A Richmond law firm dragged into a bankruptcy suit tied to an Idaho Ponzi scheme wants the case to be tossed out, arguing that the plaintiff is merely casting a huge net to collect money from everyone and their mother.
Hirschler Fleischer is defending itself against a suit filed by the trustee of a defunct real estate firm accused of fraud.
DBSI Companies, a bankrupt real estate investment company, went belly-up in 2008 and has been accused of running a massive Ponzi scheme that lined the pockets of its insiders.
The suit in question, filed in federal court in Delaware in June, accused the Shockoe Bottom law firm of helping carry out a “massive scheme of financial fraud.”
By representing and assisting DBSI in its business, Hirschler Fleischer allegedly had a hand in the scheme, the original suit contended.
“Not only is that preposterous, they don’t allege any facts that Hirschler Fleischer had any inkling this was going on,” said Andy Morris, an attorney with Washington-based Carr Maloney, which is representing Hirschler Fleischer.
In its more than 50-page response and motion to dismiss, Hirschler and its lawyers argue in often colorful language that the lengthy suit fails to argue any facts that prove the firm had any involvement in the fraud.
“It identifies nothing that gave Hirschler Fleischer even a hint of wrongdoing by the Insiders: not a memo, an email, a meeting, or a whisper, or even a circumstance that was suspicious,” Hirschler said in its response. “The trustee’s complaint pleads nothing.”
Morris also argues that the trustee’s investigation, which lasted months and cost $3 million, never even mentioned Hirschler Fleischer within its 369-page report.
“They are trying to make this sound like a fraud, and you have to be able to point to some fact, whether true or not, that suggest our guys were connected with, knew about or helped this fraud,” Morris said Tuesday in a phone interview. “They have no facts that suggest Hirschler Fleischer did anything remotely wrong. They did what a law firm was supposed to do.”
DBSI sold investors into tenant-in-common real estate investments, which allowed investors to pool their money for fractional ownership of commercial real estate. DBSI also used 1031 exchange tax shelters as a way of attracting investors.
When it collapsed in conjunction with the bursting of the real estate bubble, allegations surfaced that DBSI and its various entities were using the money collected from new investors to pay previous investors.
Another part of Hirschler’s argument is to show that the trustee’s suit is nothing more than a generic lawsuit, no different than those that trustees in such cases file routinely against any professional firm that did business with a bankrupt entity.
Hirschler is far from alone in its fight against the trustee.
At least two other law firms have been hit with similar suits, including one filed against Idaho law firm Moffatt Thomas in late 2010. That suit made nearly identical allegations and included numerous sections of language identical to that contained in the case against Hirschler.
Another similar suit was filed against a large Milwaukee law firm last week.
The trustee is expected to file its argument against Hirschler’s motion to dismiss before the end of the month. Hirschler will then have another chance to make an argument, likely before the end of the year.
Brian McMahon, an attorney with Gibbons, a law firm in New Jersey representing the trustee, did not respond to a request for comment.
Michael Schwartz is a BizSense reporter and covers the legal industry. Please send news tips to [email protected]