District Court dismisses breach of contract suit against Connecticut firm

Courts Lending Contracts

On May 1, the U.S. District Court for the District of Connecticut dismissed a malpractice suit brought against a Connecticut-based law firm for allegedly inducing a Boston-based mortgage/mezzanine lender and its Delaware-based trustee (plaintiffs) to enter into a contract resulting in a loss of approximately $13 million. The lender alleged that it entered into a $12 million mezzanine loan agreement in 2012 with a company that owned commercial property located in Connecticut (borrower). The plaintiffs asserted that the firm acted as counsel to various entities associated with the borrower, and issued an opinion letter to the lender concerning agreements memorializing the loan transaction and establishing borrower’s interest in the loan collateral. When the borrower defaulted on the loan due to allegedly misrepresenting ownership percentages, the plaintiffs filed suit against the firm claiming, among other things, (i) breach of contract for rendering an opinion letter, which the firm and borrower intended the lender to rely upon as part of the transaction; (ii) breach of the covenant of good faith and fair dealing; and (iii) negligent misrepresentation.

The firm, however, argued that the lender’s claims lacked standing because (i) it was never a client of the firm and the opinion letter was not a contract; (ii) “a third-party beneficiary of a written contract [between the borrower and the firm] cannot recover for a breach of implied covenant of good faith and fair dealing; and (iii) claims of negligent misrepresentation were barred by the statute of limitations.

The court agreed with the firm and ruled that the opinion letter was not a contract that created a contractual obligation the firm could breach. Because the lender and related entities were “neither a party to a contract with [the firm] nor the intended third-party beneficiary of a contract between the borrower and [the firm] ... their breach of contract claim against [the firm] must be dismissed,” the judge stated. The court also dismissed the remaining allegations, stating the lender had not sufficiently alleged that it reasonably relied on the advice of the firm’s advice to make the loan to the borrower.