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Greycas Inc. v. Proud

decided: August 3, 1987.


Appeal from the United States District Court for the Southern District of Illinois, Alton Division. No. 82 C 5138--William L. Beatty, Judge.

Bauer, Chief Judge, and Cummings and Posner, Circuit Judges. Butler, Chief Judge, concurring.

Author: Posner

POSNER, Circuit Judge.

Theodore S. Proud, Jr., a member of the Illinois bar who practices law in a suburb of Chicago, appeals from a judgment against him for $833,760, entered after a bench trial. The tale of malpractice and misrepresentation that led to the judgment begins with Proud's brother-in-law, Wayne Crawford, like Proud a lawyer but one who devoted most of his attention to a large farm that he owned in downstate Illinois. The farm fell on hard times and by 1981 Crawford was in dire financial straits. He had pledged most of his farm machinery to lenders, yet now desperately needed more money. He approached Greycas, Inc., the plaintiff in this case, a large financial company headquartered in Arizona, seeking a large loan that he offered to secure with the farm machinery. He did not tell Greycas about his financial difficulties or that he had pledged the machinery to other lenders, but he did make clear that he needed the loan in a hurry. Greycas obtained several appraisals of Crawford's farm machinery but did not investigate Crawford's financial position or discover that he had pledged the collateral to other lenders, who had perfected their liens in the collateral. Greycas agreed to lend Crawford $1,367,966.50, which was less than the appraised value of the machinery.

The loan was subject, however, to an important condition, which is at the heart of this case: Crawford was required to submit a letter to Greycas, from counsel whom he would retain, assuring Greycas that there were no prior liens on the machinery that was to secure the loan. Crawford asked Proud to prepare the letter, and he did so, and mailed it to Greycas, and within 20 days of the first contact between Crawford and Greycas the loan closed and the money was disbursed. A year later Crawford defaulted on the loan; shortly afterward he committed suicide. Greycas then learned that most of the farm machinery that Crawford had pledged to it had previously been pledged to other lenders.

The machinery was sold at auction. The Illinois state court that determined the creditors' priorities in the proceeds of the sale held that Greycas did not have a first priority on most of the machinery that secured its loan; as a result Greycas has been able to recover only a small part of the loan. The judgment it obtained in the present suit is the district judge's estimate of the value that it would have realized on its collateral had there been no prior liens, as Proud represented in his letter.

That letter is the centerpiece of the litigation. Typed on the stationery of Proud's firm and addressed to Greycas, it identifies Proud as Crawford's lawyer and states that, "in such capacity, I have been asked to render my opinion in connection with" the proposed loan to Crawford. It also states that "this opinion is being delivered in accordance with the requirements of the Loan Agreement" and that

I have conducted a U.C.C., tax, and judgment search with respect to the Company [i.e., Crawford's farm] as of March 19, 1981, and except as hereinafter noted all units listed on the attached Exhibit A ("Equipment") are free and clear of all liens or encumbrances other than Lender's perfected security interest therein which was recorded March 19, 1981 at the Office of the Recorder of Deeds of Fayette County, Illinois.

The reference to the lender's security interest is to Greycas's interest; Crawford, pursuant to the loan agreement, had filed a notice of that interest with the recorder. The excepted units to which the letter refers are four vehicles. Exhibit A is a long list of farm machinery -- the collateral that Greycas thought it was getting to secure the loan, free of any other liens. Attached to the loan agreement itself, however, as Exhibit B, is another list of farm machinery constituting the collateral for the loan, and there are discrepancies between the two lists; more on this later.

Proud never conducted a search for prior liens on the machinery listed in Exhibit A. His brother-in-law gave him the list and told him there were no liens other than the one that Crawford had just filed for Greycas. Proud made no effort to verify Crawford's statement. The theory of the complaint is that Proud was negligent in representing that there were no prior liens, merely on his brother-in-law's say-so. No doubt Proud was negligent in failing to conduct a search, but we are not clear why the misrepresentation is alleged to be negligent rather than deliberate and hence fraudulent, in which event Greycas's alleged contributory negligence would not be an issue (as it is, we shall see), since there is no defense of contributory or comparative negligence to a deliberate tort, such as fraud. See, e.g., Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir. 1982) (Illinois law); cf. Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 528-29 (7th Cir. 1985). Proud did not merely say, "There are no liens"; he said, "I have conducted a U.C.C., tax, and judgment search"; and not only is this statement, too, a false one, but its falsehood cannot have been inadvertent, for Proud knew he had not conducted such a search. The concealment of his relationship with Crawford might also support a charge of fraud. But Greycas decided, for whatever reason, to argue negligent misrepresentation rather than fraud. It may have feared that Proud's insurance policy for professional malpractice excluded deliberate wrongdoing from its coverage, or may not have wanted to bear the higher burden of proving fraud, or may have feared that an accusation of fraud would make it harder to settle the case -- for most cases, of course, are settled, though this one has not been. In any event, Proud does not argue that either he is liable for fraud or he is liable for nothing.

He also does not, and could not, deny or justify the misrepresentation; but he argues that it is not actionable under the tort law of Illinois, because he had no duty of care to Greycas. (This is a diversity case and the parties agree that Illinois tort law governs the substantive issues.) He argues that Greycas had an adversarial relationship with Proud's client, Crawford, and that a lawyer has no duty of straight dealing to an adversary, at least none enforceable by a tort suit. In so arguing, Proud is characterizing Greycas's suit as one for professional malpractice rather than negligent misrepresentation, yet elsewhere in his briefs he insists that the suit was solely for negligent misrepresentation -- while Greycas insists that its suit charges both torts. Legal malpractice based on a false representation, and negligent misrepresentation by a lawyer, are such similar legal concepts, however, that we have great difficulty both in holding them apart in our minds and in understanding why the parties are quarreling over the exact characterization; no one suggests, for example, that the statute of limitations might have run on one but not the other tort. So we shall discuss both.

Proud is undoubtedly correct in arguing that a lawyer has no general duty of care toward his adversary's client; it would be a considerable and, as it seems to us, an undesirable novelty to hold that every bit of sharp dealing by a lawyer gives rise to prima facie tort liability to the opposing party in the lawsuit or negotiation. The tort of malpractice normally refers to a lawyer's careless or otherwise wrongful conduct toward his own client. Proud argues that Crawford rather than Greycas was his client, and although this is not so clear as Proud supposes -- another characterization of the transaction is that Crawford undertook to obtain a lawyer for Greycas in the loan transaction -- we shall assume for purposes of discussion that Greycas was not Proud's client.

Therefore if malpractice just meant carelessness or other misconduct toward one's own client, Proud would not be liable for malpractice to Greycas. But in Pelham v. Griesheimer, 92 Ill. 2d 13, 440 N.E.2d 96, 64 Ill. Dec. 544 (1982), the Supreme Court of Illinois discarded the old common law requirement of privity of contract for professional malpractice; so now it is possible for someone who is not the lawyer's (or other professional's) client to sue him for malpractice. The court in Pelham was worried, though, about the possibility of a lawyer's being held liable "to an unlimited and unknown number of potential plaintiffs," id. at 20, 440 N.E.2d at 99, so it added that "for a nonclient to succeed in a negligence action against an attorney, he must prove that the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party," id. at 21, 440 N.E.2d at 100. That, however, describes this case exactly. Crawford hired Proud not only for the primary purpose, but for the sole purpose, of influencing Greycas to make Crawford a loan. The case is much like Brumley v. Touche, Ross & Co., 139 Ill. App. 3d 831, 836, 487 N.E.2d 641, 644-45, 93 Ill. Dec. 816 (1985), where a complaint that an accounting firm had negligently prepared an audit report that the firm knew would be shown to an investor in the audited corporation and relied on by that investor was held to state a claim for professional malpractice. In Conroy v. Andeck Resources '81 Year-End Ltd., 137 Ill. App. 3d 375, 389-91, 484 N.E.2d 525, 536-37, 92 Ill. Dec. 10 (1985), in contrast, a law firm that represented an offeror of securities was held not to have any duty of care to investors. The representation was not intended for the benefit of investors. Their reliance on the law firm's using due care in the services it provided in connection with the offer was not invited. Cf. Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 497 (7th Cir. 1986).

All this assumes that Pelham governs this case, but arguably it does not, for Greycas, as we noted, may have decided to bring this as a suit for negligent misrepresentation rather than professional malpractice. We know of no obstacle to such an election; ...

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