The Evolution of Legal Malpractice in Estate Planning in South Carolina, 0715 SCBJ, SC Lawyer, July 2015, #34
| Author | Andrew D. Merline and David A. Merlinejr, J. |
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\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0One of the most important duties of an attorney is to provide competent legal services to clients. Because the area of estate planning is an ever-changing legal landscape, estate planning attorneys must continually exercise care so that their representation of clients does not fall below the reasonable standards of performance required of an attorney and expected by clients.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The nationwide evolution of legal malpractice in estate planning
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Initially the prevailing view in estate planning was the strict privity doctrine, which allowed only clients or the estate to sue the drafting attorney1 However, only a few states still adhere to the strict privity doctrine.2 A majority of jurisdictions now recognize a cause of action by a third-party beneficiary of a will or estate planning document against the attorney whose drafting error defeats or diminishes the client's intent.3
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The jurisdictions that recognize a cause of action by a third-party beneficiary have imposed liability using a variety of tests and formulations: (1) a negligence theory,4 (2) a third-party beneficiary contract claim5 or (3) a combination of the two.6
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The evolution of legal malpractice in estate planning in South Carolina
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Historically, South Carolina courts have strictly adhered to the rule that a plaintiff in a legal malpractice action must establish the existence of an attorney-client relationship.7 As such, the plaintiff was required to establish four elements: (1) the existence of an attorney-client relationship, (2) a breach of duty by the attorney, (3) damage to the client and (4) proximate causation of the client's damages by the breach.8 As a result of the privity requirement, attorneys were immune from liability to third parties arising from the performance of professional activities as an attorney on behalf of and with the knowledge of the client.9 In addition, an attorney does not owe a duty to a non-client unless the attorney breaches some independent duty to a third-party or acts in the attorney's own personal interest, outside the scope of the representation of the client.10 However, as a result of the S.C. Supreme Court's holding in Fabian v. Lindsay, South Carolina no longer recognizes privity as a defense in an estate planning legal malpractice action.11
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0History of the privity doctrine in South Carolina
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Historically, South Carolina courts have followed the position set forth in Wright v. Winterbottorn, holding that privity of contract must exist in order for a duty to extend to a third party12 Privity is defined as the connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding or piece of property).13 South Carolina courts have equated privity with standing.14 If applicable, the privity requirement would virtually eliminate potential liability to third parties for estate planning attorneys.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Impact of Fabian v. Lindsay
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0As a result of Fabian, South Carolina joins the vast majority of states holding that privity is not a defense to legal malpractice in the estate planning context. South Carolina now recognizes a cause of action, in both tort and contract, by a third-party beneficiary of an existing will or estate planning document against an attorney whose drafting error defeats or diminishes the client's intent.15 Recovery under either cause of action is limited to persons who are named in the estate planning document or otherwise identified in the instrument by their status.16
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Prior to Fabian, South Carolina estate planning attorneys had never been held liable to beneficiaries for legal malpractice. Thus, as a practical matter, no one had the right to sue for the attorney's negligent frustration of the testator's intent. In Fabian, the Court recognizes that an attorney's negligence in preparing an estate or testamentary document impacts three potential classes of plaintiffs: (1) the client, (2) the decedent's estate and (3) the intended beneficiaries.17 Of those three possible plaintiffs, only the beneficiaries have the motivation and sufficient damages to bring a legal malpractice claim.18] Relying on observations from Barcelo v. Elliott,19 regarding the traditional objectives of tort law, and on compelling policy arguments, the Court removed the protective shield of immunity that estate planning attorneys in South Carolina had long enjoyed.20
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The Court's decision in Fabian adopts two of the approaches discussed above: (1) the Balancing Factors Test and (2) the Third-Party Beneficiary of Contract Theory.21 Where the plaintiff's case sounds in both tort and contract, the plaintiff will ordinarily have the freedom of election between the two actions.22 Specifically as to tort actions, the Court states that it will use the balancing factors test propounded by the California courts and adopted in Donahue v. Shughart and Blair v. Ing.23 With contract actions under the third-party beneficiary theory, the Court recognizes that the main purpose of the drafting of a will is the future transfer of the testator's estate to beneficiaries named in the will.24 This main purpose and intent can be effectuated, in the event of a breach by the attorney, only by giving the beneficiaries a right of action.25 The Court does limit standing only to those specifically named in the instrument.26 Granting standing to a narrow class of third-party beneficiaries is appropriate based on the Restatement (Second) of Contracts when the intent to benefit the plaintiff is clear and the testator is unable to enforce the contract. Otherwise, named devisees would have no recourse for failed legacies that resulted from attorney malpractice.27
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Maintaining its position that the main purpose of the transaction between the defendant attorney and the testator was to provide for the transfer of property to the beneficiaries, the Court specifically rejected the Florida-Iowa Rule. The Florida-Iowa Rule allows a plaintiff to have standing under the balancing factors test but only if, due to the attorney's professional negligence, the testamentary intent expressed in the instrument is frustrated and the beneficiaries clearly designated by the testator lose their legacy as a direct result of such negligence.28 The fundamental flaw in the Florida-Iowa Rule is that it focuses on the testamentary documents prepared by the attorney rather than the source of the beneficiary's claim, which is not the allegedly defective will or trust document, but instead is the attorney-client agreement that was intended to satisfy the client's testamentary intent.29 In other words, the Florida-Iowa Rule did not allow the admission of extrinsic evidence to establish the client's intent.30 Although the Court rejects the Florida-Iowa Rule, thus permitting extrinsic evidence, the majority never addresses the applicable burden of proof. However, the concurring Justices agree that the beneficiary asserting the claim must prove by clear and convincing evidence that (1) the attorney breached the duty owed to the beneficiary, and (2) the beneficiary suffered damages that were proximately caused by the attorney's breach.31
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0While the existing law of legal malpractice typically requires an attorney-client relationship, Fabian is not the radical departure that it might appear to be. When a client hires an attorney to carry out the client's intent for estate planning and to provide for the client's beneficiaries, there is an attorney-client relationship that forms the basis for the attorney's duty to carry out the client's intent.32 This intent in estate planning is directly and inescapably for the benefit of the third-party beneficiaries.33 Thus, when the client is deceased, providing an avenue of recourse for the beneficiary is effectively enforcing the client's intent, and the third party is therefore in privity with the attorney34 It is the breach of the attorney's duty to the client that is the actionable conduct in these cases.35 In these circumstances, retaining strict privity would immunize estate planning attorneys from liability for their professional negligence.36
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Although the Court considers the policy issues related to third-party beneficiaries, Fabian does not address the protections lost for attorneys such as: (1) the attorney's duty of loyalty to and effective advocacy for the client, (2) the potential for unlimited liability against attorneys and (3) attorney-client confidentiality. Instead, the Court's opinion in Fabian concludes that the privity rule is unjustifiable. Ultimately, the Court holds that discarding the privity doctrine does not impose an undue burden on estate planning attorneys because it merely puts them in the same position as most other legal professionals by making them responsible for their professional negligence to the same extent as attorneys practicing in other areas.37
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Hazard areas and limitations
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Changes in the law often result in far-reaching, unintended consequences that cannot always be anticipated ahead of time. Some consequences are immediate while others remain hidden until certain...
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