Texas Lawyer Liability for Negligent Misrepresentation to Nonclients (2002)

© A. Hawkins 2002

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List of Cases Covered in this Course

Texas Supreme Court

Federal Land Bank Association of Tyler v. Sloane et. al.

825 S.W.2d 439 (Tex. 1991)

McCamish, Martin, Brown & Loeffler, Petitioner v. F. E. Appling Interests, individually and on behalf of Boca Chica Development Co., Respondent

991 S.W.2d 787 (Tex. 1999)

Courts of Appeals

Arlitt v. Paterson

995 S.W.2d 713 (Tex. App. - San Antonio 1999)

Federal Land Bank Association of Tyler v. Sloane et. al.

793 S.W.2d 692 (Tex. App. -Tyler 1990)

Mitchell v. Chapman

10 S.W. 3d 810 ( Tex. App. - Dallas 2000)

Safeway Managing Gen. Agency, Inc.., for State and County Mutual Fire Insurance Company v. Clark & Gamble, Kenneth L. Clarke, Sr., P.C., Kenneth L. Clark, William J. Gamble, and John R. Wondra

985 S.W.2d 166 (Tex. App.-San Antonio 1998, no pet.)

Hight v. Dublin Veterinary Clinic

22 S.W.3d 614 (Tex.App.-Eastland 2000)

Chapman v. Porter and Hedges

32 S.W.3d 429 (Tex.App. - Houston [14th dist] 2000)

Lesikar v Rappeport

33 S.W.3d 382 (Tex.App. Texarkana 2000)

Table of Contents

Case #1 1990: Sloane:[1] The Chicken Feed Case

Prologue to Sloane

Which comes first, the chickens or the chicken coop?

Which comes first, the chicken coop, or the loan?

What about the loan?

Why was the suit filed?

Benefit

Intent

The loving couple

The Texas Supreme Court adopts the tort of Negligent Misrepresentation

The Elements of Negligent Misrepresentation

Damages for Negligent Misrepresentation

The Sloane facts . . . the damages were not just chicken feed.

The remedy is for the damages caused by the misrepresentation itself

Mr. Sloane flew the coop

The Texas Supreme Court limited the remedy to pecuniary loss

The Texas Supreme Court notes the “lower degree of fault”

Case #2 1999 McCamish: Lawyers are not exempt from liability for

The Chicken Feed Tort of Negligent Misrepresentation.

The Texas Supreme Court’s Synopsis of the McCamish case.

The Supreme Court’s short statement of the McCamish facts.

The court’s long statement of the McCamish Facts

An aside and preview: Transaction or Litigation?

The Supreme Court’s statement of the McCamish Issue.

The Texas Supreme Court’s holding in McCamish.

The Texas Supreme Court Limits Liability for Negligent Misrepresentation

Limitations on the tort of Negligent Misrepresentation

How to Avoid Liability

The Supreme Court tells Lawyers how they may Avoid or Minimize Liability

The Solution

Could a Disclaimer Increase Liability?

Tortious Silence

Case #3 Safeway: 1998: trial lawyers are not exempt from

The Chicken Feed Tort of Negligent Misrepresentation

Case #4 Mitchell 2000: After McCamish held that lawyers are not exempt from liability to the adverse party in a litigation context, the Dallas Court of Appeals exempted a lawyer from liability to the adverse party in litigation, citing McCamish.

Case #5 Chapman Trusts 2000: After McCamish held that lawyers are not exempt from liability to the adverse party in a litigation context, the Houston’s 14th Court of Appeals exempted a lawyer from liability to the adverse party, citing McCamish.

Case #6 Lesikar[2] 2000: After McCamish held that lawyers are not exempt from liability to the adverse party in a litigation context, the Texarkana Court of Appeals exempted a lawyer from liability to the adverse party, citing McCamish.

Case #7 Arlitt 1999: Estate lawyers are not exempt from

The Chicken Feed Tort of Negligent Misrepresentation

The court of appeals described Arlitt’s convoluted facts.

The court of appeals describes the malpractice claim.

The court of appeals allowed the Negligent Misrepresentation claim.

The court of appeals permitted suit for Attorney’s Fees and Costs as Damages.

The Court of Appeals conclusion in Arlitt.

Case #8 Hight[3] 2000: The Chicken Feed Tort of Negligent Misrepresentation might apply to dehorning horny goats - but it might not.

Workshop - How to be Sued for Negligent Misrepresentation

Situation #1 What a kick! - Locke and Erxleben

Judge Throws Erxleben In Jail

Locke Liddell Settlement Serves as Warning to Other Firms[4]

Situation #2 Deep in the Heart of Texas.

Situation #3 Enron - When the mighty fall, many are hurt.

Millions, Billions, Trillions

Thank You

Goats

The Course Text

Texas Lawyer Liability for Negligent Misrepresentation to Nonclients (2002)

Texas lawyers are being sued for negligently misrepresenting facts to nonclients. A Lawyer can be liable even though the lawyer does not benefit from the misrepresentation. A Lawyer can be liable for silence that misleads. Lawyers can be liable to a nonclient for misleading the nonclient on behalf of a client.

The stakes are not chicken feed.

For example, Locke Liddell & Sapp has paid tens of millions to settle claims by nonclients who invested with Locke Liddell & Sapp clients. A primary allegation seems to be that (1) lawyers did not reveal to nonclients information the the lawyers learned about their client and (2) lawyers approved communications by the client which misrepresented facts to the nonclients. After reviewing the law, we will return to the Locke Liddell & Sapp story to see how Locke Liddell & Sapp became liable to nonclients for the wrongs of their clients.

After picking the Locke cases apart, we will ponder the public reports about Enron, including the role of Vinson & Elkins. Instead of the tens of millions paid by Locke, will a claim be brought for tens of billions?

As we examine the cases, we will particularly note two issues. First, does the tort apply to lawyers in litigation or does it only apply outside of a litigation context? Second, can a lawyer avoid liability by misrepresenting while disclaiming liability?

Before examining cases of lawyer misrepresentation, we turn to Sloane, the leading Texas case on negligent misrepresentation.

* * * * *

Case #1: Sloane:[5] The Chicken Feed Case

In Sloane, chicken feed is central to the misrepresentation. In honor of the Sloane case, this course refers to the tort of negligent misrepresentation as “The Chicken Feed Tort of Negligent Misrepresentation.” [6] [7] [8]

Prologue to Sloane

Sloane began with a heartwarming entrepreneurial undertaking by the Sloanes. The Sloanes’ dream was chicken feed. The Sloanes applied for a loan to build a chicken coop[9] and arranged to feed chickens for Pilgrim’s Pride.

A banker negligently misrepresented that the loan had been approved. It wasn’t. The Sloanes relied on the banker’s representation. Dirt work was performed for the new coop. The loan was denied, the chicken coop could not be finished or paid for, and the chickens never came home to roost.

The Sloanes appeared to have lost everything, but, through the wonders of the chicken feed tort of negligent misrepresentation, money was awarded to the Sloanes to replace lost love and lost money. The Texas Supreme Court held that the chicken feed tort of negligent misrepresentation exists and that the cost of “dirt work” for the chicken coop justified a monetary remedy, but the Texas Supreme Court also held that the chicken feed tort of negligent misrepresentation provides no remedy for losses to emotions or personal relationships.

Which comes first, the chickens or the chicken coop?

What a foolish question! The coop of course. Pilgrim’s Pride chickens must have a place to call home, or the chickens cannot come home to roost.

Which comes first, the chicken coop, or the loan?

What a good question! The loan of course. Without the loan, there can be no coop, and the chickens cannot come home to roost.

What about the loan?

The loan application was denied, and rightfully so. There was no complaint about that. There was no suit over denial of the loan. Denial of the loan was fine.

Why was the suit filed?

Even though the loan was denied, the bank officer represented to the Sloanes that (1) the loan had been approved and (2) the work could begin. The Sloanes relied on the representation. It was false. It was a misrepresentation. The bank officer was negligent. The Sloanes began the work. The earth moved. Expenses were incurred and money spent because of the Sloane’s reliance on the misrepresentation that the loan was approved. The misrepresentation caused a headache, heartache, misplaced dirt, and other damages.

Benefit

No one benefited. The misrepresentation did not benefit the banker or the bank.

Intent

The Sloane’s cause of action was for the tort of negligent misrepresentation, not intentional misrepresentation. Intention to misrepresent is not required. Intention to represent, actual representation, and actual error in the facts represented, which makes it a misrepresentation of facts, are required.

The loving couple

The Sloanes were married for 31 years prior to the misrepresentation. After the chicken feed loan fiasco, Mr. Sloane moved out. There was damage to the heart, the head, and the pocketbook.

The Texas Supreme Court adopts the tort of Negligent Misrepresentation

“The Sloanes claim that the bank has a duty to use reasonable care whenever it provides information to its customers or potential customers, and that the bank breached this duty when it allegedly encouraged the Sloanes to incur expenses in reliance on the information related to their loan application. The Sloanes further allege that the bank misrepresented an existing fact rather than a promise of future conduct. Both the bank and the Sloanes rely on RESTATEMENT (SECOND) OF TORTS Sec. 552 (1977) to define the scope of this duty. We agree with the Restatement’s definition. . . .#[10] ”

The Elements of Negligent Misrepresentation

“The elements of a cause of action for the breach of this duty are:

(1) the representation is made by a defendant in the course of his business, or in a transaction in which he has a pecuniary interest;

(2) the defendant supplies ‘false information’ for the guidance of others in their business;

(3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information; and

(4) the plaintiff suffers pecuniary loss by justifiably relying on the representation.”

Damages for Negligent Misrepresentation

“The Restatement provides damages for this tort as follows:

‘(1) The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is legal cause, including

‘(a) the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and

‘(b) pecuniary loss suffered otherwise as a consequence of the plaintiff’s reliance upon the misrepresentation.

‘(2) the damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff’s contract with the defendant.’ ”

The Sloane facts . . . the damages were not just chicken feed.

The Sloanes would have fed Pilgrim’s Pride chickens with Pilgrim’s Pride feed under a weight watcher’s contract in which the Sloanes would be paid for the weight gained by the chickens.

“In early 1986, William, Lettie, and Robert Sloane had been out of the business of raising chickens for two years when they learned they could get a contract from Pilgrim’s Pride to raise broilers for the company on the condition that they build new chicken houses on their farm.[11] On March 7, 1986, the Sloanes applied for a $141,000 loan from the Federal Land Bank Association of Tyler. During the application process, the Sloanes obtained an estimate of $105,000 for the costs of necessary equipment and the construction of two chicken houses. They also obtained a letter from Pilgrim’s Pride stating that the company agreed to ‘feed out broilers’ for the Sloanes once the houses were constructed according to specifications provided by Pilgrim’s Pride. The Sloanes subsequently sent the construction estimate and the letter from Pilgrim’s Pride to their loan officer at the bank.

“Approximately a month after the Sloanes had applied for the loan, the loan officer informed them that the bank’s board had approved the loan, and that the Sloanes could go ahead with site preparation work. The contractor hired by the Sloanes to build the new chicken houses contacted the bank’s loan officer to see if he should begin construction, notwithstanding the pending nature of the loan. The loan officer said that there was ‘no problem,’ and that ‘there was not any reason for them not to continue at that point.’ . . .

“In June 1986, the Sloanes had one of their old chicken houses demolished, and they paid approximately $9,000 for further site preparation. As the work progressed they supplied the bank with receipts. In August, 1986, the Sloanes received a letter from the bank denying their loan application, giving as reasons the fact that they failed to include two outstanding debts on their application, and that they incurred additional liability for a car purchase while the loan was being processed.[12] The Sloanes subsequently failed to obtain other financing. They then sued the bank alleging that the loan officer had negligently misrepresented that the bank would approve their loan application. Their claims included the financial and property damages suffered in preparing to build the chicken houses, the loss of the Pilgrim’s Pride contract, and the mental anguish caused by the bank’s allegedly negligent conduct. #[13]”

The remedy is for the damages caused by the misrepresentation itself

There was no loan. There was no suit for the failure to make the loan or for the benefit that the Sloanes would have gained if the loan had been made. The only damages for negligent misrepresentations are those damages caused by the misrepresentation itself.

“The Sloanes would not have received the contract regardless of whether the misrepresentation was made. Under the legal theory of this section of the Restatement, they should not, therefore, receive the benefit of a bargain that would never have taken place. The sole reason the Sloanes did not get the Pilgrim’s Pride contract is because the bank did not give them the loan money to build acceptable chicken houses. The Sloanes’ claim to these damages is impermissibly predicated on giving them the benefit of the loan.”

Mr. Sloane flew the coop

The misrepresentation and its consequences split the Sloane’s marital union. The court of appeals tells the sad story.

“Mrs. Sloane testified that since the denial of the loan, her husband of 31 years had moved out of their house because he was so angry with her as a result of this transaction. She further testified that since the denial of the loan, she had suffered from and been treated for migraine headaches due to nerves. Additionally, Robert Sloane testified that his nerves were ‘on the edge all the time,’ that since the denial of the loan, he was required to work two jobs to make ends meet and that he spent a great deal of time worrying. . . . We find that there was sufficient evidence to support the jury’s award of $15,000 for past mental anguish.”

The Texas Supreme Court limited the remedy to pecuniary loss

“The Restatement advances several policy reasons for limiting damages, including a lower degree of fault indicated by a less culpable mental state and the need to keep liability proportional to risk. RESTATEMENT (SECOND) OF TORTS Sec. 552, comment a. There has been no trend to reject the pecuniary loss rule in what is essentially a commercial tort.[14] We decline to extend damages beyond those limits provided in Restatement section 552B.#[15] . . . We reverse the judgment of the court of appeals insofar as it includes an award for mental anguish.”

The Texas Supreme Court notes the “lower degree of fault”

An aspect of the above statement by the Texas Supreme Court warrants comment. The court noted the “lower degree of fault indicated by a less culpable mental state.” This reminds us that the the chicken feed tort of negligent misrepresentation does not require a high degree of fault, or a highly culpable mental state. In other words, the defendant can be liable even though the defendant’s acts were merely the product of negligence. Good intentions are not a defense. The standard for liability is low.

* * * * *

Sloane teaches about the chicken feed tort of negligent misrepresentation in general. In 1999, the Texas Supreme Court applied the tort to misrepresentations by lawyers to nonclients.

Case #2: 1999: McCamish: Lawyers are not exempt from liability for

The Chicken Feed Tort of Negligent Misrepresentation.

In McCamish, Texas Supreme Court unanimously refused to exempt lawyers from liability for The Chicken Feed Tort of Negligent Misrepresentation. It is important to note that the court did not single out lawyers for liability. It only refused to exempt lawyers. Liability for The Chicken Feed Tort of Negligent Misrepresentation is normal, not exceptional. Exempting lawyers would have created an exception.

“This Court has already adopted the tort of negligent misrepresentation as described by the Restatement (Second) of Torts § 552.#[16] In Sloane, the Court endorsed section 552 to define the scope of a lender’s duty to avoid negligent misrepresentations to prospective borrowers. Section 552(1) provides:

‘One who, in the course of his business, profession or employment, or in any transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.’ ”

“ [A] negligent misrepresentation claim is not equivalent to a legal malpractice claim. . . . Under the tort of negligent misrepresentation, liability is not based on the breach of duty a professional owes his or her clients or others in privity, but on an independent duty to the nonclient based on the professional’s manifest awareness of the nonclient’s reliance on the misrepresentation and the professional’s intention[17] that the nonclient so rely.#[18] Therefore, an attorney can be subject to a negligent misrepresentation claim in a case in which she is not subject to a legal malpractice claim.#[19]

“The theory of negligent misrepresentation permits plaintiffs who are not parties to a contract for professional services to recover from the contracting professionals.#[20] Likewise, section 552 imposes a duty to avoid negligent misrepresentation, irrespective of privity.#[21]”

“Neither section 552 nor Sloane limits the class of potential defendants under section 552 to nonlawyers. In addition, the theory of negligent misrepresentation and section 552 itself do not require privity or implicate the policy concerns behind the privity rule. Finally, the Restatement (Third) of the Law Governing Lawyers § 73(2), which specifically addresses situations in which an attorney invites reliance by a nonclient, not only recognizes the tort of negligent misrepresentation, as defined by section 552, but also incorporates the limitations of section 552 into its duty analysis. We, therefore, conclude that there is no reason to exempt lawyers from the operation of section 552 or to impose a privity requirement on a negligent misrepresentation cause of action under section 552.”

The Texas Supreme Court’s Synopsis of the McCamish case.

“In this case, we determine whether McCamish, Martin, Brown & Loeffler, a law firm representing (VSA), may be liable to... nonclients [Appling], for the tort of negligent misrepresentation, as defined by the Restatement (Second) of Torts § 552 (1977). At trial, McCamish, Martin moved for summary judgment on Appling’s negligent misrepresentation claim on the sole ground that, absent privity, McCamish, Martin owed no duty to Appling. The trial court rendered a take-nothing summary judgment in favor of McCamish, Martin based on the lack of privity between the parties. The court of appeals reversed and remanded for a trial on the merits,[22]holding that a negligent misrepresentation claim is not the equivalent of a legal malpractice claim and is not barred by the privity rule. We affirm the judgment of the court of appeals.”

The Supreme Court’s short statement of the McCamish facts.

“Appling ... filed this suit... against McCamish, Martin, alleging that McCamish, Martin negligently misrepresented that the VSA Board had approved the settlement agreement.”

The court’s long statement of the McCamish Facts

“Appling, a general partnership comprising four family trusts, was the managing partner of Boca Chica, a joint venture formed to develop recreational property. According to Appling’s affidavit, Boca Chica obtained a loan and line of credit from VSA in 1985 to finance a real estate project. Boca Chica accepted the loan based on VSA’s oral representation that VSA would later expand the line of credit, provided that Boca Chica’s lot sales justified completing the development. However, in 1987, VSA decided not to extend the additional credit, despite the continued viability of the project. In 1988, Boca Chica went bankrupt and brought a lender liability claim against VSA for $15 million in damages.

“With trial set for March 13, 1989, Boca Chica feared that the Federal Savings & Loan Insurance Corporation would declare VSA insolvent and take it over before a judgment could be obtained. If VSA were placed in receivership, Boca Chica’s claim, based on the breach of an oral promise, would be unenforceable against VSA. Boca Chica was, therefore, anxious to settle. Boca Chica and VSA entered into settlement negotiations in early March 1989. They reached an agreement, which called for Boca Chica to deed the development to VSA in exchange for forgiveness of the outstanding debt that Boca Chica owed to VSA. Once the parties agreed on these terms, Appling wanted to ensure that the settlement agreement would be enforceable against the FSLIC.

“Under 12 U.S.C. § 1823(e)(1), no agreement is enforceable against the FSLIC unless the agreement:

“(A) is in writing, (B) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution, (C) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (D) has been, continuously, from the time of its execution, an official record of the depository institution.

“Appling distrusted VSA’s representations that the agreement met the requirements of section 1823(e). Consequently, Appling agreed to sign the agreement only if VSA’s lawyers would affirm that the agreement did, in fact, comply with the statute. The parties and their attorneys signed a settlement agreement, dated March 8 and 9, 1989, in which the requested representations were made:

“[B]oth Victoria and its counsel represent to Plaintiffs that (a) this agreement is in writing; (b) it is being executed by both Victoria and Plaintiffs contemporaneously with the acquisition of these assets by Victoria; (c) that the Agreement has been approved by the Board of Directors of Victoria Savings Association and that such approval is reflected in the minutes of said board (a copy of which shall be attached to this Agreement); and (d) that a copy of this Agreement shall be from the time of its execution continuously maintained as an official record of Victoria; all in accordance with 12 USC § 1823(e).

“The settlement agreement also included a ‘full, mutual general release’ by both parties as to ‘all claims and causes of action, known and unknown, asserted or which might have been asserted, in this litigation.’ The agreement did not contain any disclaimer of reliance on representations made by the other party.

“McCamish, Martin represented VSA in the underlying lawsuit. Ralph Lopez, an attorney with McCamish, Martin, signed the settlement agreement. In his deposition, Lopez stated that he was VSA’s attorney of record for the lawsuit and that he signed the settlement agreement in the course and scope of his employment with VSA.

“On February 16, 1989, the VSA Board of Directors, including Tom Martin, a McCamish, Martin shareholder who principally represented VSA, adopted a resolution consenting to the Texas Savings and Loan Commissioner putting VSA under ‘voluntary supervision.’ This resolution gave Jerry Payne, representative of the Texas Savings and Loan Department, the power to settle lawsuits against VSA. On March 3, 1989, the VSA Board, including Martin, and James Pledger, the Savings and Loan Commissioner, signed an agreed order placing VSA under the Commissioner’s voluntary supervisory control. The order provided, in part, that ‘no action taken at any Board meeting will be valid or binding on [VSA] unless and until such action is approved in writing by the Supervisor or the Commissioner.’

“On March 12, 1989, the VSA Board approved the settlement agreement reached by Appling and Boca Chica. Martin did not sign the approval resolution. In his deposition, Lopez claimed that Martin did not inform him about the supervisory order and that Lopez did not know the VSA Board lacked the authority to approve the settlement agreement when he signed the agreement on behalf of VSA.

“Payne never ratified the settlement agreement, and the agreement was never entered as a final judgment. On June 29, 1989, VSA was declared insolvent, and the FSLIC was appointed receiver. The FSLIC removed Appling’s case against VSA to federal court. The federal court concluded that the VSA Board gave up its authority to enter into a settlement when it signed the agreed supervisory order on March 3, 1989. Thus, the settlement agreement was not binding on the FSLIC because it was not approved by the VSA Board as required by section 1823(e). See F.E. Appling Interests v. McCamish, Martin, Brown & Loeffler, C.A. NO. V-89-0027 (S.D. Tex. May 11, 1992) (mem.).

“Appling then filed this suit, individually and on behalf of Boca Chica, against McCamish, Martin, alleging that McCamish, Martin negligently misrepresented that the VSA Board had approved the settlement agreement.”

An aside and preview: Transaction or Litigation?

In McCamish the alleged misrepresentation was made in the context of settlement of litigation. It was made by lawyers for one litigant to an adverse litigant. The Supreme Court held that the tort of negligent misrepresentation reaches such facts.

Was this a “transactional” setting? Was it an “adversarial” setting? Was it “litigation”? Was it “in the course of the lawyer’s business?” On its face, it appears to the author to be an adversarial litigation setting and that it is “in the course of the lawyer’s business.” Some appellate courts, without explanation or analysis, have stated that it was a “transactional” setting, as opposed to an “adversarial” setting.

Does McCamish apply to a lawyer who makes a representation to a nonclient who is in an adversarial relationship with the lawyer’s client? Does McCamish answer that question? If so, what is the answer?

Later we examine Mitchell, Chapman Trusts, and Lesikar. In Mitchell, the Dallas Court of Appeals cited McCamish for the proposition that negligent misrepresentation does not apply to a lawyer misrepresenting facts to a party adverse to the lawyer’s client in the course of litigation. Chapman Trusts from the 14th Court of Appeals and Lesikar from the Texarkana Court of Appeals also read McCamish as being limited to “transactional” settings and exempt adversarial litigation misrepresentations. For now, just think about McCamish. Is it a transactional setting, or a litigation setting? McCamish arose out of the settlement of litigation.

Exempting adversarial settings has some appeal. Is an adversarial setting excluded? In McCamish, was the setting adversarial? Consider the elements of the tort. There must be an intent to create reliance on a factual representation. That is not a classic “adversarial” situation. If it occurs during litigation, it might be seen as a representation made under a flag of truce. For example, in response to a discovery request, may a lawyer say “the document you requested does not exist” when the requested document is on the lawyer’s desk? Is such a factual misrepresentation proper, or must adversaries avoid misrepresentations, even in an adversarial context?

We return to McCamish.

The Supreme Court’s statement of the McCamish Issue.

“...[T]he parties present this Court with one precise question: Whether the absence of an attorney-client relationship precludes a third party from suing an attorney for negligent misrepresentation under the Restatement (Second) of Torts § 552. We do not decide or address in any way the liability of McCamish, Martin in this case. Instead, we determine only whether Appling, a nonclient, may bring a negligent misrepresentation cause of action, as defined by section 552, against McCamish, Martin.”

The Texas Supreme Court’s holding in McCamish.

“The trial court granted McCamish, Martin’s motion for summary judgment on Appling’s negligent misrepresentation claim on the sole ground that, absent privity, McCamish, Martin owed no duty to Appling. Because we hold that McCamish, Martin may owe a duty to Appling, irrespective of privity, we affirm the judgment of the court of appeals, remanding this cause to the trial court.”

The Texas Supreme Court Limits Liability for Negligent Misrepresentation

“Under section 552(2), liability is limited to loss suffered:

(a) by the person or one of a limited group of persons for whose benefit and guidance [one] intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that [one] intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.[23]

“This formulation limits liability to situations in which the attorney who provides the information is aware of the nonclient and intends that the nonclient rely on the information.[24] In other words, a section 552 cause of action is available only when information is transferred by an attorney to a known party for a known purpose. Again we see that reliance is intended by the lawyer. A lawyer may also avoid or minimize the risk of liability to a nonclient by setting forth (1) limitations as to whom the representation is directed and who should rely on it, or (2) disclaimers as to the scope and accuracy of the factual investigation or assumptions forming the basis of the representation or the representation itself.#[25]

“Moreover, section 552 guards against exposure to unlimited liability by requiring that a claimant justifiably rely on a lawyer’s representation of material fact. Thus, not every statement made by an attorney to a nonclient is actionable under section 552. For example, an attorney’s statements communicating her client’s negotiating position are not statements of material fact.#[26] [27]”

Limitations on the tort of Negligent Misrepresentation

The Supreme Court describes limitations on the tort of negligent misrepresentation by an attorney to a nonclient.[28]

1. information is transferred

2. by an attorney

3. to a known party, and

4. for a known purpose

The Supreme Court also states that the limitations are the following.[29]

1. an attorney

2. provides information

3. aware of the nonclient, and

4. intends that the nonclient rely on the information