Continuing a trend in bankruptcy legal malpractice filings, here is the story, from NY Lawyer, of Pillsbury Winthrop Shaw Pittman and Levene, Neale, Bender, Rankin & Brill  all being asked to disgorge fees and expenses.in the amounts of $4.2 million $1.2 million.

"The filings ask for compensatory damages of at least $11 million from Pillsbury, former counsel for SonicBlue; $5 million from Levene, former counsel for the creditors’ committee; and $14 million from the group of three creditors. The trustee also asks that the court consider punitive damages for Pillsbury and the creditors. "

In this Federal Case, Cobalt Multifamily Investors I, LLC v. Shapiro, 06 Civ. 6468, Decided March 28, 2008 ,District Judge Kimba M. Wood
U.S. DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK  

The Court ultimately determined that under the Wagoner rule trustee lacks standing, and that the bankruptcy trustee’s powers are limited.

"The court-appointed receiver (the "Receiver") for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related, defunct entities (collectively, the "Cobalt entities"), filed this lawsuit against three individuals alleged to have been the principals of the Cobalt entities, and three sets of attorneys who provided professional services to the Cobalt entities at various times during their active corporate lives. The three individuals named as defendants are Defendants Mark A. Shapiro, Irving J. Stitsky, and William B. Foster (collectively, the "Individual Defendants"). The three sets of attorneys named as defendants are Defendants Robert F. Cohen and his firm, Cohen & Werz LLC (the "Cohen Defendants"); Martin P. Unger and his firm, Certilman Balin Adler & Hyman LLC (the "Certilman Defendants"); and Philip Chapman and his firm, Lum, Danzis, Drasco & Positan LLC (the "Lum Defendants") (collectively, the "Law Firm Defendants").

The Complaint alleges that the Individual Defendants engaged in a massive fraud on the investing public by setting up the Cobalt entities, and persuading members of the public to invest millions of dollars in these same entities through various misrepresentations and cold-calling schemes. (Compl. §§4, 51-87.) The Individual Defendants then allegedly misappropriated the majority of the funds invested in the Cobalt entities for their own personal use. (Compl. §§83-85.) The Complaint alleges that the Law Firm Defendants assisted the Individual Defendants in committing this investor fraud, and in subsequently looting the Cobalt entities of corporate assets. (Compl. §§94-137"

A. The Wagoner Rule.

In challenging the Receiver’s standing, the Law Firm Defendants rely principally on the line of decisions beginning with Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ("Wagoner"), which addresses the issue of standing in the bankruptcy context. (Report 32-37.) In Wagoner, the Second Circuit stated the "well settled" principle that a bankruptcy trustee has standing to assert only those claims held by the bankrupt corporation. Id. at 118 (citing Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 434 (1972)). A bankrupt corporation lacks standing to assert fraud claims against third parties where those third parties assisted corporate managers in committing the alleged fraud.6 Wagoner, 944 F.2d at 120; In re CBI Holding Co., Inc., 311 B.R. 350, 368-69 (S.D.N.Y. 2004) ("CBI Holding I"). Thus, under Wagoner, a bankruptcy trustee also lacks standing to assert such fraud claims against third parties. See In re Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir. 2003).

In Hirsch v. Arthur Anderson & Co., 72 F.3d 1085 (2d Cir. 1995), the Second Circuit applied the Wagoner rule to also preclude a bankruptcy trustee from asserting certain claims against third parties that are based in fraud, but are denominated as claims other than fraud (e.g., malpractice or breach of contract). See Hirsch, 72 F.3d at 1094-95 (applying Wagoner rule to preclude bankruptcy trustee’s malpractice claim where the claim was based on allegations that the defendant assisted corporation managers in defrauding the corporation); see also In re CBI Holding Co., Inc., 318 B.R. 761, 766 (S.D.N.Y. 2004) ("CBI Holding II") (applying Wagoner rule to bar plaintiff’s breach of contract, negligence, and fraud claims against defendant accounting firm where the claims were "premised on allegedly deficient auditing by [defendant] that failed to discover fraudulent acts committed by certain members of [corporate] management"); Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. 704, 709 (S.D.N.Y. 2001) (applying Wagoner rule to preclude plaintiff’s various claims against defendant professionals where the claims alleged that defendants’ misconduct "allowed the [corporate principals] to perpetuate their fraudulent scheme"). "

Today’s Outside Counsel Column in the NYLJ by Garber and Vaughn does not mention or discuss legal malpractice.  Nevertheless, its thesis is highly relevant. 

"The 212 people exonerated by DNA evidence since 1989 have raised significant awareness about the criminal justice system’s failure to protect the innocent from wrongful conviction and have led to reform in the handling of criminal investigations and prosecutions.

As 149 of these DNA exonerations have come in the last seven years, a body of data has recently developed that can now be relied upon for meaningful analysis of the causes of erroneous convictions. Cases most likely to result in the conviction of the innocent involve faulty eyewitness identification, misleading forensic evidence, false confessions, or unreliable informant testimony."

Beyond systematic problems in criminal prosecution, there is the lurking elephant of poor work by a criminal defense attorney.  Regularly unavailable for a legal malpractice case, in the absence of actual innocence, the cases of these 212 should similarly be examined for attorney shortcoming.

Incidentally, the legal malpractice statute of limitations starts to run with exoneration.

Here is a primer in how litigation can go sour, starting with one problem, leading to one after another.  This  NJ case discusses affidavits of merit in NJ legal malpractice cases, pro-se litigants and potential dispensations to them, and the statute of limitations in bankruptcy cases. SHIRLEY A. GOODHEART, v. STEVEN P. KARTZMAN, ESQ.; WACKS, MULLEN & KARTZMAN; GLEN SAVITS, ESQ.; LUCAS, SAVITS AND MAROSE, LLC; and GREEN AND SAVITS, LLC,

"Plaintiff now argues that (1) the statute of limitations did not bar the amended complaint because the discovery rule should apply and no malpractice claim accrued until the bankruptcy plan was confirmed on June 17, 2002; and (2) the trial court erred in failing to enter an order memorializing the trial judge’s instruction that plaintiff file an amended complaint within thirty days, thereby prejudicing a pro se plaintiff.

With respect to the statute of limitations, it is unclear in the complaint whether the allegations arise from confirmation of the bankruptcy plan in 2002 or the reopening of the Chapter 7 bankruptcy proceeding in 1999. We are, therefore, constrained to remand for a hearing pursuant to Lopez v. Swyer, 62 N.J. 267 (1973), to determine when the cause of action actually accrued.

With respect to plaintiff’s second point, she is entitled to no special consideration as a pro se plaintiff. She must be aware of the law and compliant with the Rules of Court as does any other litigant. Tuckey v. Harleysville Ins. Co., 236 N.J. Super. 221, 224 (App. Div. 1989). The judge instructed her to file the amended complaint within thirty days of the July 14, 2006 case management conference. She did not file her motion to restore and amend the complaint until August 27, 2006; however, we expressly decline to reverse the February 16, 2007 order at this juncture. Rather, the matter is remanded for a Lopez hearing to determine whether plaintiff filed the complaint within the statute of limitations. If the court finds that she did, plaintiff may move to restore the complaint and proceed with the litigation. If, on the other hand, the trial court finds that the cause of action accrued in 1999, rather than 2002, the complaint shall remain dismissed.

This front page article from the NYLJ tells of a new type of legal malpractice case originating in a securities law suit, by a non-client, stretching the bounds of privity:

"A federal judge in Manhattan has ruled that a lawsuit brought under Oregon "Blue Sky" law may proceed against the New York law firm Seward & Kissel for allegedly aiding and abetting securities fraud by a client hedge fund.

Aider and abettor claims against lawyers or accountants in securities fraud cases are barred under federal law. But Southern District Judge Harold Baer has ruled they are permissible under a state securities fraud statute, or Blue Sky law.

The suit by Oregon-based investor Howard Houston stems from Seward & Kissel’s representation of Wood River Partners, a hedge fund that collapsed in 2005 after a sharp decline in the stock of Endwave Corp., the small technology company that comprised more than 60 percent of the fund’s holdings.

Mr. Houston claims he invested $2.75 million in Wood River based on offering documents and marketing materials that stated Wood River would pursue a diversified investment strategy. He claims Seward & Kissel helped Wood River perpetrate fraud because the law firm drafted some of the documents and allowed its name to be used in the fund’s prospectus"

Bankruptcy Legal Malpractice cases are on the rise.  Trustees have greater powers than do regular plaintiffs, there are longer statutes of limitation in Bankruptcy situations, and the numbers are really big.  Here is a case from the NY Lawyer site.

"Gibson, Dunn & Crutcher is the latest law firm to be named in a suit stemming from the breakdown of the commodities firm Refco, Inc. The action, filed by liquidators and the trustee for Sphinx Funds, a family of funds that collapsed after doing business with Refco, was filed March 8 in New York trial court; a notice of removal to federal district court in Manhattan was filed by one of the defendants March 28.

Refco filed for bankruptcy in October 2005. Several lawsuits and criminal proceedings have followed. This latest action claims the funds lost $263 million as a result of Refco¹s meltdown; Gibson, Dunn’s representation of various Sphinx entities also contributed to the loss, the suit claims.

Gibson, Dunn represented Sphinx Funds and its investment manager, PlusFunds, Inc., as well as fund directors and entities controlled by those directors.

Work for those entities was a conflict of interest that the firm never disclosed, the complaint says. The plaintiffs also charge Gibson, Dunn with helping to conceal the nature of numerous loans made by Refco to Sphinx directors that were in fact payments to those directors in exchange for Sphinx’s business with Refco. "

Here , in AccuWeb, Inc., Raymond Buisker, v.  Foley & Lardner, Harry C. Engstrom, Quarles & Brady LLP and Nicholas Seay, we find one of the rare state court patent legal malpractice cases.  Generally, as patent law is a federal question, one of the parties either brings the action in Federal District Court or removes it there.  Here is the decision on a motion for summary judgment:

"This case centers on whether AccuWeb, at the summary judgment stage, put forth sufficient evidence to raise a genuine issue of material fact on the question of whether the alleged failure of the Respondents to prevent the premature expiration of AccuWeb’s 5,072,414 patent (the 414 patent) was a substantial factor in causing AccuWeb actionable damages, thus preventing summary judgment. The second issue is whether AccuWeb presented sufficient evidence to allow a fair and reasonable estimate of the amount of such damages, so that there was a genuine issue of material fact, thus preventing summary judgment as to the amount of those damages. We address the second issue because it was addressed by the circuit court. This case involves the interpretation and application of Wis. Stat. § 802.08 (2003-04),[2] the Wisconsin summary judgment statute. "

The familiar triumverate of client, insurance company and independent defense attorney is a familiar model.  Certainly, there are cracks in the facade.  The attorney has dual roles, and a divided loyalty…  In Texas, a recent ruling permits the insurance company to use in-house attorneys to defend insureds. 

Law and Insurance Blog reports: "Unauthorized Practice of Law Committee v. American Home Assur. Co., #04-0138 (Tex. March 28, 2008) See Law Committee Decision.

The Texas Supreme Court ruled that, despite genuine concerns for potential conflicts of interest, insurers’ use of salaried employee-staff lawyers to defend insureds did not constitute an unauthorized practice of law by an insurance company. However, staff lawyers may be used only where the interests of the insurer and the insured are aligned in defeating the claim against the insured. Also, the insurer must fully disclose the defense attorney’s affiliation with the insurer.

Unauthorized Practice of Law Committee v. American Home Assur. Co., #04-0138 (Tex. March 28, 2008) See Law Committee Decision.

The Texas Supreme Court ruled that, despite genuine concerns for potential conflicts of interest, insurers’ use of salaried employee-staff lawyers to defend insureds did not constitute an unauthorized practice of law by an insurance company. However, staff lawyers may be used only where the interests of the insurer and the insured are aligned in defeating the claim against the insured. Also, the insurer must fully disclose the defense attorney’s affiliation with the insurer. "