TRUST THE OTHER SIDE’S LAWYER AT YOUR PERIL, AT LEAST IN AN “ADVERSARIAL” SETTING

Weilbacher v. Craft
Dallas Court of Appeals, No. 05-13-01252-CV (November 19, 2014)
Justices O’Neill (Opinion), Lang-Miers, and Brown
Weilbacher sued DDC and its principal, Jones, both represented by Craft. Craft negotiated a settlement with Weilbacher’s lawyer, and the mediator informed the court a settlement had been reached. Jones and DDC failed to make payments under the agreement. When Weilbacher sought to enforce the agreement, Jones asserted the payment obligations rested on DDC alone, and testified that Craft had no authority to agree to his personal guaranty of those obligations. Weilbacher then amended to add a fraud claim against Craft for representing she had authority to enter into a settlement that included Jones’s personal guaranty, noting that the original term sheet Craft prepared and sent to Weilbacher provided for Jones’s personal guaranty, as did several iterations of the draft settlement papers either generated or acknowledged by Craft, including the purported final draft, which Craft prepared and asked Weilbacher to sign. Craft sought and was granted summary judgment on the ground there was no reasonable reliance. The Dallas Court of Appeals affirmed.

Although it noted the settlement agreement was not signed by Jones or DDC, and that “Craft made no express representation that her clients had approved or would sign it,” the Court relied on a different rationale to affirm. Even assuming Craft misrepresented she had authority to enter into the settlement agreement and that a settlement had been reached, the Court of Appeals held reliance on such statements “was not reasonable as a matter of law.” “[C]ourts have generally acknowledged,” the Court said, “that a third party’s reliance on an [opposing] attorney’s representation is not justified when the representation takes place in an adversarial context,” including settlement negotiations.

The Texas Supreme Court articulated this “adversarial context” exception to reasonable reliance on opposing counsel’s statements in its 1999 McCamish decision. There, it went on to explain, “This adversary concept reflects the notion that an attorney, hired by a client for the benefit and protection of the client’s interests, must pursue those interests with undivided loyalty (within the confines of the Disciplinary Rules of Professional Conduct), without the imposition of a conflicting duty to a nonclient whose interests are adverse to the client.” DR 4.01(a) directs that “a lawyer shall not knowingly … make a false statement of material fact or law to a third person,” but commentary to that rule explains this directive doesn’t apply to mere “negotiating positions.” The difficulty, as this case demonstrates, is differentiating an actionable knowing misrepresentation of “material fact” from a non-actionable “negotiating position.”

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