Opinion
Civ. No. 95-0517 (DRD).
November 9, 1999
William D. Sanders, Esq., David N. Butler, Esq., ALPERT, BUTLER, SANDERS, P.C., West Orange, New Jersey, Attorneys for Plaintiffs.
Timothy R. Greiner, Esq., GREINER LANGER, Parsippany, New Jersey, Attorneys for Defendants.
O P I N I O N
This is a diversity action for professional legal malpractice. Defendants Crummy, Del Deo, Dolan, Griffinger Vecchione and Robert Delventhal ("defendants") have moved for an order of summary judgment dismissing plaintiffs' complaint with prejudice in its entirety. Plaintiffs have cross-moved for an order permitting them to amend their complaint. For the reasons set forth herein, defendants' motion will be granted in part and denied in part; plaintiffs' cross-motion will be denied.
STATEMENT OF FACTS
This lawsuit arises from defendants' work in connection with a 1988 secured transaction between plaintiff Anthes Incorporated ("Anthes") and a Maryland firm, Eastern Forms, Inc. ("EF"). Anthes sold scaffolding and related construction equipment to EF in exchange for a promissory note, retaining a security interest in the equipment. Defendants are alleged to have committed malpractice in failing to properly perfect this security interest on behalf of Anthes in accordance with the laws of Maryland.
At the time of the secured transaction, Maryland's Uniform Commercial Code required that UCC documents be filed with the Maryland State Department of Assessments and Taxation and also with the office of the clerk of the circuit court in the county where the debtor is located. Md. Code. Ann., Com. Law § 9-401(1) (West 1989). Defendants are alleged to have filed the original UCC financing statement, as well as a subsequent notice of assignment, with the Department of Assessments and Taxation only.
In February 1989, Anthes sold substantially all of its assets, including the account receivable from EF ("the EF debt"), to Umacs, Inc. ("Umacs"). Umacs was a shell company created solely for the purpose of acquiring Anthes' assets by the Aluma Group, a collection of companies ultimately owned by a Canadian corporation known as TDZ Holdings, Inc. As part of this transaction, Anthes represented to Umacs that the EF debt was properly secured. Anthes' sold its remaining assets to plaintiff Patheon, Inc. ("Patheon"), and then merged with Patheon's parent corporation, Anthes Industries, Inc.
The EF debt changed hands several more times in a complex series of corporate transactions. On June 30, 1989, Umacs sold certain assets, including the EF debt, to Aluma Systems, Inc. ("Aluma Systems"), another Aluma Group company. Umacs then merged with plaintiff Trilan Ontario Ltd. ("Trilan"), also part of the Aluma Group, on December 26, 1989.
Aluma Systems sold the EF debt to Burke Scaffolding Company on February 1, 1990. Burke Scaffolding Company in turn sold its assets to yet another part of the Aluma Group, the Burke Company, on December 31, 1990. Burke Scaffolding merged with Aluma Systems later that same day. Several years later, on June 30, 1994, the Burke Company changed its corporate name to Aluma Systems USA, Inc. Aluma USA is, at least for the moment, a part of the Aluma Group.
Trilan filed suit against Anthes and Patheon in Ontario, Canada on November 8, 1991 ("the Trilan litigation"), alleging that the assets which Umacs purchased from Anthes had been overvalued. In the meantime, EF filed a Chapter 11 bankruptcy petition in January 1992. In the bankruptcy proceedings, Aluma USA's secured claim was relegated to general creditor status due to defendants' alleged failure to properly perfect the security interest in the construction equipment.
On January 11, 1995, Anthes and Patheon assigned their malpractice claim against defendants to Trilan and Aluma USA ("the Assignment"). This lawsuit was filed shortly thereafter on January 31, 1995. Trilan later entered bankruptcy in Ontario, and on July 4, 1996, the bankruptcy trustee approved the sale of Trilan's interest in the Trilan litigation to Nualt Enterprises, Inc., yet another part of the Aluma Group.
The Trilan litigation eventually settled on July 5, 1996. Anthes and/or Patheon paid the sum of $250,000 to another Aluma Group company, Aluma Enterprises, Inc., in an exchange for the release of all claims against them related to the sale of assets to Umacs in February 1989. At least some portion of this $250,000 settlement is allocated to the claim arising from the unsecured EF debt.
It is not clear from the terms of the settlement agreement whether this figure is in Canadian or U.S. dollars.
PROCEDURAL HISTORY
Plaintiffs filed this lawsuit on January 31, 1995. On December 14, 1995, plaintiffs moved for summary judgment as to liability only and further moved to amend their complaint to add two additional Aluma Group companies as plaintiffs. The motion to amend the complaint was denied by way of a letter opinion and order entered by Judge John W. Bissell on April 15, 1996. Therein, Judge Bissell stated that "I have examined the proposed amended complaint and determined that it does not adequately identify the interests and/or standing of the proposed new [plaintiffs]. Indeed, the interests and standing of the four other particular plaintiffs also are not clearly presented in the proposed Amended Complaint." The motion for summary judgment as to liability was denied on September 27, 1996. A motion for reconsideration, as well as an application to bifurcate and limit issues for trial, was denied on June 4, 1997.
The case lay dormant for the next two years until a conference was held before Magistrate Judge Ronald J. Hedges on June 30, 1999. Magistrate Judge Hedges apparently expressed his concern over the issue of plaintiffs' standing, and plaintiffs indicate that following additional conferences, he directed the parties to conduct additional discovery aimed towards clarifying the various plaintiffs' standing to maintain this action. A scheduling order for this discovery was filed by the Magistrate Judge on August 30, 1999, further ordering that the deadline for filing defendants' motion for summary judgment on the standing issue would be September 24, 1999.
Accordingly, defendants have moved for summary judgment, alleging that Anthes and Patheon lack standing by virtue of the assignment of their claim to Trilan and Aluma USA, and that Trilan and Aluma USA lack standing because the Assignment was invalid under New Jersey law. Plaintiffs, in addition to opposing defendants' motion, have cross-moved for leave to amend the complaint to make certain factual changes and clarifications, as well as to include Aluma Systems as an additional plaintiff.
STANDARD OF REVIEW
Summary judgment will be granted if the record establishes that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
Rule 56(c) imposes a burden on the moving party simply to point out to the district court that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has met this burden, the burden then shifts to the opposition to "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The evidence need not be in a form that would be admissible at trial. Celotex, 477 U.S. at 324. However, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
At the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but rather to determine whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. Id. at 247. In determining whether there exists a material issue of disputed fact, however, the facts and the inferences to be drawn from the facts are to be viewed in the light most favorable to the nonmoving party. Pollock v. American Tel. Tel. Long Lines, 794 F.2d 860, 864 (3d Cir. 1986).
In addition to being genuine, the disputed facts must be material, as determined by the substantive law. Anderson, 477 U.S. at 248. Debate over extraneous issues will not suffice; "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id.
I. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
Defendants' position in this matter suffers from an inherent inconsistency. On the one hand, defendants seek summary judgment against Anthes and Patheon on the grounds that these plaintiffs lack standing insofar as they assigned any claim they may have had against defendants to Trilan and Aluma USA before the commencement of the action. At the same time, they assert that neither Trilan or Aluma USA can maintain an action against defendants because the Assignment is invalid under New Jersey law. Rather than award summary judgment to defendants on the basis of this legal Catch-22, it is necessary to determine whether the assignment of Anthes and/or Patheon's claim to Trilan and Aluma USA may be enforced.
A. Validity of the Assignment Agreement
Defendants correctly observe that under New Jersey law, tort claims, including legal malpractice claims, are not assignable prior to judgment. Alcman Servs. Corp. v. Bullock, 925 F. Supp. 252, 258 (D.N.J. 1996); Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487, 490 (3d Cir. 1997). The Assignment itself, however, states that it shall be construed in accordance with the laws of the Province of Ontario and the federal laws of Canada. See Declaration of William D. Sanders at Exhibit H at 3. New Jersey's choice of law rules generally permit the parties to a contract to choose the law which will govern the contract, provided such choice does not violate New Jersey's public policy. Id. at 259. Under New Jersey law, the contractual choice of law will be respected as long as the forum bears a reasonable relationship to the parties of the transaction and the application of the law of the chosen state would not violate a fundamental policy of a state which has a materially greater interest than the chosen state and whose law would otherwise apply. Id.
Plaintiffs argue that Bullock is inapplicable because New Jersey courts have not specifically addressed the assignability of legal malpractice claims. In the absence of a definitive statement from the New Jersey courts, these federal cases, which are firmly grounded in New Jersey law, stand as valid precedents. Plaintiffs' extensive reliance on cases from other jurisdictions is misplaced.
The parties to the Assignment in this case consist of Trilan (an Ontario corporation), Aluma USA (a California corporation), Patheon (a Canadian corporation), and Anthes (a Pennsylvania corporation). The agreement itself was entered into in Ontario. The selection of Ontario and Canadian law thus bears a reasonable relationship to the parties, two of whom are Canadian corporations. This lawsuit has been brought in New Jersey against two New Jersey defendants, and so New Jersey law would most likely be applied absent the forum selection clause in the Assignment. Thus, the ultimate question is whether application of Canadian law would violate a fundamental policy of the State of New Jersey.
While the parties to the Assignment are all foreign corporations and the agreement was entered into in Canada, the defendants in this litigation are two New Jersey residents. The subject matter of the litigation is an alleged malpractice claim based on work which the defendants performed pursuant to an attorney-client relationship in New Jersey. As noted by the court in Bullock, New Jersey "has a significant interest in the relationship between its lawyers and their clients."Bullock, 925 F. Supp. at 259. Moreover, application of Canadian law could violate New Jersey's strong public policy against pre-judgment assignment of tort claims. See Integrated Solutions, 124 F.3d at 490. The Province of Ontario does not have a materially greater interest in this matter than the State of New Jersey; accordingly, the validity of the assignment will be determined under New Jersey law.
As alluded to earlier, this district has held that New Jersey law does not permit the pre-judgment assignment of legal malpractice claims. See Bullock, 925 F. Supp. at 258. The logic behind this holding is two-fold. First, legal malpractice claims are tort claims, and New Jersey prohibits the pre-judgment assignment of all tort claims. Id. Second, "compelling reasons of public policy" dictate that legal malpractice claims "are not a commodity to be sold to a bidder who has never even had a relationship with the lawyer. The decision to bring a malpractice action `is one peculiarly vested in the client.'" Id., quoting Chaffe v. Smith, 98 Nev. 222, 645 P.2d 966 (1982).
Plaintiffs' argument that legal malpractice claims may be assignable as a breach of contract claim runs counter to relevant authority. See Bullock at 258 ("plaintiff's argument that a legal malpractice action also sounds in contract has some foundation in other jurisdictions and in legal theory, but it has no foundation in the law of New Jersey ") (emphasis added).
The assignment of Anthes and/or Patheon's malpractice claim against defendants is invalid as a matter of New Jersey law and will not be recognized. Thus, the malpractice claim remains in the hands of Anthes and/or Patheon. Anthes, and Patheon as its successor in interest, have standing to maintain this suit by virtue of their attorney-client relationship with defendants. See Conklin v. Hannoch Weisman, 145 N.J. 395, 416 (1996).
Under New Jersey law, a legal malpractice claim derives from the tort of negligence. Grunwald v. Bronkesh, 131 N.J. 483, 492 (1993). As with all negligence actions, damages are an essential element of the claim itself. See, e.g., Lieberman v. Employers Ins. of Wasau, 84 N.J. 325, 342 (1980) (stating that in order to recover damages for legal malpractice, a plaintiff must demonstrate actual injury as a result of the defendant's breaches). Defendants conceded at oral argument that Anthes and/or Patheon may have suffered some damages resulting from defendants' alleged malpractice, namely that portion of the $250,000 settlement paid to Aluma Enterprises, Inc. allocable to the claim based on the unsecured EF debt. Anthes and/or Patheon have standing to bring suit against defendants for their alleged malpractice, and so defendants' motion for summary judgment will be denied pending resolution of the issue of defendants' liability.
B. Trilan and Aluma USA's Standing to Bring Suit
The determination that the Assignment is invalid means that plaintiffs Trilan and Aluma USA lack standing insofar as it is based on the purported Assignment of the cause of action. Defendants note that "no other basis for these parties' standing to sue is alleged in the Complaint." Defendants' brief in support of their motion at 6.
Trilan lacks standing to maintain this suit. Trilan's proposed amended complaint identifies only two bases for liability, the merits of which should be clear from the discussion to this point. Trilan's standing as an assignee of Anthes and/or Patheon's claim has already been rejected. In the alternative, Trilan moves to amend its complaint to assert a breach of contract claim as a third-party beneficiary of the attorney-client contract between Anthes and defendants. As discussed above, New Jersey's courts have repeatedly rejected the notion that legal malpractice claims can be pursued under a breach of contract theory, let alone as a third-party beneficiary. An action in tort is the sole remedy for legal malpractice in New Jersey; third parties may recover only to the extent that their injuries are a foreseeable consequence of the attorney's malpractice as discussed below. See Petrillo v. Bachenberg, 139 N.J. 472, 482-83 (1995). Furthermore, it is unclear what injury Trilan has suffered, if any. The only party that appears to have been harmed by defendants' alleged malpractice (other than Anthes or Patheon) is Aluma USA, the plaintiff left holding the unsecured debt. Defendants' motion for summary judgment as to plaintiff Trilan will be granted.
As to Aluma USA's claim, plaintiffs counter that under New Jersey law, an attorney's duty of care may extend to non-clients if the attorney knew or should have foreseen that non-clients would rely on the lawyer's work. See Petrillo v. Bachenberg, 139 N.J. 472, 482-83 (1995); DeAngelis v. Rose, 320 N.J. Super. 263, 274 (App.Div. 1999) ("the absence of an attorney-client or fiduciary relationship is not necessarily always a basis to deny a legal malpractice claim asserted against an attorney by a non-client").
New Jersey's courts have remarked, however, on the need to limit a lawyer's potential liability to non-clients. It is necessary "to cabin the duty of the lawyer so the resulting obligation is fair to both lawyers and the public." Petrillo, 139 N.J. at 484. The Petrillo court based its decision on the Restatement (Second) of Torts § 552(1) (1977), which limits the lawyer's liability to losses 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 the 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 transactionPetrillo, 139 N.J. at 484. Recognizing the potential for limitless liability, the Petrillo court held that "the objective purpose of documents . . . and the extent to which others may reasonably rely on them, determines the scope of a lawyer's duty in preparing such documents." Id. at 485.
Further guidance can be found in the DeAngelis decision, which states that a lawyer owes a duty to use care to a non-client to the extent that: 1) the lawyer or the client, with the lawyer's acquiescence, invites a non-client to rely on the lawyer's services, and the non-client so relies, and; 2) the non-client is not, under applicable tort law, too remote from the lawyer to be entitled to protection. See 320 N.J.Super. at 274, quoting the Restatement of the Law Governing Lawyers § 73 (Tentative Draft No. 8, 1997). Citing the Restatement, the DeAngelis court went on to identify several situations in which a lawyer could owe a duty of care to non-clients.
The objective purposes of a UCC filing are twofold. First, notice filing gives notice to other creditors that the secured party may have an interest in the collateral. Crestar Bank v. Neal, 960 F.2d 1242, 1247 (4th Cir. 1992), citing Official Comments to UCC § 9-402. Second, filing is required to perfect certain security interests and to establish priority as against other secured creditors. See Md. Code. Ann., Com. Law §§ 9-302, 9-312.
Certainly, the lawyer has a duty in this context to ensure that his client's status as a secured creditor is properly perfected in accordance with the law of the appropriate jurisdiction. What is not clear is whether the scope of the attorney's duty should extend to a limitless number of subsequent purchasers who may later acquire the secured debt. While New Jersey's courts have recognized a foreseeable duty to persons who act in reliance on the lawyer's work, at some point the actor's relationship to the attorney may become too remote to sustain tort liability. See Petrillo at 484-85.
Turning to the facts of this case, defendants' original attorney-client relationship was with a Pennsylvania corporation making a secured commercial sale to a Maryland corporation. The resulting security interest was then transferred at least four times, eventually ending up in the hands of a California subsidiary of a Canadian corporation. The question is whether this chain of events was reasonably foreseeable such that defendants can be held liable for Aluma USA's eventual injury.
"The determination of any duty is a question of law for the court,"Petrillo at 479. Aluma USA is simply too far removed from the "limited group of persons" defendants intended their work to benefit. At oral argument, the parties had considerable difficulty even explaining the bewildering series of corporate transactions which resulted in Aluma USA's possession of the EF debt; it cannot be fairly said that such a remarkable chain of transactions was foreseeable to defendants.
There is also nothing in the record to suggest that defendants knew, at the time of the original UCC filing, that their client intended to sell the secured debt to subsequent parties who might rely on their work. Finally, it does not appear that the subsequent purchasers in fact relied on defendants' work in deciding to purchase the security interest, or that such reliance was reasonable under the circumstances. A more diligent creditor might have taken the time to ensure that the EF debt had been properly perfected, rather than relying solely on the strength of defendants' reputation. Under basic principles of tort liability, Aluma USA's relationship to defendants is too attenuated to support liability.
II. PLAINTIFFS' MOTION TO AMEND THEIR COMPLAINT
Plaintiffs seek to amend their complaint to add Aluma Systems as an additional plaintiff, relying on the language of Fed.R.Civ.P. 15(a). Once the responsive pleadings have been filed however, amendments adding or deleting parties are properly analyzed under Rule 21. See Commodity Futures Trading Comm'n v. American Metal Exchange, 693 F. Supp. 168, 189 (D.N.J. 1988); Fed.R.Civ.P. 21. Rule 21 provides that "[p]arties may be dropped or added by order of the court on motion of any party or on its own initiative at any stage of the action and on such terms as are just." The standard of review, however, is essentially the same as under Rule 15(a). Id. Amendment will be permitted unless the underlying circumstances illustrate undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the nonmovant, or the futility of the proposed amendment. Id., citing Foman v. Davis, 371 U.S. 178, 182 (1962).
There has been considerable delay in bringing this motion. This case was originally filed in early 1995, more than four years ago. It is true that plaintiffs attempted to make this same amendment in 1996, but no further efforts have been made in the three and one-half years since that motion was denied. Nevertheless, the present motion to amend was made promptly after the close of discovery on the standing issue, and permitting the amendment at this time poses little threat of prejudice to the defendants.
It appears, however, that the addition of Aluma Systems as a plaintiff would be futile. The proposed amended complaint asserts a cause of action for legal malpractice on behalf of Aluma Systems, alleging that defendants committed malpractice by failing to properly file a UCC-3 notice of assignment, leaving Aluma Systems as an unsecured creditor. The fundamental flaw in this cause of action is that Aluma Systems, like plaintiff Trilan, was no longer a creditor at the time of EF's bankruptcy petition. Aluma Systems sold the EF debt to Burke Scaffolding Company on February 1, 1990, almost two years before EF filed for bankruptcy. Paragraph 77 of the proposed amended complaint alleges that "as a result of [defendants'] negligence and malpractice, [Aluma Systems] was severely damaged," but it is difficult to imagine how. Aluma Systems' remaining proposed causes of action for breach of contract as a third-party beneficiary and negligent misrepresentation lack merit for the same reasons that plaintiff Trilan's identical claims lack merit. Plaintiffs' cross-motion to amend the complaint will be denied.
CONCLUSION
For the reasons set forth herein, defendants' motion for summary judgment will be denied as to plaintiffs Anthes Incorporated and Patheon, Inc., and is granted as to plaintiffs Trilan Ontario Ltd. and Aluma Systems USA, Inc. Plaintiffs' cross-motion to amend the complaint will be denied.