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A lawyer can be sued for aiding and abetting a breach of fiduciary duty so long as the allegations include a claim that the lawyer both knew of the breach and provided “substantial assistance or encouragement … in effecting that breach,” a federal judge has ruled. In his 15-page opinion in Adena Inc. v. Clifford B. Cohn Esq., Senior U.S. District Judge James McGirr Kelly refused to dismiss RICO, civil conspiracy and breach of fiduciary duty claims against Philadelphia attorney Clifford B. Cohn and his former client, Philippe Malecki. The case stems from Malecki’s opening and operation of a Hermes boutique in Philadelphia in which his now-ex-wife, Carolyn Long, and her parents, Donna and David Long, were all minority shareholders. The suit alleges that Malecki secretly drained funds from the corporation to get his own satellite dish decal business off the ground. It also says he later used corporate funds to pay the lawyers who worked on his divorce from Carolyn Long and defended him in deportation proceedings. According to the suit, which was filed by attorney Lloyd George Parry of Davis Riter Parry & Hartman, the Longs and Malecki agreed to form a corporation known as Adena Inc. in which Malecki owned 660 of the 1,000 shares and the Longs owned the rest. Malecki also acted as Adena’s sole director, president, secretary and treasurer. Malecki allegedly used Adena checks to pay for secretaries and mass mailings for his other business while justifying them as legitimate expenses for Adena. Auditors later discovered that Malecki had written a $10,000 check to a Hermes employee who periodically withdrew cash from her account and returned it to Malecki. Between 1996 and 1998, Malecki allegedly used Adena’s credit accounts for nearly $125,000 in personal expenses unrelated to Adena. Cohn was hired in 1997 when Malecki was in the midst of divorcing Carolyn Long. The suit says Cohn began working on two matters — Malecki’s divorce and his immigration problems. (A native of France, Malecki has since returned there and now lives in Corsica.) Even before Cohn was hired, the suit says, Malecki was using Adena funds to pay his lawyers — recording the checks as being for legal and accounting fees. When Cohn was hired, he signed an agreement with both Malecki and Adena, the suit says, even though his joint representation was never approved by the minority shareholders. The Longs claim that Cohn performed legal services purely for Malecki, but billed the corporation. In August 1997, the suit says, David and Donna Long made repeated demands on Malecki and Cohn for access to Adena’s books and financial records to no avail. When the Longs filed suit in Montgomery County, Pa., to demand access to the records, they say Cohn represented Adena. The case ultimately was discontinued when Malecki transferred his controlling shares to David and Donna Long and resigned from his corporate offices in December 1998. That dramatic turn of events came on the heels of a decision by Hermes to stop shipping goods to the Philadelphia store due to Adena’s failure to pay more than $200,000. To keep the store alive, the Longs say they negotiated with Malecki and agreed to pay the outstanding bill to Hermes and to make a loan of more than $150,000 to Adena in return for Malecki’s agreement to transfer his stock to Donna and David Long. But when they took over control of Adena, the Longs say they learned the extent of Malecki’s misuse of corporate funds. After the deal was completed, Cohn billed Adena for more than $27,000 for his work in the months leading up to the agreement. The Longs say they demanded that Cohn specify which of his charges were properly billed to Adena, as opposed to Malecki, but that Cohn refused and simply swore under oath that the corporation owed him the full amount. The corporation’s new lawyers hired Deloitte & Touche to conduct an audit, the suit says, and Malecki’s extensive misuse of corporate funds was uncovered. During the audit, the suit says, Malecki threatened an Adena employee with arrest and criminal prosecution if she cooperated with the auditors. MOTION TO DISMISS Adena Inc. and the Longs filed a civil RICO suit against Malecki, Cohn and Cohn’s firm. In addition to conspiracy and breach of fiduciary duty claims, the suit also accused Malecki of conversion and Cohn of malpractice. Malecki, who is back in France, has not responded to the suit and a default judgment was entered against him on April 2. But Cohn’s lawyer, Jeffrey B. Albert of Philadelphia’s McKissock & Hoffman, moved to dismiss the entire case or at least have it stayed while the issue of Cohn’s fee is decided by an arbitrator with the Fee Disputes Committee of the Philadelphia Bar Association. Albert argued that the 1997 settlement agreement between Malecki and the Longs released all claims against Cohn. But Judge Kelly found that while the express language of the release suggests that the Longs did release Malecki’s attorneys from liability, they did so “except with respect to the terms and conditions of [that] agreement.” Kelly refused to enforce the release, finding that the Longs may be able to prove that their decision to sign it was induced by fraud. “The release provision did not release the Cohn defendants from the present claims against them because of both the limited scope of the release and its questionable validity in light of the plaintiff’s allegations of misrepresentations,” Kelly wrote. Kelly also refused to defer to the arbitration case currently before the bar association’s committee on fee disputes, saying the arbitration provision “applies only to standard fee disputes and not to the types of more complicated claims that the plaintiffs are currently asserting against the Cohn defendants.” Albert argued that Cohn, as a lawyer, is not liable for aiding and abetting a corporate officer’s breach of fiduciary duty absent direct and knowing participation in the breach itself. Kelly disagreed, saying that while the Pennsylvania Supreme Court has yet to rule on the issue of whether it would recognize a claim of aiding and abetting a breach of fiduciary duty, several federal judges have already predicted that it would. But even if he sided with Albert on that point, Kelly found that the Longs’ claim against Cohn would survive. “Even if such a heightened involvement were required, the plaintiffs sufficiently alleged that the Cohn defendants were indeed knowing and active participants in Malecki’s breach,” Kelly wrote. Finally, Cohn argued that the mere failure to segregate bills for services rendered to Adena and to Malecki could not possibly constitute a RICO violation. But Kelly found that “the extensive allegations set forth in the complaint … go beyond merely claiming faulty billing practices on the part of Cohn and, therefore, sufficiently state a claim for RICO violations.” To establish a “pattern of racketeering,” Kelly said, the plaintiff must show that the defendant committed at least two predicate acts over a 10-year period and that the racketeering predicates were related and amounted to or posed a threat of “continuous criminal activity.” The Longs met the test, Kelly found, by alleging that Cohn committed multiple acts of mail fraud. “The plaintiffs met this requirement by alleging that Cohn repeatedly billed, and accepted payment from, Adena for legal services purported to have been rendered on behalf of the corporation but which were actually rendered exclusively to Malecki and were unrelated, and often in opposition to, to the interests of Adena,” Kelly wrote. Kelly said the suit “sufficiently alleged that Cohn used the United States Mail to seek and receive payment from Adena for services rendered to Malecki personally.” In an interview Thursday, Albert stressed that the rulings by Judge Kelly did nothing more than approve of the theory of the suit and said he and Cohn intend to “vigorously defend” against the allegations. In the end, Albert said, “I predict that this case will revert back to what I’ve always considered it to be — a dispute about attorney’s fees.”

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