Rider Bennett faces $12M fraud claim

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The breakup of the Minneapolis law firm of Rider Bennett has been widely attributed to economic pressures resulting from the departure of a number of lawyers. A $12 million fraud claim pending against the firm in Hennepin County District Court was not one of the economic pressures cited, but the firm’s dissolution leaves the future of that claim in limbo.

The case stems from a divorce in which former Rider Bennett partner Steven B. Schmidt represented the husband. Claiming Schmidt helped the husband misrepresent the value of his business during the marital dissolution, the wife is suing the both the lawyer and, under doctrines of agency and respondeat superior, Rider Bennett. (The wife has already obtained a $4 million judgment against the husband.)

Schmidt’s departure from the firm several years ago had nothing to do with the case, according to Rider’s lawyer, Lewis A. Remele. The claim also had nothing to do with the demise of the firm, Remele added.

But the claim may well be a casualty of the end of the firm, which is structured as a limited liability partnership. Although the firm carries insurance to indemnify it against a negligence claim, there is a substantial retention amount that the firm would have to pay, said Remele. Furthermore, Rider’s secured creditors are first in line, he added.

’Gloom and doom?’

The couple involved in the dissolution of marriage owned a 50-percent interest in a company called The Tile Shop. The husband was an employee and officer of the company and the wife did not have any financial information about the business.

Based on information provided to him, a neutral business evaluator determined that the parties’ marital interest in the company was $7.125 million. The wife was paid $2.4 million for her share after capital gains taxes were considered. Less than a year after the divorce, the husband paid his partner in The Tile Shop approximately $18 million in a forced buy-out.

After re-opening the property settlement, Hennepin County District Court Judge Marilyn Justman Kaman found that the husband engaged in an intentional course of material misrepresentation and nondisclosure during the dissolution and that the couple’s 50-percent interest in the business actually was $15.367 million. The wife was awarded an additional $3.285 million plus 6.5-percent interest dating from the date of the divorce.

After the property distribution was amended, the wife sued Schmidt and Rider Bennett for fraud, fraud upon the court, and aiding and abetting the husband’s fraud upon the court. The suit alleges that The Tile Shop provided Schmidt with information that Schmidt did not disclose and that Schmidt assisted in providing false “divorce projections” of the shop’s anticipated revenue. It notes that Kaman specifically found that Schmidt asked The Tile Shop employees to prepare a “gloom and doom” scenario for the divorce valuation.

The lawsuit seeks treble damages pursuant to Minn. Stat. secs. 481.07 and 481.071. The plaintiff’s attorney, William R. Skolnick of Minneapolis, told Minnesota Lawyer that his client is entitled to the $3.3 million in damages, plus interest — trebled. That brings the defendant’s exposure to about $12 million, said Skolnick.

Election of

remedies

Remele and attorney Joseph W. Anthony, who represents Schmidt, have moved to dismiss the case as barred by the election of remedies doctrine. They argue that the wife chose to seek to have the original property settlement set aside, and that her decision to pursue that remedy precluded her from bring a separate fraud action.

“This is really double-dipping,” said Remele. Anthony pointed out that Kaman put the responsibility for the fraud solely on the husband.

Skolnick maintains that the election of remedies defense is inapplicable. “There is a specific statute applying to the conduct by the law firm which the wife had no ability to prosecute against the husband,” he said. The husband claimed that he gave Schmidt all the financial information and blames Schmidt for failing to disclose it, he added.

A question of waiver

The question could be framed as whether the wife waived her claims against the lawyer and firm when she pursued her remedy against the husband, said Minneapolis attorney Kyle Hart, who has handled fraud and deceit claims against law firms. That answer is unclear, he added.

Hart brought a class action lawsuit against the Minneapolis law firm Schwebel, Goetz and Sieben after its partner, David Moskal, stole more than $2 million from the firm and its clients. The fraud case against the law firm was settled for $6 million over and above the $1.78 million the firm voluntarily repaid to clients.

“The Moskal case does, indeed, set the precedent for a claim for treble damages against a lawyer that engages in fraudulent practices in connection with an ongoing lawsuit. It also stands for the proposition that the law firm can be vicariously liable for the treble damages,” said Hart, adding that election of remedies was not an issue in that case.