Counsel Concerns

Damages Assessed Against Lawyer with Share of Royalty Company for Fraudulent Transfer of Assets

The U.S. Bankruptcy Court for the Western District of Texas assessed actual and exemplary damages against a former attorney who the court ruled had fraudulently transferred the assets of a music royalties collection company. In Re: Galaz, 07-53287. Music producer Julian Jackson and California entertainment attorney Raul Galaz obtained the rights to the Ohio Players music and in 1998 formed Artist Rights Foundation (ARF) to collect the related royalties. In a 2002 divorce decree, Galaz assigned half of his 50% share of ARF to his then ex-wife Lisa Ann, who after filing for bankruptcy in 2007, pursued an adversary proceeding against Raul. The adversary proceeding was based on Raul's transfer of ARF's assets in 2005 to the Texas LLC Segundo Suenos. Chief Bankruptcy Judge Ronald B. King found that, as a managing member of ARF, “Galaz breached his fiduciary duties of loyalty and care through his failure to account for the property and profits derived from the business of ARF, the perpetration of an intentional fraud in an effort to secure the Royalties for his own benefit, and the wrongful dissolution of ARF after making the transfer. In breaching his fiduciary duties of loyalty and care, Galaz acted with malice.” Chief Bankruptcy Judge King thus awarded Lisa Ann $241,309 in actual damages for the value of her economic interest in the music royalties and $250,000 in exemplary damages for “gross negligence, malice, and fraud” by Raul Galaz and his father, an adversary proceeding co-defendant whom Raul had helped form Segundo Suenos. In addition, the bankruptcy judge awarded Julian Jackson $479,217 in actual damages and $500,000 in exemplary damages.

No Judicial Estoppel against Law Firm in Malpractice Suit over Multimedia Patents

The U.S. District Court for the District of Columbia granted partial summary judgment in favor of a law firm defending a malpractice action over its representation of the plaintiff in patents for a multimedia database search system. Encyclopaedia Britannica Inc. v. Dickstein Shapiro LLP, 10-0454. Dickstein Shapiro had represented Britannica before the U.S. Patent and Trademark Office (PTO) in filing expedited patent applications in which Dickstein lawyer Jon Grossman stated: “Applicants' attorney is aware of at least one infringing product on the market that infringes one or more claims of this application. Applicants' attorney has made a rigid comparison of the alleged infringing device with the claims of the application. In the opinion of Applicants' attorney, some of the claims are unquestionably infringed.” Britannica later sued Dickstein Shapiro for malpractice after the U.S. District Court for the Western District of Texas ruled the patents were invalid in an infringement suit Brittanica had filed in that district. In the malpractice suit, Brittanica argued that judicial estoppel should bar Dickstein Shapiro from denying that the products in the Texas litigation infringed the patents the law firm had sought for Brittanica. But District of Columbia federal Judge John D. Bates observed: “Rather than a party in the PTO proceedings, Dickstein was counsel to Britannica itself. Hence, Britannica's judicial estoppel argument fails because judicial estoppel cannot apply to statements made by an entity that was not a party in the prior proceedings where the statements were made.” Judge Bates added: “The logic of judicial estoppel unravels in the malpractice context. An entity acting as a lawyer to a client is fundamentally differently situated than an entity acting in its own interest in subsequent malpractice litigation. The positions a law firm takes in those two contexts are necessarily in significant tension ' as a lawyer representing a client, a firm defends the strengths of the client's position while in malpractice litigation it seeks to demonstrate the opposite, i.e., that the client would have lost. A lawyer cannot be faulted for this inherent inconsistency, and where a party cannot be faulted, applying judicial estoppel is often inappropriate.”

Damages Assessed Against Lawyer with Share of Royalty Company for Fraudulent Transfer of Assets

The U.S. Bankruptcy Court for the Western District of Texas assessed actual and exemplary damages against a former attorney who the court ruled had fraudulently transferred the assets of a music royalties collection company. In Re: Galaz, 07-53287. Music producer Julian Jackson and California entertainment attorney Raul Galaz obtained the rights to the Ohio Players music and in 1998 formed Artist Rights Foundation (ARF) to collect the related royalties. In a 2002 divorce decree, Galaz assigned half of his 50% share of ARF to his then ex-wife Lisa Ann, who after filing for bankruptcy in 2007, pursued an adversary proceeding against Raul. The adversary proceeding was based on Raul's transfer of ARF's assets in 2005 to the Texas LLC Segundo Suenos. Chief Bankruptcy Judge Ronald B. King found that, as a managing member of ARF, “Galaz breached his fiduciary duties of loyalty and care through his failure to account for the property and profits derived from the business of ARF, the perpetration of an intentional fraud in an effort to secure the Royalties for his own benefit, and the wrongful dissolution of ARF after making the transfer. In breaching his fiduciary duties of loyalty and care, Galaz acted with malice.” Chief Bankruptcy Judge King thus awarded Lisa Ann $241,309 in actual damages for the value of her economic interest in the music royalties and $250,000 in exemplary damages for “gross negligence, malice, and fraud” by Raul Galaz and his father, an adversary proceeding co-defendant whom Raul had helped form Segundo Suenos. In addition, the bankruptcy judge awarded Julian Jackson $479,217 in actual damages and $500,000 in exemplary damages.

No Judicial Estoppel against Law Firm in Malpractice Suit over Multimedia Patents

The U.S. District Court for the District of Columbia granted partial summary judgment in favor of a law firm defending a malpractice action over its representation of the plaintiff in patents for a multimedia database search system. Encyclopaedia Britannica Inc. v. Dickstein Shapiro LLP, 10-0454. Dickstein Shapiro had represented Britannica before the U.S. Patent and Trademark Office (PTO) in filing expedited patent applications in which Dickstein lawyer Jon Grossman stated: “Applicants' attorney is aware of at least one infringing product on the market that infringes one or more claims of this application. Applicants' attorney has made a rigid comparison of the alleged infringing device with the claims of the application. In the opinion of Applicants' attorney, some of the claims are unquestionably infringed.” Britannica later sued Dickstein Shapiro for malpractice after the U.S. District Court for the Western District of Texas ruled the patents were invalid in an infringement suit Brittanica had filed in that district. In the malpractice suit, Brittanica argued that judicial estoppel should bar Dickstein Shapiro from denying that the products in the Texas litigation infringed the patents the law firm had sought for Brittanica. But District of Columbia federal Judge John D. Bates observed: “Rather than a party in the PTO proceedings, Dickstein was counsel to Britannica itself. Hence, Britannica's judicial estoppel argument fails because judicial estoppel cannot apply to statements made by an entity that was not a party in the prior proceedings where the statements were made.” Judge Bates added: “The logic of judicial estoppel unravels in the malpractice context. An entity acting as a lawyer to a client is fundamentally differently situated than an entity acting in its own interest in subsequent malpractice litigation. The positions a law firm takes in those two contexts are necessarily in significant tension ' as a lawyer representing a client, a firm defends the strengths of the client's position while in malpractice litigation it seeks to demonstrate the opposite, i.e., that the client would have lost. A lawyer cannot be faulted for this inherent inconsistency, and where a party cannot be faulted, applying judicial estoppel is often inappropriate.”