Law Firm not Liable for Failing to Control Client Aiding & abetting suit is dismissed By Eric T.

Berkman April 24, 2014 Lawyers from Holland & Knight who properly advised a company accused of carrying out a Ponzi scheme could not be sued by third-party investors for failing to ensure that their legal advice was followed by the client, a Superior Court judge has ruled. The investors argued that the law firm and its partner, Richard J. Hind-lian, aided and abetted the companys fraud by allowing the scheme to continue even when they knew or should have known they had been ignored and deceived by their client. But Judge Janet L. Sanders disagreed and granted a motion to dismiss all claims against Holland & Knight. Certainly, this Court is aware of no precedent for the proposition that an attorney has to take affirmative steps to ensure that a client follows his advice in order to avoid being held liable for the consequences of his clients conduct, the judge wrote. [T]his Court is [also] not aware of any duty imposed on a lawyer which would require that he independently verify that what his client tells him is indeed the truth. The eight-page decision is Sgarzi, et al. v. Sharkansky LLP, et al., Lawyers Weekly No. 12-048-14. The full text of the ruling will be available for ordering at lwopinions.com later this week. Lawyers advise and clients decide Nicholas J. Nesgos of Posternak, Blankstein & Lund in Boston, who represented Holland & Knight, said in a written statement that attorneys are ethically obligated to provide clients with legal advice. But they are not required to monitor their clients behavior to ensure compliance with that advice, he said.

Judge Sanders ruling confirms that bedrock principle, Nesgos said. Her ruling should discourage future lawsuits that seek to hold lawyers liable for the acts or omissions of their clients. Richard J. Yurko of Bostons Yurko, Salvesen & Remz is counsel to the plaintiffs. He declined to comment due to the pending nature of the claims against other defendants named in the suit. Former Board of Bar Overseers Chairman George A. Berman, who is not involved in the case, said lawyers are not guarantors of their clients conduct. The Peabody & Arnold partner added that attorneys do not have the ability to make sure clients accept their advice. Lawyers serve as their clients attorneys, not as their mothers, and once the client is told that his homework is due, its the clients job to get it done, he said. We are responsible to give or provide advice, but we are not responsible to nag and hector to see that the advice is adopted. The Massachusetts Rules of Professional Conduct limit a lawyers exposure to third parties to ensure that clients receive conflict-free advice, he said. Lawyers cannot zealously represent their own clients if theyre constantly worried about liability to non-clients, Berman said. Clients will often take steps, which are inconvenient or damaging to a third party, and if the lawyer has to give advice to a client worried about his own direct liability to those people, the bottom line is that he cant give unbiased advice. Donn A. Randall of Bulkley, Richardson & Gelinas said one of the reasons the suit was dismissed was because Holland & Knight had no fiduciary duty to the investors. For an aiding and abetting suit to survive a motion to dismiss, there would have to be evidence the firm actively participated in the clients fraud, he said. Randall handled a 2012 Supreme Judicial Court case cited by Sanders in which the court held that a bank had no duty to investigate the withdrawal or deposit of funds. A banks duty only arises where they have actual knowledge of an intended or apparent misappropriation, he said. That same logic would apply in the context of a law firm like Holland & Knight, which is why this suit was properly dismissed. Debra A. Squires-Lee of Sherin & Lodgen in Boston said it would be pretty scary if Sanders ruling had come out the other way. She noted that the judges dismissal at such an early stage of the litigation sends a strong message to the bar that the law in Massachusetts protects firms when clients opt to ignore its attorneys guidance.

The mantra is that lawyers advise and clients decide, Squires-Lee said. It would be totally contrary to that relationship if lawyers were now going to be held liable for the clients failure to follow that advice. Questioning the advice The plaintiffs invested in Inofin, a motor vehicle finance company that underwrote the lending activities of used car dealerships by purchasing contracts on subprime loans made to high-risk customers. To operate in Massachusetts, Inofin was required to submit audited financial statements, maintain a license with the Division of Banks and certify a positive net worth of $20,000. To fund its operations, the company obtained loans from the plaintiffs by assuring them the money would be used only to extend loans to finance used car purchases. But in late 2003 and 2004, the plaintiffs claimed Inofin and its two controlling shareholders began using investor money to operate much riskier used car dealerships. Corporations were set up to run the dealerships, which received loans from Inofin even though they regularly operated at a loss. As the losses mounted, it became clear that if the corporations financial statements were consolidated with Inofins, they wou ld not be able to satisfy the $20,000 net worth threshold. To avoid carrying losses on its books, the plaintiffs argued that the controlling shareholders in 2005 arranged a sham sale to an Inofin employee. As business continued to deteriorate, Inofin began secretly selling off large portions of its consumer loan portfolio at a discount without telling the plaintiffs. When one of the controlling shareholders first retained Hindlian in 2006, the Holland & Knight lawyer correctly told him the Division of Banks would likely require consolidated statements from Inofin and the corporations. But Inofin ignored that advice and instead filed unconsolidated statements, which were eventually rejected by the Division of Banks. If Inofin had followed Hindlians advice and filed compliant financial statements, they would have shown Inofin was insolvent and it would have been shut down. Instead, Inofin continued to operate, with Holland & Knight acting as its lawyers on several legal matters. In 2008, when Inofin tried to raise cash by selling promissory notes to investors, Hindlian properly told the company it would have to do so in the form of a private placement with appropriate disclosures to investors. Hindlian, who declined to comment to Lawyers Weekly, began drafting a private placement memorandum but was informed by the companys controlling shareholder that he intended to raise money from friends and family.

The plaintiffs complaint alleged that Hindlian knew or should have known the assertion was plainly untrue. They further alleged that when the SEC began investigating Inofin in 2009, Holland & Knight urged the agency not to contact investors and took no steps to encourage the company to disclose the investigation to investors. Silence or inaction In dismissing the claim, Sanders said the plaintiffs had fallen well short of alleging facts to show Holland & Knight provided substantial assistance in the commission of Inofins fraud. She said Hindlian correctly and repeatedly advised Inofin as to how it should proceed. That Inofin chose to ignore that advice and that the defendants did nothing to stop it (or acquiesced, as the Complaint alleges) cannot support an inference that they thereby participated or assisted in that conduct, Sanders wrote. Silence or inaction in the face of a clients tortious conduct does not mean that the lawyer can be held liable for that conduct in the absence of any separate duty owed to the plaintiffs. The judge further found that an attorney cannot be said to aid and abet a wrongdoer client simply because he continued to represent the client on other matters. Substantial assistance means something more than merely providing routine professional services that aid a tortfeasor in remaining in business, Sanders wrote. More generally, the plaintiffs maintain that inaction or silence may constitute substantial assistance where the defendant manifests a conscious intent to further the principal violation, she said. Massachusetts does not appear to have adopted conscious intent as a substitute for active participation, however. CASE: Sgarzi, et al. v. Sharkansky LLP, et al., Lawyers Weekly No. 12-048-14 COURT: Superior Court ISSUE: Could Holland & Knight be sued for aiding and abetting by third party investors for failing to ensure that the legal advice it offered to a client was followed?