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Cost of lawyer’s fraud falls on client, not third party

Massachusetts Lawyers Weekly By Bernkopf Goodman on 07.20.2017
Posted In: In The News

Settlement deal upheld, despite principal’s lack of awareness

When an attorney’s fraud victimizes both a third party and the principal who hired him, the principal must bear the cost of that fraudulent conduct, a Middlesex Superior Court judge has decided.

An attorney accepted and converted for his own use payments on a settlement agreement he had negotiated without his client’s consent. The client then hired new counsel and sued to recover the $23,000 business debt it believed it was still owed.

The client seemed to have a compelling precedent on its side: the Supreme Judicial Court’s decision in the 1930 case Precious v. O’Rourke, in which the court invalidated a settlement negotiated without the client’s authorization. The court placed the burden on the opposing party to “ascertain at his peril whether the attorney has authority to make the settlement.”

But Judge Christopher K. Barry-Smith distinguished the case before him from Precious. In the current case, the third party had been provided a settlement agreement that appeared to have been signed by the attorney’s client. While it later turned out that the signature had been forged, the settlement agreement “provides a basis for apparent authority that did not exist, or at least was not evaluated, in Precious,” Barry-Smith wrote.

Even if apparent authority remained in dispute, the attorney’s fraudulent conduct “triggers agency principles beyond actual and apparent authority that are designed to apportion risk as between the principal and the third party when both are unaware of the agent’s fraudulent conduct,” the judge continued.

Leaning heavily on the Restatement (Second) of Agency, Barry-Smith found that the attorney had both apparent and inherent authority to settle the claim and that the cost of his fraud should fall on his client.

The 18-page decision is Artin Service Station, Inc. v. Mitri, Lawyers Weekly No. 12-088-17, and can be ordered here.

‘More attuned to present-day practice’

The defendant’s Fall River counsel, Michael S. Sahady, said that ascertaining the extent of opposing counsel’s authority is part of every case lawyers handle, whether they realize it or not.

“Normally, we take each other’s word that we do represent who we say we represent, and we don’t do anything beyond that to determine the extent of opposing counsel’s authority to bind the principal,” he said.

Sahady was not surprised by his opponent’s reliance on the Precious case.

“Maybe someday the SJC will revisit the decision in Precious and give the bar a ruling more attuned to present-day practice,” he said.

A former District and Superior Court judge, Sahady noted that much has changed in the practice of law since Precious was decided.

“When I started to practice [in 1959], we knew every lawyer in town by first name, last name, their children’s names,” he said.

Boston attorney Stephen D. Riden said that the message from the decision is that companies and individuals shopping for legal representation need to do their homework and then monitor their lawyer’s activities.

He added that the cautionary tale extends to employers who use “agents,” i.e., their employees, whose wrongful conduct could bind and harm them.

The decision went the right way from a practical perspective, Riden said. If the decision had imposed a duty to investigate possible fraudulent conduct by an agent, it would “inject a huge amount of uncertainty into every business transaction,” potentially bringing those dealings to a halt.

But Boston attorney Robert W. Stetson noted that a forger is not typically considered an agent. In order to hold a principal liable for a forger’s act, the principal generally needs to ratify the forged signature through some act or statement, he said. A third party may also prevail using an estoppel theory, showing that there was some kind of detrimental reliance on the forgery.

Barry-Smith’s decision does comport with the policy rationale of the Restatement, which says that the principal is in a better position than an unwitting third party to prevent an agent’s misconduct.

Still, Stetson noted that there is “some tension” between Barry-Smith’s ruling and historical case law, such as the 1862 SJC case The President, Directors and Company of the Greenfield Bank v. Crafts, et al., which required some conduct by the principal to ratify the forger’s act.

For similar reasons, Boston attorney Paula M. Bagger is somewhat troubled by Barry-Smith’s reliance on the “apparent authority” rationale. Apparent authority, she said, is usually manifested by a statement or action by the principal that hold the person out as their agent. That was absent in this case.

Bagger agreed with Sahady that the burden imposed in Precious is “a lot more unrealistic” in the modern era.

“The way we all work now, there is an awful lot not going on in person, face to face,” she said.

If a principal is harmed by an agent’s negligent actions, insurance — malpractice insurance, in the case of a lawyer — will generally help make the principal whole. But here, where the attorney’s actions were intentional, insurance was probably unavailable, she said.

Given the amount of money at stake, further review seems unlikely.

In one sense, that’s a shame, as it would have been a “good, meaty appeal,” Bagger said.

She noted that the concept of inherent authority has not been carried forward in the Third Restatement of Agency, perhaps because it allows for a lot of judicial discretion.

“The fact that Massachusetts, at least in one trial court, has embraced [inherent authority] will raise an interesting question when the next case comes along,” Bagger said.

The plaintiff’s Cohasset attorney, Mark A. Bross, did not return calls seeking comment.

Delivery dispute

In October 2011, defendant George Mitri, who did business as Tiverton Sun, authorized plaintiff Artin Service Station to debit funds from his company’s checking account to pay for gasoline deliveries.

But after one delivery in December 2012, Tiverton Sun blocked Artin’s attempts to withdraw $33,354.10 as payment because it had come to believe it was being overcharged and receiving less gas than it was paying for. Tiverton Sun would eventually make a partial payment of $10,000, but Artin believed it was still owed $23,354.10 and hired attorney Yuri Levintoff to pursue payment.

After instructing Tiverton Sun to deal exclusively with him and not contact Antin, Levintoff negotiated a settlement without his client’s knowledge or assent. Tiverton Sun agreed to make two equal payments totaling $11,677.05 — half of what Antin believed it was owed.

When Tiverton Sun’s counsel mailed the first payment to Levintoff on Aug. 13, 2014, the attorney included a settlement agreement signed by Tiverton Sun’s principal.

On Sept. 5, 2014, Levintoff acknowledged receipt of the check and attached to his email a signature page from the settlement agreement, which seemed to bear the signature of Antin’s owner. In fact, Levintoff had forged the signature.

When Levintoff was disbarred in February 2016, the Supreme Judicial Court explained that he had gone beyond forging the signature and converting the settlement funds. He had also tried to cover his tracks by fabricating a settlement offer that appeared had come from Tiverton Sun as well an agreement for judgment “purportedly filed in a fictitious court.” Further, Levintoff provided his client with an altered image of the check he had received from Tiverton Sun and claimed that the check had been returned for insufficient funds.

Artin subsequently retained new counsel and sued for payment of the outstanding debt. It moved for summary judgment on its breach-of-contract claim in July of 2016. Tiverton Sun opposed the motion and responded with a motion to enforce the settlement agreement it had negotiated with Levintoff.

Policy rationale

Quoting from the 2014 SJC decision of Licata v. GGNSC Malden Dexter LLC, Barry-Smith noted that apparent authority arises from “written or spoken words or any other conduct of the principal which, reasonably interpreted, causes a third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.”

While there was no dispute that the principal here was unaware that his attorney had forged his signature, the Restatement makes clear that “apparent authority is gauged from the perspective of the third party dealing with the principal’s agent,” Barry-Smith wrote.

The signed agreement, while fraudulent, made it reasonable for Tiverton Sun to have faith in the attorney’s authority, the judge said.

Further, even if the facts did not establish apparent authority, Barry-Smith noted that §8A of the Restatement defines “inherent agency power,” which “exists for the protection of persons harmed by or dealing with a servant or other agent.”

Because “agents are fiduciaries acting generally in the principal’s interests, and are trusted and controlled by him, it is fairer that the risk of loss by disobedience of agents should fall upon the principal rather than upon third persons,” the Restatement reads.

The judge pointed to instances where the SJC and the Appeals Court, as well as federal courts in Massachusetts, have cited §8A with approval.

“The principle of ‘inherent authority’ discussed in the Restatement and these Massachusetts cases is designed to address circumstances like this case. When an agent acts improperly — as Levintoff unquestionably did — to the detriment of both the principal and the third party, the court must determine where to allocate responsibility for the agent’s misconduct,” Barry-Smith wrote. “If the third party had no involvement [in] or knowledge of the agent’s wrongdoing, and their belief in the agent’s authority was reasonable, then the law allocates responsibility to the principal who hired the agent.”

He concluded, “Even though the principal did nothing wrong — indeed, here Antin was misled by his own lawyer at every turn — the principal is better positioned than the third party to hire, control, and oversee the attorney agent.”

Originally published in Massachusetts Lawyers Weekly, July 20, 2017