United States: Mass Torts And Mass Frauds

Last week we discussed a federal court's holding that mere fear of injury was not an actionable tort. In the run-up to the description of the case, we reminisced about the diet drug litigation, where many plaintiffs alleged heart valve injuries that had not yet manifested any physical symptoms. Those plaintiffs claimed they feared sudden death or open-heart surgery. Would those scary things happen? When? Those cases produced wildly inconsistent results. On essentially the same facts, some cases were dismissed by courts, some made it to a jury that would award zero or minimal damages (perhaps the cost of antibiotics for dental visits) and we can think of one trial that culminated in two verdicts of over $100 million because the Philadelphia trial judge permitted the plaintiff lawyers to make the case about the company's funding of studies (where the studies were entirely legitimate and the company's connection was disclosed, mind you) rather than about the particular plaintiff. Not to put too fine point on it, but the diet drug litigation was not one of the glorious episodes in American jurisprudential history.

That is an understatement. It turns out that there were plenty of plaintiffs who did not even have actual heart valve injury. The diet drug mass tort mostly settled, under threat of class certification (something that, thankfully, doesn't happen anymore). There were opt-outs, to be sure, but lots of plaintiffs signed onto a settlement process where plaintiffs' payments depended on their placement on a grid, with extent of injury being the key factor. How to determine extent of injury? Ah, there's the rub. It turns out that some doctors working with/for some plaintiff lawyers sold their integrity and purposely misinterpreted echocardiograms to call valvular regurgitation moderate or severe when it was actually mild or did not even exist at all. That was fraud, it was ultimately found out, and medical licenses were lost. Pretty bad, right?

Wouldn't you know it that the day after our post last week the Sixth Circuit issued a decision, McGirr v. Rehme, ___ F.3d ___, No. 17-3519, 2018 WL 2437184 (6th Cir. May 31, 2018), that reminded us of another fraud associated with the diet drug mass tort litigation – this time involving the legal profession in a very ugly way. The case was an effort by diet drug plaintiffs to recover money from a plaintiff lawyer who had stiffed them. Their entitlement to the money had already been established. The problem was collecting on the judgment, because the plaintiff lawyer was doing a nifty job of moving his assets around. Because any further characterization by us will likely elicit accusations of schadenfreude on our part, we will rely on direct quotes from the Sixth Circuit's opinion as much as possible.

Here is how the opinion begins: "For years, plaintiffs' attorney Stanley Chesley appears to have been orchestrating a high-stakes shell game in an effort to escape a long overdue multi-million dollar judgment. In the process, he has defrauded hundreds of judgment creditors, many of whom are plaintiffs here." 2018 WL 2437184, at *1. And we're off.

What had happened? A diet drug settlement in 2001 gave the plaintiff lawyers $200 million, with the defendant leaving it to the plaintiff lawyers "to divvy up the settlement among the class members as they saw fit. Trusting the attorneys with such a task proved to be a mistake." Id. at *2.

Another understatement. Plaintiff lawyers told their clients they had received a settlement in a certain amount, but then reported a significantly higher amount to the defendant, and the plaintiff "lawyers kept the difference." Id. In the end, clients received a total of $75 million when they should have received $134 million. Id. Easy money, but not an especially clever scheme. Indeed, the Kentucky Bar authorities smelled something foul. To cover their tracks, the plaintiff lawyers found a compliant Kentucky judge who retroactively altered the terms of the fee deal and then sealed the record. That judge also was set up as a director of a charitable organization created by the new fee deal. That judge pocketed over $48,000 from the arrangement. That judge has since been "permanently disbarred." Id. at *3.

So far, clients were cheated and the judiciary was corrupted. But wait, there's more.

The plaintiffs won a lawsuit in Kentucky and got a judgment in 2007 against their lawyers (and Chesley as a co-conspirator) in the amount of $42 million. Id. In 2011, the Kentucky Bar held that Chesley violated "eight separate rules of professional conduct and recommended his permanent disbarment" and the Kentucky Supreme Court upheld that decision. Id. (footnote omitted). "Chesley's time as an attorney in Kentucky had come to an end." Id. Chesley's home jurisdiction of Ohio "would likely impose reciprocal discipline" but it never got the chance because Chesley retired from the practice of law in 2013. Id. He then executed a "wind-up" agreement with his law firm that "served as a vessel through which Chesley could move his assets." Id.

The Kentucky plaintiffs, looking to execute on their judgment, "came knocking," but Chesley found a helpful judge in Ohio who kept entering "unusual" orders that frustrated the execution efforts of the Kentucky plaintiffs. Id. at *3-4. "This kicked off a jurisdictional turf war on either side of the Ohio River." Id. at *4. In 2015, the Kentucky judge ordered Chesley to cross the river and justify his noncompliance with the court's order, but Chesley did not show, so an arrest warrant was issued. No matter, because that helpful Ohio judge granted an injunction "preventing Chesley's arrest." Id.

This all happened in the United States of America.

Speaking of the United States, the plaintiffs got the bright idea to turn to the federal courts. They brought an action in S.D. Ohio "to get an order recognizing Chesley's recent transfer transfers (including the wind-up agreement) as fraudulent and to unwind those transfers." Id. The plaintiffs asked the Ohio federal court to enter "a preliminary injunction that would freeze Chesley's assets to prevent him from moving those assets outside the court's jurisdictional reach." Id. at *5. Before the court could enter any injunction, the assets moved yet again, via a maneuver in Ohio state probate court. The district court found the new transfer malodorous and issued a TRO, later converted to the preliminary injunction sought by the plaintiffs. Id. (This must have all seemed awkward to the court, as Chesley's wife was a federal judge in the same courthouse. Yikes.) The Ohio Supreme Court "validated the district court's suspicions" and found the asset transfer to be fraudulent and an abuse of process. Id.

Meanwhile, the preliminary injunction was in place, and went up on appeal to the Sixth Circuit. Because of the asset transfers, Chesley was not a party to the appeal. This case was about following the money. After reciting this sordid story, the Sixth Circuit applied the standard factors for assessing a preliminary injunction: (1) the movant's likelihood of success on the merits, (2) whether the moving would suffer permanent harm absent an injunction, (3) whether the injunction would harm third parties, and (4) whether the injunction would serve the public interest. Id.

This was not a hard case. The Sixth Circuit concluded that the questionable asset transfer checked "virtually all of the ... boxes" for the Ohio statute on fraudulent conveyances. Id. at *6. The Ohio Supreme Court's decision finding a transfer fraudulent made an easy decision even easier regarding the merits of the plaintiff's action. This blog is not about fraudulent conveyance law, so let's leave it at this: there was ample evidence of transferring assets to an insider, of Chesley's retention of actual control of the money, of concealment, and of convenient timing. Chesley and the other defendants offered explanations, of course. But the Sixth Circuit kept its eyes on the big picture: "In the mid-2000s, after helping to steal millions of dollars from the Guard case plaintiffs, Chesley felt the walls closing in on him. In 2005, his ex-clients used him. In 2006, a Kentucky court found his accomplices liable. In 2007, the same court entered a $42 million judgment against them. All the while, the Kentucky Bar was investigating him. Shortly after, Chesley began to move the majority of his assets around. Id. at *7-8. This evidence suggests that Chesley has been carefully keeping his money just out of the plaintiffs' reach, in the event that he was also found liable for the $42 million he had stolen." Id. at *8.

As we said, this was an easy case.

Irreparable harm was obvious. The continuing shell game, if successful, would keep the money out of the plaintiffs' hands. The probate action "was just another move in that game." Id.. Only the injunction could put an end to the game. By contrast, Chesley could not demonstrate actual harm to other creditors. Id. But it is the public interest prong where the Sixth Circuit opinion really sings. The litigation "has been lumbering through federal and state courts for two decades. In its wake, officers of the court have been disbarred and imprisoned; Kentucky and Ohio state courts have been pitted against each other; and Chesley has forced the federal courts to use judicial resources to try to stop it all. There is a fundamental public interest in ending such abuse of the judicial system, in conserving judicial resources, and in preventing further confusion and disruption in this litigation." Id. at *9.

The Sixth Circuit affirmed the district court's entry of a preliminary injunction.

What are we to make of this concatenation of depressing facts? One could mutter a platitude about how the case offers a cautionary tale. Fine. What is the caution? Don't cheat clients? Don't corrupt judges? Any lawyer who really needs to hear those things is probably too far gone anyway. No, the true caution is this: mass torts offer opportunities for massive frauds. That is so not only because the large amounts of money are tempting and the large number of plaintiffs permits gamesmanship, but also because courts too often treat mass torts as settlements waiting to happen. The litigation becomes a sausage grinder. The system grinds away, doing everything possible to encourage, or force, settlement. But some cases shouldn't be settled. And the assumption that the plaintiff side is a good-guy David while the defendant side is a greedy malefactor Goliath is ridiculous and unfair.

It would be wrong to write off this case as an outlier. First, you have certainly heard of other mass tort settlement schemes that ended up being wracked with fraud. Just in the past week we've read about allegations of questionable plaintiff-side conduct in both the NFL concussion and State Street foreign exchange mass/class litigations. Second, what about the frauds you haven't heard about? Once a mass tort becomes a settlement waiting to happen, it becomes a fraud waiting to happen. Rather than await the next awful morality tale that shames the legal profession and the judiciary, could we perhaps step back and check some of the assumptions plaguing the system?

This article is presented for informational purposes only and is not intended to constitute legal advice.

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