Thursday, September 4, 2014

Attorney-defendants' alleged participation in a fraudulent corporate scheme.

Practice point:  Plaintiffs allege that the attorney-defendants, who were retained as the attorneys for the allegedly fraudulent corporation, were complicit in the fraudulent scheme by drafting documents and a shareholder agreement designed to give plaintiffs the impression that the corporation was legitimate, and by dealing directly with plaintiffs in reviewing the documents and giving them "accompanying legal advice and counsel."

The Appellate Division determined that, as against the attorney-defendants, the causes of action sounding in constructive fraud and negligent misrepresentation causes of action were deficient, as they failed to to allege the requisite fiduciary or special relationship between plaintiffs and defendants. The Appellate Division noted that the attorneys for a corporation represent the corporate entity, not the shareholders, and here the parties did not expressly agree otherwise. Plaintiffs' subjective belief did not create an attorney-client relationship or a close relationship approaching privity that imposed on defendants a duty to impart correct information.

Student note:  To the extent that the causes of action, as pleaded, could be fairly interpreted as including liability for aiding and abetting fraud, they are still deficient because they fail to allege that the attorney-defendants had actual knowledge of the fraud and provided substantial assistance in its commission. The allegation that the attorneys "knew or should have known" of the fraud is conclusory, and alleges mere constructive knowledge. The allegations that the attorneys prepared merger documents and a shareholder agreement are allegations of ordinary professional activity, not substantial assistance.

Case: Gregor v. Rossi, NY Slip Op 06012 (1st Dept. 2014)

Here is the decision.

Tomorrow's issue: Whistleblower suits and notices of claim.