Morganroth & Morganroth v. Norris, Mclaughlin

• Decision Date: 30 May 2003
• Docket Number: No. 02-2087.,02-2087.
• Citation: 331 F.3d 406
• Court: U.S. Court of Appeals — Third Circuit
• Parties: MORGANROTH & MORGANROTH, a Michigan partnership; Mayer Morganroth, Appellants v. NORRIS, MCLAUGHLIN & MARCUS, P.C.; Victor S. Elgort; Daniel R. Guadalupe; John Doe(s), I-X.

Page 406

331 F.3d 406

MORGANROTH & MORGANROTH, a Michigan partnership; Mayer Morganroth, Appellants v. NORRIS, MCLAUGHLIN & MARCUS, P.C.; Victor S. Elgort; Daniel R. Guadalupe; John Doe(s), I-X.

No. 02-2087.

United States Court of Appeals, Third Circuit.

Argued April 10, 2003.

Filed May 30, 2003.

Thomas S. Howard, (Argued), Heather W. Goldstein, Kirsch, Gartenberg & Howard, Hackensack, NJ, for Appellants.

Wendy L. Mager, (Argued), William J. Brennan III, Smith, Stratton, Wise, Heher & Brennan, L.L.P., Princeton, NJ, for Appellees.

Before BARRY and ROSENN, Circuit Judges, and POLLAK,^* District Judge.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal raises thorny questions relating to the bounds of legitimate legal advocacy and transgressive participation by attorneys at law in a client's illegal conduct. The plaintiffs, Morganroth & Morganroth, a Michigan law firm, and Mayer Morganroth, Esq. ("Morganroths"), sued John Z. DeLorean in a federal court in Michigan for legal services rendered over approximately ten years. The jury returned a verdict in their favor against DeLorean and Ecclesiastes 9:10-11-12, Inc. ("Ecclesiastes"), a corporation controlled by him, in a sum exceeding six million dollars. The Michigan Court enjoined DeLorean from transferring his assets. It set aside a purported transfer to Genesis III, Inc. ("Genesis") (another corporation DeLorean controlled) of DeLorean's Lamington Farm in New Jersey as a fraudulent conveyance to hinder, delay, or defraud DeLorean's creditors.

The plaintiffs brought the instant suit against Norris, McLaughlin & Marcus, P.C. (Norris, McLaughlin), a New Jersey law firm, as well as Victor S. Elgort, Esq., and Daniel R. Guadalupe, Esq., its employees or affiliates. The complaint alleges that they actively, knowingly, and intentionally participated in their client's unlawful efforts to avoid execution on his property. The United States District Court for the District of New Jersey dismissed the action on the ground that the plaintiffs had not alleged all of the elements of common law fraud, including misrepresentations to the plaintiffs, detrimental reliance, and cognizable damages. The plaintiffs timely appealed. We vacate and remand.

I.

For the purposes of defendants' motion to dismiss, we must accept as true the allegations in plaintiffs' complaint and make all reasonable inferences in their favor. Shaev v. Saper, 320 F.3d 373, 375 (3d Cir.2003). The statements of fact in this opinion are drawn from the allegations in the complaint.

The plaintiffs filed suit against DeLorean and Ecclesiastes in a federal district court in Michigan in February 1993, seeking a judgment for their legal services and also injunctive relief. Defendants Norris, McLaughlin and/or Elgort represented DeLorean in that action. In May 1994, DeLorean purported to convey his interests in his 430 acre Lamington Farm for a nominal sum to Genesis. Norris, McLaughlin assisted DeLorean in this transaction and in forming Genesis.

On July 11, 1994, the Honorable Anna Diggs Taylor enjoined DeLorean from transferring any assets, including Lamington Farm. Judge Taylor set aside the purported transfer of the farm to Genesis on September 12, 1994, and declared that it was a fraudulent conveyance with intent to hinder, delay, or defraud DeLorean's creditors, including the Morganroths. The Michigan jury found for the Morganroths and in February 1995 they obtained a judgment against DeLorean and Ecclesiastes, jointly and severally, in the sum of $6,228,235. A substantial amount of the judgment remains unpaid.

The complaint alleges that after the Michigan trial, DeLorean continued to take steps to obstruct the Morganroths from recovering on the judgment. In February 1995, he delivered his shares of capital stock in a Nevada corporation called CRISTINA to the United States Marshals Service to facilitate execution of a judgment in favor of DeLorean Cadillac, Inc., an Ohio corporation controlled by his brother. The Morganroths allege that this action was a fraudulent effort to obstruct them from enforcing their judgment against DeLorean's CRISTINA stock.

In April 1995, Elgort and Norris, McLaughlin prepared a deed purporting to confirm the May 24, 1994 deed conveying DeLorean's interests in Lamington Farm to Genesis. They recorded the deed with the Somerset County, New Jersey Clerk. The Morganroths allege that the defendants took this action "with the intent of defrauding [them] and aiding DeLorean in his efforts to hinder and delay [the Morganroths'] enforcement of the Michigan Judgment."

Two days after the defendants recorded the deed, the Morganroths sought to enforce the Michigan judgment in a supplementary proceeding against DeLorean and Ecclesiastes in the United States District Court for the District of New Jersey. Norris, McLaughlin and/or Elgort and/or Guadalupe represented DeLorean in the supplementary action. The Morganroths registered the Michigan judgment in the United States District Court for the Southern District of New York and served DeLorean with a restraining order to prevent him from conveying property until their judgment against him had been satisfied.

The complaint alleges that on or before June 2, 1995, Norris, McLaughlin and Guadalupe prepared a Memorandum of Life Lease in which Genesis, the purported title holder of Lamington Farm, acknowledged a preexisting life lease created in September 1987 between DeLorean, as lessor, and DeLorean, as guardian for his children, as lessee. The Memorandum was created after the entry of the Michigan judgment. The purported lease concerned all or a portion of Lamington Farm, including a mansion house, several additional dwelling units, and other buildings. The Morganroths allege that the life lease was a fiction and that Norris, McLaughlin and Guadalupe knew it was; the defendants created the Memorandum in a fraudulent attempt to obstruct plaintiffs' enforcement of the Michigan judgment.

Two weeks before DeLorean was to be deposed, Norris, McLaughlin recorded the purported life lease Memorandum with the Somerset County Clerk. Norris, McLaughlin subsequently prepared and recorded a corrective deed, again purporting to transfer DeLorean's interest in Lamington Farm to Genesis. On August 3, 1995, Norris, McLaughlin wrote a letter to the Somerset County Clerk. The letter enclosed a copy of Judge Taylor's November 3, 1994 order dissolving the July 11, 1994 preliminary injunction order. According to the complaint, Norris, McLaughlin misrepresented to the Clerk that the November 3, 1994 order had the effect of dissolving Judge Taylor's September 12, 1994 order which had set aside DeLorean's fraudulent conveyance of Lamington Farm to Genesis. The Clerk relied on this deceptive letter and entered into the public record erroneous marginal notations of the purported dissolution of Judge Taylor's September 12, 1994 order.

In January 1996, the United States District Court for the District of New Jersey issued on the Morganroths' behalf a writ of execution in the supplementary proceeding. This writ included in the execution, inter alia, Lamington Farm, certain personal property, and the CRISTINA shares. Elgort privately contacted the attorney representing DeLorean Cadillac, which was controlled by DeLorean's brother. Elgort asked the attorney not to contact the Morganroths or the Marshal in connection with some furniture described in the writ of execution that was being removed by John DeLorean to a warehouse owned by DeLorean Cadillac for the purpose of escaping plaintiffs' writ of execution. The instant defendants did not disclose to the District Court at the time they moved for and argued the motion to vacate the plaintiffs' writ of execution that DeLorean had delivered the CRISTINA shares to the Marshal to facilitate the execution by DeLorean Cadillac on its writ.

Based on the transfers, Norris, McLaughlin and Guadalupe argued that the CRISTINA shares and Lamington Farm were not subject to the plaintiffs' writ of execution. Plaintiffs allege that Norris, McLaughlin and Guadalupe knew, or should have known, that these transfers were made by DeLorean and others with the intent to hinder, delay, and defraud the plaintiffs. On October 3, 1996, the District Court denied the motion and found that Judge Taylor's September 12, 1994 order setting aside DeLorean's purported transfer of Lamington Farm to Genesis was a facially valid order that had not been vacated.

On April 7, 1999, the District Court issued a further writ of execution ("Second Alias Writ"). This writ included DeLorean's right to redeem Lamington Farm from Merrill Lynch Credit Corporation under an amended consent order in foreclosure proceedings brought by Merrill Lynch against DeLorean and others in the New Jersey Chancery Court ("the Redemption Rights"). Again, Norris, McLaughlin moved to vacate this writ, maintaining that DeLorean's Redemption Rights were not subject to execution based upon the previous transfers and other transactions. The Morganroths allege that defendants knew or should have known that these transactions were entered into by DeLorean and others to hinder, delay, and/or defraud the Morganroths and also knew that the New Jersey Chancery Court had held that plaintiffs could execute their judgment against DeLorean's Redemption Rights.

The District Court held in July 1999 that plaintiffs could execute the New Jersey Chancery Court's judgment against the Redemption Rights and ordered a U.S. Marshal's sale of those rights. The Morganroths allege that the defendants made every effort to hinder the sale by making arguments based on transactions that the defendants knew to be fraudulent. Additionally, plaintiffs allege that in Chapter 11 bankruptcy proceedings in the District of Maryland, Norris, McLaughlin maintained that the Redemption Rights were the property of DeLorean's children and not subject to the Second Alias Writ, although it knew that the District...