An imprisoned reality TV figure, a multimillion-dollar loan fraud and the suicide of a former owner of a real estate investment company all feature prominently in a legal malpractice lawsuit facing law firm Clark Hill.
An Arizona suit lodged in 2017 against the Detroit-based Am Law 200 firm, which merged earlier this year with Dallas’ Strasburger & Price, targets Clark Hill and Phoenix-based member David Beauchamp over his work for the now-defunct DenSco Investment Corp. Over the past few months, proceedings in the case have focused on attempts by DenSco’s court-appointed receiver to gather information from Clark Hill, including about its finances.
But the roots of the malpractice case stretch back to the early 2000s, when Beauchamp began advising DenSco and owner Denny Chittick, who died in 2016 at age 48. Early in the client relationship with Chittick and DenSco, Beauchamp was based at Gammage & Burnham, though in 2008 he moved to Bryan Cave and, in 2013, joined Clark Hill.
An obituary for Chittick says he “suddenly died” in late July 2016, though court documents in the malpractice case describe his death as a suicide. Before that, Chittick’s business offered “hard money” loans, which are typically short-term and require loan recipients to put up a property holding as collateral. Such loans are often used by developers looking to “flip” houses by buying at a low value and later selling for a profit.
DenSco’s top lending clients included Yomtov “Scott” Menaged, a former star of the Discovery Channel reality show “Property Wars” that aired in 2012 and 2013, and chronicled Phoenix-area house “flippers” who’d buy foreclosed homes with an eye toward selling them at higher prices down the road.
Menaged, however, was later exposed as a fraud. In December 2017 he was sentenced to 17 years in prison after he pleaded guilty to bank fraud, money laundering and aggravated identity theft. Federal prosecutors said Menaged ran multiple fraud schemes that resulted in more than $30 million in losses.
One of the schemes involved using phony real estate purchase documents to secure loans from DenSco for additional property purchases—in reality, prosecutors said, Menaged embezzled that money instead of buying property and used it to fund a lavish lifestyle. When that fraud dried up, Menaged moved on to an “elaborate identity theft scheme” run out of a furniture store that he also owned. The second fraud involved obtaining the information of people who had recently died, then submitting fake credit applications from Menaged’s store to a variety of banks.
Due to DenSco’s heavy lending to Menaged—who allegedly took out more than 2,100 loans worth some $734.5 million, with only 96 of the loans actually being used for property deals—Chittick’s business began to flail. After Chittick’s death in 2016, the Arizona Corporation Commission, a state agency in charge of regulating securities, petitioned a state judge in Maricopa County to appoint a receiver to oversee DenSco’s remaining assets.
The commission alleged that DenSco and Chittick had repeatedly misled other investors by failing to disclose just how much had been lent to Menaged, and that the reality TV personality had failed to make payments on some $28 million in loans. Since the DenSco receivership began in August 2016, the receiver has recovered some $7 million that have been distributed to investors who lost money doing business with Chittick.
The Malpractice Claim
In the malpractice suit, which is part of the effort to recoup losses for DenSco’s investors, the receiver alleged in Arizona state court that Beauchamp and Clark Hill could have done more to discover Menaged’s fraud and the toll it took on Chittick’s business. The October 2017 complaint alleges that, during a critical period in late 2013 to mid-2014, Beauchamp and his firm knew enough that they should have advised DenSco to stop accepting new investor money and conduct an investigation into the fraud.
“They did not,” the malpractice complaint said.
Responding to the claims, Clark Hill has argued that Beauchamp’s work for Chittick and DenSco ended in 2014. Toward the end of the representation, the firm said, Chittick was regularly disregarding Beauchamp’s advice.
“Mr. Chittick seemingly did not follow the advice of his counsel from late 2013 through mid-2014. Specifically, he ignored the advice of his attorney regarding how the loans made to Mr. Menaged (and other borrowers) should be documented and verified, and how the loans made by DenSco should be secured,” Clark Hill’s lawyers wrote in a June court filing. “It is thus likely that the losses experienced by DenSco were due directly to the action, or inaction, of Mr. Chittick.”
Beauchamp echoed that argument in a deposition in July after he was asked whether he believed Chittick was a “good client.” Beauchamp said that especially after he joined Clark Hill in 2013, Chittick seemed highly distracted and apparently became less and less willing to accept his lawyer’s advice.
“While I was at Clark Hill … at that time it was pulling teeth to get information out of him, which was very, very unusual,” Beauchamp said in a July 18 deposition, according to a transcript. “I thought I did the absolute best job possible to protect DenSco and its investors … and if he had followed my advice, that would have happened in terms of doing the best they could under the circumstances.”
The DenSco receiver, Peter Davis of Simon Consulting, is represented by a team from Phoenix’s Osborn Maledon, led by partner Colin Campbell, while Clark Hill has tapped a defense team led by John DeWulf of Coppersmith Brockelman in Phoenix.
Campbell said in an interview that he believes there’s a “disconnect” between what documents in the case have shown and what Clark Hill has said in response to the claims—that Chittick became an increasingly unreliable client who disregarded his lawyer’s advice, and that the firm terminated its relationship with DenSco in early 2014.
“What Clark Hill says went on is just not backed up by the documents at all,” said Campbell, who previously spent 17 years as a state judge in Maricopa County, where the malpractice case was filed. For example, he said that while Clark Hill claims to have terminated its relationship with DenSco, it hasn’t turned over a letter or anything else that memorialized the end of the representation.
“I think most firms would document that,” Campbell said.
DeWulf, Clark Hill’s defense lawyer, said in a statement that the firm did nothing wrong.
“Although the firm cannot comment on the details of ongoing litigation, the firm stands by its court filings that reject the receiver’s claims of fault or liability for the tragic consequences of frauds perpetrated by others,” he said.