CA1: Legal malpractice claims by 3d-party based on defrauded ponzi scheme fail

International Strategies v. Greenberg Traurig, 06-1790.  This case involves a lot of people and firms that I really don’t want to smear. Not because I don’t like smearing, but because I think that most of the defendants here were trying to represent their clients in a good way, but their clients did a lot of bad things.  If any of the people involve want to chime in, send me an email and I will prominently post your version of events or the law, or correct anything I got wrong (based on the published opinion.)

The underlying transactions are quite complex.  But they ended in their ex-client suing their lawyers.  ISG “invested” money with Corporation of the BankHouse ("COB"), who seemed to promise the impossible, and, of course, was a ponzi scheme.  COB claimed that it was the victim of another scheme, and its CEO declared that "I have chosen to move to prepare litigation against the parties utilizing the law firm of Greenberg & Traurig [sic]. I have utilized the law firm of Seamin Cherin & Melott [sic] for the criminal assistance against the parties." Specifically,  A. John Pappalardo began representing COB, and somehow COB convinced ISG to not independently sue the people that “defrauded” COB, because they would take care of it.  Therefore, “ ISG alleges that these representations, and other events that we detail below, led it to believe that Pappalardo was ISG's legal representative and that an attorney-client relationship had been formed.”

Pappalardo kept telling everyone that he would recover the funds, but he never sued anyone.  Eventually, “ISG finally retained outside counsel on November 7, 2001. Through counsel, ISG filed suit against COB and Pomeroy in March 2002. ISG obtained a $10 million judgment in that suit, but the award has proven uncollectible.”  Then, ISG sued everyone.

Essentially, everything is a question of state law.  Much of it hinges on whether Pappalardo and ISG had an attorney-client relationship.  The First says, quite sensibly, that there was no evidence that there was such a relationship.  No retainer agreement.  But there was a power of attorney that was executed in order to return the missing funds.  Obviously, this isn’t good enough.

Citing DeVaux v. Am. Home Assurance Co., 387 Mass. 814, 444 N.E.2d 355, 357 (1983), the First also concludes that there was no implied attorney-client relationship.  ISG had claimed that “...based on Pappalardo's assurance that he represented the interests of the investors and his warnings that filing independent charges would jeopardize his attempts to negotiate a recovery of the funds, ISG reasonably believed that Pappalardo was its attorney and forebore from pursuing independent legal action on that basis.”  Pappalardo maintains that he made it clear that he didn’t represent ISG, and they didn’t rely on him.  This seems like an easy call.  They didn’t even seek legal advice from him.  There actually is extensive discussion of this issue, but I don’t see what the point is. 

Secondly, the court rejects, under One Nat'l Bank v. Antonellis, 80 F.3d 606, 609 (1st Cir. 1996), the theory that Pappalardo had a duty to non-clients – i.e. a “‘foreseeable reliance’ exception to this rule, which creates a duty to nonclients where the attorney knew, or should have reasonably foreseen, that the nonclient would rely on his services.”  But this fails, because, as the First points out, ISG and COB were potentially adverse parties. 

Finally, claims for “conversion, and aiding and abetting fraud and breach of fiduciary duty” fail on statute of limitations grounds.  The court finds that they knew about it at the time ISG learned of a transfer of some funds into an account of another law firm, Eckert, Seamans, Cherin & Mellott.  Because no attorney-client relationship existed, the “continuous representation” doctrine also fails.