NJ Supreme Court: No Fiduciary Duty to Third Parties Without Attorney-Client Relationship
Newark, N.J. (June 16, 2020) - The Supreme Court of New Jersey issued a unanimous decision recently regarding legal malpractice liability to third-parties. In Meisels v. Fox Rothschild, the court considered conversion and breach of fiduciary duty claims brought against Fox Rothschild regarding a wire-transfer in an underlying real estate deal. In sum, the court found, on these facts, no liability could follow as to either claim.
The facts of the matter addressed on appeal center on Moshe Meisels, Eliyahu Weinstein, and Fox Rothschild. It should be noted that the court indicates that more parties were involved at earlier stages of the litigation, but the opinion (and this alert) addresses only the conversion and breach of fiduciary duty claims brought by Meisels against Fox Rothschild and a former attorney of Fox Rothschild.
In its opinion, the court noted that Meisels and Weinstein entered into a real estate agreement with one another. Only Weinstein was a client of Fox Rothschild. Meisels and Weinstein agreed to each provide $2.5 million, in accordance with the real estate agreement, “toward the purchase of a property in Irvington, New Jersey.” Meisels alleged he instructed an intermediary, Rightmatch Ltd., to transfer upwards of $2 million to Fox Rothschild, which represented Weinstein during this period. Rightmatch in turn carried out “two transfers, executed by Cambridge Mercantile Group” to Fox Rothchild’s attorney trust account in the amounts of $1,328,680.99 and $1,083,482.51.
The Supreme Court of New Jersey noted that “the record demonstrates that the funds that Meisels alleged he had wire-transferred to Fox Rothschild’s trust account did not contain any instruction from Meisels.” Thereafter, Meisels alleges Weinstein requested the firm “distribute the funds [he had transferred to Fox Rothschild’s attorney trust account] for purposes other than the agreed-upon real estate transaction,” which was ultimately never completed. While the court does not opine as to the specific purpose for which the funds were eventually used, it noted that “[a]ccording to Meisels, the purchase of the Irvington property was never consummated; Weinstein defrauded Meisels and his related co-plaintiffs.”
Below, the trial court summarily dismissed both claims. The trial court determined with respect to the claim for conversion there was no evidence that the funds “belonged to Meisels” nor “any indication that the firm acted wrongfully.” With respect to the claim for breach of fiduciary duty, the trial court found that “the firm was not Meisels’ counsel, did not make any representations to him, and therefore did not make representations with the intent that he would rely on them.” The Appellate Division affirmed the trial court’s summary dismissal of the breach of fiduciary duty and reversed the trial court’s summary dismissal of the claim for conversion.
The Supreme Court of New Jersey affirmed the Appellate Division’s decision with respect to the breach of fiduciary duty. Justice LaVecchia, writing for the court, acknowledged no duty could follow on the basis there was a direct attorney-client relationship, as Meisels was not a client of Fox Rothschild. With respect to third-party duty that could be assessed against Fox Rothschild, the court highlighted principles of fairness inherent in extending the duty.
While Meisels argued that an attorney “‘owes a fiduciary duty to persons, though not strictly clients, who he knows or should know rely on him in his professional capacity,’” the court stressed this was not absolute. Citing Petrillo v. Bachenberg, 139 N.J. 472, 484 (1995), the court averred “case law extending an attorney’s duty to a third party not in privity with the attorney has been approached with care so as to be fair to all; generally stated, it is cabined by considerations of reasonableness.” The court determined here no duty could be found. The court reasoned “Meisels admits that defendants had no knowledge of his existence, had no contact with him, possessed no knowledge about any purported agreement between him and Weinstein, and made no representations to Meisels.” Moreover, the court determined that “[t]he circumstances of this case” “offer no indicia that defendants endeavored to induce Meisels to rely on the firm.”
With respect to conversion, the court reversed the Appellate Division’s decision. The court determined the Appellate Division erred, noting that demand is a critical component of a claim for conversion in instances following lawful acquisition of property. The demand requirement, according the court, citing Mueller v. Tech. Devices Corp., 8 N.J. 201, 207 (1951) “puts the defendant on notice and is crucial when the initial possession is lawful or when it cannot be said that the holder is exercising independent dominion or control.” The court ultimately found Fox Rothschild did not execute independent dominion over the funds when they “acted in accordance with its client’s direction concerning the funds’ disbursement,” as they were held in the trust account on behalf of the client and Fox Rothschild “received no limiting instructions or conditions.” No competing claims were known to the firm, and therefore, no cause of action sounding in tort could arise.
In the legal malpractice context, the case serves as an important reminder of the limitations of the duty requirement to third parties.
For more information on this decision, contact the authors of this alert. Visit our Professional Liability Practice page for more alerts and information about this group.
Meredith K. Stoma, Partner
Natalie M. Rankin, Associate