FL: OK to Assign Legal Mal Cause of Action for the Benefit of Creditors

Posted on October 21, 2010 by Ben Wasserman

Kaplan v. Cowan Liebowitz & Latman, P.C., 832 So.2d 138 (Fla. App. 2002)

FL: Underlying private placement securities offering

Student Contributor: Farah Shahidpour

Facts: Medical Research Industries, Inc. (MRI) was a Florida corporation in the business of marketing medical products. William Tishman, was the majority shareholder, CEO, Chairman, secretary, treasurer, and director of MRI. MRI wanted to raise money to expand their business by selling shares through private placement memoranda (PPM) which is a non-public offering. The Attorneys counseled MRI on securities issues and prepared the PPM. As a result, MRI raised $50,000,000 over two and a half years. MRI became insolvent after Tishman borrowed $18,000,000 from the money raised through the private placements. MRI appointed Donald Kaplan as assignee for the benefit of MRI’s creditors. Kaplan brought a legal malpractice suit against Attorneys alleging that they knew or should have known that the PPM were false and misleading because they did not disclose that the money raised was not used to expand business but for loans to Tishman.

Issue: Whether an assignee for the benefit of creditors, acting as a fiduciary for a corporation has standing to bring a legal malpractice against the corporation’s attorneys in an action on behalf of the now-insolvent corporation?

Ruling: Yes. Under Florida law, legal malpractice claims are not assignable because of the “highly personal nature of legal representation and confidentiality.” However, an exception to this rule applies to claims that, “involve reliance on the allegedly confidential information by interests other than the entity for whom the information was prepared.” KPMG Peat Marwich v. National Union Fire Ins. Co., 765 So.2d 36, 38-39 (Fla.2000). Kaplan has standing to bring the malpractice claims against the Attorneys because their legal services involved the publication of incomplete information to the investors.

Lesson: When attorneys provide legal services that involve the publication of corporate information to third parties (investors), they, “owe ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public.” KPMG at 38. Therefore, an assignee has standing to bring legal malpractice claims against the corporation’s securities attorney who made the incomplete disclosures. 

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NY: NJ Law Firm Gets Snagged as "Aiding and Abetting" a Ponzi Scheme

Posted on July 7, 2010 by Ben Wasserman

 Oster v. Kirschner, et al 2010 NY Slip Op. 05981 (App Div, 1st Dept. 7-6-2010)

NY: Underlying Private  investment

FACTS: A NJ law firm, Lum, Danzis, Drasco & Positan,LLC lost its bid to stay out of a NY law suit brought by investors in a private investment  plan named Cobalt,  which turned out to be a Ponzi scheme  operated by a convicted felon with the help of an admitted criminal with numerous convictions for securities violations and  who was banned from the securities industry.  Investors lost over $22 million. As Cobalt's attorneys,  the law firm is accused of preparing the private placement memorandum  (PPM) which failed to disclose the criminal histories  of the investment's managers, although the Firm's attorneys were aware of it.  Also, the PPM allegedly contained other affirmative misrepresentations to which plaintiffs pointed in their "aiding and abetting" , fraud and breach of fiduciary duty Complaint. The Law Firm also served as the  escrow agent for the investment transactions. The Law Firm "did not seriously dispute that they had knowledge of [their clients'] criminal backgrounds." It just claimed that knowledge and the knowledge of misrepresentations in the PPMs--"the admitted vehicle by which investment in the Ponzi scheme was carried out--does not sufficiently allege actual knowledge..."

ISSUE: Does the Complaint adequately plead fraud, or should the trial court's dismissal of the Complaint be reversed?

HELD: Order dismissing Complaint reversed. Complaint re-instsated.

1. A plaintiff alleging an aiding and abetting fraud claim must allege the existence of he underlying fraud, actual knowledge and substantial assistance.  Actual knowledge of fraud can be "discerned from surrounding circumstances."

2. The Law Firm's preparation of the PPM, including, significantly, a backdated amendment to it that showed the investment managers criminal past which it had not previously disclosed, constitutes "substantial assistance."

The PPMs authored by defendant attorneys were the means by which the Cobalt...entities were able to solicit funds for ...[the] Ponzi scheme. The PPM is the very mechanism by which investments such as Cobalt are placed in the marketplace, and the admitted "but for" cause of plaintiff's investment losses. Yet defendants assert that "loss causation" is lacking because it has not been adequately pleaded that defendant attorneys had actual knowledge that their clients--whom they admittedly knew to be criminals, banned from the securities industry for engaging in fraudulent investment schemes--would operate...Cobalt...as a Ponzi scheme. If the facts and circumstances herein do not support an inference of actual knowledge, then it is doubtful that any action for aiding-and-abetting fraud could be sustained against any attorney, who, like defendant attorneys, consciously chose to look the other way when their clients asked them to prepare the PPM...To say that defendant attorneys merely furnished legal services to help solicit investments in...Cobalt..., and did not have knowledge of the fraud they helped perpetrate...[is] simply not tenable. The Court cannot and will not endorse what is essentially a "see no evil, hear no evil" approach. 

LESSON:  Is the NY Court expanding the duty of vigilance of the lawyer regarding disclosure of information that non-clients should be entitled to know?  Will there be an appeal from this ruling? Let's wait and see. 

For an interesting NJ case involving a different NJ law firm also involved in composing a "defective" PPM, see Profit Sharing Trust v. Lampf Lipkind, 630 A.2d 1191 (1993).

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