The U.S. Appeals Court for the Ninth Circuit recently reopened a legal malpractice case valued at $100 million against the Bryan Cave LLP law firm. The appeals court reopened the cases and overturned a federal trial court’s decision to dismiss the complaint against the firm.
A real estate investment firm specifically hired Bryan Cave to review fraud issues at an investment firm. The complaint alleges that lawyers at Bryan Cave knew a client was committing securities fraud. Additionally, the complaint alleges the law firm failed to stop it. The investment firm was operating as a Ponzi scheme.
The real estate firm hired the law firm 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 successfully argued an affirmative defense known as “in pari delicto,” which means “in equal fault”. Under this defense, the defendant acknowledges that it committed a crime, but that there was a reasonable justification for it. 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. 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. 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.