Contract and Negligent Misrepresentation Claims Against Opinion Giver

UC Funding I, LP v. Berkowitz, Trager & Trager, LLC also known as UCF I Trust 1 v. Berkowitz, Trager & Trager, LLC

On May 31, 2018, Lender filed an Amended Complaint against Law Firm alleging (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) negligent misrepresentation.  The claims were based on a third-party opinion letter (the “Opinion Letter”) provided to Lender by Law Firm, which represented Borrower and Pledgor, among others, in connection with a loan from Lender.  The Amended Complaint stated Lender brought the complaint in accordance with the Ruling on Motion to Dismiss (the “Ruling”) filed May 1, 2018.  (The Ruling was discussed on the Committee’s listserve in May 2018.)  UC Funding I, LP, Trustee v. Berkowitz, Trager & Trager, LLC, No. 3:17-CV-1325, 2018 WL 2023485 (D. Conn. May 1, 2018).

The Amended Complaint included the following allegations (among others): On November 1, 2012, Lender made a mezzanine loan to Borrower.  In accordance with a loan agreement, Borrower was the 100% owner of Property Owner.  To induce Lender to extend the loan to Borrower, Pledgor entered into a guaranty secured by a pledge agreement in favor of Lender.  In the pledge agreement, Pledgor represented that it was the sole member of Borrower and owned 100% of the membership interests of Borrower.  After the loan funded and a subsequent default by Borrower, Lender learned that Pledgor did not own a 100% interest in Borrower.  Instead, Borrower was owned 25% by its Parent and 75% by others.  Per the Amended Complaint, the Opinion Letter stated that Parent owned 100% of the membership interests of Non-Pledgor and that Non-Pledgor owned 100% of the ownership interests of Pledgor.  Because Pledgor did not own 100% of Borrower, Lender’s security interest did not attach to 100% of the ownership interests in Borrower.  As a result, Lender suffered a loss with respect to the loan.

The Amended Complaint is silent as to whether the Opinion Letter included an express assumption as to title or an express exclusion of an opinion concerning title. See Paragraphs 2.1(b) and 4.6(u) in both the Illustrative Language of a Real Estate Finance Opinion Letter, Chapter Three of the Real Estate Finance Opinion Report of 2012, and the Illustrative Opinion Letter, Addendum to the Local Counsel Supplement thereto.

Opinion Letter

The Opinion Letter included statements that Law Firm (1) relied on certificates of its clients and representations made by them in the documents covered by the Opinion Letter, and (2) assumed the statements of fact in all certificates and other documents reviewed are accurate and complete.  In addition, the Opinion Letter expressly excluded a title opinion as to some of its clients: “We express no opinion with respect to: (i) Borrower’s or Pledgor’s rights in or title to any real or personal property or as to the existence of any collateral. . . .”

Contract Claims

In the Ruling, the Court found that the breach of contract claim was based solely on Law Firm’s alleged failure to provide accurate information in the Opinion Letter, and therefore it sounded in tort rather than in breach of contract.  The Court (a) dismissed the breach of contract claim because Lender was neither a party to a contract with Law Firm nor the intended third-party beneficiary of a contract between Law Firm and its clients, and (b) dismissed the implied covenant claim because such a covenant is only implied in a contractual relationship (distinguishing cases regarding wills where a lawyer owes duties to both the lawyer’s client and to third parties that are the client’s intended beneficiaries).

The Amended Complaint addressed the Court’s dismissal of the contract claims, alleging as follows: Law Firm and the entities related to Borrower entered into a contract in which Law Firm would represent the Borrower entities and provide the Opinion Letter.  The Opinion Letter was prepared for the benefit of Lender and was to contain “accurate and verified information.”  As a consequence, Lender was an intended third-party beneficiary of the agreements between the Borrower entities and Law Firm, and Lender had a right to enforcement of the agreements.  Law Firm breached its contractual obligations as the Opinion Letter contained inaccurate information concerning the ownership of Borrower.  As a direct and proximate result of Law Firm’s breach, Lender suffered monetary damages.  Law Firm’s conduct as set forth in the Amended Complaint violated the covenant of good faith and fair dealing implied in every contract and, as a direct and proximate result of Law Firm’s conduct or omissions, Lender suffered monetary damages.

Negligent Misrepresentation Claim

With respect to the negligent misrepresentation claim, the Ruling stated that Lender did not sufficiently allege that it was reasonable for Lender to rely on the advice of Law Firm, which was counsel to an adverse party in a financial transaction.  In dismissing this claim, the Court noted that while detailed factual allegations are not required to defeat a Rule 12(b)(6) motion to dismiss, those allegations must raise a right to relief above the speculative level, and Lender’s conclusory allegations failed to cross the line between possibility and plausibility of entitlement to relief.

The Amended Complaint addressed the Court’s dismissal of the negligent misrepresentation claim first by explaining that it is customary in commercial loan transactions for the borrower’s attorneys to issue an opinion letter, quoting an explanation from the 2003 Real Estate Opinion Letter Guidelines.   In addition, the Amended Complaint noted that the Official Commentary to Connecticut Rules of Professional Conduct R. 2.3 “specifically contemplates the rendering of opinion letters by borrower’s counsel to a lender and that the opinion letter does not violate or interfere with the attorney-client relationship between the borrower and its counsel. . . .” Thereafter, the Amended Complaint alleged that Law Firm made false representations to Lender with the express intention that Lender would rely on them and that Law Firm failed to exercise reasonable care.  As a direct and proximate result of Lender’s reliance on Law Firm’s representations, Lender suffered monetary damages.

Conclusion

We will monitor this case and advise of further developments, whether in a future issue or on the Committee’s listserve or webpage.