In this highly complicated case, COBALT MULTIFAMILY INVESTORS I, LLC, , -against- MARK A. SHAPIRO, et al., Defendants.;06 Civ. 6468 (KMW) (MHD);UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK;2009 U.S. Dist. LEXIS 60481 we see what may turn out to be a blueprint for a legal malpractice niche.  In this case a receiver brings legal malpractice actions against the attorneys for a situation in which "The Complaint alleges that Mark A. Shapiro, Irving J. Stitsky, and William B. Foster (collectively, "Individual Defendants" or "managers") engaged in a massive fraud on the investing public by founding the Cobalt entities and making egregious misrepresentations in order to persuade members of the public to invest millions of dollars in Cobalt. 2 In the written materials disseminated to potential and actual investors, Individual Defendants allegedly misrepresented: (1) their personal and professional backgrounds, such as failing to disclose their past criminal histories; (2) Stitsky and Foster’s involvement in Cobalt; (3) their plans for [*4] the investors’ funds; and (4) the nature and scope of Cobalt’s property holdings. Individual Defendants allegedly appropriated the majority of the funds invested in Cobalt for their own personal use."

This case has already been to a magistrate’s hearing, a decision by Judge Kimba Wood, to the 2d Circuit, and now back.  Turning in large part on the Waggoner rule, the question before the court was whether the receiver had standing to sue on behalf of the corporation, or whether the receiver was divested of standing based upon the acts of the managers of the corporation.

"The Complaint alleges that all of Law Firm Defendants assisted the Individual Defendants in committing investor fraud, and in subsequently looting the Cobalt entities of corporate assets. Law Firm Defendants allegedly: (1) approved documents that they should have known contained material misrepresentations; (2) assisted the Individual Defendants in siphoning corporate funds into the Individual Defendants’ bank accounts; and (3) helped conceal the Individual Defendants’ criminal activities from both investors and law enforcement."
 

We will discuss this rule in upcoming posts.