Fraudster Who Faked Own Death Caused Client’s Losses, Not Lawyers

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By Joan C. Rogers

Any negligence on the part of lawyers who represented a now-defunct company that invested in a struggling bank wasn’t the proximate cause of the company’s losses, the U.S. District Court for the Northern District of Georgia ruled Sept. 28 ( Damian v. Nelson Mullins Riley & Scarborough, LLP , 2017 BL 343970, N.D. Ga., No. 1:14-cv-3498-TCB, 9/28/17 ).

Rather, the loss of the company’s investment was caused by the acts of its founder, a “financier-turned-fraudster” who plundered the bank’s assets before faking his death, Judge Timothy C. Batten, Sr. said.

When an acquisition goes bad, investors sometimes try to recoup losses from lawyers involved in the transaction.

Nelson Mullins Riley & Scarborough LLP represented PFGBI LLC in a transaction to acquire a controlling interest in Montgomery Bank & Trust, a distressed bank in Georgia.

After the deal closed, PFGBI’s founder, Aubrey Lee Price, squandered almost $15 million of the bank’s funds before writing a “confidential confession for regulators,” staging his death, growing his hair out, and going on the lam until he was discovered alive during a routine traffic stop more than a year later.

Scope of Duty Disputed

The receiver for PFGBI claimed that if Nelson Mullins had conducted adequate due diligence, especially regarding the bank’s financial health, PFGBI would never have invested in the bank and wouldn’t have lost its investment when the bank was shuttered.

The court flatly rejected the idea that every transactional attorney has a duty to opine on the merits of the deal.

“Even in the context of an otherwise unlimited representation, a lawyer is not obligated to second-guess a client’s business judgment or ‘protect the client from his or her own limited business expertise,’” the court said.

Accordingly, a duty to do “financial due diligence” doesn’t inhere as a matter of law in every legal representation, the court said.

However, the conflicting evidence in this case would permit a jury to find—or not find—that Nelson Mullins voluntarily assumed a duty to conduct financial due diligence in connection with the transaction, the court said.

But No Proximate Cause

On the other hand, the court didn’t see a jury question as to whether the firm’s alleged negligence was the proximate cause of the client’s damages.

No one suggested that Price’s fraud was foreseeable, and even if the lawyers were negligent and that their negligence facilitated closing the transaction, any causal connection to PFGBI’s losses was speculative at best, the court said.

The evidence showed instead that the loss of PFGBI’s investment was caused by Price’s intervening decision to defraud and lie to the bank’s officers and directors, his own investors, government regulators, and the Nelson Mullins lawyers themselves, the court said.

The receiver argued that PFGBI actually suffered its losses at the time the transaction closed because the bank wasn’t salvageable at that time. The court didn’t agree.

“It would invite speculation—and create an unreasonable specter of liability for transactional attorneys—to hold that a business was past the point of no return when its acquisition was approved by Government regulators, it continued to operate for a year and a half after closing, and it eventually ceased operations just days after the fraudulent and criminal activity of one of the business’s own directors came to light,” the court said.

Damian & Valori LLP and Petitt Worrell Craine Wolfe LLC represented the plaintiff. King & Spalding LLP-Atlanta represented the defendants.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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