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Morganroth & Morganroth v. Norris

May 30, 2003

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



Appeal from the United States District Court For the District of New Jersey D.C. No.: 00-cv-4139 District Judge: Honorable Garrett E. Brown, Jr.

Before: Barry and Rosenn, Circuit Judges, and POLLAK,*fn1 District Judge.

The opinion of the court was delivered by: Rosenn, Circuit Judge.

PRECEDENTIAL

Argued: April 10, 2003

OPINION OF THE COURT

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 pre-existing 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 ...


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