Reply Brief — Tew v. Arky

Supreme Court, U.S.

EILED

No. 88-186

In The

Supreme Court of the United States

October Term, 1988

THOMAS TEW, as Trustee for ESM Government

Securities, Inc., and as Receiver for ESM Group, Ine.

and ESM Financial Group, Ine.,

Petitioner,

ARKY, FREED, STEARNS, WATSON, GREER,

WEAVER & HARRIS, P.A., & EUGENE E. STEARNS,

Respondents.

PETITIONER’S REPLY BRIEF

LAWRENCE A. KELLOGG

Counsel of Reeord

Jose’ R. GarcrA-PEDROSA

Tew JorRDEN SCHULTE & BEASLEY

701 Brickell Avenue

Miami, Florida 33131

(305) 371-2600

Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

or call collect (402) 342-2831

TABLE OF AUTHORITIES

Page

Barrett v. United States, 423 U.S. 212 (1976) ................ 1

In re Investors Funding Corporation of New

York Securities Litigation, 523 F.Supp. 533

(S.D.N.Y. 1980) ae

Ivan Allen Co. v. United States, 422 U.S. 617 (1975) ..... 1

Nia v. Whiteside, 475 U.S. 157 (1986) 1

Oregon Department of Fish & Wildlife v. Klamath

Indian Tribe, 473 U.S. 753 (1985) 1

Saxbe v. Washington Post Co., 417 U.S. 843 (1974) ..... 1

Schacht v. Brown, 711 F.2d 1343 (7th Cir.), cert.

denied, 464 U.S. 1002 (1983) 3

Standard Oi! Company v. United States, 307 F.2d

120 (5th Cir. 1962) 3

PETITIONER’S REPLY BRIEF

Contrary to Respondent’s assertions, a conflict in prin-

ciple exists between the opinion below and this Court’s

decision in Nix v. Whiteside, 475 U.S. 157 (1986). A con-

flict in principle or approach is reviewable by this Court.

See, e.g., Oregon Department of Fish & Wildlife v. Kla-

math Indian Tribe, 473 U.S. 753, 764 (1985); Barrett v.

United States, 423 U.S. 212, 215 (1976); Ivan Allen Co. v.

United States, 422 U.S. 617, 623 (1975); Saxbe v. Wash-

ington Post Co., 417 U.S. %43, 846 (1974).

The conflict in principle arises from the Courts’ dif-

fering interpretations of “reasonable professional re-

sponses” when an attorney is faced with an ethical dilemma

concerning a client’s dishonesty. The opinion in Niz states

that “counsel is precluded from taking steps or in any way

assisting the client in... violating the law... .” 475 U.S.

at 166. The orders below condone actions by Arky, I"reed

that have been expressly prohibited by this Court. The

opinion letter issued by Arky, Freed assisted the officers

and directors of ESM in perpetuating the widespread

fraud that affected a multitude of financial institutions,

municipalities and school boards across the nation. The

dictates of the Nix Court limiting the duty owed by an

attorney to his client to “legitimate, lawful conduct,” 475

U.S. at 166, was ignored by both the district court and the

Eleventh Cireuit Court of Appeals.

Furthermore, in rendering its orders, the district court

relied upon a code of conduct applicable as guidelines to

all attorneys in the United States. In granting the motion

for summary judgment filed by Arky, Freed, the district

court found that the ABA Statement of Policy Regarding

1

a Lawyer’s Response to Auditor’s Request for Informa-

tion [ABA Statement], controls an attorney’s responsi-

bility with respect to auditor’s inquiries. The erroneous

ruling of the district court and the court of appeals arises

from the district court’s misinterpretation and misappli-

eation of the ABA Statement in determining that the

conduct of Arky, Freed and Eugene Stearns was protected

by an attorney/client privilege and was not actionable. As

the ABA Statement is applicable as guidelines to all at-

torneys and is not limited to Florida attorneys, the dis-

trict court’s misapplication of the ABA Statement presents

questions of national concern. Thus, Respondents’ conten-

tion that the orders below involve only state law issues is

incorrect. The fundamental issue raised by this case—

whether an attorney can lie on behalf of the officers and

directors of a client to continue a fraud without suffering

civil repercussions for his actions—is an issue that should

be addressed by this Court for uniformity across the

nation.

Respondents also assert that the court of appeals

decision could have been based on alternative grounds.

However, the court of appeals’ ruling consisted of a per

curiam affirmance without any indication that grounds

other than those expressed by the district court were con-

sidered in rendering its opinion. The district court’s opin-

ion is totally devoid of any reference to the alternative

argument set forth by Respondent in its brief. Thus, Re-

spondent’s argument on this point is without merit.

In fact, the conduct of ESM’s principals does not

bar the trustee/receiver’s action on behalf of insolvent

corporate entities, because the principals’ conduct was ad-

verse to the interests of the ESM corporate entities.

When an officer, director, shareholder, agent or employee

of a corporation acts adversely or detrimentally to the

corporation, his knowledge and actions will not he im-

puted to the corporation, and thus will not be considered

as corporate knowledge or actions. For example, in Stan-

dard Oil Company v. United States, 307 F.2d 120 (5th

Cir. 1962), the court held that corporate agents were act-

ing adversely to the corporation by stealing from it. For

this reason, the Fifth Cireuit held that their actions should

not be imputed to the corporation. Similarly, in Schacht

v. Brown, 711 F.2d 1343 (7th Cir.), cert. denied, 464 U.S.

1002 (1983), the state liquidator of an insurance company

brought suit on behalf of the corporation. The defendants

challenged the liquidator’s standing and capacity to bring

the suit, arguing that he was estopped to do so by virtue

of the actions of the insurance company’s officers and

directors in instigating the conduct attacked by the

liquidator. The Supreme Court refused to impute the

actions of the principals to the corporation, however, be-

cause by looting the corporation and artifically prolonging

its existence, they had harmed rather than benefited the

corporation. See also In re Investors Funding Corpo-

ration of New York Securities Litigation, 523 F.Supp.

533 (S.D.N.Y. 1980) (bankruptcy trestee’s actions not

barred by conduct of corporate principals hecause cor-

poration kept alive by principals after insolvency in order

for principals to continue looting corporation).

In this ease, the ESM principals kept ESM alive

long after the point of insolvency in order to continue their

practice of stealing cash from ESM through excessive

salaries, improper loans and unwarranted bonuses. Thus,

the principal’s conduct was motivated by a desire for

personal gain, as well as for the purpose of avoiding de-

tection of their crimes. Since their actions certainly were

not beneficial to ESM, their conduct should not be im-

puted to ESM to bar the trustee/receiver’s action against

Arky, Freed.

CONCLUSION

For the reasons stated herein and in Petitioner’s

initial brief, the Petition for a Writ of Certiorari should

be granted.

Respectfully submitted,

Lawrence A. Ke.Loce

Counsel of Record

Jose’ R. Garcia-Peprosa

Tew Jorpen Scuvutre & Beasiey

701 Brickell Avenue

Miami, Florida 33131

(305) 371-2600

Aitorneys for Petitioner