Sedgwick LLP has moved to dismiss what it called "over-reaching" claims in a $200 million malpractice lawsuit filed by the receiver of a purported medical receivables purchasing company in California that was revealed to be a $1 billion Ponzi scheme.
The San Francisco firm, which served as lending counsel to the company, argued that its attorneys did not even document six of the 22 loans at issue. The action was brought by the receiver of Medical Capital Holdings Inc., appointed in 2009 as part of a U.S. Securities and Exchange Commission case.
A hearing on the motion to dismiss is scheduled for May 20.
"Under the rationale of the Opposition, not only can law firms be liable for work they actually did for a client, but they can also be liable for work that they did not do (but done by other law firms),’ " Sedgwick’s attorney Peter Stone, a partner at Paul Hastings in Palo Alto, Calif., wrote in a May 6 filing. "Plaintiff’s artful argument aside, law firms are only responsible for work that they actually do and that falls within the scope of their representation. Being ‘primary loan counsel,’ absent more, does not mean being counsel for loans done by other law firms."
An attorney for the receiver disputed that argument.
"The Receiver alleges that Sedgwick helped dig the part of the Medical Capital ditch involving the making of unauthorized loans, and that Sedgwick breached its professional duty of care in doing so," Francis Scollan, a partner at Los Angeles-based Allen Matkins Leck Gamble Mallory & Natsis, wrote in an April 22 filing. "The fact that others were also involved does not absolve Sedgwick, nor does the assertion that Sedgwick did not dig the entire ditch."
Stone declined comment and Scollan did not return a call.
Medical Capital Holdings purportedly purchased accounts receivable and made loans to doctors, hospitals and others in the medical field in need of immediate financing. The receiver claims that the company and its affiliates raised about $1.7 billion from 20,000 investors between 2003 and 2009.
Two banks, Wells Fargo Bank N.A. and Bank of New York Mellon Corp., acting as indentured trustees of the investor funds, paid $106 million in June to resolve the SEC case. In multidistrict litigation brought by investors who alleged the banks improperly disbursed hundreds of millions of dollars to Medical Capital, Bank of New York Mellon has paid $114 million and Wells Fargo announced a $105 million settlement on April 30.
Sedgwick, sued on May 2, 2011, in federal court in Los Angeles, is the only law firm facing malpractice claims over its role in Medical Capital, although Manatt, Phelps & Phillips and Thomas Fazio, now at Blodnick Fazio & Associates in Garden City, N.Y., both served as counsel to the company.
The recent filings are the third attempt for Sedgwick to dismiss the claims against it. On August 31, 2011, U.S. District Judge David Carter granted Sedgwick’s first motion to dismiss on statute of limitations ground, but allowed the receiver, Thomas Seaman, to amend his complaint. On January 26, 2012, Carter refused to dismiss the amended complaint, finding that Seaman had stated plausible claims for professional negligence and aiding and abetting a breach of fiduciary duty.
On January 18, Sedgwick moved for sanctions against Seaman and his attorneys, arguing that they improperly included in their allegations eight loans for which the firm’s lawyers did not perform legal work. Sedgwick asked that references to those loans, and $200 million in damages, be struck from the case and that it be awarded attorney fees and costs.
Instead of ruling on the sanctions motion, Carter allowed the receiver to amend his complaint. That complaint, filed on March 5, fails to remedy the problem, according to Sedgwick.
Sedgwick argued that it did not prepare documents for at least six of the loans at issue—totaling nearly $60 million—or any of the fund transfers alleged in the complaint.
Seaman insisted that Sedgwick’s role in the scheme went beyond simply serving as "scrivener" on the loans, instead providing "substantial assistance" in causing investor losses.
"During the course of that representation, Sedgwick ignored its professional responsibilities to those client entities and took no steps to stop the abuses, either by disclosing serious conflicts of interest between the entities or preventing loans from exceeding the limitations of the Governing Documents," Scollan wrote. "It is plausible to conclude that, if the lawyers had not breached their duties, the unauthorized loan program would not have gone forward at all or on such a massive scale, and the losses described in the Second Amended Complaint would not have occurred."
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