suretyship contract or surety bond is essentially an agreement to satisfy the contractual obligations of another party. See Black's Law Dictionary 1442 (6th ed. 1990). Under the LGA, Midwest agreed to indemnify Credit General from any losses or expenses associated with these bonds which were incurred as a result of negligent or intentional actions, errors, or omissions on its part, excluding any losses caused by Credit General's own misconduct.
Much of the dispute between Credit General and Midwest centers around one bond (the "W.S. Lee bond") issued by Midwest, and guaranteeing the contractual performance of W.S. Lee Construction Co. as a subcontractor to Jones Brothers Construction Co. ("Jones Bros."). The W.S. Lee bond was executed pursuant to fronting agreement between Indiana Lumbermens Mutual Insurance Company ("Indiana Lumbermens") and Credit General. Under this "fronting agreement," Indiana Lumbermens agreed to issue surety bonds to Credit General customers. Although these bonds purportedly committed Indiana Lumbermens, under the terms of the fronting agreement, Credit General indemnified and held Indiana Lumbermens harmless from any losses and expenses associated with the issuance of these bonds.
Unfortunately for all concerned, W.S. Lee was unable to fulfill its contractual obligations. Jones Bros., as obligees under the bond, subsequently brought suit in California to enforce the bond, seeking the penal sum of the W.S. Lee bond plus damages for the alleged bad faith handling of the company's claim. Although the California suit was brought against Indiana Lumbermens, Credit General directed the litigation, retaining AMC, a California law firm, as counsel. Credit General allegedly informed AMC at this time that it had a contractual obligation to indemnify Indiana Lumbersmens for legal expenses incurred and any judgment awarded in the Jones Bros. litigation, and that Credit General, in turn expected Midwest to indemnify it for any sums Credit General was required to pay as a result of the litigation.
Things went badly in California. Midwest alleges that as a result of the negligence of the third party defendants, a $ 4.7 million jury verdict was returned against Indiana Lumbermens. Midwest's complaint cites the following acts (or failures to act) in support of its legal malpractice claim: (1) failure to advise Credit General or Midwest of the nature and risks of the Jones Bros. litigation; (2) failure to minimize the potential for direct exposure to losses; (3) failure to advise Credit General or Midwest of the danger that potential liability exceeded the amount Jones Bros. was willing to accept as a settlement; (4) failure to provide accurate information or well-founded legal opinions upon which Credit General or Midwest could weigh the merits of settling versus litigating; and (5) offering legal advice and opinions which they knew or should have known were contrary to controlling law. Midwest estimates that with attorney's fees and costs, the actual judgment could have exceeded $ 7 million. However, prior to the entry of judgment, Indiana Lumbermens settled the case with Jones Bros. for $ 3.65 million.
Following the settlement, Indiana Lumbermens initiated an arbitration proceeding against Credit General to recover the loss. Credit General and Indiana Lumbermens ultimately settled their dispute over the scope of Credit General's indemnification obligation for $ 2.85 million. In July 1993, Credit General obtained leave from this court to amend its complaint against Midwest to seek recovery of the $ 2.85 million payment to Indiana Lumbermens plus an additional $ 1 million in loss adjustment expenses.
Approximately six months later, on January 7, 1994, Midwest filed its third-party complaint against AMC, Murphy and Robinson.
Midwest is not now, nor has it ever been, a client of AMC. Under the traditional privity of contract rule, this fact alone would bar the instant suit. See Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice §§ 7.1-7.8 (3d ed. 1989). The modern trend, however, is to recognize the existence of a duty owed by attorneys to non-clients in a variety of circumstances. Beginning with its supreme court's decision in Biakanja v. Irving, 49 Cal. 2d 647, 320 P.2d 16 (Cal. 1958), California has been at the forefront of this movement.
Biakanja involved a notary public who performed unauthorized legal services in preparing a will for a client. The will was subsequently invalidated for lack of a proper attestation clause. Id. at 17. In holding that a beneficiary under the will could sue the notary for negligence, the court stated that a duty to a non-client could be found as a matter of public policy upon a balancing of the following six factors:
(1) the extent to which the transaction was intended to affect the plaintiff;