Opinion
No. 4:00CV00763 SMR
January 31, 2002
ORDER
Pending before this Court is Defendants' Motion For Summary Judgment (Doc. No. 18). For the reasons stated below the motion is granted.
This is a civil action brought by the United States of America against Jerome Green and Jerome Green Associates. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1345. Plaintiff is the United States on behalf of its agency, the United States Department of Agriculture (USDA) and its component agency, Rural Business Services (RBS), a division of USDA Rural Development.
FACTS
Plaintiff did not file a statement contesting Defendant's statement of undisputed material facts; therefore, pursuant to Local Rule 56.1, those facts included in Defendant's statement are deemed admitted. RBS administers the Business and Industry Direct Loan Program for the USDA. The Business and Industry Direct Loan Program provides loan funds to qualified rural businesses. Third Party Defendant Freeman Group, Inc. (FGI) applied for and was approved for a Business and Industry Direct Loan in the amount of $700,000.00. In furtherance of the loan application process, FGI was sent a Letter of Conditions which required FGI to give Rural Development a first priority security interest in all real and intangible property interests owned by FGI, including a first priority mortgage on real property located at 512 West Broadway in Forrest City, Arkansas. FGI agreed to these conditions.
FGI retained Defendant Jerome Green, d/b/a Jerome Green Associates, to perform all legal work in connection with the closing of the loan. Privity of contract existed at all material times between Defendant and FGI. At no time did privity of contract exist between Defendant and any agency of Plaintiff. Defendant was considered to be FGI's attorney by Plaintiff. See Exhibit 4 of Defendants' Motion For Summary Judgment, Deposition of Shirley Tucker, Director of Rural Business Cooperative Programs Service, page 42, lines 11-21; page 50, line 13 — page 51, line 11.
On October 1, 1997, Form RD 1927 and the USDA "Loan Closing Instructions" were sent to Defendant. Instruction number II.(3) stated that
The title attorney should issue his final title opinion for the real estate showing marketable title vested in the borrower subject to a valid agency first lien. If mortgagee title insurance is used, it should name the United States of America as the insured for the amount of the loan and contain only those exceptions you approve.
This instruction, along with all the others, was initialed by Defendant and a representative of Rural Development on October 20, 1997. At the end of the instructions, both Defendant and Rural Development's representative certified that the instruction requirements had been met. Defendant's signature was clearly delineated as that of the "BORROWER'S ATTORNEY." A copy of the instructions and certification bearing Defendant's initials and signature was never delivered to the borrower, FGI.
Also on October 20, 1997, Defendant signed a Closing and Non-Litigation Certificate. This document certified that officers of FGI signed the note and that no litigation was pending. Defendant was clearly identified as the "attorney for the Freeman Group, Inc." This certificate was never delivered to FGI.
On August 14, 1998, Defendant sent a letter to the USDA confirming the enclosure of the minutes of the FGI board meeting during which the resolution to borrow was adopted. This letter was never sent to FGI. These three documents are the only documents produced by Plaintiff which bear the mark, initials, or signature of Defendant.
On October 20, 1997, the Rural Development loan closed. Plaintiff alleges that a subsequent title examination revealed that a lien in favor of the Arkansas Industrial Development Commission had not been removed from the Forrest City property. Plaintiff alleges that this was contrary to the loan closing instructions and to Defendant's certification that he had complied with the instructions. Plaintiff alleges that this prior lien has impaired the security for its loan by approximately $153,500. Plaintiff has filed its complaint alleging negligence by Defendant and, in a separate count, breach of fiduciary responsibility.
ANALYSIS
Plaintiff first claims that Defendant was negligent in his performance of legal services. An attorney can be held liable for negligence if the attorney was in privity of contract with the party seeking damages. See Ark. Code Ann. § 16-22-310(a). Plaintiff has made no allegation that it was in privity of contract with Defendant. Plaintiff has conceded at every opportunity that it was not in privity of contract with Defendant. If Defendant is to be held liable it must be under another theory.
Plaintiff made no allegation in its Complaint, or in later pleadings, that it had any form of quasi-contract with Defendant. As such, this Court agrees that Plaintiff has no claim for breach of contract.
An attorney can also be held liable for negligence by a third party beneficiary if: (1) the attorney was aware that a primary intent of the client was for the attorney's services to benefit the third party; (2) the attorney identifies in writing to the client those persons who are intended to rely on the services; and (3) the attorney sends a copy of the writing to those persons identified in the writing. See Ark. Code Ann. § 16-22-310(a)(2). A recent case from the Arkansas Supreme Court confirmed that all three requirements had to be met before a third party beneficiary could recover for an attorney's negligence. See McDonald v. Pettus, 988 S.W.2d 9, 13-14 (Ark. 1999) (relying on the "virtually identical" accountant-immunity statute, Ark. Code Ann. § 16-114-302, and Swink v. Ernst Young, 908 S.W.2d 660 (Ark. 1995)). See also H. Keith Morrison Robert W. George, Arkansas's Privity Requirement For Attorney and Accountant Liability, 51 Ark. L. Rev. 697 (1999) (discussing Swink and its application to attorney liability). The first requirement demands both intent on the part of the client and an awareness of that intent on the part of the attorney. These are obviously questions of fact which would need to be decided by a jury. This Court could not say at this stage that these two elements were so lacking that a summary judgment is appropriate.
The third requirement is that the attorney send a copy of a writing to those third parties who have been identified as having the right to rely on the attorney's services. As mentioned above, Plaintiff has only produced three documents which bear the mark, initials, or signature of Defendant. This Court does not believe that any of these writings sufficiently identify "persons who are intended to rely on the services" of the attorney.
Assuming arguendo that one, or all, of these writings could satisfy the third requirement, Plaintiff's failure to satisfy the second requirement would still necessitate a summary judgment.
The second requirement is that the attorney identify in writing to the client those persons who are intended to rely on the attorney's services. Plaintiff has conceded that not one of the writings it produced has been delivered to the client, FGI. Therefore, Plaintiff cannot meet the all of the requirements of the attorney-immunity statute.
Plaintiff has generally conceded the above analysis but argues that the attorney immunity statute does not apply to it. Plaintiff bases its argument on the following language from the statute: "No [attorney] shall be liable to persons not in privity of contract with the [attorney]. . . ." See Ark. Code Ann. § 16-22-310(a) (emphasis added). Plaintiff argues that as a government entity it is not a person for purposes of this statute and, therefore, is not bound by its privity requirements. This particular subchapter of the Arkansas Code is, unfortunately, without a definition section. Plaintiff argues that, absent a codified definition, this Court should adopt the plain meaning of the word "person" and hold that the meaning does not include a government entity. This Court cannot agree.
This Court is not totally without guidance on this issue. In construing the term "person" to include a government agency this Court relies principally on the following: (1) the emergency clause of the act which led to attorney-immunity statute; and (2) the definition sections of other areas of the Arkansas Code.
The emergency clause of 1987 Ark. Acts 661 states that "[i]t is hereby found and determined by the General Assembly that the liability of . . . attorneys to persons not in privity of contract with them should be specifically outlined by legislative enactment; [and] that this Act establishes the limits of such liability. . . ." See 1987 Ark. Acts 661. This language clearly indicates a legislative desire to narrowly define the circumstances under which an attorney can be held liable to third persons. In essence, the legislature starts with the notion that an attorney cannot be liable to a third party who is not in privity of contract and then carves out a narrow exception when the writing requirements are met.
If this Court were to accept Plaintiff's construction of the statute, it would turn a small aperture in the statute into a gaping hole. Plaintiff essentially asks this Court to construe the term "person" to include only natural persons. This Court cannot believe, given the language of the emergency clause, that the legislature sought to protect attorneys only from natural persons and not other entities, including corporations, partnerships, etc.
This Court also finds the definition statutes from other areas of the law persuasive. Person is defined to include government or government agency in nearly every area of the law. For example, statutes dealing with agriculture, non-profit organizations, corporations, partnerships, fraudulent transfers, trade secret theft, criminal destruction of property, controlled substances, environmental testing, solid waste, hazardous substances, pollution, adoption, child custody, athlete agency, unclaimed property, rights of the terminally ill, anatomical gifts, swimming pools, public utilities, mortgage loan companies, securities, state income tax, and fiduciary duties all define person in such a way as to include a government or a government agency. This Court finds these statutes to be powerful evidence of a common practice by the legislature. This Court is generally loathe to add sections to statutes. However, given the mandate of the emergency clause and the overwhelming evidence of the common practice of the legislature, this Court believes it can safely say that were the legislature to have included a definition section in the subchapter, it would have defined person to include governments and their agencies.
But see Ark. Code Ann. §§ 20-21-203, 20-21-303 (excepting, specifically, the federal government and its agencies from the definition of person).
See Ark. Code Ann. §§ 4-27-140, 4-33-140.
See Ark. Code Ann. §§ 8-6-203, 8-6-503, 8-6-1602.
See Ark. Code Ann. §§ 8-7-203, 8-7-304, 8-7-403, 8-7-503.
See Ark. Code Ann. § 23-39-102.
Finally, this Court believes that the common law that existed prior to this statute would also mandate a finding of no liability. Plaintiff apparently believes that if this Court finds that the statute does not apply to it, then it automatically will be able to recover. This Court cannot agree. If the statute does not apply, this Court would then have to turn to the common law of Arkansas to determine Defendants' liability. A federal court sitting in diversity attempted to predict how the Arkansas Supreme Court would rule on the privity requirement shortly before the statute's enactment. See Robertson v. White, 633 F. Supp. 954, 970-71 (W.D.Ark. 1986). It determined that, even in the face of more "progressive" or "learned" rules, Arkansas would adhere to the rule that recovery was barred absent privity between the parties. See id. Shortly after the Robertson decision, this statute was enacted, and, as Judge Waters later stated, it "appears to be a legislative statement that the privity requirement still exists in Arkansas in connection with contract or negligence actions." See Almand v. Benton County, 145 B.R. 608, 617 (W.D.Ark. 1992).
In other words, the common law rule requiring privity still exists subject to the narrow exception drawn by the legislature. If this Court were to hold that this statute did not apply to Plaintiff, it still would have to apply the common law rule forbidding recovery absent privity. In short, whether this statute applies or not, there can be no recovery in Arkansas by this third party beneficiary. Summary judgment must be granted on the negligence claim.
Plaintiff is also seeking damages for breach of fiduciary duty. This claim has a different title but seeks recovery for the same acts allegedly committed by Defendants. As the language of the emergency clause quoted above makes clear, the legislature specifically outlined the limits of liability of an attorney to non-clients. Plaintiff now seeks to avoid the statute by naming his claim differently. At least when it is "closely aligned" with a negligence claim, a third party claim for breach of fiduciary duty is forbidden by statute. See Clark v. Ridgeway, 914 S.W.2d 745, 750-51 (Ark. 1996). This Court cannot allow Plaintiff to recover by calling his claim something other than negligence. Summary judgment must also be granted on the fiduciary duty claim.
For the reasons stated above, Defendants' Motion For Summary Judgment (Doc. No. 18) is GRANTED.
JUDGMENT
Pursuant to an Order in this matter this date, it is Considered, Ordered and Adjudged that this case be, and it hereby is, dismissed with prejudice.