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Lawyers Aren’t Liable For Nonprofit’s Ponzi Scheme

(CN) - A defunct nonprofit organization can't win damages from its attorneys for failing to advise the group to stop running a Ponzi scheme, a federal appeals court in Denver ruled.

The Utah-based National School Fitness Foundation went bankrupt in 2004 after four years of selling equipment and curricula to schools.

While the foundation advertised the equipment as free, the schools were directed to pay a for-profit group called School Fitness Systems (SFS). The foundation would reimburse the schools for the equipment.

However, the foundation and SFS were the same company, and SFS kicked back 50 percent of the schools' money to the foundation.

The defendant law firm of Ray, Quinney & Nebeker may have been at fault, the trial court ruled, but not as much as the plaintiffs. The 10th Circuit agreed.

"It is well established that in pari delicto may bar an action by a bankruptcy trustee against a third party who participated in or facilitated wrongful conduct of the debtor," Judge Tacha wrote.

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