Articles Posted in Conflict of Interest

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Lawyers can be sued for aiding an abetting a fraudulent act or scheme. Such cases are rare, but not unheard of. Harpia Asset Management, LLC v. Shanbaum, 2020 NY Slip Op 30953(U) is one such case. Plaintiff alleged that the defendant lawyer aided and abetted another party’s wrongful conduct in connection with a foreclosure sale. (These are allegations that have not been proven.) The key allegation is that the lawyer favored one client over another in connection with a foreclosure sale.

The opinion summarizes the facts this way:

Harpia Asset Management LLC, 434 Throop Avenue LLC, Harpia Throop JV LLC, Harpia NYC Throop Holdings LLC, and Kris Henry (collectively, the Plaintiffs) operated a joint venture for the purpose of developing a property located at 434 Throop Avenue, Brooklyn, New York (the Property). The Shanbaum Defendants represented the Plaintiffs in a foreclosure action involving the Property captioned Nationstar Mortgage LLC v. Kris Henry et al., Index No. 506082/2014 (the Foreclosure Action). And, on January 30, 2019, the court (Dear, J.) in the Foreclosure Action signed a Final Judgment of Foreclosure (the Foreclosure Judgment), which ordered the sale of the Property within 90 days (NYSCEF Doc. No. 1, ¶ 35). On March 27, 2019, Nationstar Mortgage LLC (Nationstar) filed a Notice of Sale scheduling an auction sale (the Auction) of the Property on April 18, 2019 (id., ¶ 38). However, inasmuch as when the Foreclosure Judgment was entered on February 5, 2019, the Foreclosure Judgment was entered with the incorrect block number for the Property (id., ¶¶ 36-37), on March 29, 2019, Nationstar filed a motion to correct the Foreclosure Judgment nunc pro tunc, to correct the block number and extend the time for the Auction (id., ¶ 39).

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The case is Grayson v. Michael J. Korst, P.C., and Michael J. Korst, 16 c 1297 N. D. Ill.  Grayson and his business partner were represented by the Defendants in a transaction in which Grayson and his business partner sold the business (a Domino’s franchise) to a buyer. Grayson alleged that Korst had a conflict in that he represented the company and the two partners and that their interests conflicted. Grayson claimed that Korst failed to notify him that he was entitled to a share of the sale proceeds.

There was also evidence in the record that Grayson was going through a divorce and tried to claim that his interest in the company had a negligible value so that he would not have to make payments to his soon to be ex-wife.

Ultimately, because the case involved complicated conflict issues, Grayson had a duty to obtain an expert. Because he had no expert, he had no ability to explain how the lawyer’s performance failed to meet the standard of care. The lawyer had had both business partners, including Grayson, sign a waiver of any potential conflict, which further weakened the case.

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Please note that I was one of the lawyers who represented the plaintiff in this case. The case was designed to challenge the confession of judgment by a law firm that had previously represented a bank that filed a collection lawsuit.

So, the Bank, represented by Ginsberg Jacobs filed suit on a promissory note and on personal guarantees. An associate with Ginsberg Jacobs then confessed a judgment against the plaintiffs. They sued alleging that the confession of judgment created a conflict of interest in that the law firm was representing opposing parties in a lawsuit.

The Defendants moved for summary judgment on the ground that the mere act of confessing a judgment did not create an attorney-client relationship. The District Court, in a thoughtful opinion by Magistrate Rowland, agreed with the defendants. The Court explained:

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This legal malpractice claim is a spin-off from other long running litigation filed by Prospect Development LLC against the City of Prospect Heights arising out of a real estate deal that went sour.  The defendant attorney in the legal malpractice action was Robert Kreger. Kreger was the general counsel of Prospect Heights until 2004.

The Underlying Case

The facts of the dispute are set forth in the Appellate Court’s 2012 opinion in the case captioned  Prospect Development LLC v. Village of Prospect Heights, 2012 IL App 103759-U. According to the Appellate Court, Prospect Development, which was owned by John G. Wilson, sought to develop an arena in Prospect Heights. The project was never completed. In 2004, the Village of Prospect Heights terminated the project. Prospect Development sued for breach of contract. The trial court found that Prospect Development had substantially performed the contract with the Village. However, the trial court also found that Prospect Development had unclean hands because it had secretly made loans to Robert Kreger, the general counsel of the Village. The trial court held that the secret loans constituted unclean hands and that the unclean hands barred Prospect Heights from seeking relief against the Village. Kreger had been a partner of a large law firm, Schiff Hardin and had acted as the general counsel for the Village of Prospect Heights. Opinion ¶ 2.

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The plaintiff, Cynthia O’Neal, brought a legal malpractice claim against her former lawyers. O’Neal, an owner of a restaurant chain that fell on hard times, alleged that her former lawyers had a conflict of interest when the represented her company and the opposing party in an assumption of a lease. The court rejected her claim on the grounds that she was unable to establish proximate causation.

In my experience, proximate causation can be difficult to prove. Lawyers make mistakes. Sometimes those mistakes breach the duty of care. The plaintiff must tie the negligent act to the damages suffered by plaintiff and come up with a plausible theory as to how the lawyers made things worse and caused the damage.

One area where it is very difficult to prove proximate causation is a legal malpractice claim in the foreclosure setting. The lawyer who defends the foreclosure may miss a deadline or make a legal error. However, that lawyer did not cause the default and did not proximately cause any damages.

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IN RE MARRIAGE OF WIXOM AND WIXOM, Wash: Court of Appeals, 3rd Div. 2014 – Google Scholar.

This is an appeal from a divorce case in which a lawyer (Robert Caruso) and his client (Rick Wixom) were held jointly and severally liable for a $55,000 sanction award. The lawyer and client were sanctioned because, in the underlying custody litigation, they made false charges about Rick’s ex-wife Linda.

Here is where the lawyer made an error. He appealed the sanctions against himself and filed an appeal for his client, Rick Wixom. The court explains how the lawyer threw the client under the bus:

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ARDC claims conflict of interest.

Filed August 24.

This case illustrates one of the problems with the ARDC process.  The underlying conduct took place in 2004.  The ARDC filed a complaint against the respondent in December 2008!  She answered in February 2009, but the case did not come to hearing until January 2012.  The decision was issued on August 24, 2012.

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