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MNC CREDIT CORPORATION v. SICKELS, ET AL.


MNC
CREDIT CORPORATION v. SICKELS, ET AL.


February 27, 1998
Record No. 971441

MNC CREDIT
CORPORATION

v.

CHARLES W. SICKELS,
ESQ., ET AL.

OPINION BY JUSTICE
LEROY R. HASSELL, SR.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

Arthur B. Vieregg,
Jr., Judge
Present: All the Justices


The primary issue
that we consider in this appeal is whether a claim of legal
malpractice against an attorney may be assigned by a former
client to a third party.

Because this case
was decided on demurrer, we will state the facts "in
accordance with well-established principles that a demurrer
admits the truth of all material facts that are properly pleaded,
facts which are impliedly alleged, and facts which may be fairly
and justly inferred from alleged facts."
Cox
Cable Hampton Roads
v. City of Norfolk,
242 Va. 394, 397, 410 S.E.2d 652, 653 (1991).

In September 1992,
Ashburton Limited Partnership, a Virginia limited partnership,
and John D. Long, Sr., (the developers) executed a contract to
buy and develop land in Fairfax County. The developers planned to
construct a residential subdivision on the property. Fairfax
County and the Virginia Department of Transportation required the
developers to post collateral to ensure that certain contemplated
public improvements in the proposed development were, in fact,
constructed as planned. Maryland National Mortgage Corporation
(Maryland National), a Maryland corporation, provided letters of
credit as collateral. Maryland National retained Charles W.
Sickels and his law firm, Hall, Markle, Sickels & Fudala,
P.C., to prepare the necessary documentation required for the
transaction.

Fairfax County and
the Virginia Department of Transportation refused to accept the
letters of credit as collateral, and Ashburton and Maryland
National posted cash bonds. The attorneys "were aware of
this change and accepted the responsibility for drafting any and
all documentation necessary to insure that Fairfax County and
[the Virginia Department of Transportation] returned all funds so
posted directly to [Maryland National] when the public
improvements were completed." Maryland National posted two
cash bonds with Fairfax County totaling $919,000 and a separate
cash bond with the Virginia Department of Transportation in the
amount of $145,500.

Pursuant to the
terms of an "Asset Purchase Agreement," Maryland
National assigned all its rights, interests, and obligations in
connection with a loan to MNC Credit Corporation (MNC Credit).
[1] Subsequently, Fairfax County
released to the developers all but $153,000 of the cash bond that
Maryland National had posted, and the Virginia Department of
Transportation released to the developers the entire cash bond of
$145,500 that Maryland National had posted. MNC Credit made
repeated demands to the developers for repayment of these funds,
but the developers refused, asserting that they were not required
to return the funds under the terms of the loan documents that
the attorneys had drafted.

MNC Credit filed its
amended bill of complaint against the attorneys, as well as
Ashburton and Long.
[2] MNC Credit asserted in its
amended bill that: Maryland National had assigned its claims of
legal malpractice to MNC Credit; the attorneys had committed acts
of legal malpractice; the attorneys had breached express and
implied contracts; and MNC Credit was a third-party beneficiary
of the contracts between Maryland National and the attorneys. The
attorneys filed a demurrer to the amended bill, asserting, among
other things, that a client may not assign a legal malpractice
claim to a third party, and that MNC Credit failed to plead
sufficient facts to show it was a third-party beneficiary of the
contract between Maryland National and the attorneys. The trial
court entered a judgment sustaining the demurrer, and MNC Credit
appeals.

MNC Credit, relying
upon Code ? 8.01-26 and court decisions in other
jurisdictions, asserts that legal malpractice claims are
assignable in this Commonwealth. We disagree.

The General Assembly
has declared that "[t]he common law of England, insofar as
it is not repugnant to the principles of the Bill of Rights and
Constitution of this Commonwealth, shall continue in full force
within the same, and be the rule of decision, except as altered
by the General Assembly." Code ? 1-10. Even though the
General Assembly may abrogate the common law, the legislature's
intent to do so must be "plainly manifested."
Hyman
v.
Glover, 232 Va. 140, 143, 348 S.E.2d
269, 271 (1986) (quoting
Hannabass v. Ryan,
164 Va. 519, 525, 180 S.E. 416, 418 (1935)).
Accord
Wackwitz v. Roy,
244 Va. 60, 65, 418 S.E.2d 861, 864 (1992).

The common law of
this Commonwealth did not permit the assignment of legal
malpractice claims. At common law, contracts for legal services
were not assignable because of the fiduciary duties inherent in
the attorney-client relationship.
See McGuire
v.
Brown, 114 Va. 235, 242, 76 S.E. 295,
297 (1912);
Epperson v. Epperson,
108 Va. 471, 476, 62 S.E. 344, 346 (1908).

In 1977, the General
Assembly enacted Code ? 8.01-26 which states in relevant
part: "Only those causes of action for damage to real or
personal property, whether such damage be direct or indirect, and
causes of action ex contractu are assignable." In view of
the highly confidential and fiduciary relationship between an
attorney and client, we hold that this statute does not abrogate
the common law rule which prohibits the assignment of legal
malpractice claims in this Commonwealth because the General
Assembly did not plainly manifest an intent to do so.

There are a number
of reasons why the common law prohibited the assignment of legal
malpractice actions. As one court has explained:

"The
assignment of such claims could relegate the legal
malpractice action to the market place and convert it to a
commodity to be exploited and transferred to economic bidders
who have never had a professional relationship with the
attorney and to whom the attorney has never owed a legal
duty, and who have never had any prior connection with the
assignor or his rights. The commercial aspect of
assignability of choses in action arising out of legal
malpractice is rife with probabilities that could only debase
the legal profession. The almost certain end result of
merchandizing such causes of action is the lucrative business
of factoring malpractice claims which would encourage
unjustified lawsuits against members of the legal profession,
generate an increase in legal malpractice litigation, promote
champerty and force attorneys to defend themselves against
strangers. The endless complications and litigious
intricacies arising out of such commercial activities would
place an undue burden on not only the legal profession but
the already overburdened judicial system, restrict the
availability of competent legal services, embarrass the
attorney-client relationship and imperil the sanctity of the
highly confidential and fiduciary relationship existing
between attorney and client."
Goodley
v.
Wank and Wank, Inc., 133 Cal.
Rptr. 83, 87 (Cal. Ct. App. 1976).

Furthermore, the
common law rule which prohibits the assignment of legal
malpractice claims safeguards the attorney-client relationship
which is an indispensable component of our adversarial system of
justice. As the Supreme Court of Indiana has observed:

"Unlike any
other commercial transaction, the client-lawyer relationship
is structured to function within an adversarial legal system.
In order to operate within this system, the relationship must
do more than bind together a client and a lawyer. It must
also work to repel attacks from legal adversaries. Those who
are not privy to the relationship are often purposefully
excluded because they are pursuing interests adverse to the
client's interests."
Picadilly, Inc.
v.
Raikos, 582 N.E.2d 338, 343-44
(Ind. 1991).

Indeed, most courts
have held that legal malpractice claims cannot be assigned
because to do so would undermine the important relationship
between an attorney and client.
Schroeder
v.
Hudgins, 690 P.2d 114, 118 (Ariz. Ct.
App. 1984);
Goodley, 133 Cal. Rptr. at
87;
Roberts v. Holland &
Hart
, 857 P.2d 492, 495 (Colo. Ct. App. 1993); Washington
v.
Fireman's Fund Ins. Co., 459 So. 2d
1148, 1148-49 (Fla. Dist. Ct. App. 1984);
Brocato
v.
Prairie State Farmers Ins. Assoc.,
520 N.E.2d 1200, 1201-02 (Ill. App. Ct. 1988);
Bank
IV Wichita
v. Arn, Mullins, Unruh, Kuhn
& Wilson
, 827 P.2d 758, 764-65 (Kan. 1992); Picadilly,
Inc.
, 582 N.E.2d at 342; Coffey
v.
Jefferson County Bd. Of Educ., 756
S.W.2d 155, 157 (Ky. Ct. App. 1988);
Wagener
v.
McDonald, 509 N.W.2d 188, 191 (Minn.
Ct. App. 1993);
Earth Science Laboratories, Inc.
v.
Adkins & Wondra, P.C., 523 N.W.2d
254, 257 (Neb. 1994);
Can Do, Inc. v. Manier,
Herod, Hollabaugh & Smith, P.C.
, 922 S.W.2d 865,
868-69 (Tenn. 1996);
McLaughlin v. Martin,
940 S.W.2d 261, 263-64 (Tex. App. 1997).
But
see Collins v. Fitzwater,
560 P.2d 1074, 1078 (Or. 1977);
Hedlund Mfg. Co.
v.
Weiser, Stapler & Spivak, 539
A.2d 357, 358-59 (Pa. 1988).

Next, MNC Credit
argues that it pled a cause of action for breach of contract
against the attorneys because it alleged in its amended bill of
complaint that MNC Credit was a third-party beneficiary to the
contract between the attorneys and Maryland National. The
attorneys, relying upon
Copenhaver v. Rogers,
238 Va. 361, 384 S.E.2d 593 (1989), respond that MNC Credit's
bill of complaint failed to plead sufficient facts, which, if
proven at trial, would establish that it was a third-party
beneficiary to the contract. We agree with the attorneys.

In Copenhaver,
we considered whether beneficiaries named in a will were
third-party beneficiaries to a contract between the testators and
the lawyers who drafted the will. We discussed our precedent and
Code ? 55-22
[3] and stated the following
principles, which are equally pertinent here:

"In order
to proceed on the third-party beneficiary contract theory,
the party claiming the benefit must show that the parties to
a contract 'clearly and definitely intended' to confer a
benefit upon him.
Allen v. Lindstrom,
237 Va. 489, 500, 379 S.E.2d 450, 457 (1989);
Professional
Realty Corp.
v. Bender,
216 Va. 737, 739, 222 S.E.2d 810, 812 (1976). Thus, Code ?
55-22 has no application unless the party against whom
liability is asserted has assumed an obligation for the
benefit of a third party.
Valley Company
v.
Rolland, 218 Va. 257, 259-60, 237
S.E.2d 120, 122 (1977);
Burton v. Chesapeake
Box, Etc. Corp.
, 190 Va. 755, 763, 57 S.E.2d
904, 909 (1950). Put another way, a person who benefits only
incidentally from a contract between others cannot sue
thereon.
Valley Company, 218 Va. at
260, 237 S.E.2d at 122.
The
essence of a third-party beneficiary's claim is that others
have agreed between themselves to bestow a benefit upon the
third party but one of the parties to the agreement fails to
uphold his portion of the bargain."
Copenhaver,
238 Va. at 367, 384 S.E.2d at 596.

Applying these
principles in
Copenhaver, we held that
the trial court properly sustained a demurrer to the
beneficiaries' motion for judgment because they failed to allege
that the testators entered into a contract with their lawyers
with the intent of conferring a direct benefit upon the
beneficiaries of the will. Likewise, we hold here that the trial
court properly sustained the attorneys' demurrer to MNC Credit's
amended bill of complaint because MNC Credit failed to allege
that the attorneys executed a contract with Maryland National
with the intent of conferring a direct benefit upon MNC Credit.
MNC Credit's allegations that the attorneys "were aware that
the Loan might be transferred from [Maryland National] to a
related corporation or a third party" and that the loan
documents "contemplated that such a transfer might
occur" are factually insufficient to establish a claim that
the attorneys and Maryland National intended to confer a benefit
upon MNC Credit.
See Levine
v.
Selective Insurance Co., 250 Va. 282,
286, 462 S.E.2d 81, 83-84 (1995);
Ward
v.
Ernst & Young, 246 Va. 317,
330-31, 435 S.E.2d 628, 634-35 (1993).

For the foregoing
reasons, the judgment of the trial court will be

Affirmed.

 

 

 

 

FOOTNOTES:

[1] MNC Financial, Inc., is the
parent corporation of both MNC Credit Corporation and Maryland
National.

[2] MNC Credit settled its claims
against Ashburton and Long.

[3] Code ? 55-22 states:

"An
immediate estate or interest in or the benefit of a condition
respecting any estate may be taken by a person under an
instrument, although he be not a party thereto; and if a
covenant or promise be made for the benefit, in whole or in
part, of a person with whom it is not made, or with whom it
is made jointly with others, such person, whether named in
the instrument or not, may maintain in his own name any
action thereon which he might maintain in case it had been
made with him only and the consideration had moved from him
to the party making such covenant or promise. In such action
the covenantor or promisor shall be permitted to make all
defenses he may have, not only against the covenantee or
promisee, but against such beneficiary as well."

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