Justia Professional Malpractice & Ethics Opinion Summaries

Bank of America lost approximately $34 million when the Knight companies went bankrupt. BOA sued, claiming that Knight’s directors and managers looted the firm and that its accountants failed to detect the embezzlement. The district court dismissed. The accountants invoked the protection of Illinois law, 225 ILCS 450/30.1, which provides that an accountant is liable only to its clients unless the accountant itself committed fraud (not alleged in this case) or “was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action” The court found that BOA did not plausibly allege that the accountants knew that Knight’s “primary intent” was to benefit the Bank in alleging that the accountants knew that Knight would furnish copies of the financial statements to lenders. The Seventh Circuit affirmed, noting BOA’s choice not to pursue its claims in the bankruptcy process. View "Bank of America, N.A. v. Knight" on Justia Law

Stern represented Allen in a discrimination suit, after which they became romantically involved. Allen and her husband had separated and had executed a settlement agreement awarding Allen $95,000, to be paid in installments. A month later, Allen visited a bankruptcy attorney, Losey, giving Stern’s name as “friend/referral” on an intake form. In filing for bankruptcy, Allen did not disclose the marital settlement. While her bankruptcy was pending, Allen received the money. A month after her bankruptcy discharge, Allen transferred the settlement proceeds to Stern, who opened a CD in his name. The attorney for Allen’s ex-husband informed the bankruptcy trustee that Allen failed to disclose the settlementand the discharge was revoked. Allen pleaded guilty to making a false declaration in a bankruptcy proceeding, 18 U.S.C. 152(3). She told a grand jury that Stern had not referred her to Losey and was convicted of making a material false statement in a grand jury proceeding, 18 U.S.C. 1623. The court admitted Losey’s client-intake form as evidence of perjury. Stern was convicted of conspiring to commit money laundering, 18 U.S.C. 1956(h). The Seventh Circuit affirmed Allen’s conviction, holding that the intake form was not a communication in furtherance of legal representation and was not subject to attorney-client privilege. Reversing Stern’s conviction, the court held that the judge erred in excluding Stern’s testimony about why he purchased the CDs. View "United States v. Stern" on Justia Law

Spehar, hired by CMGT to assist in finding financing for its business, sued CMGT over a dispute related to this agreement and obtained a $17 million default judgment against CMGT, which had no assets. Spehar Capital devised a plan to: force CMGT into bankruptcy; convince the bankruptcy trustee to bring a malpractice action against CMGT’s law firm on the theory that but for the firm’s negligence, Spehar would not have obtained the default judgment; win the malpractice action or force a settlement; obtain a share of the payment to the bankruptcy estate. The bankruptcy trustee sued CMGT’s law firm, Mayer Brown. The district court granted Mayer Brown summary judgment, reasoning that the doctrine of judicial estoppel barred the inconsistencies in the suit, based on undisputed facts. The Seventh Circuit affirmed. If the trustee were to prevail, there would be a clear impression that a court was misled. It would be “absurd” for Spehar to recover when proving the causation element of malpractice would require the trustee to prove that Spehar was not entitled to prevail in the earlier suit. View "Grochocinski v. Mayer, Brown, Rowe & Maw, LLP" on Justia Law

The Trustee for McKenzie’s bankruptcy estate filed an adversary proceeding against GKH, McKenzie’s law firm (and a creditor), seeking records pertaining to entities in which McKenzie allegedly had an interest (11 U.S.C. 542). The parties entered into an agreed order. The Trustee then filed other actions, arising from the same post-petition transfer of 50 acres from the Cleveland Auto Mall, an entity in which McKenzie had a 50% interest, to a newly formed entity in which McKenzie had no interest. The Trustee alleged violation of the automatic stay, 11 U.S.C. 362(k) and preferential or fraudulent transfer, 11 U.S.C. 547(b) and 544(g)). The Bankruptcy Court dismissed, finding that under Tennessee law and notwithstanding prior dissolution, CAM existed as a separate legal entity such that the land remained its separate property. The Trustee then filed a state court action, alleging breach of fiduciary duty and civil conspiracy to commit fraud; GKH allegedly represented McKenzie under a conflict of interest in drafting the transfer documents. Several claims were dismissed as untimely. GKH then sued the Trustee alleging malicious prosecution and abuse of process. The Bankruptcy Court dismissed GKH’s adversary proceeding alleging claims, citing quasi-judicial immunity and failure to state a claim, and denied GKH’s motion for leave to file a complaint in state court. The district court and Seventh Circuit affirmed. View "In re McKenzie" on Justia Law

Tamara Lucas and her husband James brought a legal malpractice claim against attorney Mat Stevenson after they hired Stevenson to defend James against criminal charges and to represent them in a civil suit against the city police department, the city, and individual police officers that arrested James for disturbing the peace and felony assault on a peace officer. However, Stevenson later learned that the Lucases had previously filed for bankruptcy. The civil suit was determined to an asset of the bankruptcy estate, and Stevenson was reassigned to pursue the case on behalf of the bankruptcy estate. After a settlement agreement was reached, the Lucases brought this action against Stevenson. The district court granted summary judgment in favor of Stevenson. The Supreme Court affirmed, holding that the district court correctly determined (1) the Lucases' civil claims were properly determined to be an asset of the bankruptcy estate; and (2) Stevenson did not represent the Lucases at the time the claims were settled, and therefore, the Lucases had no standing to bring a legal malpractice claim against him. View "Lucas v. Stevenson" on Justia Law

Stone owned STM, which owed Fifth Third about $1 million, secured by liens on business assets and on Stone’s house. Stone’s attorney, Atherton, introduced Stone to Waldman, a potential investor. Stone did not know that Atherton was indebted to Waldman and had given Waldman STM’s proprietary business data. Atherton filed STM’s Chapter 11 bankruptcy petition to preserve assets so that Waldman could acquire them. Atherton allowed the automatic stay to expire. Fifth Third foreclosed, obtaining judgments and a lien on Stone’s house. Waldman paid Fifth Third $900,000 for the bank’s rights. Waldman and Atherton offered to pay off Stone’s debts and employ him in exchange for STM’s assets and told Stone to sign documents without reading them, to meet a filing deadline. The documents actually transferred all STM assets exchange for a job. Ultimately, Waldman owned all STM assets and Stone’s indebtedness, with no obligation to forgive it. Waldman filed garnishment actions; Stone filed a Chapter 11 bankruptcy petition, alleging that Waldman had fraudulently acquired debts and assets. Atherton was disbarred. The bankruptcy court found that Waldman and Atherton had perpetrated “egregious frauds,” invalidated Stone’s obligations, and awarded Stone $1,191,374 in compensatory and $2,000,000 in punitive damages. The district court affirmed. The Sixth Circuit affirmed the discharge, but vacated the award of damages as unauthorized. View "Waldman v. Stone" on Justia Law

In connection with a loan, Bayonne provided Nuveen with an audit report authored by accounting firm, Withum and an opinion letter from Bayonne’s counsel, Lindabury. Soon after the transaction, Bayonne filed a Chapter 11 bankruptcy petition, 11 U.S.C. 101. Nuveen claimed that the audit report and opinion letter concealed problems with Bayonne’s financial condition and that, had it known about these financial issues, it would not have entered into the transaction. The district court dismissed claims of fraud (Withum), negligent misrepresentation, and malpractice (Lindabury) based on Nuveen’s noncompliance with New Jersey’s Affidavit of Merit statute, N.J. Stat. 2A:53A-26, which requires an affidavit of merit for certain actions against professionals. The Third Circuit remanded for reconsideration of diversity jurisdiction. On remand, the court accepted an argument that the action was “related to” Bayonne’s bankruptcy proceeding, establishing jurisdiction under 28 U.S.C. 1334(b), and again dismissed. The Third Circuit affirmed as to jurisdiction and held that the AOM Statute can be applied by a federal court without conflicting with FRCP 8. If the AOM Statute applies, noncompliance requires dismissal. The court certified to the New Jersey Supreme Court questions relating to the “nature of the injury” and “cause of action” elements of the statute. View "Nuveen Mun. Trust v. Withumsmith Brown PC, et al" on Justia Law

Plaintiffs appealed a district court order dismissing several of their claims in a suit regarding conduct that occurred during bankruptcy proceedings. Plaintiffs were former officers of EBW Laser, a company that entered bankruptcy in 2005. After the case was converted to Chapter 7, the court appointed attorney Charles Ivey as trustee and Ivey subsequently retained his firm (IMGT) to serve as his counsel and to prosecute an adversary proceeding he had filed against plaintiffs. On appeal, plaintiffs argued that the district court erred in dismissing their claims against the IMGT defendants under the Barton doctrine. The Supreme Court established in Barton that before another court could obtain subject-matter jurisdiction over a suit filed against a receiver for acts committed in his official capacity, plaintiff must obtain leave of the court that appointed the receiver. The court held that the district court properly dismissed plaintiffs' claims and properly applied the Barton doctrine. Therefore, the court affirmed the district court's order. View "McDaniel, Jr. v. Blust" on Justia Law

This case involved a claim for breach of the fiduciary duty of loyalty that stemmed from a dispute regarding assets of IFCT, a now defunct tech startup company founded by Stephen Marsh to develop potentially revolutionary micro fuel cell technology. The crux of plaintiff's argument was that the Director Defendants conducted an unfair and disloyal bidding process, whereby they favored the Echelon-backed bid and refused to follow up on or negotiate with other superior bids. As a result, IFCT missed its chance to sell its assets at the peak of their value and was forced to sell its assets at a discount in bankruptcy. Given that the Director Defendants have conceded the applicability of entire fairness review and given the fact-intensive nature of that review, the court found that the Director Defendants have not met their burden at this stage to achieve summary judgment against Encite. The court also found that material facts remained as to the liability of Echelon for aiding and abetting the alleged breach of fiduciary duty by the Director Defendants and therefore, the court denied Echelon's motion for summary judgment on that claim. The court finally found that material facts also remained regarding Echelon's third party claims, and so denied Marsh's motion for summary judgment. View "Encite, LLC v. Soni, et al." on Justia Law

The United States Trustee, Region 3, appealed a district court’s reversal of sanctions originally imposed by the bankruptcy court on attorneys Mark Udren and Lorraine Doyle and HSBC for violating the Federal Rules of Bankruptcy Procedure. "This case [was] an unfortunate example of the ways in which overreliance on computerized processes in a high-volume practice, as well as a failure on the part of client and lawyers alike to take responsibility for accurate knowledge of a case, can lead to attorney misconduct before a court." At issue were two pleadings that HSBC’s attorneys filed in bankruptcy court. Both documents contained imperfect information and were filed with the court. The attorneys appealed the sanctions order arguing that the facts contained in the filed documents were "actually literally true." Upon review, the Third Circuit found that the statements therein were not wholly true, and faulted counsel for "rubber-stamping" the information taken from its computerized database without additional investigation as to their veracity: "[w]here a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a "form pleading" she has been trained to fill out, and ignores obvious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry." The Court concluded the bankruptcy court did not abuse its discretion in imposing sanctions on Doyle or the Udren Firm itself. However, it found the lower court abused its discretion in imposing sanctions on Udren individually. View "In re: Taylor, et al" on Justia Law