After plaintiffs lost the money they had invested in what turned out to be a Ponzi scheme, they sued the attorney who represented the Ponzi scheme operator. The Ponzi scheme operator, Antoinette Hodgson, had claimed to own a real estate investment business. During the time period in which the plaintiffs invested with Hodgson, the defendant attorney, John J. Merlino, Jr., performed legal services for Hodgson.

The attorney prepared mortgage notes securing some of the loans made by plaintiff to Hodgson. One of the mortgages drafted by Hodgson’s attorney contained a representation that Hodgson “warrants that … the premises are free from all liens…,” when in fact the property was already encumbered by a mortgage. The attorney did not conduct a title search before preparing the mortgage, and did not include a disclaimer in the mortgage to that effect.

Plaintiffs’ liability expert opined that attorney Merlino owed plaintiffs a “third-party duty” and that he was obligated to perform a title search on the property that was the subject of the above-referenced mortgage.

At the trial court level, the defendant attorney moved for summary judgment. The trial judge had granted the motion dismissing the case, finding that there was no evidence that the attorney knew the representation in the mortgage was false, or that the attorney had a duty to perform a title search prior to drafting the mortgage.

On appeal, the Appellate Division affirmed the trial court’s dismissal of the claim regarding the mortgage, finding no evidence that the attorney “knew or should have known” that the mortgage representation was false. The Appellate Division quoted that Supreme Court’s holding in Petrillo v. Bachenburg that,

whether an attorney owes a duty to a non-client third party depends on balancing the attorney’s duty to represent clients vigorously, [RPC 1.3], with the duty not to provide misleading information on which third parties foreseeably will rely, [RPC 4.1]… Attorneys may owe a duty of care to non-clients when the attorneys know, or should know, that non-clients will rely on the attorneys’ representations and the non-clients are not too remote from the attorneys to be entitled to protection.

The appellate court noted that it was Hodgson, not attorney Merlino, who made the representation that the property was free of liens, and there was no evidence that Merlino knew at the time that the representation was false. “The attorney drafted the document containing the representation, but did not make the representation.” As the court explained,

We do not interpret our Supreme Court’s pronouncements as extending attorneys’ malpractice liability to non-client third parties when the attorneys have done nothing more than draft documents containing representations or warranties, without reason to believe the representations are false.

However, the plaintiffs had also claimed that they had relied upon affirmative misrepresentations by attorney Merlino. Although the trial court had dismissed those claims, that part of the trial court’s dismissal was reversed by the Appellate Division. Plaintiffs had one telephone communication with attorney Merlino, in which plaintiffs claim that the attorney stated that Hodgson “absolutely” had enough net worth to pay plaintiffs what they had loaned her. The defendant attorney also sent plaintiffs a letter advising that he was representing Hodgson on the refinancing of six properties from which plaintiffs would be repaid, which turned out to be untrue. The Appellate Division found “some merit” to the plaintiffs’ claims. Because it concluded that a jury “could reasonably infer plaintiffs’ reliance on defendant’s assertions about Hodgson’s ability to repay the loans was reasonable,” it reversed that portion of the summary judgment dismissal, and remanded the case for further proceedings.

A copy of Goodman v. Merlino can be found here – Goodman v Merlino

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