SUMMARY OF ATTORNEY LIABILITY CASES
FOR ASSET PROTECTION CLE COURSE
FLORIDA BAR ANNUAL WEALTH PROTECTION CONFERENCE

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“The Real World of Attorney Liability In Asset Protection Planning”
May 9, 2003

RICO

Gutierrez v. Givens, 989 F. Sup. 1033 (SD Cal. 1997)

Class action lawsuit by all current or former California residents who purchased memberships in the Charles J. Givens Organization (included an allegation for civil RICO against attorney David Tedder)

Plaintiffs alleged that Givens transferred several millions of dollars of assets to holding companies controlled by attorney Tedder, Givens and other defendants. Plaintiff alleged that Tedder was the owner, director, or officer of many holding companies involved in Givens’ scheme, and Plaintiff alleged that Tedder profited beyond compensation for professional fees. The Court held that RICO liability can be imposed on defendants with a formal position in an enterprise or who have some part in directing the affairs of an enterprise. Because of Tedder’s alleged management positions in various Givens organizations, the Court found that there could be a cause of action for civil RICO against attorney Tedder.

Cadle v. Schultz, 79 F. Sup. 392 (ND Tex 1991).

A default judgment was entered against Defendant Schultz for approximately $41,000. Subsequent to the judgment, Schultz, with the help of attorney/co-defendant R. Leonard Weiner, conveyed some of Schultz’s assets in an attempt to escape his creditors. Plaintiff alleged that Schultz and his counsel sent written communications to a judgment creditor offering their cooperation in paying the judgment, and that these communications were, in fact, an attempt to “lull” the creditor into believing that Schultz was trying in good faith to pay the judgment. Plaintiff alleged that the communications were actually designed to gain time to complete fraudulent conveyances. The court held the scheme to fraudulently transfer Schultz’s assets was a scheme to defraud and constituted a basis for liability against attorney Weiner for civil RICO.

Nulty v. Pearson, 994 F. 2d 1131 (Cal. 8, Neb. 1993)

For attorneys to be liable under civil RICO it must be shown that the attorney participated in the operation or management of an enterprise.

CIVIL CONSPIRACY

Joel v. Weber, 602 NYS 2nd 383 (1993)

Entertainer Billy Joel sued his management company’s attorney on a count of aiding and abetting alleging that the attorney helped the management company convert and then conceal from Joel assets in breach of the management company’s fiduciary obligations to Joel. The complaint further alleged that $75,000 in legal fees paid to the attorney when the company was insolvent was a fraudulent conveyance. The complaint was upheld.

McElhaonon v. Hing, 728 P 2d 273 (Arizona, 1986)

Plaintiff McElhaonon obtained a monetary judgment against former business partner Charles Harris. Following the judgment, attorney Hing assisted Harris in conveying corporate stock to John Greer, Harris’s business partner. The Arizona Supreme Court found that a cause of action lies against a judgment debtor’s attorney who conspires to defraud a judgment creditor.

This Arizona Supreme Court decision upheld an appellate court opinion that found that there was a cause of action against Hing for conspiracy to defraud his client’s creditor. The lower court, however, put specific requirements and pre-conditions on such cause of action. The appellate court stated:

1. The plaintiff must be a judgment creditor (i.e., he must have reduced his claim to judgment).

2. The conspiracy defendant must know that the transfer would leave the debtor insolvent and must know that the debtor intends to defraud the judgment creditor.

3. The plaintiff must show that the remedies otherwise provided by Arizona’s fraudulent conveyance statutes are inadequate, including without limitation, that the fraudulently transferred property is no longer in the hands of the transferee or that the property has lost value.

4. Damages for conspiracy are limited to the judgment amount or the value of the property at the time of transfer plus incidental expenses.

Forum Insurance Co. v. Devere Ltd., 151 F. Sup. 2d 1145 (CD Cal. 2001)

Plaintiff alleged that an accountant conspired with his client to commit fraudulent transfers in violation of the California Uniform Transfers Act. The court held that civil conspiracy claims cannot exceed the remedies afforded by the Uniform Fraudulent Transfer Act. Plaintiff was found to have no remedy against defendant/accountant because the UFTA provides only equitable remedies solely against debtors and transferees and the defendant/accountant was not a transferee.

Beck v. Prupis, 120 Sup. Ct. 1608 (2000)

This case involved a complaint for civil conspiracy to violate civil RICO statutes. The U.S. Supreme Court held that in order to bring a cause of action based on civil conspiracy the alleged conspiracy defendant must have, itself, committed an act that was tortious and which act gave rise to a cause of action for damages. Unlike criminal conspiracy, conspiring to commit a tort is itself not actionable unless the alleged conspirators themselves engage in tortious conduct.

Richard Bertram, Inc. v. Sterling Bank and Trust, 820 So. 2d 963 (4th DCA 2002)

The Fourth DCA held that an attorney serves as an agent for his or her client, and the attorney’s acts are the acts of the principal, the client. In respect to civil conspiracy, the court stated that it is well settled that neither an agent nor an employee can conspire with his principal except where the agent (attorney) has a personal stake separate from the principal’s (client’s) interest. The court noted that an attorney may be liable for his or her own independent fraudulent statements.

Monastra v. Konica Business Machines USA, Inc., 43 Cal. App. 4th 1996

A California appellate court held an attorney liable for civil conspiracy to make a fraudulent conveyance. The court stated that civil conspiracy requires an underlying civil wrong, but that a fraudulent conveyance leaving a creditor unable to satisfy their judgment constitutes such a civil wrong.

THIRD-PARTY LIABILITY FOR FRAUDULENT CONVEYANCE

Elliott v. Glushon, 390 F. 2d 514 (9th Cir. 1967)

A bankruptcy trustee sued attorney Eugene Glushon for his role in structuring transfers of bankruptcy estate property which were found to be fraudulent transfers under the Bankruptcy Act. The trustee sought to recover the property from Glushon or other co-defendants. In an affidavit submitted in evidence Glushon was quoted as saying, “You know we did it, and we know we did it. But just try to prove it.” The court found that Glushon was not liable for damages because of his role in the alleged fraudulent conveyance. The court found that the purpose of the Bankruptcy Act is to preserve assets of the estate and not to render civilly liable all persons who may have contributed in some way to the dissipation of estate assets. A trustee may bring suit against those persons who received transferred property and may recover from the transferees the value of that property if they have subsequently converted the property. The court held that the term “fraudulent transfer” as used in the Bankruptcy Act includes a great many transactions which do not constitute “actual fraud.”

Mack v. Newton, 737 F. 2d 1343 (5th Cir. 1984)

A corporate debtor sold 188 cows subject to a mortgage and applied the proceeds not to reduce the cow mortgage but to reduce another debt. Defendant Newton was one of the principals of the bankrupt corporation and also a principal of another entity who received the benefit of the proceeds from the sale of the cows. The trustee filed an action against Newton, in part, on the basis of civil conspiracy to make a fraudulent conveyance. The court held that under the Bankruptcy Act, a third party is not liable for the value of the property fraudulent conveyed, even though he may have participated or conspired in the fraudulent conveyance, provided he did not receive any of the property transferred.

Coggin v. Coggin, 30 F. 3d 1143 (11th Cir. 1994)

A bankruptcy debtor transferred $13,000 to his son. The transfer was found to be an avoidable conveyance under §548 of the Bankruptcy Act and grounds for denial of discharge. A partial recovery was made through settlement with the transferee’s son, and the trustee sought to recover the additional amount of money from the transferor/debtor. The Eleventh Circuit denied recovery against the debtor for the value of the fraudulent conveyance not otherwise recoverable from the transferee, and did not permit an award of damages against the transferor debtor. Although not citing Elliott or Glushon, this case is consistent with these precedents because if the trustee cannot recover damages for a fraudulent conveyance from the debtor, then logically there is no grounds for same damages from the debtor’s attorney or other agents.

Yusem v. South Florida Water Management District, 770 So. 2d 746 (4th DCA 2000)

During a lawsuit but prior to a judgment being entered against him, defendant Henry Yusim came into possession of approximately $210,000 and immediately thereafter transferred the same amount into an offshore trust. The money temporarily moved through the joint account of Henry Yusim and his wife, Judith Yusim. The court held that Judith Yusim was not liable because she was not the transferee of the money. The court further held that Florida’s fraudulent conveyance statutes are nothing more than a creditor’s equitable remedy that sets aside transfers leaving the creditor free to pursue the subject assets in the hands of the debtor or to maintain an action against the transferee who has received the asset. The fraudulent conveyance statutes do not provide for judgments for additional money against the debtor.


ETHICS

The Florida Bar v. Edward B. Rood, Fla. Sup. Ct., 1993

A Michigan judgment was entered against attorney Edward B. Rood’s son, Edward C. Rood. Following the judgment, Edward C. Rood conveyed a parcel of real estate he owned to his father. The Florida Supreme Court found that Edward B. Rood had assisted in his son’s fraudulent conveyance and that he had filed a false affidavit in the proceeding stating he was not aware of the Michigan judgment. The Bar suspended Edward B. Rood for one (1) year. In this case, the subject transfers took place after a judgment was entered against the debtor, and that the disciplined attorney was the transferee of the property.

In Re: Carl L. Kenyon and Robert P. Lusk, 491 SE 2d 252 (SC 1997)

This was a South Carolina disciplinary case brought against two attorneys (Kenyon and Lusk) who represented an estate. At the time of their client’s death, several liens and foreclosures had been instituted against their client’s assets, and claims totaling at least $548,000 had been filed against the estate. Approximately three years after the client’s death, Kenyon and Lusk assisted the surviving heirs with the conveyance of property to a corporation controlled by Kenyon and Lusk to evade creditor claims. Furthermore, Kenyon and Lusk helped mortgage the subject property to a corporation they controlled. The attorneys were disciplined for assisting their clients in the transfer of assets to avoid their deceased client’s creditors. The South Carolina Supreme Court held that assisting clients to cheat their creditors is dishonest and is a violation of that state’s ethical rules. Acts sufficient to constitute the civil definition of fraudulent conveyance do not have to be found for the Supreme Court to find fraudulent or dishonest conduct of an attorney.

Florida Bar v. Scott, 566 So. 2d 765 (Fla. 1990)

Attorney Scott was suspended for 91 days for, in part, accepting conveyances of property from a friend to help the friend avoid creditors with the understanding that the property would be returned upon his friend’s request. Scott was also disciplined for concealing from his friend’s heirs the existence of the property and claiming ownership for himself.

In Re: Conduct of Taylor, 878 P. 2d 1103 (Or. 1994)

The Supreme Court of Oregon cleared attorney Taylor of alleged unethical conduct for assisting a fraudulent conveyance. The Oregon Bar had accused Taylor of violating disciplinary rules by assisting his client’s fraudulent transfers. The court found that Taylor did not exercise any control over the proceeds or knew of the whereabouts of the proceeds following the delivery of same to his client. The court held that “in disciplinary rules, ‘fraud’ refers to conduct that would be actionable fraud in Oregon in the tort sense.” The court also held that assisting a client to cheat a creditor is dishonest conduct under the disciplinary rules provided that the attorney acts with intent to cheat the creditors.

In Re: Benson, 854 P. 2d 466 (Or. 1993)

The Oregon Supreme Court disciplined attorney Stephen E. Benson for helping a client place bogus encumbrances on property to trigger advanced warnings of potential criminal forfeiture proceedings initiated by law enforcement agencies. Benson’s client faced forfeiture of his property allegedly used in the commission of a crime. In order to protect his client’s property from forfeiture, the attorney assisted the client in the preparation of a note and mortgages secured by real property owned by the client. The notes and mortgage were recorded. The loan transaction referred to in those documents had not, in fact, occurred. The attorney was suspended for six (6) months for assisting his client in conduct known to be illegal or fraudulent.