The Business Litigation Blog

Court Revives $100 Million Legal Malpractice Case

The U.S. Appeals Court for the Ninth Circuit (which serves the west coast) recently reopened a legal malpractice case valued at $100 million against the Bryan Cave LLP law firm. The appeals court has reopened the cases, overturning a decision by a federal trial court to dismiss the complaint against the law firm.

Securities Fraud

The complaint alleges that lawyers at Bryan Cave knew of securities fraud by a client and did nothing to stop it. The complaint argues that the firm was hired specifically to review issues such as fraud at an investment firm, but failed to do so. The investment firm has been found to have been operating as a Ponzi scheme (a fradulent investment program in which new investments are used to pay existing investors and the leaders of the scheme, but no money is actually invested). The law firm was hired in 2006 to monitor the investment firm, but apparently took no action until the investment firm went bankrupt in 2008.

"Unclean Hands" Defense

At the trial level, the law firm had successfully argued an affirmative defense known as "in pari delicto," which means "in equal fault." Under an affirmative defense, the defendant (the law firm here) acknowledges that it committed a crime, but that there was a reasonable justification for the action or that it is unreasonable to sue in that situation. The "in pari delicto" defense is a type of "unclean hands" defense. "In pari delicto" applies when both the plaintiff and defendant are engaged in the same type of illegal activity, while a general "unclean hands" defense applies when the plaintiff has engaged in some sort of illegal activity.

Here, the "unclean hands" argument was directed at the plaintiffs, who are various investors who hired the law firm to monitor the investment firm. The law firm successfully argued at trial that the investors knew, or should have known, that something fraudulent was still going on so they share responsibility for the wrongdoing, or they have "unclean hands."

The appeals court rejected that argument on appeal. The appeals court found that for the "unclean hands" argument to work it would have to be obvious for a layperson (a non-investment banker or attorney) to understand that there was fraud going on. The appeals court decided that it was not obvious enough for a layperson to realize the fraud was occurring.

Trust Seasoned Attorneys for Advice

 If you have any concerns about work that an attorney may have recently done for you, contact an attorney at the Patterson Law Firm for advice and guidance.

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