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Debtors’ counsel, chagrined by recent cases holding their brethren liable for fraud, finally got a ray of sunshine on Aug. 20. The 3rd U.S. Circuit Court of Appeals ruled that mere assistance of a client in a fraudulent asset transfer is not sufficient cause for liability. The judges, in an unreported opinion, In re Yacuk, 02-2926, cleared Springfield, N.J., solo Howard Lipstein of complicity in a fraudulent conveyance, finding that he never made any misrepresentations to the creditor nor had reason to foresee that the transfer would adversely affect it. The ruling is a victory for the debtors’ bar because it rejects the notion that lawyers need to “interrogate” their clients about finances, says Daniel Stolz, chairman of the State Bar Association’s Bankruptcy Law section. “But it’s also a good ruling for all lawyers, who shouldn’t have to worry if they are asking their clients all the right questions,” Stolz adds. Stephen and Christine Yacuk hired Lipstein in May 1991 to transfer their $500,000 house to their son, Richard, for one dollar. The couple, who continued living in the house, made the conveyance after Chemical Bank sent them a letter holding them responsible as guarantors for the $688,321 balance on a loan to their real estate development business. The couple told Lipstein they shifted the property to their son because he was paying the bills on the house. When Lipstein asked Stephen whether there were any judgments, liens or claims against them, he answered no. Lipstein did not ask whether Stephen had outstanding loans, either as borrower or guarantor. Lipstein prepared the closing documents, including a letter stating that the consideration was one dollar because Richard had been paying the mortgage and other bills on the property. The letter also stated that Lipstein had not done a title search and could not make any representations with regard to liens or encumbrances. On July 21, 1991, Chemical Bank sued the Yacuks as personal guarantors of the loan and obtained a default judgment against them in March 1992. Lipstein represented the Yacuks in the post-judgment collection proceedings. A year later, United National Bank, the mortgagee on the residence, foreclosed on the property, alleging payment defaults and failure to pay property taxes. Lipstein again represented the Yacuks. Summary judgment was entered against them and the property was sold to a third party. In January 1995, during proceedings to enforce the bank’s default judgment, Stephen and Christine Yacuk testified in depositions that the residence had been transferred to Richard in 1991 but for the first time, Christine denied that Richard had made any mortgage or property tax payments on the residence. Richard testified at his deposition that not only had he never made any payments on any note, mortgage or household bills related to the residence, but also that his parents continued to pay these expenses from the time of the conveyance until he sold the property in December of 1993. On Jan. 31, 1995, Chemical Bank, succeeded in interest by Northern New Jersey LLC, sued the Yacuks in Superior Court for fraudulent conveyance. Stephen and Christine Yacuk filed for bankruptcy, the suit was removed to bankruptcy court as an adversary proceeding and Lipstein was added as a defendant. U.S. Bankruptcy Court Judge Novalyn Winfield granted Lipstein’s motion for summary judgment, finding the Yacuks and their son, Richard, liable for fraudulent conveyance and dismissing the count against the lawyer. U.S. District Court Judge John Bissell upheld the ruling and the 3rd Circuit affirmed. “Nothing in the record indicates that Lipstein made any representation or admission to the bank or its attorneys which one would expect that the bank would rely on to its financial detriment,” wrote Circuit Judges Samuel Alito and Julio Fuentes, joined by U.S. District Judge R. Barclay Surrick of Philadelphia, sitting by designation. Lipstein’s attorney, Thomas Flinn, says that for the court to have ruled otherwise would require lawyers to closely scrutinize clients’ finances in every simple house closing. “I think the potential that we were concerned about in this case was not really a bankruptcy attorney but any attorney doing a real estate transaction. There’s a potential that attorneys representing sellers in real estate transactions would have to undertake an obligation to do a lot more than what’s being done,” says Flinn, of Montclair, N.J.’s Garrity, Graham, Favetta & Flinn. The attorney for the creditor, Jeffrey Donner, a partner at Stryker, Tams & Dill in Newark, N.J., did not return reporters’ calls. Liability of lawyers who help debtors protect assets is a matter of growing concern, prompted in part by a handful of high-profile cases. Some lawyers fear the trend marks an expansion of their duty to nonclients in collection matters. The 3rd Circuit ruled May 30 that Somerville, N.J.’s Norris, McLaughlin & Marcus can be sued for fraud for its representation of carmaker John DeLorean in a creditor action. And on June 9, a trustee in the bankruptcy of financier Robert Brennan hit Gerald Gline, of Hackensack, N.J.’s Cole, Schotz, Meisel, Forman & Leonard, with an $11 million complaint charging him with concealing his client’s assets from creditors. The State Bar Association is appearing amicus at the state Supreme Court in Banco Popular North America v. Gandhi, No. 54,787, in which a lawyer is charged with fraud for advising a debtor to shift assets to his wife’s name.

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