A company that lost $50 million in a fraudulent deal with ex-attorney Marc S. Dreier cannot recover damages from Dechert for certifying that the deal was legitimate, a unanimous Appellate Division, First Department, panel ruled yesterday.
The panel, which consisted of Justices David B. Saxe (See Profile), John W. Sweeny Jr. (See Profile), James M. Catterson (See Profile), Helen E. Freedman (See Profile) and Nelson S. Roman (See Profile), found in Fortress Credit Corp. v. Dechert LLP, 603819/2009, that Dechert had not done anything wrong in vouching for the deal based on the documents it reviewed, even though those documents turned out to be fraudulent.
The unsigned decision reversed an order by Supreme Court Justice Charles E. Ramos (See Profile), who denied the law firm’s motion to dismiss in August 2010.
Fortress, an investment management firm, sued Dechert in 2009 (NYLJ, Dec. 23, 2009). According to the complaint, Mr. Dreier recommended to Fortress that it act as lender in a short-term note program to help real estate developer Sheldon Solow, a client of Mr. Dreier, purchase foreign real estate through his company, Solow Realty & Development Company. In 2006, Fortress executed two such loans, totalling $60 million.
In 2008, Mr. Dreier suggested that Fortress lend another $50 million to companies controlled by Mr. Solow. As a condition of this transaction, Fortress required that Mr. Dreier and Solow Realty hire independent counsel to prepare an opinion letter representing that the loan was legally binding. Mr. Dreier gave all the documents in the transaction, including some ostensibly signed by Mr. Solow, to Dechert, which then certified that the transaction was legally binding. After receiving the opinion letter, Fortress wired $50 million to a trust account maintained by Mr. Dreier’s firm.
Months later, in December 2008, Mr. Dreier was arrested for multiple frauds, including a scheme to sell $700 million in fake promissory notes. The 2008 loan to Mr. Solow was revealed to be a fraud. Mr. Solow had never known about the purported deal, and Mr. Dreier had forged documents with Mr. Solow’s signature.
In its lawsuit, Fortress accused Dechert of issuing an “utterly false legal opinion letter” and failing to do “even the most basic due diligence” before preparing an opinion. The suit also claimed that Dechert had said in a letter that it was serving as counsel to Mr. Dreier and to Solow Realty, even though it never had any contact with the latter.
The firm moved to dismiss, arguing that it was never called on to investigate the documents for possible fraud. Justice Ramos denied the motion, and the firm appealed. In reversing the lower court and dismissing the case, the First Department agreed with Dechert’s interpretation of its role.
“[T]he complaint fails to allege (a) that plaintiffs informed defendant that its obligations were not limited solely to a review of relevant and specified documents or (b) that plaintiffs informed defendant that it was to investigate, verify and report on the legitimacy of the transaction,” the panel wrote. “Absent such factual allegations, plaintiffs cannot establish that defendant breached a duty of care.”
The panel said that, since Mr. Dreier was Solow Realty’s long-time attorney and the guarantor of the loan, Dechert had no reason to suspect that he would forge Mr. Solow’s signature.
“Moreover, the opinion, by its very terms, provided only legal conclusions upon which plaintiffs could rely,” the panel added. “The opinion was clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents, made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining those facts.”
“We think it’s a great decision for lawyers who give legal opinions,” said Joel M. Miller of Miller & Wrubel, who represented Dechert.
Attorneys are often asked to give opinions on transactions based on documents, and are entitled to assume the documents are genuine unless they are asked to investigate further.
“Dechert was not asked to do anything but opine as to the enforceability of the loan against the borrower according to the specified documents it reviewed,” Mr. Miller said.
Marc E. Kasowitz of Kasowitz Benson Torres & Friedman, counsel to Fortress, said in an e-mail, “We respectfully disagree with the decision of the First Department.”
He added, “In its opinion letter at issue in the case, Dechert told Fortress that it was acting as ‘special corporate counsel’ to Solow Realty in the transaction—a statement that Fortress relied on in entering into the transaction and that proved to be utterly false.
“If it stands, the Appellate Division’s ruling would permit law firms to provide legal opinions without so much as knowing who they represent, and would put parties at their peril in relying on legal opinions in corporate transactions. Fortress is reviewing the decision and considering all of its available legal options.”
@|Brendan Pierson can be contacted at email@example.com.