Maryland Court of Appeals Refines Third-Party Beneficiary Rules

In Noble v. Bruce, 349 Md. 730, 709 A.2d 1264 (1998), the Court of Appeals considered the issue of whether a nonclient, testamentary beneficiary may maintain a cause of action for professional malpractice against an attorney where it is alleged that the attorney either provided negligent estate planning advice to the testator, or negligently drafted the testator's will, in a manner which resulted in significant estate and inheritance taxes that could have been avoided.

The beneficiaries filed their malpractice action against the estate planning attorney on the theory that he was negligent in failing to advise the decedent couple that they could each shelter up to $600,000 in both of their estates from any federal estate tax under 26 U.S.C. § 2010, the Unified Credit Against Estate Tax. If both spouses use the Unified Credit, up to $1.2 million can pass to beneficiaries free of federal estate tax. The attorney's defense was that he did advise the decedents of the tax laws and of the benefits of utilizing a bypass trust, but they rejected such a mechanism because it would interfere with their control over their assets during their lifetimes.

The Circuit Court granted summary judgment to the attorney, on the grounds that the beneficiaries would be unable to prove what the decedent's intentions were.

On appeal, the Court of Special Appeals affirmed on other grounds, holding that the beneficiaries did not have standing to sue the attorney as third-party beneficiaries.

The Maryland Court of Appeals affirmed, and held that the traditional rule of strict privity applies in these cases, and that the beneficiaries may not maintain a malpractice action against the attorneys because no employment relationship existed between the beneficiaries and the attorneys.

The Court also held that the beneficiaries did not come within the third-party beneficiary exception. That ruling was based on the following factors: (1) the beneficiaries never had any direct contact with the attorney; (2) the beneficiaries did not rely on any representations of the attorney; (3) there is no indication that the attorney assumed any duty towards the beneficiaries; and (4) in cases involving wills, the beneficiary of a will is not necessarily the beneficiary of the attorney-client relationship.

The testator/client's intent may not be to benefit the beneficiaries named in the will, but rather to prevent the intestate distribution of assets.

Among other stated rationales, the Court observed that the beneficiaries' alleged damages constitute purely economic losses. There was no risk of death or serious personal injury generated by any alleged negligent conduct by the attorneys. Thus, the attorneys owed no tort duty to the beneficiaries for mere economic losses absnet contractual privity or its equivalent.

Following its own decision in Noble v. Bruce, the Court of Appeals in Ferguson v. Cramer, 349 Md. 760, 709 A.2d 1279 (1998) held that a beneficiary under a will may not maintain a cause of action for professional malpractice against an attorney retained by the personal representative of the testator's estate. The beneficiaries in Ferguson alleged that the attorney failed to properly obtain accurate appraisals of the testator's assets, including the inventory of the decedent's business, resulting in an overvaluation of estate assets. Among other things, they also alleged that the attorney failed to adequately advise the personal representative regarding the estate's rights to the payment of trademark and tradename licensing fees and copyright royalty payments.

The Court reasoned that the beneficiaries under the will were not third party beneficiaries of the attorney-client relationship because where a personal representative hires an attorney to assist him or her in performing his or her duties, the direct purpose in hiring the attorney is not to benefit the beneficiaries; rather, any benefit to the beneficiaries is merely incidental. The Court noted that the beneficiaries' status as the only heirs of the decedent does not automatically make them third-party beneficiaries of the contract between the attorney and the personal representative.

The Court also noted that the beneficiaries could have brought suit against the personal representative for breach of fiduciary duties, and then the personal representative in turn could have sued the attorney. "The beneficiaries cannot attempt to insulate their mother [who was the personal representative] from liability by asserting instead that her attorney breached a duty owed to the beneficiaries."

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