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A New Jersey law firm’s aggressive efforts in hindering a client’s judgment creditors can be the basis of liability for fraud, the Third U.S. Circuit Court of Appeals has ruled. The judges on May 30 reinstated a suit against Norris, McLaughlin & Marcus over its representation of carmaker John DeLorean in the 1990s. The suit claims that the Bridgewater firm actively, knowingly and intentionally participated in DeLorean’s unlawful efforts to avoid execution on his property based on an out-of-state federal court judgment. The New Jersey federal district court threw out the suit for failure to state all the elements of common law fraud – misrepresentation, detrimental reliance and damages – but the appeals court said creditor fraud requires no such showing. “We hold that when a complaint alleges that an attorney has knowingly and intentionally participated in a client’s unlawful conduct to hinder, delay, and/or fraudulently obstruct the enforcement of a judgment of a court, the plaintiff has stated a claim under New Jersey law for creditor fraud against the attorney,” Circuit Judge Max Rosenn wrote in Morganroth & Morganroth v. Norris, McLaughlin & Marcus, 02-2087. “This is so even if the complaint does not allege any misrepresentation by the attorney to the judgment creditor and does not allege that the creditor detrimentally relied on such misrepresentation.” Rosenn observed that the case raises “thorny questions relating to the bounds of legitimate legal advocacy and transgressive participation by attorneys . . . in a client’s illegal conduct.” The suit charged, among other counts, that Norris McLaughlin committed fraud through material misrepresentations, fraudulent concealment, and wrongful withholding of information. The plaintiff, Morganroth & Morganroth, a Southfield, Mich., law firm that once represented DeLorean, won a $6.23 million judgment against him for unpaid legal fees in Michigan’s federal court on Feb. 6, 1995, and registered it in the New Jersey district on April 19, 1995. Many of Norris McLaughlin’s alleged acts were attempts to prevent execution on DeLorean’s 430-acre Lamington Farm in Bedminster. On April 13, 1995, Norris McLaughlin allegedly prepared and recorded a deed that purported to confirm the 1994 transfer of Lamington Farm for $10 to Genesis III, a company 98 percent owned by DeLorean. The Michigan judge had set aside the transfer as a fraudulent conveyance in September 1994. A litany of other wrongful acts were alleged, among them preparing and recording a sham Memorandum of Life Lease of the property that purported to acknowledge existence of a fictional 1987 lessor-lessee relationship between DeLorean as owner and DeLorean as guardian for his children. Norris McLaughlin moved to dismiss, arguing that the complaint did not allege the plaintiffs relied upon any of its statements to their detriment. The district court concluded that in the absence of allegations of material misrepresentations to the plaintiffs, reasonable reliance and damages proximately caused by the misrepresentations, there could be no finding of common law fraud. But the appeals court found that New Jersey case law provides a cause of action against a judgment debtor who fraudulently obstructs enforcement of a judgment, citing Karo Marketing Corp. v. Playdrome America, 331 N.J. Super. 430 (2000), and Jugan v. Friedman, 275 N.J. Super. 556 (1994). The district court said the complaint made only general allegations that the defendants conspired with the debtors to deprive them of their enforcement of the judgment, but the appeals court disagreed. “The Morganroths have alleged facts that, if proven, would establish that the defendants went beyond the bounds of permissible advocacy; they allege that defendants were active participants and planners in the scheme to obstruct the plaintiffs’ efforts to execute on their judgment,” wrote Rosenn, joined by Judges Maryanne Trump Barry and Louis Pollack (the latter sitting by designation). Thomas Howard, the lawyer for Morganroth, estimates the cost of trying to enforce the judgment at more than $1 million. “We put in a substantial number of hours dealing with defensive tactics by Norris McLaughlin,” says Howard, adding he thinks the ruling also allows recovery of any of the uncollected millions of dollars remaining as a result of Norris McLaughlin’s obstruction. “To the extent we lost the opportunity to recover any money or incurred any additional expenses as a result of anything the law firm did, we are entitled to recover that,” says Howard, a partner with Kirsch, Gartenberg & Howard in Hackensack. Mayer Morganroth, who represented DeLorean for more than a decade in criminal, family and civil matters, says he has recovered only about $2.5 million of the judgment, largely from the sale of Lamington Farm. Most of that went to Howard and other lawyers trying to satisfy the judgment. Though Lamington Farm was worth about $25 million, efforts to challenge its transfer delayed its sale until DeLorean declared personal bankruptcy and its sale by the bankruptcy court yielded only about $15 million, Morganroth says. He adds that most proceeds, about $9 million, went to Merrill Lynch, a priority creditor. Norris McLaughlin should be held accountable for forcing his firm to jump through “hoops that we never should have had to go through,” he says. William Brennan III, who represents Norris McLaughlin, says that at most, Morganroth can recover its “marginal legal fees to address what Norris McLaughlin did.” In any event, Morganroth cannot show it was Norris McLaughlin’s actions that thwarted collection. “Even assuming all this is true, at the end of the day there were creditors with rights superior to Morganroth. You can’t be convicted of a murder for putting a bullet into a corpse,” says Brennan, a partner with Princeton’s Smith Stratton, Wise Heher & Brennan. Brennan says the Third Circuit failed to distinguish between “vigorous forms of permissible advocacy” and conduct proscribed by the Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20 et seq., which does not create a private tort action. Now, “any lawyer would be reluctant to take on a case like this, knowing . . . the disgruntled creditor [who strikes] out against the judgment debtor will go after the judgment debtor’s attorney,” he says.

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