Update: This article has been updated to reflect that Sedgwick’s attorney, Peter Stone, a partner at Paul Hastings in Palo Alto, Calif., declined to comment. Also, the article has been corrected to reflect that Sedgwick is not the only law firm facing malpractice claims associated with Medical Capital Holdings. On June 6, the receiver for Medical Capital sued Thomas Fazio, now at Blocnick Fazio & Associates in Garden City, N.Y., who was former general counsel and executive vice president of Medical Capital. The receiver also has instituted an arbitration for malpractice against Manatt, Phelps & Phillips, according to an attorney knowledgeable about the case. Neither Fazio nor Manatt’s attorney, Alan Weil, of Gaims, Weil, West & Epstein, responded to requests for comment.
A federal judge has trimmed claims worth $36 million from a $200 million malpractice case against Sedgwick LLP, throwing out allegations brought by the receiver of a failed Ponzi scheme in California related to two allegedly fraudulent loans.
Sedgwick, which was lending counsel to Medical Capital Holdings Inc., a medical receivables purchasing company that turned out to be a $1 billion Ponzi scheme, had argued that the receiver couldn’t prove its attorneys documented six of 22 loans at issue, totaling about $60 million.
In a July 8 ruling, U.S. District Judge David Carter in Santa Ana, Calif., agreed with Sedgwick regarding two of those loans, dismissing them from the case. He denied the motion regarding the other four loans. He allowed the receiver, Thomas Seaman, to amend his complaint by July 29.
Seaman’s attorney, Patrick Breen, a partner at Los Angeles-based Allen Matkins Leck Gamble Mallory & Natsis, said he wasn’t sure the receiver would amend the complaint but noted there remain $160 million in claims that the receiver can pursue against Sedgwick.
“We’re obviously very pleased with the result because it allows us to pursue the claims and eliminate the theory that Sedgwick argued it could not have any liability for those claims,” he said.
Sedgwick's attorney, Peter Stone, a partner at Paul Hastings in Palo Alto, Calif., declined to comment.
Seaman was appointed in 2009 as part of a U.S. Securities and Exchange Commission case against Medical Capital, which 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, have resolved separate claims brought by the receiver and by investors.
Under its global settlement, Bank of New York Mellon agreed to pay $114 million. But, in a motion for good-faith settlement in the receiver case, the bank sought approval to bar third parties, including Sedgwick, from bringing claims against it.
Sedgwick, in response, argued that it should be provided a $139 million offset based on the value of the bank’s settlement and an indemnity release valued by the receiver at $25 million. Carter tentatively rejected Sedgwick’s argument during a June 24 hearing, Breen said.
Sedgwick is not the only law firm facing malpractice claims associated with Medical Capital. On June 6, Seaman sued Thomas Fazio, now at Blocnick Fazio & Associates in Garden City, N.Y., who was former general counsel and executive vice president of Medical Capital. Manatt, Phelps & Phillips, which also served as counsel to the company, also has filed court documents in the case against Medical Capital.
Carter’s dismissal ruling was the third in the case against Sedgwick. On January 18, Sedgwick moved for sanctions against Seaman and his attorneys, arguing that they improperly included eight loans in their complaint for which the firm’s lawyers did not perform legal work. Rather than rule on the sanctions motion, Carter allowed the receiver to amend his complaint, which he did on March 5.
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.
Sedgwick, in its motion to dismiss, argued that the amended complaint failed to address the fact that it did not prepare documents for at least six loans or any of the fund transfers alleged in the complaint.
Carter found that for one loan, which grew to about $18 million, “Sedgwick was not involved in making that loan and there are no facts alleged that it knew the loan was made, or knew that the loan steadily increased.” As for another, worth $18.2 million, “there are no facts pled to show Sedgwick knew, or should have known, about loans that MPFC IV.2 [a Medical Capital entity] would make, aided by other firms’ legal work.”
Carter indicated that claims regarding fund transfers associated with unidentified loans could be dismissed. But he allowed the receiver to amend his complaint to identify those loans and specify how Sedgwick was connected to them.
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