Justia Professional Malpractice & Ethics Opinion Summaries

Starr, AIG's former principal shareholder, filed suit against the FRBNY for breach of fiduciary duty in its rescue of AIG during the fall 2008 financial crisis. The district court dismissed Starr's claims and Starr appealed. The suit challenged the extraordinary measures taken by FRBNY to rescue AIG from bankruptcy at the height of the direst financial crisis in modern times. In light of the direct conflict these measures created between the private duties imposed by Delaware fiduciary duty law and the public duties imposed by FRBNY's governing statutes and regulations, the court held that, in this suit, state fiduciary duty law was preempted by federal common law. Accordingly, the court affirmed the judgment of the district court. View "Starr Int'l Co. v. Federal Reserve Bank of New York" on Justia Law

After the mutual funds, known as the Lancelot or Colossus group, folded in 2008, the trustee in bankruptcy filed independent suits or adversary actions seeking to recover from solvent third parties, including the Funds’ auditor, law firm, and some of the Funds’ investors, which the Trustee believes received preferential transfers or fraudulent conveyances. The Funds had invested in notes issued by Thousand Lakes, which was actually a Ponzi scheme, paying old investors with newly raised money. In these proceedings the trustee contends that investors who redeemed shares before the bankruptcy received preferential transfers, 11 U.S.C. 547, or fraudulent conveyances, 11 U.S.C. 548(a)(1)(B) and raised a claim under the Illinois fraudulent-conveyance statute, using the avoiding power of 11 U.S.C. 544. The bankruptcy court dismissed the claims against the law firm that prepared circulars for the Firms. The Seventh Circuit affirmed. No Illinois court has held that failure to report a corporate manager’s acts to the board of directors exposes a law firm to malpractice liability. The complaint does not plausibly allege that alerting the directors would have made a difference. View "Peterson v. Winston & Strawn, LLP" on Justia Law

Lamesa filed suit against Liberty Mutual alleging that Liberty Mutual was liable under a federally-required surety bond for the alleged misconduct of its principal, a trustee in a Chapter 7 bankruptcy proceeding. On appeal, Liberty Mutual appealed the district court's decision to affirm the bankruptcy court's judgment that the trustee had committed gross negligence and Liberty Mutual, as the trustee's surety, was liable for damages under the terms of the bond. The court held that the controlling limitations period in this case was provided by 11 U.S.C. 322(d). Because Liberty Mutual did not contest that Lamesa's claim was timely under that provision, the court affirmed the bankruptcy court's conclusion that Lamesa's suit was not time-barred. On the merits, the court concluded that the bankruptcy court's finding that the trustee was grossly negligent in performing her duties was not clearly erroneous; expert testimony was not necessary to establish that the trustee failed to meet her standard of care; and Liberty Mutual failed to demonstrate that the district court's damage award was clearly erroneous. Accordingly, the court affirmed the judgment of the district court. View "Liberty Mutual Ins. Co. v. USA by Lamesa National Bank" on Justia Law

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