer of the law firm to HBL's cross-complaint, allowing the action to proceed and noting that “ ‘In simple terms, defendants are alleged to have prepared a false and/or misleading document, the purpose of which was to influence plaintiffs' conduct․’ [Citation.]” (Id., at p. 1284, 255 Cal.Rptr. 483.) 5
We conclude that the reference to B.L.M. as a participant in the project in the resolution passed by Rialto approving the project in concept and appointing Sabo & Deitsch to work with the city's staff and appointing Sabo & Deitsch as bond counsel for the project was not sufficient to render B.L.M. a third party beneficiary of the employment agreement between Rialto and Sabo & Deitsch. Thus, B.L.M. failed to allege facts that would have created a contractual obligation on the part of Sabo & Deitsch toward B.L.M. under a third party beneficiary theory.
We hold that the trial court correctly concluded that Sabo & Deitsch owed no duty of professional care to B.L.M., and thus could not be held liable to B.L.M. for legal malpractice.
III. Complaint Failed to State a Cause of Action for Negligent Misrepresentation
The complaint in the present case states only one cause of action, entitled legal malpractice. However, on appeal B.L.M. argues that it should be permitted to proceed against Sabo & Deitsch under a negligent misrepresentation theory. B.L.M. argues that it sufficiently alleged the elements of that tort in the complaint, and appears to ignore the fact that at no time did either the defendant or the trial court have notice that there was an additional theory of recovery. However, resolving every reasonable doubt in favor of the complaint, as we must in review of grant of a motion for summary judgment (Truestone, Inc. v. Simi West Industrial Park II (1984) 163 Cal.App.3d 715, 721, 209 Cal.Rptr. 757), we will review B.L.M.'s contention in this appeal. In our review we are guided by the discussion of the tort of negligent misrepresentation contained in Bily, supra, 3 Cal.4th. at p. 407, 11 Cal.Rptr.2d 51, 834 P.2d 745 et seq. The court there stated that “Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit.” (Id., at p. 407, 11 Cal.Rptr.2d 51, 834 P.2d 745.)
“To be actionable deceit, the representation need not be made with knowledge of actual falsity, but need only be an ‘assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true’ [citations] and made ‘with intent to induce [the recipient] to alter his position to his injury or his risk․’ [Citations.]” (Gagne v. Bertran (1954) 43 Cal.2d 481, 487-488, 275 P.2d 15.) The elements of negligent misrepresentation also include justifiable reliance on the representation, and resulting damage. (Home Budget Loans, Inc. v. Jacoby & Meyers Law Offices, supra, 207 Cal.App.3d 1277, 1285, 255 Cal.Rptr. 483; see also Fox v. Pollack (1986) 181 Cal.App.3d 954, 962, 226 Cal.Rptr. 532 [“Negligent misrepresentation is a form of deceit, the elements of which consist of (1) a misrepresentation of a past or existing material fact, (2) without reasonable grounds for believing it to be true, (3) with intent to induce another's reliance on the fact misrepresented, (4) ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed, and (5) damages.”].)
In our review of a summary judgment motion this court, like the trial court, must begin its inquiry with a review of the complaint to identify the issues framed by the pleadings. The complaint in the present action alleges that Sabo & Deitsch misrepresented the need for the project to require payment of prevailing wage. “Under certain circumstances, expressions of professional opinion are treated as representations of fact. When a statement, although in the form of an opinion, is ‘not a casual expression of belief’ but ‘a deliberate affirmation of the matters stated,’ it may be regarded as a positive assertion of fact. [Citation.]” (Bily, supra, 3 Cal.4th at p. 408, 11 Cal.Rptr.2d 51, 834 P.2d 745.) Next, by stating that if Sabo & Deitsch had “utilized the skill, prudence and diligence” commonly possessed and exercised by members of their profession they would not have provided the opinion that prevailing wage was not required, the complaint implies that Sabo & Deitsch lacked reasonable grounds for believing the representations to be true.6 B.L.M. alleges in the complaint that it relied on the representation of Sabo & Deitsch, and that it suffered damages as a result. It would appear that the pleadings as to those elements of negligent misrepresentation would be sufficient to give notice to defendants of the actions for which they were to be held liable.
We conclude, however, that B.L.M. failed to sufficiently allege in the complaint that Sabo & Deitsch had the intent to induce B.L.M.'s reliance on its representations, or that the reliance of B.L.M. was justifiable under the circumstances of the case.
A. Intent to Influence
In Bily the Supreme Court noted that in order to recognize a cause of action on behalf of a third party for negligent misrepresentation by a professional, “California courts have consistently required some manifestation on the part of a professional who offers an opinion, information, or advice that he or she is acting to benefit a third party or defined group of third parties in a specific and circumscribed transaction.” (Bily, supra, 3 Cal.4th at pp. 411-412, 11 Cal.Rptr.2d 51, 834 P.2d 745.) “ ‘Intent to influence is a threshold issue. In its absence there is no liability even though a plaintiff has relied on the misrepresentation to his or her detriment, and even if such reliance were reasonably foreseeable.’ (Stagen v. Stewart-West Coast Title Co. (1983) 149 Cal.App.3d 114, 121-122, 196 Cal.Rptr. 732 ․, italics added.)” (3 Cal.4th at p. 412, 11 Cal.Rptr.2d 51, 834 P.2d 745, fn. omitted.)
Discussing section 552 of the Restatement Second of Torts, the Bily court paraphrased the requirement of that section as follows: “[A] supplier of information is liable for negligence to a third party only if he or she intends to supply the information for the benefit of one or more third parties in a specific transaction or type of transaction identified to the supplier.” (Bily, supra, 3 Cal.4th at p. 392, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The court continued: “The ‘intent to benefit’ language of the Restatement Second of Torts thus creates an objective standard that looks to the specific circumstances (e.g., supplier-client engagement and the supplier's communications with the third party) to ascertain whether a supplier has undertaken to inform and guide a third party with respect to an identified transaction or type of transaction. If such a specific undertaking has been made, liability is imposed on the supplier.” (3 Cal.4th at p. 410, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics in original.)
The complaint here alleges that discussions were held between B.L.M. and Sabo & Deitsch “with regard to the requirement for public bidding and payment of prevailing wage. [Sabo & Deitsch] specifically stated that public bidding and payment of the prevailing wage was not required on a project financed in this manner, because [B.L.M.] was to undertake the construction.” There is no specific allegation in the complaint of intent on the part of Sabo & Deitsch to induce B.L.M. to act in reliance on the representation; the only indication of such intent would be the inference to be drawn that if Sabo & Deitsch said it they must have intended B.L.M. to rely on it. That is a thin reed on which to hang potentially enormous liability.
B. Justifiable Reliance
A more fundamental deficiency in the complaint is the failure to allege that B.L.M.'s reliance on the representations of Sabo & Deitsch was justified. In its discussion of negligent misrepresentation the court in Bily “emphasize [d] the indispensability of justifiable reliance” on the part of the plaintiff. (Bily, supra, 3 Cal.4th at p. 413, 11 Cal.Rptr.2d 51, 834 P.2d 745.) Comparing jury instructions on general negligence, in which “The reliance element ․ is only implicit,” the court noted that “an instruction based on the elements of negligent misrepresentation necessarily and properly focuses the jury's attention on the truth or falsity of the audit report's representations and plaintiff's actual and justifiable reliance on them.” (Ibid.)
The complaint more than adequately alleges actual reliance by B.L.M. on the representations of Sabo & Deitsch regarding the need for payment of prevailing wage. However, B.L.M. has failed to allege facts sufficient to establish that the reliance was justifiable. The complaint states that the law firm representing B.L.M. had given B.L.M. an agreement outlining a proposal that specifically called for the payment of prevailing wage. This indicates that B.L.M. was represented by its own counsel, and that its counsel had at least at one point given a legal opinion directly contrary to the Sabo & Deitsch opinion on which B.L.M. subsequently relied. The complaint includes no other allegations to explain or justify B.L.M.'s reliance on the opinion of the law firm representing the parties with whom B.L.M. was in negotiations regarding development of the project. It is clear from the complaint that Sabo & Deitsch was hired by Rialto and was chosen by that city's council to work with and advise Rialto. There are no allegations in the complaint to support the claim now made by B.L.M. that B.L.M.'s reliance on the opinion by Sabo & Deitsch was justifiable, and that Sabo & Deitsch intended that should be so.
In Norton v. Hines (1975) 49 Cal.App.3d 917, 123 Cal.Rptr. 237, the trial court sustained, without leave to amend, a demurrer filed by attorney Hines to a complaint for damages for professional negligence filed by plaintiff Norton. Norton had been sued by a client of Hines's, allegedly as a result of Hines's negligent advice that the suit had merit. (Id., at p. 919, 123 Cal.Rptr. 237.) On appeal, Norton argued that “ ‘an attorney owe[s] a duty to a foreseen third person to exercise reasonable care in advising his client to commence a lawsuit against that third person․’ ” (Ibid.) In approving the order sustaining Hines's demurrer to the complaint the Norton court stated the rule that “ ‘An attorney may be liable for damage caused by his negligence to a person intended to be benefited by his performance irrespective of any lack of privity of contract between the attorney and the party to be benefited. [Citation.] The liability sounds in tort.’ (Italics added.)” (Id., at p. 921, 123 Cal.Rptr. 237, fn. omitted.) However, the court went on to conclude that “In the case at bar a former litigant is suing adverse counsel. Clearly, an adverse party is not an intended beneficiary of the adverse counsel's client.” (Ibid.; accord, Weaver v. Superior Court (1979) 95 Cal.App.3d 166, 180, 156 Cal.Rptr. 745.)
Other decisions have applied the same reasoning: See, e.g., Parnell v. Smart (1977) 66 Cal.App.3d 833, 837-838, 136 Cal.Rptr. 246 [affirming order sustaining defendants' demurrer, and stating, “Defendants [attorneys] were directly responsible to their [insurance company] client ․ and were under a duty to represent and protect their client's interest against the claim being made by plaintiff. In this role they were duty bound to challenge, minimize or, if possible, to defeat the claim being made. Under these circumstances, it is unreasonable to conceive that defendants owed some sort of legal duty to plaintiff.”]; Omega Video Inc. v. Superior Court (1983) 146 Cal.App.3d 470, 480, 194 Cal.Rptr. 574 [“It is the present state of California law that an attorney may not be sued for negligent representation of a client by an adverse party in an action who claims to have suffered resulting injury from such negligence.”].
An attorney for one of the parties in a real estate transaction does not have a duty of professional care to the escrow agent for the transaction. (St. Paul Title Co. v. Meier (1986) 181 Cal.App.3d 948, 952, 226 Cal.Rptr. 538.) An attorney does not owe a duty of professional care to “an unrepresented party to a real estate exchange in which the attorney represents the opposite party”; neither does the unrepresented party in such a situation have a cause of action against the attorney for negligent misrepresentation. (Fox v. Pollack, supra, 181 Cal.App.3d 954, 957, 963, 226 Cal.Rptr. 532.)
In a closely related issue, the loyalty owed by an attorney to a client has recently been discussed by the California Supreme Court in Flatt v. Superior Court (1994) 9 Cal.4th 275, 36 Cal.Rptr.2d 537, 885 P.2d 950. In that case Flatt, an attorney, met with a prospective client to discuss a possible malpractice action against the client's previous attorney. One week after the meeting, Flatt returned the client's papers to him and stated she could not represent him because her firm was representing the previous attorney's firm in an unrelated matter. (Id., at pp. 279-280, 36 Cal.Rptr.2d 537, 885 P.2d 950.)
Twenty-two months later the prospective client filed suit against his previous attorney and also against Flatt and her firm claiming that Flatt had breached a duty to advise him of the statute of limitations on his proposed action and had failed to advise him to consult another attorney. (Flatt v. Superior Court, supra, 9 Cal.4th at p. 280, 36 Cal.Rptr.2d 537, 885 P.2d 950.) The Supreme Court rejected this claim, holding that Flatt had an undivided duty of loyalty to the existing client and that she had no duty to give the prospective client advice that would have “aided in advancing his contemplated lawsuit against ․ the firm's existing client.” (Id., at p. 289, 36 Cal.Rptr.2d 537, 885 P.2d 950.) In its discussion the Supreme Court quoted its own language from a 1930 decision stating “ ‘It is ․ an attorney's duty to protect his client in every possible way, and it is a violation of that duty for him to assume a position adverse or antagonistic to his client without the latter's free and intelligent consent given after full knowledge of all the facts and circumstances. [Citation.] By virtue of this rule an attorney is precluded from assuming any relation which would prevent him from devoting his entire energies to his client's interests.’ ” (Id., at p. 289, 36 Cal.Rptr.2d 537, 885 P.2d 950, quoting Anderson v. Eaton (1930) 211 Cal. 113, 116, 293 P. 788, italics omitted.) 7
In light of the fact that an attorney is prohibited from representing one who holds a position adverse or antagonistic to an existing client, it would be anomalous to hold that a person in an adverse or antagonistic position could nonetheless rely on a legal opinion of the attorney as a basis for holding the attorney liable for negligent misrepresentation. This would in fact amount to creating a duty of professional care on the part of the attorney toward a person with whom the attorney would be prohibited from maintaining a professional relationship.
The dissent argues that B.L.M. and the City were not adverse parties but were instead cooperating in trying to build the project; “While they were negotiating at arm's length regarding some aspects of the deal, their interests concerning others coincided.” (Dis. opn., p. 351.) Under our reading of Flatt v. Superior Court, supra, 9 Cal.4th 275, 36 Cal.Rptr.2d 537, 885 P.2d 950, the appointment of Sabo & Deitsch as special counsel to Rialto and general counsel to the Redevelopment Agency would create a primary duty of loyalty on the part of the firm toward those clients. The fact that those entities were involved in arm's-length negotiations with B.L.M. regarding development of the project would preclude representation of B.L.M. by Sabo & Deitsch, in the absence of a written waiver.
We conclude that it would be inappropriate to hold an attorney liable to a third party for a legal opinion which the third party could not, under the Rules of Professional Conduct, have contracted to obtain from that attorney. We therefore hold that the reliance by B.L.M. on the legal opinion of Sabo & Deitsch regarding payment of prevailing wage was not justifiable under the facts alleged, and that B.L.M. has failed to sufficiently allege facts to support its claim.
We do not suggest that an attorney should be exempt from liability for negligent misrepresentation under circumstances in which a nonattorney could be held liable; we merely decline to extend professional liability under a negligent misrepresentation theory to individuals who are not clients of the attorney.8
A review of cases suggests that courts already make this distinction and have limited recovery by a third party against an attorney under a negligent misrepresentation theory to those cases involving misrepresentations of fact rather than legal opinions. Thus, for example, in Cicone v. URS Corp. (1986) 183 Cal.App.3d 194, 227 Cal.Rptr. 887, an action for negligent misrepresentation was permitted to proceed against an attorney in a suit arising out of the sale of a company. A sales agreement prepared by the buyer included a provision stating that the sellers warranted the accuracy of an unaudited balance sheet that had been provided to buyer. At a meeting on the agreement, counsel for sellers told the buyer and his attorney, Canady, that the sellers would not guarantee the accuracy of the balance sheet; Canady, with the tacit approval of the buyer, replied that the buyer understood, and would deem the sellers to be guaranteeing the information only to the sellers' best knowledge. (Id., at p. 199, 227 Cal.Rptr. 887.) When the buyer subsequently made a claim against sellers based on an inaccuracy in the balance sheet, the sellers filed a legal malpractice claim against their former attorney, who in turn filed a cross-complaint for indemnity against, among others, Canady. (Id., at p. 198, 227 Cal.Rptr. 887.) The court, in permitting the negligent misrepresentation action to proceed, noted that “Cicone's reliance on Canady's alleged misrepresentation was the very purpose of the representation. Canady expected Cicone to advise his client to close the transaction; Cicone did so and the transaction was closed.” (Id., at p. 209, 227 Cal.Rptr. 887.) It is apparent, however, that Canady's representation was not a legal opinion but was instead a misrepresentation of his client's intentions.
In Roberts v. Ball, Hunt, Hart, Brown & Baerwitz (1976) 57 Cal.App.3d 104, 128 Cal.Rptr. 901, plaintiff was allowed to proceed against a law firm under a negligent misrepresentation theory on a showing that the law firm, “at the request of [client] and with knowledge that [client] would show it to plaintiff, a prospective creditor of [partnership], gave to [client] a letter stating that, in the professional opinion of the firm, [partnership] was a duly organized general partnership, consisting of 14 individuals who were general partners.” (Id., at p. 107, 128 Cal.Rptr. 901.) Plaintiff alleged that at the time the letter was prepared the firm knew “the alleged general partners had met and voted to dissolve” and also that a number of the partners were disputing their status as general partners. (Id., at p. 108, 128 Cal.Rptr. 901.) Moreover, the firm “knew and understood that [firm's] letter was to be shown to plaintiff in order to induce plaintiff to make loans to [partnership].” (Id., at p. 107, 128 Cal.Rptr. 901.) Thus, while the existence or nonexistence of a partnership may be a legal opinion, the fact that a meeting was held and a vote was taken is not.
Decisions we have found involving reliance by a third party on a legal opinion provided by an attorney have not permitted recovery by the third party. (See, e.g., Goodman v. Kennedy (1976) 18 Cal.3d 335, 134 Cal.Rptr. 375, 556 P.2d 737 [third party not permitted to recover in suit against attorney on the basis of attorney's erroneous advice to clients that shares of stock could be issued to clients and sold to third persons without jeopardizing the exemption from the requirement that the stock be registered].) The court in Goodman v. Kennedy noted that “To make an attorney liable for negligent confidential advice not only to the client who enters into a transaction in reliance upon the advice but also to the other parties to the transaction with whom the client deals at arm's length would inject undesirable self-protective reservations into the attorney's counseling role.” (Id., at p. 344, 134 Cal.Rptr. 375, 556 P.2d 737.)
Applying these various threads to the allegations of the present case we find no decisions that, on the basis of the facts alleged in the complaint, would support a finding that B.L.M. should be permitted to proceed with an action against Sabo & Deitsch under the theory of negligent misrepresentation.
The judgment in favor of Sabo & Deitsch is affirmed.9 Costs on appeal to be borne by appellant.
I respectfully dissent.
Unlike the majority, I believe that the complaint sufficiently pleads the elements of a cause of action for negligent misrepresentation. Since Sabo & Deitsch's summary judgment motion does not establish that one or more of those elements cannot be proven, I submit that the motion was erroneously granted. Accordingly, I dissent from the majority's conclusion that the judgment should be affirmed.
While the majority weaves together “various threads” (maj. opn., p. 346) in order to reach its conclusion, those disparate arguments tend to obscure the only two issues before us: whether the complaint pleads the elements of the tort of negligent misrepresentation, and if so, whether Sabo & Deitsch has established as a matter of law that one or more of those elements cannot be proven.
A. THE COMPLAINT ASSERTS A CLAIM FOR DAMAGES FOR NEGLIGENT MISREPRESENTATION.
There is no doubt that B.L.M. pleaded a cause of action for professional negligence. The question is, did it also plead facts sufficient to constitute each of the elements of another cause of action, for negligent misrepresentation?
Preliminarily, I note that the title of the complaint-“Complaint for Legal Malpractice”-is irrelevant to the issue of whether that pleading sufficiently alleges facts sufficient to constitute some cause of action other than professional negligence. “[W]e are not limited to plaintiffs' theory of recovery in testing the sufficiency of their complaint ․, but instead must determine if the factual allegations of the complaint are adequate to state a cause of action under any legal theory. The courts of this state have, of course, long since departed from holding a plaintiff strictly to the ‘form of action’ he has pleaded․” (Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 103, 101 Cal.Rptr. 745, 496 P.2d 817.) This is true even though that theory is expressly stated in the label the plaintiff affixed to the complaint. “[C]ourts regard substance and not labels in determining the sufficiency of a pleading.” (Hutnick v. United States Fidelity & Guaranty Co. (1988) 47 Cal.3d 456, 464, fn. 6, 253 Cal.Rptr. 236, 763 P.2d 1326.) “ ‘It is an elementary principle of modern pleading that the nature and character of a pleading is to be determined from its allegations, regardless of what it may be called, and that the subject matter of an action and issues involved are determined from the facts alleged rather than from the title of the pleadings․' ” (Jaffe v. Carroll (1973) 35 Cal.App.3d 53, 57, 110 Cal.Rptr. 435, quoting from McDonald v. Filice (1967) 252 Cal.App.2d 613, 622, 60 Cal.Rptr. 832; accord, 1 Cal. Civil Procedure Before Trial (C.E.B.3d ed.1996) § 22.2, p. 22-4.) In short, a plaintiff is entitled to relief on any claim supported by the facts pleaded even if that claim is not mentioned in the title of the complaint.
Thus, the majority's criticism of B.L.M. for failing to give “notice that there was an additional theory of recovery” (maj. opn., p. 341) is unfounded. Notice of the nature of the causes of action pleaded in any complaint is provided by the factual allegations of that complaint.1 (Cf. Harman v. City and County of San Francisco (1972) 7 Cal.3d 150, 157, 101 Cal.Rptr. 880, 496 P.2d 1248.) Any defendant that relies solely on the title of the complaint does so at its own peril.
In this case, what must those factual allegations establish? Negligent misrepresentation is a species of the tort of deceit. (Civ.Code, § 1710, subd. 2.) The elements of negligent misrepresentation are that (1) a representation of material fact was made, (2) the representation was false, (3) the defendant made the representation without reasonable grounds for believing it to be true, (4) the representation was intended to induce the defendant to take some action in reliance upon it, (5) the plaintiff reasonably relied upon the truth of the representation, and (6) the plaintiff sustained damage as a result of that reliance. (Civ.Code, §§ 1709 & 1710; Gagne v. Bertran (1954) 43 Cal.2d 481, 487-488, 275 P.2d 15; Gonsalves v. Hodgson (1951) 38 Cal.2d 91, 100-101, 237 P.2d 656; BAJI No. 12.45.)
B.L.M.'s complaint alleges: that the project was not economically feasible if prevailing wages had to be paid; that from July of 1987 until the scheduled closing date in April of 1988, Sabo & Deitsch represented to B.L.M. that prevailing wages would not have to be paid; that the representation was incorrect; that Sabo & Deitsch would have known that the representation was incorrect had they exercised reasonable skill, prudence and diligence; that B.L.M. spent money to plan and develop the project in reasonable reliance upon the representation; and that B.L.M. had been damaged as a result of its reliance on the representation.
Sabo & Deitsch contends that these allegations are insufficient to plead either that the representation was made without reasonable grounds for believing it to be true or that Sabo & Deitsch intended B.L.M. to rely upon the representation. While the majority correctly rejects the former contention, it agrees with the latter. (Maj. opn., pp. 342-343.) In addition, it holds that the complaint fails to plead the elements of negligent misrepresentation for a second reason: “B.L.M. failed to sufficiently allege ․ that the reliance of B.L.M. was justifiable under the circumstances of the case.” (Id., p. 342.) I disagree.
1. Sabo & Deitsch's Intent to Induce Reliance Was Sufficiently Pleaded.
The majority is correct when it observes that the complaint does not expressly allege that Sabo & Deitsch intended to induce B.L.M. to rely on its representation. (Maj. opn., p. 343.) However, it is incorrect when it assumes that such an express allegation of that ultimate fact is required. A complaint sufficiently pleads the elements of a cause of action if the elements either are alleged expressly “or can be inferred by reasonable intendment from the matters which are pleaded” expressly. (Krug v. Meehan (1952) 109 Cal.App.2d 274, 277, 240 P.2d 732; Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 223, 194 Cal.Rptr. 180, 4 Witkin, Cal. Procedure (3d ed. 1985) Pleading, § 332, p. 383.) A defendant's intent to induce a plaintiff to alter his position can be inferred from the defendant's knowledge that the plaintiff would act in reliance upon the representation. (Gagne v. Bertran, supra, 43 Cal.2d at p. 488, 275 P.2d 15; Eddy v. Sharp (1988) 199 Cal.App.3d 858, 864, 245 Cal.Rptr. 211.)
Here, the complaint alleges that B.L.M. proposed to the city to build the project; that B.L.M. and the other parties determined that the need to pay prevailing wages would render the project economically unfeasible; that Sabo & Deitsch was involved in those discussions; that as a result of those financial concerns the project was restructured; that Sabo & Deitsch told B.L.M. on July 2, 1987, that the revised project would not be subject to the prevailing-wage requirement; that the parties entered into a formal development agreement on July 7, 1987; that simultaneously with that agreement the city appointed Sabo & Deitsch as its special counsel and “as Bond Counsel for the Projects;” that the city charged Sabo & Deitsch with the preparation of whatever documentation was required, including “documents as may be necessary to provide for the issuance of the tax-exempt bonds to finance the Projects;” and that Sabo & Deitsch repeatedly thereafter represented that the prevailing wage requirement did not apply. In addition, B.L.M. alleged that it was a third-party beneficiary of the contract between Sabo & Deitsch and the city, which necessarily implies that Sabo & Deitsch intended its services under that contract to benefit B.L.M. (See Jones v. Aetna Casualty & Surety Co. (1994) 26 Cal.App.4th 1717, 1724, 33 Cal.Rptr.2d 291.) In my view, this is a sufficient pleading of Sabo & Deitsch's knowledge and intent that B.L.M. would rely upon its opinion. (See 5 Witkin, Cal. Procedure, supra, Pleading, § 663, pp. 112-114.)
The majority summarizes the allegations supporting the inference of intent as being “that if Sabo & Deitsch said it they must have intended B.L.M. to rely on it.” (Maj. opn., p. 343.) A fairer characterization of the complaint would be that B.L.M. proposed the project to the city, Sabo & Deitsch knew that B.L.M. would not go ahead with the project unless it could avoid paying prevailing wages, Sabo & Deitsch was charged with doing whatever legal work was necessary to implement the project, and Sabo & Deitsch told B.L.M. that the requirement would not apply to the project as restructured. From those allegations, it may be reasonably inferred that Sabo & Deitsch intended B.L.M. to rely upon its opinion.
2. B.L.M.'s Reasonable Reliance Is Sufficiently Pleaded.
The complaint alleges that B.L.M. “reasonably relied to their detriment on” Sabo & Deitsch's opinion. The majority acknowledges that B.L.M. adequately alleged its actual reliance on the representation of Sabo & Deitsch, but contends that the complaint fails to allege facts sufficient to establish that the reliance was justifiable. (Maj. opn., p. 343.) I assume that the majority is not attempting to draw any distinction between justifiable reliance and reasonable reliance. Instead, the majority appears to argue either (a) that B.L.M.'s allegation is an insufficient conclusion of law or (b) that, while it would have been sufficient if viewed in isolation, other facts pleaded in the complaint demonstrate that, as a matter of law, B.L.M.'s reliance was unreasonable. I disagree with both alternatives.
a. Reasonable Reliance May Be Pleaded as an Ultimate Fact.
The majority cites no authority for the proposition that, in pleading reliance in the context of a cause of action for negligent misrepresentation, a plaintiff must allege each of the circumstances which render its reliance reasonable.
While a cause of action for fraud must be specifically pleaded, the rationale for that requirement is that “ ‘allegations of fraud involve a serious attack on character, and fairness to the defendant demands that he should receive the fullest possible details of the charge in order to prepare his defense.’ ” (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216, 197 Cal.Rptr. 783, 673 P.2d 660, quoting what is now 5 Witkin, Cal. Procedure, supra, Pleading, § 662, p. 111.) Since allegations of negligent misrepresentation, as opposed to intentional fraud, do not question the defendant's character, it is doubtful that the same requirement applies to them. (Cf. 5 Witkin, supra, § 663, p. 113 [comparing the pleading standards for “other intentional torts,” emphasis added]; but see Committee on Children's Television, Inc., supra, at pp. 215-216, 197 Cal.Rptr. 783, 673 P.2d 660 [applying without discussion the stricter pleading standard to both intentional and negligent misrepresentation].)
Even assuming that the requirement of specific pleading does apply to negligent misrepresentation actions, and assuming further that it applies to the sub-element of the reasonableness of the plaintiff's reliance, the requirement is satisfied here. While B.L.M.'s allegation that its reliance was reasonable is conclusory, it is not objectionable on that basis. The specific-pleading requirement “does not require the allegation of evidentiary facts, but only that the ultimate facts must be pleaded.” (Estate of Bixler (1924) 194 Cal. 585, 590, 229 P. 704.) It does not “exclude conclusions of fact but only conclusions of law.” (Ibid.) Just as an allegation that a particular act was performed negligently is a conclusion of fact (id., p. 589, 229 P. 704; 4 Witkin, Cal. Procedure, supra, Pleading, § 341, p. 394), so also must be the allegation that a particular act of reliance was performed reasonably.
And even assuming further that the pleading of the reasonableness of the reliance is not sufficiently specific, what is the consequence? I submit that, at this late date, that lack of specificity should either be ignored, or B.L.M. should be granted leave to amend its complaint to allege specific facts justifying its reliance on Sabo & Deitsch's misrepresentation.
The modern view is to treat an allegation of an element of a fraud cause of action through inferential pleading or conclusions of law as a matter of uncertainty rather than an outright failure to allege that element, and to uphold the sufficiency of the complaint in the absence of a special demurrer. (5 Witkin, Cal. Procedure, supra, Pleading, § 663, pp. 112-114.) This is consistent with the general rule “that defects of form appearing on the face of the complaint must be raised by demurrer or are waived, and this rule applies to most of the grounds of special demurrer.” (Id., § 909, p. 347.) Sabo & Deitsch never demurred to the complaint at all, either generally or specially. Accordingly, I would hold that any objection to a lack of specificity on the narrow issue of the reasonableness of B.L.M.'s reliance has been waived.
Even were a contrary view to be taken, and it were to be concluded that the lack of specificity had not been waived, that omission is not irreparable. Sabo & Deitsch's motion for summary judgment was addressed solely to the professional negligence cause of action. Since it did not acknowledge the existence of a cause of action for negligent misrepresentation, it inferentially asserted that no such cause of action had been sufficiently pleaded. To the extent that a summary judgment motion challenges the sufficiency of the pleadings, it is tantamount to and should be treated as a motion for judgment on the pleadings. (Sequoia Ins. Co. v. Superior Court (1993) 13 Cal.App.4th 1472, 1478, 1481, 16 Cal.Rptr.2d 888; People ex rel. Dept. of Transportation v. Outdoor Media Group (1993) 13 Cal.App.4th 1067, 1074, 17 Cal.Rptr.2d 19.) Accordingly, as to the negligent misrepresentation cause of action, the motion must be treated as a motion for judgment on the pleadings.
By granting the motion as to the negligent misrepresentation claim, the trial court effectively granted a motion for judgment on the pleadings without leave to amend. However, the established rule is that upon granting such a pleading motion, “ ‘great liberality’ ” should be used in allowing amendments. (Higgins v. Del Faro (1981) 123 Cal.App.3d 558, 565, 176 Cal.Rptr. 704, quoting from Estate of Hunter (1961) 194 Cal.App.2d 859, 865, 15 Cal.Rptr. 556.) Thus, “when the facts stated indicate that the party probably has a good cause of action or defense, but that it has been pleaded imperfectly or defectively, and the defects have not been called to his attention by demurrer or by a notice of motion for judgment on the pleadings, the court should not grant the motion without first giving the party an opportunity to elect whether he will stand on his pleadings or amend them. The granting of the motion without leave to amend would in many cases be an absolute denial of justice, and is directly opposed to the policy of the law that cases should be tried and decided on the merits.” (MacIsaac v. Pozzo (1945) 26 Cal.2d 809, 815-816, 161 P.2d 449; accord, Higgins, pp. 564-565, 176 Cal.Rptr. 704.) “[W]here an amendment provides merely the addition of matters essential to make the original cause of action complete the amendment should certainly be allowed by the court.” (Id., p. 565, 176 Cal.Rptr. 704, internal quotations omitted.)
B.L.M. was given no leave to amend in the trial court. Nor does the majority afford it the opportunity to amend now to cure the minor aspects in which its allegation of reasonable reliance may have been conclusionary, even though that defect was raised for the first time by the majority. I submit that such denials are abuses of discretion. To the extent that the complaint fails to specifically plead each element of negligent misrepresentation, B.L.M. should be given at least one chance to cure those imperfections.
b. The Circumstances Pleaded in the Complaint Do Not Establish as a Matter of Undisputed Fact that B.L.M.'s Reliance Was Unreasonable.
A plaintiff's reliance is unjustifiable “ ‘[i]f the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable․’ ” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240, 44 Cal.Rptr.2d 352, 900 P.2d 601, quoting Seeger v. Odell (1941) 18 Cal.2d 409, 415, 115 P.2d 977.) “ ‘Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff's reliance is reasonable is a question of fact.’ ” (Alliance Mortgage Co., supra, p. 1239, 44 Cal.Rptr.2d 352, 900 P.2d 601, quoting Blankenheim v. E.F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1475, 266 Cal.Rptr. 593.) The majority relies on a variety of facts pleaded in the complaint to support its conclusion that B.L.M.'s reliance on Sabo & Deitsch's misrepresentation was, as a matter of law, unreasonable. I am unpersuaded.
First, the majority notes that the complaint alleges that in early 1987, B.L.M. proposed that the project be built by the city with public funding. B.L.M.'s attorneys, acknowledging that prevailing wages would have to be paid under those circumstances, drafted a proposed agreement which expressly provided for the payment of prevailing wages. The majority infers that, prior to drafting that contract, B.L.M.'s attorneys rendered a “legal opinion directly contrary to the Sabo & Deitsch opinion on which B.L.M. subsequently relied.” (Maj. opn., p. 343.) Given that inconsistent opinion from its own attorney, it argues, B.L.M.'s reliance on Sabo & Deitsch's opinion cannot be justified.
This argument ignores the fact that the opinion from B.L.M.'s attorneys concerned a project built directly by the city. By contrast, Sabo & Deitsch's opinion concerned the legal obligation to pay prevailing wages on a materially different project: one that would be built by B.L.M. and subsequently acquired by the city or its redevelopment agency. Since the two opinions dealt with materially different circumstances, reliance on both is neither inconsistent nor necessarily unreasonable.
Next, noting that Sabo & Deitsch was the counsel for the city, the adverse party in this transaction, the majority argues that reliance by B.L.M. on its opinion could never be justifiable. It supports that contention with citations to cases in which one party to litigation attempted to sue the attorney for an opposing party in that litigation, on either negligence or negligent misrepresentation theories. In a proceeding between two adverse parties, it is clear that one party is not an intended beneficiary of the advice given or other professional services rendered by the attorney for the opposing party. (Norton v. Hines (1975) 49 Cal.App.3d 917, 921, 123 Cal.Rptr. 237; accord, Weaver v. Superior Court (1979) 95 Cal.App.3d 166, 182, 156 Cal.Rptr. 745; Parnell v. Smart (1977) 66 Cal.App.3d 833, 837-838, 136 Cal.Rptr. 246; Omega Video Inc. v. Superior Court (1983) 146 Cal.App.3d 470, 480-481, 194 Cal.Rptr. 574.)
On the other hand, in the absence of the absolute adversity of litigation, the question of whether there is a duty owed to a third party, entitling that party to rely upon statements made by another party's attorney, becomes a much closer question, which turns on the facts of each case. Under some factual circumstances, a duty is found to be lacking. (E.g., Goodman v. Kennedy (1976) 18 Cal.3d 335, 134 Cal.Rptr. 375, 556 P.2d 737.2 ) Under others, courts have found that the attorney did owe a duty to the third party, and thus the third party could reasonably rely upon the attorney's statements. (Cicone v. URS Corp. (1986) 183 Cal.App.3d 194, 207-211, 227 Cal.Rptr. 887; Courtney v. Waring (1987) 191 Cal.App.3d 1434, 1443-1444, 237 Cal.Rptr. 233; Home Budget Loans, Inc. v. Jacoby & Meyers Law Offices (1989) 207 Cal.App.3d 1277, 1284, 255 Cal.Rptr. 483.)
Here, B.L.M. and the city were not adverse parties in litigation.3 Instead, they were cooperating in trying to build the project. While they were negotiating at arm's length regarding some aspects of the deal, their interests concerning others coincided. In particular, they were both interested in having the bonds issued by which the project was to be financed. Accordingly, while Sabo & Deitsch was designated as special counsel for the city, it was also designated as bond counsel “for the project,” suggesting that it was representing both parties in that joint endeavor. Given the ambiguity of the nature and extent of Sabo & Deitsch representation, this is not one of those “rare case[s] where the undisputed facts leave no room for a reasonable difference of opinion” on the question of whether a plaintiff's reliance was reasonable. (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1239, 44 Cal.Rptr.2d 352, 900 P.2d 601.)
Finally, the majority appears to contend that the reliance upon Sabo & Deitsch's representation could not have been reasonable because it was a legal opinion rather than a representation of fact. (Maj. opn., pp. 345-346.) However, as the majority stated earlier in its own opinion: “ ‘Under certain circumstances, expressions of professional opinion are treated as representations of fact. When a statement, although in the form of an opinion, is “not a casual expression of belief” but “a deliberate affirmation of the matters stated,” it may be regarded as a positive assertion of fact. [Citation.]’ ” (Maj. opn., p. 342, quoting from Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 408, 11 Cal.Rptr.2d 51, 834 P.2d 745.)
As noted above, the reasonableness of a plaintiff's reliance is a question of fact unless no reasonable finder of fact could disagree. I find the facts alleged in the complaint to be sufficient to plead that element and sufficiently debatable to preclude a court from finding that B.L.M.'s reliance was unreasonable as a matter of law.
In summary, although pleaded in just one count, the complaint asserts claims for damages under two theories, negligence and negligent misrepresentation.
B. THE MOTION FAILS TO ESTABLISH THAT B.L.M. CANNOT PREVAIL ON A NEGLIGENT MISREPRESENTATION CLAIM.
Having established that the pleading is sufficient to support a claim for negligent misrepresentation, I now proceed to the second question, which because of its contrary conclusion the majority never reached: Did Sabo & Deitsch establish that B.L.M. cannot prevail on its negligent misrepresentation claim?
In challenging B.L.M.'s ability to prove the elements of its claims, Sabo & Deitsch's summary judgment motion did not seek to establish that Sabo & Deitsch had not made the representation, that the representation was immaterial or true, that it had reasonable grounds for believing the representation to be true, or that B.L.M. had not reasonably relied on the truth of the representation to its detriment. Instead, the motion was directed solely to the issue of whether Sabo & Deitsch owed B.L.M. a duty of care.
Sabo & Deitsch had not been hired by B.L.M. and did not have an attorney-client relationship with B.L.M. However, the absence of that relationship is not determinative of the existence and extent of Sabo & Deitsch's duty toward B.L.M.
“Every person is bound, without contract, to abstain from injuring the person or property of another, or infringing upon any of his rights.” (Civ.Code, § 1708.) “Civil liability for injury to others is imposed based on causes of action in tort,” including negligence and negligent misrepresentation. (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 396, 11 Cal.Rptr.2d 51, 834 P.2d 745.) Liability for the potentially limitless consequences of negligent acts is judicially constrained by the concept of duty. (Bily, p. 397, 11 Cal.Rptr.2d 51, 834 P.2d 745.) Thus, rather than being an aid to analysis, the existence of duty is a conclusion, “ ‘ “an expression of the sum total of those considerations of policy which lead the law to say that the particular plaintiff is entitled to protection.” ’ ” (Ibid., quoting Dillon v. Legg (1968) 68 Cal.2d 728, 734, 69 Cal.Rptr. 72, 441 P.2d 912.)
In Bily v. Arthur Young & Co., supra, our Supreme Court adopted the Restatement Second of Torts, section 552, subdivision (2) to define the class of persons who are entitled to protection from negligent misrepresentations (Bily, p. 414, 11 Cal.Rptr.2d 51, 834 P.2d 745) made by attorneys, accountants, and other suppliers of commercial information (id., p. 410, 11 Cal.Rptr.2d 51, 834 P.2d 745.) That subdivision provides that liability for such negligent misrepresentations “is limited 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.” (Rest.2d Torts, § 552, subd. (2).)
A defendant's intention to benefit the plaintiff is not dependent upon the subjective mental state of the defendant. Instead, the rule adopted by the Supreme Court “attempts to identify those situations in which the supplier undertakes to supply information to a third party whom he or she knows is likely to rely on it in a transaction that has sufficiently specific economic parameters to permit the supplier to assess the risk of moving forward.” (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 409, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The existence of that knowledge is determined according to “an objective standard that looks to the specific circumstances (e.g., supplier-client engagement and the supplier's communications with the third party) to ascertain whether a supplier has undertaken to inform and guide a third party with respect to an identified transaction or type of transaction.” (Id., p. 410, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics omitted.)
The only information before us concerning the terms of Sabo & Deitsch's engagement as counsel for the city and the redevelopment agency and as bond counsel for the project as a whole indicates that the law firm was engaged to perform whatever legal services were necessary to implement the apartment project and the financing of the project. Since the project was proposed by B.L.M. and B.L.M. was expressly recognized as the intended developer of the project, and since B.L.M. had informed the city in the presence of Sabo & Deitsch that the project could not proceed if prevailing wages had to be paid, the record suggests that Sabo & Deitsch's opinion that the prevailing-wage requirement did not apply to the restructured project was intended to guide all the parties to the various agreements, including B.L.M. The delivery of the opinion to B.L.M. (an allegation which Sabo & Deitsch denied in their answer but which was not one of the factual contentions which was addressed in their statement of undisputed facts) supports the same conclusion. Thus, an objective examination of the circumstances of the delivery of the opinion indicates that the Bily test for an intention to benefit is met: Sabo & Deitsch undertook to supply information to B.L.M., a third party who Sabo & Deitsch knew was likely to rely on it by pursuing a project familiar to Sabo & Deitsch.
Sabo & Deitsch's summary judgment motion did not establish, or even attempt to establish, that any of those facts could not be proven. The motion therefore fails to establish that B.L.M. is outside of the limits of liability for those damaged by negligent misrepresentations, as those limited are defined by Bily. Accordingly, the motion failed to establish that Sabo & Deitsch owed no duty to B.L.M. Since that was the only ground for the summary judgment motion, I conclude that the motion was erroneously granted and that the resulting judgment should be reversed.
Since the motion did not seek, in the alternative, a summary adjudication of any issues, I do not address whether Sabo & Deitsch succeeded in demonstrating that it is not liable to B.L.M. for professional negligence as opposed to negligent misrepresentation. Nor do I address B.L.M.'s argument regarding Sabo & Deitsch's use of an unlicensed attorney, both because I would reverse the judgment on other grounds, and because that issue is not within the scope of the complaint as currently pleaded.
I would reverse.
1. B.L.M. did not allege in its complaint that the opinion offered by Sabo & Deitsch that prevailing wage was required for the project was erroneous. That being the case, it is not apparent on what grounds B.L.M. sought in its complaint to recover lost profits on the project since it was not alleging that the project could legally have gone forward.
2. This is actually B.L.M.'s second appeal. We dismissed its first appeal in 1994 because a cross-complaint was still pending between the parties that had not been resolved by the summary judgment motion. (B.L.M. v. Sabo & Deitsch (Nov. 8, 1994) E012862 [nonpub. opn.]) That cross-complaint has since been dismissed, and thus the summary judgment is now final and appealable.
3. Although the Bily decision itself involved only accountant liability, the court stated, “Accountants are not unique in their position as suppliers of information and evaluations for the use and benefit of others. Other professionals, including attorneys, architects, engineers, title insurers and abstractors, and others also perform that function. And, like auditors, these professionals may also face suits by third persons claiming reliance on information and opinions generated in a professional capacity.” (Bily, supra, 3 Cal.4th at p. 410, 11 Cal.Rptr.2d 51, 834 P.2d 745.) We assume, therefore, that the court intended its discussion of liability to third parties to be considered in a case such as the one now before us.
4. The court in Johnson v. Superior Court, supra, found no duty of professional care owed to limited partners under third party beneficiary theory by an attorney who provided services to the general partner of a partnership, although as attorney for the partnership he might have owed a duty to individual limited partners. (38 Cal.App.4th at pp. 472, 479, 45 Cal.Rptr.2d 312.)
5. Compare the decision in Burger v. Pond (1990) 224 Cal.App.3d 597, 273 Cal.Rptr. 709, in which the second wife of plaintiff Kenneth Burger sought to recover from Burger's attorney, Pond, following Pond's negligent handling of Burger's divorce from his first wife. This court concluded that “The transaction between Kenneth Burger and Pond was not intended to benefit or affect plaintiff. The main, and in our view sole, purpose of the Burger-Pond transaction was to dissolve Kenneth Burger's existing marriage.” (Id., at p. 605, 273 Cal.Rptr. 709.)
6. Implicit in the complaint's characterization of Sabo & Deitsch's lack of reasonable grounds for believing their representations to be true is the assumption that Sabo & Deitsch were to be held to a standard applicable to attorneys rather than to the general public in making a negligent misrepresentation. We conclude, however, that even if we apply a standard equally applicable to non-attorneys, B.L.M. has sufficiently alleged that Sabo & Deitsch lacked reasonable grounds for believing their representations to be true.
7. This same rule is set forth in rule 3-310, subd. (C)(1), of the California Rules of Professional Conduct, which states, in part: “A member shall not, without the informed written consent of each client:“(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict․”
8. Extending liability for legal opinions under such a theory seems to us to undercut the holding of Bily, supra, that liability for legal malpractice extends only to clients and to those identified as third party beneficiaries of the professional employment agreement.To hold that reliance by a nonclient on an attorney's professional opinion, in combination with an inference that the attorney intended such reliance, is sufficient to hold the attorney liable for unknown errors in that opinion, seems to extend professional liability beyond what was approved in Bily.
9. In an odd twist, B.L.M. argues in this appeal that payment of prevailing wage may not have been required, and that Sabo & Deitsch should have proceeded to issue the opinion of bond counsel that would have allowed the project to proceed. That would undermine completely the basis for the current action, because B.L.M. would then be unable to show breach of any duty of care owed to it (assuming a duty was owed), and would be unable to show that there was a lack of reasonable belief on the part of Sabo & Deitsch that their opinion was correct. Our review is limited to the theories of recovery made, or arguably made, in the complaint and the moving papers below.
1. Here, as will be discussed, those factual allegations provided notice to Sabo & Deitsch that B.L.M. was asserting a negligent misrepresentation theory.Sabo & Deitsch was further alerted to that fact by B.L.M.'s opposition to the summary judgment motion. There, in arguing that Sabo & Deitsch can be liable to B.L.M. despite the lack of an attorney-client relationship, B.L.M. stated: “On August 27, 1992, the Supreme Court dispelled any questions on the matter in Bily v. Arthur Young & Co., (1992) 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745. The Court defined the tort as negligent misrepresentation․” B.L.M. also noted that in Bily, the Supreme Court approved a series of Court of Appeal cases which “ ‘have endorsed liability for negligence or negligent misrepresentation in the dissemination of commercial information to persons who were intended beneficiaries of the information. In several of these cases, § 552 of the Restat.2d of Tort [sic ] was consulted or relied on as a general statement of the rule of law.’ ”Sabo & Deitsch received and understood this “notice” but chose to ignore it, as confirmed by its own reply to B.L.M.'s opposition: “Defendants [sic; plaintiffs] offer various authorities which are inapplicable to this legal malpractice action․ [¶] Defendants acknowledge that liability of an attorney to third persons may exist in cases of ․ negligent misrepresentation․ However, this is not such a case.”
2. Goodman v. Kennedy never specifically addressed the issue of the reasonableness of any reliance, because in that case there was “no allegation that the advice was ever communicated to plaintiffs and hence no basis for any claim that they relied upon it․” (Id., 18 Cal.3d at p. 343, 134 Cal.Rptr. 375, 556 P.2d 737.)
3. Thus, the facts here are distinguishable from those in Flatt v. Superior Court (1994) 9 Cal.4th 275, 36 Cal.Rptr.2d 537, 885 P.2d 950, upon which the majority mistakenly relies. There, the issue is the extent of a duty owed by an attorney to advise a new client seeking to sue an existing client of the attorney's firm. Moreover, since Flatt involves a claim of legal malpractice rather than any claim of misrepresentation, it sheds no light on the issue of reasonable reliance.
RAMIREZ, Presiding Justice.
HOLLENHORST, J., concurs.