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Northern New Jersey Limited Liability Company v. Yacuk

02-2926 (U.S. Ct. App. 3rd Cir. 2003) (Unpublished)

ATTORNEYS; FRAUDULENT CONVEYANCES—A borrower’s attorney has no duty to the lender to advise the lender of a possibly fraudulent transfer when the lender already knows of such a possibility.

In this fraudulent conveyance action that was filed in connection with a bankruptcy petition, the personal guarantors of a loan conveyed their house to their son for no consideration after being advised that the bank intended to enforce the guaranty. Their attorney relied on his clients’ representation that they were conveying the property because their son was paying the bills. The attorney did not order a title report nor did he conduct an investigation to determine if his clients were telling the truth. The bank claimed that the attorney owed it a duty of care. The bankruptcy court found that the attorney owed no duty to the bank, a non-client, and granted the attorney’s motion for summary judgment. The District Court affirmed the bankruptcy court’s decision. On appeal, the Third Circuit Court of Appeals also affirmed. An attorney’s duty to a non-client is limited to cases where the attorney has taken an action or made a representation to a non-client. If an attorney promises to act, and it is reasonably foreseeable that the non-client would rely on that promise to act, the attorney may be liable for failing to act. In this case, the attorney did not take any action on the bank’s behalf nor did he make affirmative representations to the bank that one would expect the bank to rely on to its detriment. The Court also found that the attorney did not do anything to prevent the bank from discovering the fraudulent conveyance. Further, prior to the filing of the bankruptcy action the bank was on notice that the guarantors had transferred the house’s ownership. As a sophisticated lender, it was on notice of the possibility that the transfer was a fraudulently conveyance. Consequently, the guarantor’s attorney had no obligation to advise the bank or its attorneys that the transfer was a fraudulent conveyance when each already knew there was such a possibility.

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