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Three foreign companies are relying on a recent ruling allowing third-party legal malpractice claims to allege that Gunster Yoakley damaged them by not disclosing crucial information in a debt offering. The suit was filed last week in U.S. District Court in Miami on behalf of three foreign corporations related to Miami-based Espirito Santo Bank. The corporations were not represented by Gunster. Warren R. Trazenfeld, a Miami solo practitioner, is representing the plaintiffs. This is the second malpractice suit the West Palm Beach, Fla.-based law firm faces related to its representation of the bankrupt factoring firm E.S. Bankest. In the first suit, filed last year in U.S. Bankruptcy Court in Miami, former clients accuse the law firm and its attorneys of conflict of interest. Both suits stem from the 2003 collapse of E.S. Bankest. The company was co-owned by Miami-based Espirito Santo Bank and by brothers Hector and Eduardo Orlansky. E.S. Bankest, organized in 1998, bought accounts receivable at a discount from other companies. The Orlanskys are set for trial in October in federal court in Miami on fraud charges. They are accused of swindling E.S. Bankest investors. The first suit against Gunster, which represented E.S. Bankest, seeks $170 million in damages. The new case seeks $140 million in damages. The new suit alleges that Gunster failed in its obligation to the three foreign corporations — which had placed E.S. Bankest debentures in the hands of investors — and in its obligations to the three companies’ investors. The law firm allegedly failed to exercise due diligence in disclosing material information on whom Gunster represented and how E.S. Bankest would use the money it raised from the debentures. The suit alleges Gunster failed to disclose that a number of the companies whose accounts receivable would be purchased by E.S. Bankest were also owned, in part or in total, by the Orlanskys and that Gunster also represented those companies. “The gist of my suit is that the documents prepared by Gunster were malpractice,” Trazenfeld said in an interview. William Perry, the managing partner in Gunster’s West Palm Beach office and a member of the firm’s governing committee, said that Gunster perceives the plaintiffs in this latest case and the plaintiffs in the earlier case to be essentially identical. “The interested parties are the same,” he said. Perry declined to comment further on the suits. In general, legal malpractice can be alleged against an attorney or law firm by a party that retained the lawyer’s or law firm’s services. But in March, the Florida Supreme Court held that a third party that relied on the lawyer’s professional services — even if those services were rendered on behalf of another — can sue if the lawyer failed to exercise due diligence and proper care and thereby damaged the third party. In Cowan Liebowitz & Latman, P.C., et al. v. Donald Kaplan, the Supreme Court permitted creditors of an insolvent corporation to sue the lawyers who represented the corporation. The creditors accused the lawyers of failing to disclose material information in private placement memoranda for the sale of shares in the soon-to-be-insolvent company, Medical Research Industries Inc. That decision made Trazenfeld’s suit possible. MORE CASES POSSIBLE Stetson University law school professor Bobbie Flowers said the Kaplan decision set negligence as the standard for a third party to prevail if the plaintiff reasonably can be construed as having relied on the lawyer’s work even without having a direct lawyer-client relationship. In general, the ruling increases the number of people who can sue Florida lawyers for malpractice by permitting the assignment of malpractice claims by persons who were not represented by the law firm, said Los Angeles-based lawyer and legal malpractice expert witness Phillip Feldman. “It’s a matter of reliance,” Feldman said. “The general rule is that assignment is considered bad because it encourages litigation, and the general rule is that you can’t assign malpractice cases. That’s changing because judges are trying to be fair to injured parties whether or not they have a direct relationship with the lawyer.” Still, the Supreme Court took pains in Kaplan to limit malpractice suits to specific facts, Flowers said. “The court did not want to open the floodgates to malpractice claims,” she said. “Florida is now on the cutting edge in these cases, and this is a scary place for the courts to venture into.” The new malpractice suit against Gunster is being brought by three companies — Banco Espirito Santo International Ltd., a Cayman Islands corporation; ESB Finance Ltd., a British Virgin Islands corporation; and Banco Espirito Santo, S.A., a Portuguese corporation — all affiliated with Espirito Santo Bank. The Miami bank is a key creditor in the E.S. Bankest bankruptcy. According to the suit, Gunster represented E.S. Bankest and its two 50 percent shareholders — Espirito Santo Bank and Bankest Capital Corp., which was owned by the Orlansky brothers and Dominick Parlapiano, who ran Bankest’s day-to-day operations. E.S. Bankest allegedly funded its purchases of accounts receivable from other companies largely through the placement of debentures or unsecured notes. Most of those factoring accounts were found to be fictitious after E.S. Bankest failed, the suit states. “It was discovered that the [Bankest] Capital principals had looted Bankest of $170 million loaned by plaintiffs and funneled that money to factor clients in which the Capital principals held equity interests,” the complaint alleges. The suit alleges that the debentures were sold to investors on the basis of a confidential memorandum prepared by Gunster that failed to disclose material facts about Bankest. Among the undisclosed facts were that Bankest Capital owned equity interests in a number of the companies from which E.S. Bankest was buying accounts receivables; some of the companies received more than the 80 percent of face value for their accounts receivables even though the confidential memorandum set 80 percent as the limit of the purchase price; the Orlanskys had intended to take some of these factoring client companies public and therefore had a vested interest in funneling money from Bankest to those companies; and Gunster also represented a number of the client firms receiving money from E. S. Bankest. The suit claims that Gunster “owed a duty in preparing the confidential memorandum to ensure that material information it knew or should have known was disclosed.” “Had Gunster performed its duties as securities counsel and included in the [confidential memorandum] the material information known to it, or at a minimum, advised Bankest’s board of directors � of the company’s obligation to disclose this material information, Plaintiffs would not have lost the $170 million that the Capital principals stole from Bankest,” the suit alleges. “If the equity stakes had been disclosed in the [confidential memorandum] — as required by the securities laws Gunster was responsible for following — the bank would not have placed the debenture notes, the noteholders never would have purchased $140 million in Bankest debenture notes and Nassau Bank would not have lent Bankest $30 million.” Nassau Bank, which gave E.S. Bankest a $30 million line of credit, is not a party to the suit. COSTLY TO PROVE Joseph A. DeMaria, a Miami lawyer who focuses on legal malpractice but is not involved in the malpractice cases against Gunster, said Trazenfeld’s case will be expensive to prove. Its success, he said, will hinge on the extent to which it can be proven that the investors relied on Gunster’s confidential memo in deciding to loan money to E.S. Bankest. “These are foreign investors,” DeMaria said. “They’ll have to be brought in here for discovery. The fact-gathering in a case like this is complicated.” Trazenfeld said he does not know at this point how many investors are involved. E.S. Bankest was organized in 1998 and went into receivership two years ago when it failed to make good on promissory notes it had sold to investors. Espirito Santo Bank, which had sold out its half-interest in November 2002, reimbursed the investors and absorbed the losses it now seeks to recoup. After E.S. Bankest failed, the Orlansky brothers and several associates were indicted by federal prosecutors on fraud charges, accusing them of swindling investors by selling worthless promissory notes. Because E.S. Bankest has only about $20 million in assets and $200 million in claims against it, creditors have been looking for other well-heeled defendants to sue. They’ve turned their attention to Gunster and Bankest’s auditors. Gunster has $20 million in malpractice coverage. While firm leaders say they expect to prevail in the two E.S. Bankest-related malpractice case and one other pending malpractice case, some experts say that if the venerable law firm loses, it could be forced into bankruptcy.

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