A Manhattan state judge has allowed to go forward a lawsuit by an offshore wealth management company accusing its lawyers of misappropriating money they were to hold in escrow, while the lawyers maintain that the company is not a legitimate business and that they represented it only in the interest of one of its investors.

In Mutual Benefits Offshore Fund v. Emanuel Zeltser, 650438/09, Supreme Court Justice Bernard J. Fried last week dismissed three of eight causes of action in Mutual Benefits Offshore Fund’s lawsuit against Emanuel Zeltser and Alexander Fishkin, the two Manhattan attorneys targeted in the suit. The judge, however, said it was too early to address many of the factual arguments the defendants raised.

The two sides have presented starkly different accounts of the dispute in court papers.

According to the complaint, Georgian businessman and politician Badri Patarkatsishvili invested $15 million in Mutual Benefits Offshore Fund through a company called Kayley Investments. The fund in turn, invested in Mutual Benefits Corporation, a Florida brokerage. Through Mutual Benefits Corporation, the mutual benefits fund invested in viatical life insurance settlements, in which they bought life insurance policies for less than their projected value at maturity.

In 2004, Mutual Benefits Corporation was placed in receivership by the Securities and Exchange Commission after it was found to have committed fraud by manipulating life expectancies on the policies it held. Several of its officers are serving prison sentences in connection with the fraud.

The complaint before Justice Fried alleges that Mr. Zeltser and Mr. Fishkin represented Mutual Benefits Offshore Fund in recovering $4.3 million, which they agreed to hold in escrow. Instead, the complaint alleges, they used the money for other purposes and refused to turn it over to the fund.

According to Mr. Zeltser, however, Mutual Benefits Offshore Fund was created by Mutual Benefits Corporation solely as an investment vehicle for Mr. Patarkatsishvili, who is now deceased. Mr. Zeltser has argued in the Florida bankruptcy court where Mutual Benefits Corporation is in receivership, that the fund legally belongs to Mr. Patarkatsishvili and is not entitled to the $4.3 million. He said that he agreed to represent Mutual Benefits Offshore Fund only in order to recover money for Mr. Patarkatsishvili, and that the fund is not a legitimate business venture.

“The company was, from the beginning, nothing more than a piece of paper,” Mr. Zeltser said.

“Mutual Benefits Offshore Fund belonged, and belongs, to my client,” Mr. Zeltser said in a phone interview.

The Mutual Benefits Offshore Fund’s lawsuit, Mr. Zeltser said, is an attempt by its officers, including president Shaun Davis and another officer, Christopher Samuelson, to take investment proceeds that legally belong to Mr. Patarkatsishvili. A counterclaim accused the officers of being involved in the earlier fraud that led to the 2004 receivership of the Mutual Benefits Corporation, and of taking advantage of Mr. Zeltser’s incarceration in a Belarusian prison in 2009 on charges of using forged documents and economic espionage, in order to “re-embezzle” Mr. Patarkatsishvili’s investment.

Martin P. Russo of Gusrae Kaplan Bruno & Nusbaum, counsel to Mutual Benefits Offshore Fund, said Mr. Zeltser’s characterization of the fund was “absolutely false.” He said that the fund had around 24 investors who invested a total of $23 million, and that it remained a legitimate business, holding life insurance policies that are expected to yield profits for investors when they mature. He also noted that the receiver in charge of the Mutual Benefits Corporation case had released monies to Mutual Benefits Offshore Fund, showing that the fund and its officers were not part of the fraud.

“Mr. Zeltser is kicking up a lot of dirt about that, but the bottom line is that [the receiver] down in Florida is not a moron,” he said. “Certainly if he’s investigating MBC, he’s not going to give MBOF any money if they were involved in any fraud.”

Justice Fried said in his ruling it would be premature to address these factual issues.

He did, however, reject some of the dismissal arguments put forth by the attorney defendants, including that Mutual Benefits Offshore Fund did not have standing to file the suit because the $4.3 million belonged to its investors and not to the fund.

“MBOF does not dispute movants’ contention that these funds, once recovered, will need to be disbursed to MBOF’s investors, pursuant to its agreements with them,” Justice Fried said. “But this eventuality does not derogate from MBOF’s right to bring suit to recover the funds in the first place.”

Mr. Zeltser said he believed the Florida bankruptcy court would rule that the fund belonged to Mr. Patarkatsishvili and thus determine that he would prevail in the New York case before it went to trial.

Mr. Russo, however, predicted that the Florida court would not rule in Mr. Zeltser’s favor. He said Justice Fried’s decision was “well-reasoned.”