MNC Credit Corp. v. Sickels

Present: All the Justices

MNC CREDIT CORPORATION
OPINION BY JUSTICE LEROY R. HASSELL, SR.
v. Record No. 971441 February 27, 1998

CHARLES W. SICKELS, ESQ., ET AL.

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Arthur B. Vieregg, Jr., Judge

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

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

2
MNC Credit settled its claims against Ashburton and
Long.
3
§ 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:

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 “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).

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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
6
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
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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 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.

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