January 16, 2009 8:15 AM

Dorsey Off Hook for Millions as Eighth Circuit Boots Malpractice Claim

Posted by Zach Lowe

What started off as a run-of-the-mill loan arrangement turned into a decade of litigation for Dorsey & Whitney that could have cost the firm up to $4 million in malpractice verdicts--until the U.S. Court of Appeals for the Eighth Circuit tossed out the entire case Thursday. 

In the end, the case turned on a simple question: when does a bank become a law firm's client? 

Here's what happened: In 1999, a now-defunct investment bank in Minneapolis, Miller & Schroeder, packaged about $12 million in bonds and sold them to 32 banks. The banks then became the direct lenders to a Mohawk tribe in upstate New York which used the money to open a casino.

There was a problem, though. Miller & Schroeder hadn't gotten the go-ahead on the loan for the casino project from the National Indian Gaming Commission. Internal documents showed Dorsey lawyers knew this could jeopardize the entire project. They told Miller & Schroeder to go ahead with the financing anyway.

The casino was a huge failure and its management defaulted on the loans starting in 2000. The banks sued, but the casino administrators said they didn't have to repay the loans. Why? Because without the gaming commission's approval, the casino project itself wasn't valid--and neither were the loans. 

Litigation ensued. Miller & Schroeder, Dorsey's client, sued the casino management and the Mohawk tribe in bankruptcy court. Dorsey advised Miller & Schroeder to drop the tribe from the lawsuit, a strange decision. A federal district court in 2007 concluded that Dorsey made that decision only to prevent the disclosure of its mistake in advising Miller to go ahead with the loans without getting the gaming commission's approval. 

There was more: One of the banks involved, Bremer Business Finance Corp., sued Miller & Schroeder. Dorsey lawyers badly wanted to keep representing Miller, especially because a rival firm was pushing for the business, court records show. But could they ethically do so if their own error would be at the heart of Bremer's claim? Dorsey decided they could, and continued on the case. 

Finally, Bremer sued Dorsey, claiming that, in effect, Dorsey, by representing the arranger of the loan, also indirectly represented all the banks who eventually bought those loans. 

Two federal courts--a bankruptcy court and a federal district court--basically agreed and ruled against Dorsey in judgments that added up to $900,000, according to stories in the National Law Journal. Those judgments also kept the door open for larger judgments in the future.

But the Minnesota state supreme court went the opposite way in a parallel case brought against Dorsey by the banks. That court ruled that Dorsey's conduct didn't amount to malpractice, and it discredited the idea that the banks, as third parties, were Dorsey clients all along. 

On Thursday, a majority of the Eighth Circuit agreed with that interpretation and tossed all the claims against the firm.

"Demonstrating that an ethics rule has been violated, by itself, does not give rise to a cause of action against the lawyer and does not give rise to a presumption that a legal duty has been breached," the majority wrote.

A firm spokesman was not immediately available for comment.

Briggs & Morgan, a Minneapolis firm, has represented Dorsey in the litigation. 

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