A law firm that litigated on behalf of a dissolved company and then withdrew after admitting it did not know who had authority over the entity “went beyond poor judgment,” a federal judge has ruled.

Southern District Judge Shira Scheindlin (See Profile) sanctioned Wachtel Masyr & Missry, ordering it to pay attorney fees and costs for its continued representation of Omniway, a holding company that was set up for Gilad Sharon, the son of the former Israeli prime minister Ariel Sharon.

“In the absence of authorization from Sharon, continuing to represent Omniway was ‘so completely without merit as to require the conclusion that it must have been undertaken for some improper purpose,’” Scheindlin wrote in Gusinski v. Genger, 1:10-cv-04506.

Sharon is represented by Wachtel Masyr partners William Wachtel, Elliot Silverman and Julian Schreibman.

“We respectfully disagree with Judge Scheindlin’s decision that the firm and Mr. Sharon violated the rules and we are reviewing the decision and considering our options,” said Silverman.

The underlying litigation focuses on a Canadian real estate venture, AG Properties, formerly controlled by Sharon and Arie Genger, the father of the plaintiff, Sagi Genger.

Sagi Genger alleges that Sharon held his 50 percent interest in AG Properties through a $1.25 million promissory note from Omniway.

But Sharon has testified he believed Omniway was the idea of his accountant to create a structure for Sharon’s holdings in the Canadian venture. He testified that he never used Omniway to transact business and the company dissolved in 2004.

Sharon claims he only invested $25,000 in AG Properties through an Israeli company, Lerner Manor Trusteeships Limited.

Sagi Genger took over as president of AG Properties in 2005. That year, Sharon sold his shares in AG Properties and walked away with about $1.5 million.

AG Properties became unable to pay its debts and the company’s largest creditor, Russian media tycoon Vladimir Gusinksi, sued AG Partners in New York state court and won a $4.4 million judgment.

Gusinski then sued Genger in the Southern District. Genger in turn filed a third-party complaint against Sharon, Omniway and Lerner seeking contribution and indemnification. Gusinski and Genger have since settled,

In January 2011, Mitchell Silberberg & Knupp appeared on behalf of Sharon and Omniway in the federal suit. Two months later, Wachtel Masyr was substituted as counsel for Sharon, but not explicitly for Omniway.

Wachtel litigated on behalf of all defendants, accepted service on behalf of all three and filed a disclosure statement and answers.

But on Dec. 14, 2011, Sharon testified in a deposition, “I don’t know if [Omniway] was ever formed.”

In a Feb. 14, 2012, letter to Magistrate Judge Gabriel Gorenstein (See Profile), Wachtel Masyr said it had entered an appearance for Omniway, “even though Omniway does not now exist (and Mr. Sharon does not know if it ever existed).” Wachtel Masyr also said it is aware of no one who is a representative of Omniway, according to court filings.

Yet Scheindlin noted that Wachtel Masyr “continued to actively litigate on Omniway’s behalf” as late as March 26, when it threatened to move for sanctions on behalf of all defendants and sought leave to move for summary judgment.

It was only during an April 2012 hearing that Wachtel Masyr withdrew as counsel to Omniway. Shortly afterward, Scheindlin entered a default judgment against the entity.

Attorneys for Genger requested sanctions under Federal Rules of Civil Procedure 26(e) and 37(c) and 28 U.S.C. §1927 against Sharon and Wachtel for representing that they were authorized to act on behalf of Omniway.

“The Wachtel firm should know better. It is not a small firm scrambling to keep up with a heavy case load. It is a mid-sized firm, founded in 1984, with 35 attorneys,” wrote Duane Morris partner John Dellaportas, Genger’s attorney.

Wachtel Masyr responded that Genger was not prejudiced, that Sharon has not withheld evidence, and that the case would have been no shorter had it appeared solely for Sharon and Lerner Manor.

“Counsel strived at all times to speed up the adjudication of this case,” Wachtel Masyr said in court papers.

In her Sept. 5 ruling, Scheindlin said the default judgment against Omniway, incorporated in Cyprus, is not enforceable because under Cypriot law, the company lacked the capacity to be sued once it dissolved. She also ruled that Sharon can’t be held liable for the default judgment because, when it was entered, Wachtel Masyr and Sharon had denied their authority over it.

But Scheindlin said Sharon should have disclosed that he was not authorized to litigate on Omniway’s behalf and noted his failure “has caused considerable delay and cannot be considered harmless.”

She precluded Sharon from arguing that he is not liable for any subsequent judgment against Omniway and also from testifying that Omniway’s promissory note was never tendered.

Scheindlin also said, “there is no question that Wachtel exercised poor judgment in representing Omniway without first ascertaining whether it could be sued and, equally important, without securing a retainer from someone authorized to represent Omniway.”

The judge noted that there is nothing to indicate Wachtel Masyr represented the entities in bad faith and it appeared to have attempted to expedite, not delay, proceedings.

But Scheindlin said the law firm continued to litigate for Omniway “for five months after Sharon explicitly denied having an interest in Omniway in his December 2011 deposition. It was not until this Court raised this issue in the conference on summary judgment that Wachtel withdrew as counsel for Omniway.”

She directed the firm to pay the costs, expenses and attorneys fees from Dec. 11, 2011, the time of its client’s deposition.

Duane Morris attorney John Dellaportas declined to comment.