Oakland Police & Fire Retirement System v. Mayer Brown, LLP
2017 WL 2791101, 861 F.3d 644, 2017 U.S. App. LEXIS 11522 (2017)
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Rule of Law:
Under Illinois law, an attorney generally owes a duty of care only to their client, and an exception for third-party non-clients arises only when the primary purpose and intent of the attorney-client relationship was to directly benefit or influence that third party, typically not applying in adversarial commercial transactions where parties are represented by separate counsel.
Facts:
- In 2001, General Motors (GM) entered into a secured lease (the 2001 Synthetic Lease) with a syndicate of lenders, for which JP Morgan acted as agent. Mayer Brown represented GM in this transaction.
- In 2006, GM borrowed $1.5 billion from a different group of over 400 lenders (the 2006 Term Loan), including the plaintiffs, with JP Morgan again acting as agent and holding the security interests.
- In October 2008, GM instructed Mayer Brown to prepare the documents to pay off the 2001 Synthetic Lease, which included releasing the collateral securing that transaction.
- Mayer Brown mistakenly included the unrelated 2006 Term Loan UCC-1 financing statement among those to be terminated, thus preparing a UCC-3 termination statement for the collateral for the $1.5 billion 2006 Term Loan.
- Mayer Brown provided its drafted documents, including the erroneous UCC-3 termination statement, to JP Morgan's counsel (Simpson Thacher) for review.
- Without catching the error, JP Morgan's counsel authorized the release of the collateral, mistakenly terminating the $1.5 billion security interest for the 2006 Term Loan along with the security interests for the 2001 Synthetic Lease.
- In June 2009, less than a year after the 2001 Synthetic Lease payoff, General Motors filed for bankruptcy protection.
Procedural Posture:
- In June 2009, General Motors filed for bankruptcy protection.
- During the bankruptcy proceedings, the error regarding the UCC-3 termination statement for the 2006 Term Loan collateral was discovered.
- The bankruptcy court initially found that the security interest for the 2006 Term Loan had not been terminated and ordered GM to repay the lenders.
- GM creditors initiated adversary proceedings, challenging the bankruptcy court's finding.
- The bankruptcy court's decision was appealed to the Second Circuit Court of Appeals.
- In 2015, after certifying a key state law issue to the Delaware Supreme Court, the Second Circuit reversed the bankruptcy court, holding that the 2006 Term Loan security interest had, in fact, been terminated.
- Following the Second Circuit's decision, creditors amended their complaint in the adversary proceeding to 'claw back' the 2006 Term Loan principal and interest payments from the lenders.
- Oakland Police & Fire Retirement System and others (plaintiffs) filed a putative class action against Mayer Brown, LLP in the U.S. District Court for the Northern District of Illinois, alleging legal malpractice and negligent misrepresentation.
- The district court dismissed the plaintiffs' amended complaint for failure to state a claim, holding that Mayer Brown did not owe a duty of care to the plaintiffs, who were third-party non-clients.
- Plaintiffs appealed the district court's judgment to the Seventh Circuit Court of Appeals.
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Issue:
Does a law firm representing a borrower in a commercial loan transaction owe a duty of care, giving rise to claims of legal malpractice or negligent misrepresentation, to the lenders (third-party non-clients) when the law firm's client in unrelated matters also served as the lenders' agent in the transaction, or when the law firm drafted transaction documents that the lenders' counsel reviewed?
Opinions:
Majority - Hamilton, Circuit Judge
No, Mayer Brown did not owe a duty of care to the plaintiffs, who were third-party non-clients, under any of their theories. The court affirmed the district court's dismissal, holding that Illinois law generally limits an attorney's duty to their client, with a narrow exception for third parties. This exception, established in Pelham v. Griesheimer, applies only when "the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party." The court rejected the plaintiffs' first theory that Mayer Brown owed a duty because JP Morgan was a client in unrelated matters, explaining that such a claim would create an impossible, unwaivable conflict of interest for law firms, and that the scope of an attorney's duty is limited to the specific representation sought, even if the firm simultaneously represents the adverse party in other matters (citing Fitch v. McDermott, Will & Emery, LLP). The court also dismissed the plaintiffs' second theory that Mayer Brown voluntarily assumed a duty by drafting the documents. It clarified that the Pelham dictum on voluntary undertaking is not a separate exception to the primary purpose rule. Drafting initial documents in a complex transaction, especially when reviewed by opposing counsel, does not create a professional duty to all other parties, unlike a formal opinion letter specifically intended for third-party reliance. Finally, the court rejected the plaintiffs' third theory that the primary purpose of GM's relationship with Mayer Brown was to influence JP Morgan. It found that the transaction was adversarial, with GM hiring Mayer Brown for its own benefit, and JP Morgan retaining its own counsel to protect the lenders' interests. The facts did not plausibly support a "common interest" or lack of "adversity," making the situation distinct from cases where a duty to a third party was found (like the non-adversarial closing agent in Freedom Mortgage Corp. v. Burnham Mortgage, Inc.).
Analysis:
This case significantly reinforces the strict application of the 'primary purpose' rule in Illinois for establishing an attorney's duty of care to third-party non-clients, particularly in commercial transactions. It clarifies that a law firm's representation of an adverse party in separate, unrelated matters does not automatically create a duty in an adversarial transaction, nor does the act of drafting transaction documents, even if reviewed by opposing counsel. The decision underscores the critical importance of independent legal representation in complex financial deals, limiting the ability of third parties to recover from the opposing party's counsel for alleged malpractice or negligent misrepresentation.
