Corporations Lawyer Duty of Care to People Who Purchase Stocks
In Goodman v. Kennedy (1976) 18 Cal. 3d 335 [134 Cal. Rptr. 375, 556 P.2d 737], a lawyer who had represented a corporation was sued for malpractice by plaintiffs who had purchased stock in the corporation.
The Supreme Court held that the lawyer's duty of care to his client, the corporation, did not extend to the plaintiffs, who were not clients and who dealt at arm's length with the corporation. (Id. at pp. 342-345.)
As the court put it, "to make an attorney liable for negligent confidential advice not only to the client who enters into a transaction in reliance upon the advice but also to the other parties to the transaction with whom the client deals at arm's length would inject undesirable self-protective reservations into the attorney's counselling role.
The attorney's preoccupation . . . with the possibility of claims based on mere negligence (as distinct from fraud or malice) by any with whom his client might deal 'would prevent him from devoting his entire energies to his client's interests'. the result would be both 'an undue burden on the profession' [citation] and a diminution in the quality of the legal services received by the client." (Id. at p. 344.)