Law Firm Must Face Claim From Ex-Client

(CN) - A corporation looted by its chairman may pursue claims he was aided by the now-defunct Coudert Brothers LLP law firm in bankruptcy court, the Second Circuit ruled.

Hans Frederick Johnson controlled Statek Corporation, a manufacturer of quartz crystals for use in timing mechanisms for medical devices, for 12 years, and looted its treasury.

In 1990, Johnson convinced the company to hire Coudert Brothers LLP as counsel, a move the corporation claims was tied to his desire to have the firm help hide his stolen assets.

Nine years later, at age 72, he was sentenced to six years in prison after being convicted in London of hiring hit men to kill his former business associates.

Statek sued Coudert for malpractice in Connecticut state court, and the law practice soon filed for bankruptcy in New York federal court.

A federal judge initially dismissed Statek's claim as time-barred, but the Second Circuit reversed, finding that the Connecticut choice-of-law rules, and hence Connecticut limitations period, apply to Statek's claim.

On remand, the federal judge acknowledged that it was unclear as to whether Connecticut's "continuing course of conduct" doctrine provided an exception to the limitations deadline.

However, the judge affirmed her prior reasoning that Statek's "transferee court" argument was not raised in its initial complaint, and was a new argument that could not be considered on reconsideration.

But the Second Circuit again reversed the decision Tuesday, finding that the lower court ignored its prior ruling.

"Far from giving full effect to our mandate in Coudert I, the bankruptcy court here essentially gave it no legal effect," U.S. Circuit Judge Denny Chin said, writing for the three-judge panel. "In Coudert I, we instructed the bankruptcy court 'to apply Connecticut's choice of law rules in deciding Statek's motion to reconsider.' The bankruptcy court did not follow that instruction, as the Connecticut choice-of-law rules did not bear on the bankruptcy court's ultimate decision."

It was not enough simply for the lower court to consider Connecticut's choice-of-law rules in this case - the court had to apply them to fulfill the appeals court's mandate.

"The absence of a 'clear answer' was no reason to abandon the issue to be decided pursuant to the mandate," Chin said.

By not considering the "transferee court" issue, Chin said the panel necessarily implied that the argument should not be disregarded.

"It is clear that the bankruptcy court would have vacated the Claim

Disallowance Order had it not misconstrued our mandate," Chin said. "Statek should have been allowed to proceed with its claim."

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