CAN A FINANCIAL ADVISER BE SUED BY A NON-CLIENT FOR NEGLIGENCE?

The answer to that question is “probably.” At least in Missouri, New York, and Iowa.

            Missouri courts apply a balancing test when determining if a “non-client” intended beneficiary of professional services can sue for negligence despite a lack of privity. The leading case in Missouri, at least as to accountants, is Aluma Kraft Manufacturing Co. V. Elmer, 493 S.W.2d 378(1973). The Aluma court stated: 

“The determination of whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of several factors: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to him; (3) the degree of certainty that the plaintiff suffered injury; and (4) the closeness of the connection between the defendant’s conduct and the injury suffered. Westerhold, supra, 419 S.W.2d at 81. We believe that these policy factors are satisfied with this case.” 

Aluma at 383. The court relied in part upon a New York accountant case, quoting the infamous Justice Cardozo.

The same principles of non-privity professional liability have been applied to attorneys in Missouri. See Donahue v. Shugart, 900 S.W.2d 624 (Mo. 1995). In Donahue the intended beneficiaries of a decedent’s trust that was declared invalid brought a legal malpractice and breach of fiduciary duty claim against the decedent’s attorneys. Id. At 626. Prior to the decedent’s death he directed Stamper, his attorney, to ensure that a specified sum of monies from his trust account be paid to Mary Donahue and Sundy McClung upon his death. Id. at 625. Donahue and McClung were not beneficiaries of Stockton’s trust. Id. Stockton also directed Stamper to prepare a deed to his home transferring a fifty percent interest in the home to Mary Donahue, effective on Stockton’s death. Id. Upon learning that Stockton’s death was imminent, Stamper sought advice from others in his law firm on how to make the checks and deed effective in accordance with Stockton’s wishes. Id.

Stamper attempted to effectuate the transfers, but they were later declared to be invalid by the Missouri Court of Appeals. Donahue, 900 S.W.2d at 625. The Court determined that the plaintiff’s breach of fiduciary duty claim was properly dismissed as being “dependent on the existence of attorney negligence, not on the breach of trust” because the conduct complained of was merely negligence in the performance of legal services. Id. at 630. 

But the Donahue court stated that the “Determination of whether attorney owed legal duty to non-clients so as to be liable to non-clients in legal malpractice action is determined by weighing factors in balancing test, including: existence of specific intent by client that purpose of attorney’s services were to benefit plaintiffs, foreseeability of harm to plaintiffs as result of attorney’s negligence, degree of certainty that plaintiffs will suffer injury from attorney misconduct, closeness of connection between attorney’s conduct and injury, policy of preventing future harm, and burden on profession of recognizing liability under circumstances. Pleadings were sufficient to establish that attorneys owed duty to non-clients who were intended recipients of client’s gifts causa mortis.”

Finally, the Supreme Court of Iowa applied these same basic principles to an insurance agent to allow a non-client to proceed against the agent. There is no reason to believe that the courts would not apply the same public policy to financial advisers and the intended beneficiaries of their services. Food for thought.