In Stewart Title Guaranty Co. v. Sterling Savings Bank, the State Supreme Court unanimously held that a law firm paid by a title insurer to represent its insured owed a duty of care only to the law firm’s client—the insured—such that the non-client title insurer could not maintain a malpractice action against the attorney.
A bank loaned money to a borrower to purchase real property, on the condition that the bank would have a first priority security interest. The bank insured its position using a title insurance company. The title insurance company, however, failed to discover that a builder was already developing the property, which gave it a mechanic’s lien interest in the property and first position priority over the bank. When the builder initiated a foreclosure action, the bank asked its title insurance company to defend the bank. The title insurance company agreed, and retained the bank’s long-time law firm for the foreclosure action.
During the foreclosure action, the hired law firm stipulated that the builder’s position was superior to the bank’s to facilitate an early settlement. When the title insurance company wanted the bank to raise an equitable defense, the law firm disagreed, questioning the viability of such a defense. The title insurance company then fired the bank’s law firm, hiring a substitute firm instead. When the substitute firm raised the equitable defense, the trial court ruled that the bank could not argue in contravention to its earlier stipulation, then ultimately ruled against the bank in the foreclosure action.
The title insurance company then sued the bank’s law firm for malpractice based on the law firm’s entry of the stipulation that removed the bank’s ability to later raise the equitable defense. The law firm moved for summary judgment, arguing first that the law firm owed no duty of care to the title insurance company, and, alternatively, the equitable defense would not have been successful in any event. The trial court found that the law firm owed a duty of care for two reasons: 1) the law firm and the title insurance company’s interests were aligned during the law firm’s representation of the bank; and 2) the retainer between the law firm and the title insurance company established a contractual basis for the law firm’s duty of care to the title insurance company. Yet the trial court granted summary judgment for the law firm, finding the equitable defense would not have been viable during the foreclosure action.
The Supreme Court accepted review and affirmed the trial court’s dismissal but on different grounds. The Court confirmed that before a third party could bring a legal malpractice claim against another’s attorney pursuant to the precedent outlined in Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (1994), it had to make a threshold showing that the transaction on which an attorney was working was intended to benefit that third party. Here though, the Supreme Court held that the bank and the title insurance company maintained different interests, which manifested in contrasting litigation strategies. The Court also disagreed with the trial court’s conclusion that there existed a contractual basis for a duty of care that the law firm owed to the title insurance company. Instead, the Court held that the law firm’s contractual “duty to inform” was insufficient to establish a further “duty of care” permitting the title insurance company to bring a malpractice claim based on an alleged breach of duty to a different entity. Though the law firm had a duty to inform the title insurance company, the court held that the law firm had no duty of care that would give rise to the title insurance company’s malpractice claim because: 1) under Trask, a duty to inform a third party does not show that the attorney’s representation was intended to benefit that third party, and 2) under the RPCs (specifically RPC 5.4(c)), an attorney cannot contract away his or her professional duty to not permit a person who pays the attorney to render legal services for another or regulate the attorney’s professional judgment in rendering legal services. Ultimately, the Supreme Court affirmed the trial court’s summary judgment order dismissing the matter in favor of the law firm, but it applied a different reasoning than the trial court.