California Public Employees’ Retirement System v. Shearman & Sterling, 95 N.Y.2d 427 (2000)

A legal malpractice claim is not assignable where the assignor has not suffered any injury as a result of the alleged malpractice, even if the assignor attempts to transfer “all” rights related to a transaction.

Summary

California Public Employees’ Retirement System (CalPERS) sued Shearman & Sterling for legal malpractice after purchasing a loan from Equitable Real Estate Investment Management, Inc. Shearman & Sterling, as Equitable’s counsel, allegedly drafted a defective promissory note that reduced the acceleration fee. CalPERS, as Equitable’s assignee, argued it could sue Shearman & Sterling directly or through Equitable’s assigned claims. The court held that CalPERS lacked privity with Shearman & Sterling and was not a third-party beneficiary of their contract with Equitable. Critically, because Equitable suffered no injury (having been paid in full for the loan), it had no malpractice claim to assign to CalPERS. The decision underscores the necessity of injury to maintain a legal malpractice claim and limits the scope of assignment, even with broad language.

Facts

CalPERS and Equitable had an agreement where Equitable originated commercial property loans for CalPERS. Equitable retained Shearman & Sterling to handle the legal work for a loan to Sersons Corp. CalPERS approved the loan, and Shearman & Sterling drafted the loan documents, including a promissory note. The note, deviating from CalPERS’ standard form, contained a significantly lower acceleration fee. Equitable assigned the loan to CalPERS via an “Omnibus Assignment.” Sersons defaulted, and CalPERS discovered the lower fee. CalPERS and Equitable later entered a Settlement Agreement further assigning any potential claims against Shearman & Sterling to CalPERS.

Procedural History

CalPERS sued Shearman & Sterling for professional negligence and breach of contract. The Supreme Court dismissed CalPERS’ direct claims but upheld the assigned claims from Equitable. The Appellate Division dismissed the entire complaint, finding Equitable had no viable claim to assign because it suffered no injury. The New York Court of Appeals affirmed the Appellate Division’s decision.

Issue(s)

1. Whether CalPERS had a relationship with Shearman & Sterling so close to privity as to allow direct claims for negligence.
2. Whether CalPERS was an intended third-party beneficiary of Shearman & Sterling’s contract with Equitable.
3. Whether the Omnibus Assignment or the Settlement Agreement effectively assigned a viable legal malpractice claim from Equitable to CalPERS.

Holding

1. No, because CalPERS failed to demonstrate the necessary elements for a relationship approaching privity, specifically reliance on Shearman & Sterling’s actions.
2. No, because Equitable did not retain Shearman & Sterling for CalPERS’ benefit, and CalPERS’ benefit was merely incidental.
3. No, because Equitable suffered no injury from the alleged malpractice, thus it had no claim to assign; “the elimination of any injury to Equitable upon the assignment of the loan extinguished any malpractice claims Equitable may have had against defendant related to the loan, and Equitable could not thereafter assign such defunct claims”.

Court’s Reasoning

Regarding privity, the court applied the three-part test from Prudential Ins. Co. v Dewey, Ballantine, Bushby, Palmer & Wood, requiring awareness of the statement being used for a particular purpose, reliance by a known party, and conduct linking the maker to the relying party. The court found that CalPERS reserved final approval of the loan documents for itself and its counsel and failed to object to the changes, demonstrating a lack of reliance on Shearman & Sterling. As to third-party beneficiary status, the court found that Equitable retained Shearman & Sterling for its own benefit, not CalPERS’.

Crucially, the court addressed the assignment issue. The court reasoned that the Omnibus Assignment only transferred rights under the loan documents, not claims arising outside those documents. Even though the assignment used the word “all”, this did not extend to claims against Shearman & Sterling arising from a failure to adhere to the Correspondent Agreement. More importantly, Equitable suffered no injury. “Upon executing the Omnibus Assignment, CalPERS paid Equitable in full for the part it played in the negotiation and sale of the Sersons loan…The reduced acceleration fee caused no injury to Equitable and thus Equitable had no malpractice claim against Shearman & Sterling to assign.” Since a legal malpractice claim requires injury, Equitable had nothing to assign. The court effectively prevented the assignment of a claim where the assignor was made whole, emphasizing the importance of actual damages in a legal malpractice action.