Law360 (January 17, 2020, 8:02 PM EST) — The New Jersey Supreme Court’s recent refusal to saddle Fox Rothschild LLP with a fiduciary duty to a victim of incarcerated Ponzi schemer Eliyahu Weinstein caged what many law firms consider a growing menace of claims brought by nonclients shouldering major financial losses, experts said.
In its Jan. 9 decision, the high court declined to widen the scope of obligations firms have to third parties, finding it would be an “impractical burden” to require lawyers to inquire about the source of funds they’re asked to safeguard by clients.
While the scammed investor’s arguments didn’t sway the court, there’s no shortage of theories about what gives rise to a firm’s fiduciary duty, and all it takes is a “creative” plaintiffs attorney to place them before a court, said Gregg Weinberg of Roberts Markel Weinberg Butler Hailey PC in Houston.
While firms now stand a better chance of beating such cases in New Jersey, they still have to defend them, Weinberg told Law360. The key takeaway is “receiver beware,” he said, noting that firms would be wise to get as much information as possible about any funds they take into a trust account.
“I’d want to reach out to someone who sent me money and say, ‘What is it for and what are your instructions?’ Then you’re in the clear, no matter who later jumps up,” Weinberg said.
The suit was brought by United Kingdom-based investor Moshe Meisels, who gave $2.4 million to Weinstein to invest in an Irvington, New Jersey, building. But Weinstein instructed the firm, which held the funds in a trust account, to dole it out otherwise. The firm said it had no idea there was a competing claim to the funds until Meisels brought his suit.
The case, in which Fox Rothschild beat claims of breach of fiduciary duty and conversion, comes as part of what Dallas-based attorney Chad Baruch of Johnston Tobey Baruch PC sees as a national trend of litigation concerning attorneys’ duties to third parties.
That firms are often on the receiving end of the litigation isn’t surprising when you consider the plight of those scammed by the likes of Weinstein and other high-profile financial criminals such as Bernie Madoff, Baruch said.
“Generally speaking, the money‘s gone and you’re trying to claw it back from every source you can,” Baruch told Law360.
That desperation often spurs litigants to mistakenly equate alleged ethics breaches with viable court claims, experts said. That much was evident in the court’s exploration of New Jersey’s professional conduct guidelines for attorneys, after which the justices stopped short of allowing an alleged ethics gaffe to be parlayed into a legal cause of action.
The New Jersey Rules of Professional Conduct require firms to safeguard property in their possession, including that belonging to third parties. In that vein, Meisels argued that Fox Rothschild owed a duty to those who relied on the firm in a professional capacity, even nonclients.
But the justices said case law regarding attorneys’ ethics duties to third parties was “cabined by considerations of reasonableness,” and that it wasn’t reasonable to impose a fiduciary duty on Fox Rothschild with respect to a person the firm didn’t know existed. The firm, which represented a venture involved in purchasing the property, didn’t know about Meisels and his competing stake in the funds prior to the litigation because the money came with no information about its source and what, if any, restrictions applied to its disbursement.
New Jersey’s history of attorney disciplinary actions suggest the state’s high court isn’t afraid to hand down sanctions, said Robert E. Levy of Scarinci Hollenbeck LLC’s Lyndhurst, New Jersey, office. But the Meisels case indicates that supposed ethics breaches won’t necessarily stand as the basis for court claims, said Levy, who chairs the firm’s litigation practice group.
“The import of this is a clear statement by the Supreme Court that a violation of an RPC does not create a cause of damages,” Levy told Law360.
Meisels fared no better on his conversion claim, which requires a plaintiff to show a defendant has independent dominion and control over property. Plaintiffs likewise have to show that defendants who lawfully acquired the property refused to give it back when its owner demanded its return. But Meisels didn’t meet any of those burdens, the court concluded, reasoning that the money belonged to a client, not the firm, and Meisels never asked the firm to return it.
Ultimately, the justices effectively put the brakes on what Hackensack, New Jersey-based attorney Iram P. Valentin said is a steady increase of tort liability upon lawyers in New Jersey.
Valentin, who chairs Kaufman Dolowich Voluck LLP’s professional liability practice, said he found the decision refreshing.
“There has to be some sensible curbing on what I see as the ever-expanding liability of professionals in general, but particularly attorneys,” Valentin told Law360.