Category: Fraud

Can a law firm be held liable for its client’s fraudulent transfers?

Posted on by Jeff Jaeger

Cadle Co. v. Woods & Erickson, LLP (Nev. Supreme Ct. – Mar. 26, 2015)

In 2004, Robert Krause retained the law firm Woods & Erickson, LLP, for estate planning services. The following year, Woods & Erickson created for Krause various legal entities, including an asset protection trust, into which Krause eventually transferred his assets. Meanwhile, The Cadle Company (Cadle) was attempting to collect on a California judgment against Krause. After learning of the transferred assets, Cadle sued Krause and Woods & Erickson, alleging that Krause had fraudulently transferred assets in order to escape execution of the judgment and that Woods & Erickson had unlawfully facilitated the fraudulent transfers.

The district court dismissed Cadle’s claims against Woods & Erickson without prejudice. Cadle later filed a second amended complaint asserting claims for conspiracy, aiding and abetting, and concert of action against Woods & Erickson, all arising from the fraudulent transfers.

After a bench trial, the district court found in favor of Cadle against Krause. Concluding, however, that Cadle had not shown clear and convincing evidence of Woods & Erickson’s intent to defraud or deceive, the district court entered judgment in favor of Woods & Erickson on all claims. Cadle appealed.

On appeal, Cadle argued that the district court erred because it required Cadle to show actual intent to defraud or deceive in order to establish its accessory liability claims. Woods & Erickson asserted that, regardless of intent, Nevada does not recognize common-law civil conspiracy, aiding and abetting, or concert of action in the context of fraudulent transfers.

The Nevada Supreme Court agreed with Woods & Erickson that nontransferees, i.e., those who have not received or benefited from the fraudulently transferred property, are not subject to accessory liability for fraudulent transfer claims.

The Court reasoned that creditors do not possess legal claims for damages when they are the victims of fraudulent transfers. Instead, creditors have recourse in equitable proceedings in order to recover the property, or payment for its value, by which they are returned to their pre-transfer position, pursuant to NRS 112.210 and NRS 112.220(2). Nevada law does not create a legal cause of action for damages in excess of the value of the property to be recovered. Thus, the Court concluded that Nevada law does not recognize claims against nontransferees under theories of accessory liability.

Does a casino’s knowledge of insufficient funds negate the intent to defraud element under NRS 205.130?

Posted on by Jeff Jaeger

Zahavi v. State (Nev. Supreme Ct. – Feb. 26, 2015)

Beginning in the late 1990’s, Zahavi began gambling, obtaining lines of credit, and executing markers at various Las Vegas casinos. In 2008, Zahavi failed to pay $384,000 in markers he took from the Hard Rock Hotel, Caesars Palace, Venetian, and Palazzo. The State filed a four count indictment against Zahavi for writing checks with insufficient bank funds with intent to defraud. A jury found Zahavi guilty on all four counts.

On appeal, Zahavi contended that the casinos had knowledge of his insufficient funds and inability to pay back the 14 gaming markers he obtained. The Nevada Supreme Court analyzed whether the district court should have instructed the jury that a casino’s knowledge of insufficient funds in a casino patron’s bank accounts at the time of the issuance of a marker negates the intent-to-defraud element of NRS 205.130(1)(e).

The Court held that the “intent to defraud” element may be negated by a disclosure of insufficient funds to the payee and that Zahavi was entitled to have the jury so instructed if there was proof in the record supporting the instruction. The Court concluded that because Zahavi failed to make an affirmative disclosure to the casinos and the casinos had no present knowledge of his insufficiency of funds at the time the markers were executed, there was no evidence to negate the intent-to defraud element, and therefore the district court did not abuse its discretion by refusing the instruction.

Zahavi also challenged the constitutionality of NRS 205.130, arguing that it violates the provision in the Nevada Constitution that prohibits imprisonment for failing to pay a debt, except in cases of fraud. Based on prior decisions, and persuasive authority from other jurisdictions with similar constitutional prohibitions, the Court concluded that NRS 205.130 does not violate article 1,section 14 of the Nevada Constitution because Zahavi’s conviction is based on committing a fraudulent act and not on incurring a debt.