Sharp v. Bryan Cave LLP (In the Matter of Estate Financial Mortgage Fund, LLC)

Case Nos. 12-56009 and 12-56011 (9th Cir. Mar. 24, 2014) [Not for Publication]
In an unpublished memorandum decision, the Ninth Circuit reversed the district court and remanded for further proceedings, holding as follows. Under California law, a client who engages in wrongdoing in reliance on a lawyer's negligent legal advice may be barred by the unclean hands defense or the in pari delicto doctrine from pursing a claim for legal malpractice, but only if the plaintiff's conduct is egregiously wrongful. Although the majority of the allegations in the trustees' complaints did not rise to such a level of wrongdoing, isolated allegations of wrongdoing were sufficiently serious to preclude dismissal at the pleading stage.
Procedural context:
Appeal from the District Court for the Central District of California, dismissing the trustees' adversary complaints, reviewed de novo.
According to allegations in the trustees' complaints, Estate Financial Mortgage Fund, LLC and Estate Financial, Inc. ("Debtors") both violated the law before and after retaining the law firm Bryan Cave LLP to prevent and correct those violations. To the extent that Debtors also allegedly continued to violate the law after retaining Bryan Cave, they did so in reliance on negligent legal advice. Such violations included failing to comply with disclosure and licensing requirements, issuing unauthorized promotional notes, engaging in unauthorized loan transactions, exceeding the maximum number of investors, and improperly commingling funds. Debtors also allegedly used investor money to pay interest payments to other investors and improperly diverted investor money to pay interest, expenses, and forbearance fees.
Farris, N.R. Smith, Watford

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