Legal Malpractice

When May a Receiver Sue for Legal Malpractice?

By (Andrew Lavoott Bluestone)

It's a complex question, but in troubled financial times, legal malpractice law suits become more visible and valuable.  Receivers, Trustees in Bankruptcy, and other fiduciary appointees all eye and measure pockets in an ongoing attempt to broaden and increase the fisc.

in COBALT MULTIFAMILY INVESTORS I, LLC, , -against- MARK A. SHAPIRO, UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK;2009 U.S. Dist. LEXIS 111399; November 30, 2009, Decided  we see Justice Wood's analysis of the relationship:
 

"The court-appointed receiver (the "Receiver") for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related, defunct entities (collectively, "Cobalt"), filed suit against numerous Defendants, including three sets of attorneys and their law firms ("Law Firm Defendants") who provided professional services to Cobalt. Law Firm Defendants moved to dismiss the claims against them on the ground that the Receiver lacks standing. On March 28, 2008, the Court granted the motion to dismiss the Receiver's claims against Law Firm Defendants.

In light of a subsequent decision issued by the Court of Appeals for the Second Circuit, Bankruptcy Services, Inc. v. Ernst & Young ("CBI Holding Co."), 529 F.3d 432 (2d Cir. 2008), the Receiver moved for reconsideration of the motion to dismiss. On July 15, 2009, the Court granted the motion for reconsideration on the ground that failure to do so would result in clear error. On reconsideration, the Court granted in part and denied in part Defendants' motion to dismiss. Relevant to the instant motion, the Court denied Law Firm Defendants' motion to dismiss [*3] Plaintiffs' legal malpractice and corporate looting claims."
 

"A receiver or trustee representing a bankrupt corporation generally does not have standing to assert claims against third parties for defrauding the corporation where the third parties assisted corporate managers in committing the alleged fraud. See In re Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir. 2003). This legal principle is based on the Wagoner rule, which states that a bankruptcy trustee has standing to assert only those claims that the bankrupt corporation itself could have brought. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991)."

"The adverse interest exception is an exception to the Wagoner rule that [*7] is applicable when the corporate managers "totally abandoned [the corporation's] interests and [acted] entirely for his own or another's purposes." Center v. Hampton Affiliates, Inc., 66 N.Y. 2d 782, 784-85, 488 N.E.2d 828, 497 N.Y.S.2d 898 (1985). Determination of the exception's applicability requires a court to engage in a fact-specific inquiry. Such an inquiry may include consideration of (1) the manager's intent with respect to abandoning the corporation's interests, (2) the nature and extent of the benefit (if any) obtained by the manager as a result of the fraudulent conduct, (3) the nature and extent of the benefit (if any) received by the corporation itself as a result of the fraudulent conduct, (4) the various financial losses caused by the fraudulent conduct, and (5) other dynamics and details of the fraud relevant to analysis the party's standing to sue. See In re CBI Holding Co., Inc., 529 F.3d at 451-53."

"If a court finds that the adverse interest exception applies, the receiver or trustee representing the bankrupt corporation has standing to assert claims against a third party that assisted the corporate agent in the fraudulent conduct. In re Bennett Funding Group, 336 F.3d at 100 (citing Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000)."

"Even if the Court were to consider [*21] this argument's merit, there is no clear error warranting reconsideration of the July 2009 Order. The decisions cited by Certilman Defendants stand for the proposition that outside attorneys, like Law Firm Defendants, represent the corporate entity. See, e.g., Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y. 3d 553, 562, 910 N.E.2d 976, 883 N.Y.S.2d 147 (2009) ("a corporation's attorney represents the corporate entity"). Here, the Receiver stands in the shoes of Cobalt, the corporate entity, and thus has standing to assert claims that would belong to Cobalt, such as claims for legal malpractice. See Wagoner, 944 F.2d at 120. The issue of Law Firm Defendants' fiduciary duty to shareholders is no barrier to the Receiver's standing at this stage of the litigation."
 

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Full post as published by New York Attorney Malpractice Blog on December 04, 2009 (boomark / email).