Greycas, Inc. v. Proud, 826 F. 2d 1560 (7th Cir. 1987)
Underlying loan transaction–duty to adversary
Student Contributor: Clem Durham
Facts: Theodore S. Proud, Jr., a member of the Illinois bar who practices law in a suburb of Chicago, appeals from a judgment against him for $833,760, entered after a bench trial. The original plaintiff, Wayne Crawford, like Proud was a lawyer but devoted most of his attention to a large farm that he owned in downstate Illinois. The farm fell on hard times and by 1981, Crawford was in dire financial straits. He had pledged most of his farm machinery to lenders, yet now desperately needed more money. He approached Greycas, Inc., the plaintiff in this case, a large financial company headquartered in Arizona, seeking a large loan that he offered to secure with the farm machinery. He did not tell Greycas about his financial difficulties or that he had pledged the machinery to other lenders, but he did make clear that he needed the loan in a hurry. Greycas obtained several appraisals of Crawford’s farm machinery but did not investigate Crawford’s financial position or discover that he had pledged the collateral to other lenders, who had perfected their liens in the collateral. Greycas agreed to lend Crawford $1,367,966.50, which was less than the appraised value of the machinery. Crawford was required to submit a letter to Greycas, from counsel whom he would retain, assuring Greycas that there were no prior liens on the machinery that was to secure the loan. Crawford asked Proud to prepare the letter, and he did so, and mailed it to Greycas, and within 20 days of the first contact between Crawford and Greycas the loan closed and the money was disbursed. A year later Crawford defaulted on the loan; shortly afterward he committed suicide. Greycas then learned that most of the farm machinery that Crawford had pledged to it had previously been pledged to other lenders.
Issues: Does a lawyer have a duty of care to an adversary’s client when the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party?
Ruling: Yes. By addressing a letter to Greycas intended to induce reliance on the statements in it, Proud made himself prima facie liable for any material misrepresentations, careless or deliberate, in the letter, whether or not Proud was Crawford’s lawyer or for that matter anyone’s lawyer. Knowing that Greycas was relying on him to determine whether the collateral for the loan was encumbered and to advise Greycas of the results of his determination, Proud negligently misrepresented the situation, to Greycas’s detriment. Crawford hired Proud not only for the primary purpose, but for the sole purpose, of influencing Greycas to make Crawford a loan; and therefore, is liable under Illinois law for legal malpractice.
Lesson: Privity, normally required as a pre-requisite to attorney liability, is not a bar where the adverse party relied on the lawyer’s representations to its detriment. The duty of care and candor extends even to adverse parties where the lawyer knows that the adversary will rely on his/her representations to its determiment.
Tagged with: Commercial, Duties: Investigate, duty, duty of candor, duty of diligence, Duty to adversary, Duty to adverse party, Federal, Illinois, Standard of Care
Posted in: Commercial, Duties: Investigate, Federal, Illinois, Standard of Care