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Table of Contents    Cover

Featured Article June 1999
The Bily Club

Lawyers have been disappointed in their efforts to use the Bily decision as a defense against professional negligence claims by third parties
 

By Steve Howard 

Steve Howard heads the litigation department of the Los Angeles office of Milbank, Tweed, Hadley & McCloy LLP and specializes in professional liability litigation, principally involving attorneys and accountants. 

Suits against lawyers for negligence are on the rise, filed not only by clients but also by third parties. As a result, lawyers face a plight familiar to accountants, who have a long history of being sued for negligence by parties who were never their clients. Curiously, however, the law in California governing nonclient suits for negligence against lawyers has developed largely on a different track from the law governing nonclient suits against accountants. This is so even though the applicable principles and policies concerning liability to nonclients for the two professions would appear to be similar. Indeed, the California Supreme Court has suggested rather strongly that the law governing nonclient suits against members of any profession should be the same.1 

Attorney liability in California to nonclient third parties for negligence generally is governed by Biakanja v. Irving,2 a 40-year-old decision of the California Supreme Court that articulated a mushy, six-factor balancing test for determining professional liability for negligence to a party not in privity with the professional. Applying the so-called Biakanja factors has led to a haphazard, inconsistent set of appellate opinions with no bright lines and little hope for a successful demurrer or defense summary judgment at the trial court level. 

By contrast, ever since the supreme court's decision in 1992 in Bily v. Arthur Young & Company,3 the rules governing the liability of accountants to nonclients have been quite clear and favorable to the profession, with defense victories on a demurrer or a motion for summary judgment not infrequent. Bily followed a long line of decisions that began 70 years ago with Justice Benjamin Cardozo's famous opinion in Ultramares Corporation v. Touche,4 which held that an accountant could not be held liable to a third party for merely negligent misstatements. 

For a brief period starting in 1986, California law moved in the opposite direction with the California Court of Appeal's decision in International Mortgage Company v. John P. Butler Accountancy Corporation5 that an accountant could be held liable for negligence to nonclients who foreseeably relied on the accountant's work. International Mortgage Company was short-lived, however. In Bily, the supreme court elaborately analyzed the relevant public policy considerations and prior judicial decisions and held that an accountant could be sued by a nonclient for negligent misrepresentation only when the accountant intended for the nonclient to be a beneficiary of the accountant's work. The Bily court found that an accountant could almost never be sued by a nonclient for pure professional negligence. Thus, it was not enough that a nonclient had relied on an accountant's work and the reliance might have been foreseeable. To be liable at all, the accountant had to have intended that the particular plaintiff would benefit from the accountant's work. 

Not only does the Bily rationale seem equally applicable to lawyers as well as accountants, but the opinion frequently refers to "professional suppliers of information" and specifically lists lawyers as an example of that generic group.6 Many members of the professional liability bar simply assumed that Bily would govern attorney liability to third parties as well as accountant liability to third parties and that lawyers would soon find it easier to dispose of negligence cases brought by nonclients on demurrer or summary judgment-but that has not happened. 

Court of appeal decisions have been very tentative about applying Bily to suits against attorneys. Several court of appeal decisions concerning attorney liability to nonclients since Bily have not even cited the Bily decision, and one now depublished court of appeal opinion flatly held that the Bily analysis was limited to accountants. In general, the multifactor balancing test of Biakanja and its progeny remains the governing analysis for attorneys. For California's lawyers, Bily's promise of bright-line rules favorable to defendants remains largely undelivered. 

Applying the Biakanja Test 
Since 1958, all discussion of attorney liability to third parties has started (and often ended) with Biakanja,7 a decision that involved a notary public who prepared a will that was later deemed invalid because the notary failed to have the will properly attested. The sole beneficiary under the will lost her bequest and sued the notary for negligence. Despite a complete lack of privity between the putative beneficiary and the notary, the supreme court affirmed the lower court's ruling that the notary could be held liable to the beneficiary. In Biakanja, the court identified the six factors that must be balanced on a case-by-case basis to determine whether a professional owed a duty of care to a particular nonclient third party: 

[T]he extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to [the plaintiff], the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.8 

The court balanced these factors and held that it was appropriate to hold the notary liable to the third-party plaintiff for the notary's negligence, with the additional consideration that, as the court noted, the "end and aim" of the transaction in Biakanja was to provide for the passing of the estate to the plaintiff.9 

Three years later, in 1961, the supreme court applied its Biakanja analysis specifically to lawyers in Lucas v. Hamm,10 another case brought by a disappointed beneficiary against the preparer of an invalid will. This time, the defendant was a lawyer, and the will violated the rule against perpetuities. The supreme court emphasized the nexus between a nonclient's dependence on an attorney's work product and the foreseeability of harm to that nonclient if the work was negligently performed: 

As in Biakanja, one of the main purposes which the transaction between [the] defendant and the testator intended to accomplish was to provide for the transfer of property to [the] plaintiffs; the damage to [the] plaintiffs in the event of invalidity of the bequest was clearly foreseeable; it became certain, upon the death of the testator without change of the will, that [the] plaintiffs would have received the intended benefits but for the asserted negligence of [the] defendant; and if persons such as [the] plaintiffs are not permitted to recover for the loss resulting from negligence of the draftsman, no one would be able to do so and the policy of preventing future harm would be impaired.11 

The Lucas court also added a seventh factor to the six Biakanja factors: whether a finding of liability in the situation presented would unduly burden the legal profession.12 

The approach in Biakanja and Lucas leaves it to the jury to resolve all the factors, but with little guidance in any particular case. Not surprisingly, the application of Biakanja and Lucas in subsequent cases has produced confusion and seemingly inconsistent results. Two cases decided in 1976 illustrate the problem. 

In Roberts v. Ball, Hunt, Hart, Brown & Baerwitz,13 a claim for negligent misrepresentation was asserted by a lender against a borrower's attorney for a legal opinion that the lender claimed was negligently prepared. The opinion, addressed to the plaintiff lender and delivered to him by the borrower, confirmed that the borrower was a duly organized partnership and was used by the borrower to induce the plaintiff to lend money to the borrower. Indeed, the plaintiff, relying on the legal opinion, made the loan. The legal opinion, however, failed to disclose that the borrower's general partners had met and agreed to dissolve the partnership. The plaintiff lender sued the partnership's attorney for negligent misrepresentation, alleging that if he had been aware of the dissolution, he never would have made the loan. 

Relying on a Biakanja analysis, the court of appeal held that the law firm could be sued for negligent misrepresentation by the plaintiff, even though the plaintiff was a third party and was never the firm's client. The legal opinion had been drafted for the purpose of influencing the plaintiff's conduct-making a loan-and that conduct was foreseeable. The court stated that: 

We have no difficulty, therefore, in determining that the issuance of a legal opinion intended to secure benefit for the client, either monetary or otherwise, must be issued with due care, or the attorneys who do not act carefully will have breached a duty owed to those they attempted or expected to influence on behalf of their clients.14 

The plaintiff's anticipated reliance was, like the passing of the estate in Biakanja, the "end and aim" of the transaction.15 

Only nine months after Ball, Hunt was decided, the supreme court seemed to shift ground, narrowing attorney liability to third-party nonclients in Goodman v. Kennedy.16 In that case, an attorney negligently advised his client that certain shares of stock could be sold to third parties without jeopardizing the exemption from the requirement of registering the stock. The client sold the stock to a third party and, subsequently, the Securities and Exchange Commission temporarily suspended the client's registration exemption. The third party sued the attorney, claiming injury as a result of the attorney's negligent advice to his client as well as the attorney's conscious nondisclosure (to the attorney's client) of facts that would point to the possibility of vitiating the exemption. The plaintiffs asserted that if the attorney could have reasonably foreseen that his advice would economically damage nonclient third parties, the attorney should be held liable for negligence. 

The supreme court rejected this argument. The attorney's duty did not extend to third parties with whom the attorney's client, acting on the attorney's advice, dealt at arm's length, as long as there was no showing that the attorney's advice was foreseeably transmitted to, or relied upon by, the plaintiffs or that the plaintiffs were the intended beneficiaries of a transaction to which the advice pertained. "There is no allegation that the [attorney's] advice was ever communicated to [the] plaintiffs and hence no basis for any claim that they relied upon it in purchasing or retaining the stock," the court noted, adding also that "the advice [was not] given for the purpose of enabling [the attorney's] client to discharge any obligation to [the] plaintiffs."17 

The court concluded that: 

To make an attorney liable for negligent confidential advice not only to the client who enters into a transaction in reliance upon the advice but also to the other parties to the transaction with whom the client deals at arm's length would inject undesirable self-protective reservations into the attorney's counseling role. The attorney's preoccupation or concern with the possibility of claims based on mere negligence…by any with whom his client might deal "would prevent him from devoting his entire energies to his client's interests." The result would be both "an undue burden on the profession" and a diminution in the quality of the legal services received by the client.18 

While it is not impossible to reconcile Ball, Hunt and Goodman, it takes some work, and there is definite tension between the two decisions. 

Accountant Liability under Bily 
In contrast to the somewhat pro-plaintiff approach to attorney liability to third parties for negligence, California courts generally have been favorable to accountants in suits by nonclients. They have followed, with one brief interruption, the most famous of all accountant third-party liability cases, Ultramares Corporation v. Touche,19 a nearly 70-year-old New York Court of Appeal opinion written by Justice Cardozo. Ultramares examined to what extent an accounting firm should be held liable to nonclient investors and creditors of a company with an inaccurate balance sheet that had been negligently certified by an accounting firm. Warning at length about the consequences of extended liability on the part of an accountant to third parties with whom the accountant was not in privity,20 the Ultramares court held that the defendant accounting firm could not be held liable to a third party for negligent misstatements-though the firm could be held liable for fraudulent or reckless misstatements.21 
Ultramares guided California courts for 50 years22 until 1986, when the court of appeal launched a momentary period of contrary decisions with International Mortgage Company v. John P. Butler Accountancy Corporation.23 The accounting firm in International Mortgage negligently certified financial statements for a mortgage company. Based on the financial statements, a third party entered into contracts to purchase various government loans from the mortgage company, which was undercapitalized and thus could not deliver the promised trust deeds. The third-party nonclient sued the accounting firm for negligence and negligent misrepresentation. 

Reviewing the pertinent case law, including Ultramares, the International Mortgage court rejected Justice Cardozo's protectionist posture toward accountants and concluded that the role of the accountant had changed since 1931: 

An independent auditor…is employed to analyze a client's financial status and make public the ultimate findings in accord with recognized accounting principles. Such an undertaking is imbued with considerations of public trust, for the accountant must well realize the finished product, the unqualified financial statement, will be relied upon by creditors, stockholders, investors, lenders or anyone else involved in the financial concerns of the audited client.24 

Therefore, according to International Mortgage, auditors owe a duty of care to reasonably foreseeable plaintiffs who rely on negligently prepared unqualified certifications of financial statements.25 

For accountants, however, the setback delivered by International Mortgage was soon undone. Six years later, in 1992, the California Supreme Court revisited the issue of accountants' duties to third parties in Bily v. Arthur Young & Company26-and the result was a major triumph for the accounting profession. 

The Bily case arose out of the dramatic rise and fall of Osborne Computer Corporation. In 1983, Osborne engaged Arthur Young & Company-then one of the Big Eight accounting firms-to audit its 1981 and 1982 financial statements. While conducting the audit, an Arthur Young auditor discovered that Osborne had deviated from generally accepted accounting principles, but the company nonetheless issued an unqualified (also referred to as "clean") audit report on Osborne's financial statements. 

Relying on Arthur Young's clean audit report, certain investors who were not themselves clients of Arthur Young purchased warrants from Osborne. Those warrants entitled the investors to purchase large blocks of Osborne stock at favorable prices in Osborne's then-anticipated initial public offering. The investors believed that the warrants would yield them sizeable profits after the IPO. 

Osborne went bankrupt before the IPO occurred, thereby rendering the warrants worthless. The investors who purchased the warrants subsequently discovered that the financial statements that Arthur Young had certified in its report substantially understated Osborne's liabilities. In an effort to recoup their investment losses, the investors filed an action against Arthur Young for professional negligence, negligent misrepresentation, and fraud, alleging that their reliance on Arthur Young's audit report was foreseeable by Arthur Young. 

The jury returned a verdict against the plaintiffs on their claims for negligent misrepresentation and fraud but found that Arthur Young had been negligent in its performance of its audit. The plaintiffs were awarded $4.3 million in compensatory damages on their negligence claim. Arthur Young appealed the judgment for negligence but the court of appeal affirmed, relying on the holding of International Mortgage that an auditor owed a duty of care to third parties who foreseeably rely on the auditor's advice. In a lengthy opinion, the supreme court reversed. 

A major feature of the supreme court's opinion is its careful distinction between actions by third parties for negligent misrepresentation and actions by third parties for negligence. The Bily court held that nonclients who were "intended beneficiaries" of an accountant's work and who relied on that work could sue the accountant for negligent misrepresentation, noting that such intended beneficiaries were a narrow and circumscribed class. Only the accountant's client, however, could assert claims for pure negligence, according to the court: "We conclude that an auditor owes no general duty of care regarding the conduct of an audit to persons other than the client."27 Because the investor-plaintiffs in Bily were not clients of Arthur Young, the court held that they could not assert a claim for professional negligence against Arthur Young. 

Driving the court's decision was the distinction that it made between the elements of proof that a plaintiff must satisfy to recover for negligent misrepresentation as opposed to negligence and what the court deemed to be the gravamen of a nonclient's claim versus a client's claim. In essence, the court held that the right cause of action for a nonclient to assert against an accountant is negligent misrepresentation, not professional negligence: 

Nonclients of the auditor are connected with the audit only through receipt of and express reliance on the audit report.…By allowing [a nonclient to recover] for negligent misrepresentation (as opposed to mere negligence), we emphasize the indispensability of [the nonclient's] justifiable reliance on the statements contained in the report.…[A] general negligence charge directs attention to [the] defendant's level of care and compliance with professional standards established by expert testimony, as opposed to [the] plaintiff's reliance on a materially false statement made by [the] defendant. The reliance element…is only implicit [in a negligence claim].…In contrast, an instruction based on the elements of negligent misrepresentation necessarily and properly focuses the jury's attention on the truth or falsity of the audit report's representations and [the] plaintiff's actual and justifiable reliance on them. Because the audit report, not the audit itself, is the foundation of the third person's claim, negligent misrepresentation more precisely captures the gravamen of the [nonclient's] cause of action and more clearly conveys the elements essential to a recovery.28 

Bily's Unrealized Potential for Lawyers 
When it was first issued, the Bily decision seemed to hold great promise for lawyers (and other professionals) as well as accountants. It seemed certain that Bily would no doubt bring an end to the confusion of Biakanja and its progeny as they apply to lawyers. 

For starters, the Bily court appeared to say that its holding was uniformly applicable to all professional suppliers of information. The court stated that: 

Accountants are not unique in their position as suppliers of information and evaluations for the use and benefit of others. Other professionals, including attorneys, architects, engineers, title insurers and abstractors, and others also perform that function. And, like auditors, these professionals may also face suits by third persons claiming reliance on information and opinions generated in a professional capacity.29 

Given the court's analysis of the factors that are common to all parties designated as professional suppliers of information, as well as the court's apparent goal of achieving consistency and predictability in the law of negligence and negligent misrepresentation as applied to all who meet the qualifications of that designation, the extension of Bily to all professional suppliers of information, including lawyers, was considered a sure thing. Indeed, after the Bily decision, courts applied the Bily analysis not only to auditors30 but also to real estate appraisers,31 real estate brokers,32 environmental consultants,33 title insurers,34 and an insurance information clearinghouse.35 

In fact, the argument for narrow liability for negligence to third parties should have been even more compelling for lawyers than for accountants. Applicable professional standards for accountants require auditors to be independent from their clients,36 and court decisions had long stated, at least in dicta, that auditors have separate responsibilities to the public in addition to their responsibilities to their clients. In United States v. Arthur Young & Company-a case decided earlier than Bily-the U.S. Supreme Court noted that: 

By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This "public watchdog" function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.37 

Lawyers, by contrast, are mandated to represent a client zealously, with the client's interest placed above all others.38 If anything, a lawyer's liability to a party other than his or her client for negligence should be even less than the liability of an accountant to a nonclient for negligence. 

Despite Bily's potential, actual application of Bily to third-party cases against lawyers by California courts has been perplexing. Since Bily, there have been seven reported decisions of the California Court of Appeal39 on the liability of lawyers to nonclients-and three did not so much as cite Bily,40 with two others citing Bily only in passing with no express indication that the court was applying Bily's holding to lawyers.41 Of the remaining two cases-both from the Fourth District42-one flatly held that Bily does not apply to lawyers;43 the other, with little discussion, held that it does.44 

In Ronson v. Superior Court,45 individual limited partners filed suit for professional negligence against a law firm that provided counsel to the general partner. Despite Bily, the court of appeal held that the defendant law firm owed the nonclient plaintiffs a duty and could be liable to them for professional negligence. In an opinion that the supreme court later ordered not to be published, the court of appeal held that the Bily analysis simply did not apply to lawyers: 

The discussion in Bily is so fact-specific as to auditors and appears to be so narrowly limited in its policy discussions that we do not believe its reasoning may be applied to attorney malpractice claims in light of existing authority in that field. If the [s]upreme [c]ourt had meant to overrule Goodman v. Kennedy and its predecessor authority, it would have said so.46 

Nevertheless, in B.L.M. v. Sabo & Deitsch, another division of the Fourth District simply assumed that Bily was the controlling authority for third-party suits against attorneys and completely based its disposal of the case before it on a Bily analysis. The court held that a law firm acting as special counsel for the city of Rialto, California, and as bond counsel for a construction project could not be held liable in negligence to a developer who had submitted a bid for a project that was based on the law firm's incorrect statement that the construction project would not require payment of the prevailing wage. Observing in a footnote that the Bily decision involved accountant liability, the court, after quoting from Bily, stated: "We assume, therefore, that the court [in Bily] intended its discussion of liability to third parties to be considered in a case such as the one now before us."47 

Superior court judges, however, also have been reluctant to apply Bily to relieve lawyers of liability for negligence to third parties. In one case, for example, the court granted summary adjudication for a party asserting that a law firm preparing a private placement memorandum for a client owed a duty of care-or, in other words, could be liable for general professional negligence-to nonclients who purchased securities in reliance on that memorandum, even though the law firm's name appeared nowhere in the memorandum.48 

Drawing firm conclusions from the post-Bily cases is risky. Despite Bily's expansive language and its bright-line, prodefendant rules, judges seem hesitant to include lawyers in the group of protected professionals. Perhaps it is that judges, having themselves been lawyers, feel a need to be tougher on lawyers than other professionals. Whatever the reason, the law concerning the liability of lawyers to third parties for negligence remains murky and unsettled. 

Bily articulated a clear standard for suits by nonclients against auditors for negligent misrepresentation and professional negligence-and the language in that opinion signaled the intention of the California Supreme Court to apply the same standard to all professional suppliers of information, including lawyers-but California's lower courts have yet to embrace Bily as fully applicable to lawyers. Whether they ever will is a question for pending and future litigants. 

1 See Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992). 

2 Biakanja v. Irving, 49 Cal. 2d 647 (1958). 

3 Bily, 3 Cal. 4th 370. 

4 Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931). 

5 International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806 (1986), overruled by Bily, 3 Cal. 4th 370. 

6 Bily, 3 Cal. 4th at 410. 

7 Biakanja v. Irving, 49 Cal. 2d 647 (1958). 

8 Id. at 650. 

9 See id. 

10 Lucas v. Hamm, 56 Cal. 2d 583 (1961). 

11 Id. at 589. Despite finding that the lawyer owed a duty to the nonclients, the court affirmed the lower court's ruling dismissing the action on the grounds that a lawyer who makes an error with respect to the rule against perpetuities does not demonstrate negligence. See id. at 592. 

12 See id. at 589. 

13 Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57 Cal. App. 3d 104 (1976). 

14 Id. at 111. 

15 See id. 

16 Goodman v. Kennedy, 18 Cal. 3d 335 (1976). 

17 Id. at 343-44 (footnote omitted). The Goodman court specifically distinguished the Ball, Hunt decision as finding that the attorney owed a duty because the plaintiff's reliance was the "end and aim of the transaction." 

18 Id. at 344 (citations omitted). 

19 Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931). 

20 According to Justice Cardozo:
If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences. Id. at 444. 

21 Id. at 447:
Our holding does not emancipate accountants from the consequences of fraud. It does not relieve them if their audit has been so negligent as to justify a finding that they had no genuine belief in its adequacy, for this again is fraud. It does no more than say that, if less than this is proved, if there has been neither reckless misstatement nor insincere profession of an opinion, but only honest blunder, the ensuing liability for negligence is one that is bounded by the contract, and is to be enforced between the parties by whom the contract has been made. 

22 See International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806, 812 (1986) (noting that "the privity requirement in accountant malpractice suits has survived the shifting sands of time and remains relatively intact today in most jurisdictions"), overruled by Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992). 

23 International Mortgage, 177 Cal. App. 3d at 806. 

24 Id. at 817. 

25 Id. at 821. 

26 Bily, 3 Cal. 4th 370. 

27 Id. at 376; see also id. at 396-407. Even the Bily court, however, could not bring itself to draw an absolute line, qualifying its otherwise clear holding in a footnote: 

In theory, there is an additional class of persons who may be the practical and legal equivalent of "clients." It is possible the audit engagement contract might expressly identify a particular third party or parties so as to make them express third party beneficiaries of the contract. Third party beneficiaries may under appropriate circumstances possess the rights of parties to the contract. 

Id. at 406 n.16. More than one plaintiff has been able to plead around Bily's clear dictates by alleging it was "the practical and legal equivalent" of a client. 

28 Id. at 413 (citations omitted). But see Arthur Andersen LLP v. Superior Court, 79 Cal. Rptr. 2d 879 (1998) (holding "that an auditor, when auditing an insurance company, owes a duty of due care not to make negligent misrepresentations to the Insurance Commissioner in his capacity as the representative of policyholders and creditors" and finding "that when the Insurance Commissioner receives an audit report filed pursuant to [Ins. Code §]900.2, the Insurance Commissioner comes within the universe of potential plaintiffs defined by Bily…"). 

29 Bily, 3 Cal. 4th at 410. 

30 See Software Design & Application, Ltd. v. Price Waterhouse, LLP, 49 Cal. App. 4th 464 (1996). 

31 See Soderbergh v. McKinney, 44 Cal. App. 4th 1760, 1768 (1996) ("While Bily involved the liability of accountants (or auditors), we see no reason why its discussion should be limited to that group of professionals."). 

32 See FSR Brokerage, Inc. v. Los Angeles Superior Court, 35 Cal. App. 4th 69 (1995). 

33 See Lincoln Alameda Creek v. Cooper Indus., Inc., 829 F. Supp. 325, 328-29 (N.D. Cal. 1992) ("The Bily court acknowledged that other groups of professionals, such as engineers, supply information and evaluations for others to use.…Therefore, for all groups of information-supplying professionals, liability is limited to those persons the information is intended to benefit."). 

34 See Quelimane Co., Inc., v. Stewart Title Guar. Co., 19 Cal. 4th 26, 59(1998): 

In the business arena it would be unprecedented to impose a duty on one actor to operate its business in a manner that would ensure the financial success of transactions between third parties. With rare exceptions, a business entity has no duty to prevent financial loss to others with whom it deals directly. A fortiori, it has no greater duty to prevent financial losses to third parties who may be affected by its operations. 

35 See Ord & Norman v. Surplus Line Ass'n of Cal., 38 Cal. App. 4th 1276, 1279 (1995). 

36 See United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984). 

37 Id. at 817-18. 

38 See Flatt v. Superior Court, 9 Cal. 4th 275 (1994) (holding that an attorney's duty to his or her client is "inviolate" and requires undivided loyalty); Radovich v. Locke-Paddon, 35 Cal. App. 4th 946, 965 (1995); see also Bus. & Prof. Code §6068; Cal. Rules of Professional Conduct Rule 3-310. 

39 An eighth case from a federal trial court, Burnstein v. Graves, No. C-92-3623, 1994 WL 792541 (N.D. Cal. Dec. 20, 1994), aff'd, 110 F. 3d 67 (9th Cir. 1997), relied, in large part, on the California Supreme Court's decision in Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992), to find that a lawyer did not owe a duty to a third-party nonclient. 

40 See Johnson v. Superior Court, 38 Cal. App. 4th 463 (1995); Mattco Forge, Inc. v. Arthur Young & Co., 38 Cal. App. 4th 1337 (1995); Gonsalves v. Alameda County Superior Court, 24 Cal. Rptr. 2d 52 (Cal. Ct. App. 1993), Op. A062607 deleted upon direction of supreme court (Feb. 24, 1994). 

41 See Radovich, 35 Cal. App. 4th 946 (concluding, without explicit reliance on Bily, that the fear of liability to potential third-party beneficiaries could compromise a lawyer's duty to his or her client); Meighan v. Shore, 34 Cal. App. 4th 1025 (1995) (citing Bily, but finding that an attorney had a duty to a third party inasmuch as the third party was the attorney's client's spouse). 

42 Ironically, the Fourth District also authorized International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806 (1986), overruled by Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992)-but International Mortgage, as well as Ronson v. Superior Court, 29 Cal. R 

43 See Ronson, 29 Cal. Rptr. 2d 268, Op. D020090 deleted upon direction of the supreme court. 

44 See B.L.M., 55 Cal. App. 4th 823. 

45 Ronson, 29 Cal. Rptr. 2d 268, Op. D020090 deleted upon direction of the supreme court. 

46 Id., 29 Cal. Rptr. 2d at 278 n.9. 

47 B.L.M., 55 Cal. App. 4th at 830 n.3. 

48 Armstrong v. Hill Wynne Troop & Meisinger, L.A. Sup. Ct. No. BC130928, minute order (May 12, 1997) (applying Biakanja v. Irving, 49 Cal. 2d 647 (1958), and distinguishing Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992), by stating that "[t]his transaction was intended to affect investors. [T]he foreseeability of the harm was high. Investors were likely to invest and be harmed if the private placement memo did not disclose the SEC investigations and related activities."). Of course, exactly the same statements could be made about the auditor's report in Bily. 


   
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