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A federal appeals court has vacated sanctions against a law firm that litigated on behalf of a dissolved company and then withdrew after admitting it didn’t know who had authority over the company.

Wachtel Masyr & Missry was ordered in 2012 to pay $174,411.95 in attorney fees and costs in a case involving Omniway, a holding company set up in Cyprus for Gilad Sharon, the son of former Israeli prime minister Ariel Sharon.

Southern District Judge Shira Scheindlin (See Profile) ordered the sanctions in the now-settled case of Gusinki v. Genger, 10-cv-04506, a dispute over a Canadian real estate venture, AG Properties, that was formerly controlled by Sharon and Arie Genger, the father of plaintiff Sagi Genger.

Sagi Genger alleged that Sharon held a 50 percent interest in AG through a $1.25 million promissory note, but Sharon claims he only invested $25,000 in AG through an Israeli company.

Russian media tycoon Vladimir Gusinski, a major creditor of AG, sued AG Partners in New York state court and won a $4.4 million judgment. He then sued Genger in the Southern District and Genger filed a third-party complaint against Sharon, Omniway and the Israeli company seeking contribution and indemnification.

The firm of Mitchell Silberberg & Knupp appeared for Sharon and Omniway in the Southern District in January 2011, but two months later, Wachtel Masyr, a 35-attorney firm, was substituted as counsel for Sharon, but not explicitly for Omniway.

The firm changed its name to Wachtel Missry after the departure of partner Jesse Masyr to Fox Rothschild in 2013.

At deposition in December 2011, Sharon testified, “I don’t know if [Omniway] was ever formed.”

In a February 2012 letter to the court, Wachtel Masyr said it entered an appearance for Omniway “even though Omniway does not now exist (and Mr. Sharon does not know if it ever existed.)”

Wachtel Masyr withdrew as counsel for Omniway at an April 2012 hearing, after which Scheindlin entered a default judgment against the company.

Attorneys for Genger asked for sanctions against Sharon and Wachtel Masyr for representing they were authorized to act on behalf of Omniway.

Scheindlin issued her sanctions ruling on Sept. 5, 2012, saying Wachtel Masyr “went beyond poor judgment” by continuing to litigate on behalf of Omniway “for five months after Sharon explicitly denied having an interest in Omniway” (NYLJ Sept. 10, 2012)

The judge said her default order was not enforceable because the company lacked the capacity to be sued and “there’s no question that Wachtel exercised poor judgment in representing Omniway without first ascertaining whether it could be sued and, equally important, without secreting a retainer from someone authorized to represent Omniway.”

The circuit vacated the sanctions by summary order Wednesday in Wachtel Masyr & Missry v. Genger, 13-977-cv, with Judges Pierre Leval (See Profile), Rosemary Pooler (See Profile) and Denny Chin (See Profile) deciding the case.

The judges said the standard for sanctions under 28 U.S.C. §1927 for multiplying “the proceedings in any case unreasonably and vexatiously” was not met because there was no bad faith.

The lower court, the judges said, understood Sharon’s deposition testimony “to mean Wachtel was representing Omniway without authorization from Sharon or any other authorized representative.”

“However, Wachtel was at least implicitly authorized by Sharon to represent Omniway,” they said. “Indeed, the district court found that there was ‘no indication the initial representation was undertaken in bad faith.’”

The third-party complaint, the court said, alleged that Sharon was Omniway’s sole beneficial owner and liable for Omniway’s debts. Sharon said that he authorized Wachtel to represent his interests in the action and he also signed off on discovery materials submitted on behalf of all third-party defendants, most important among them, Omniway, the said.

“Sharon’s deposition testimony did nothing to alter this implicit authorization,” the circuit said. “In fact, Sharon testified that Omniway was conceived of as his personal investment vehicle.”

Wachtel Masyr partner Eliot Silverman issued a statement saying “We are gratified that the court of appeals has recognized that we did nothing in this case except zealously and successfully represent our client against a baseless claim.”

John Dellaportas, partner at Morgan Lewis & Bockius, argued for Genger.