What I've called the fen-phen flim-flam has been a tremendous and continuing embarrassment to Kentucky lawyers and to our court system. It would appear from the Kentucky Supreme Court's decision in Ford v. Baerg that the Court has had more than enough of it and those lawyers associated with it. Enough is enough, however, makes for some most puzzling legal reasoning and scuffling about.
To Recap. In 2001, a $200 million settlement was reached in a class action lawsuit against American Home Products, the manufacturer of a diet drug known as fen-phen. Two of the principal lawyers for the class, Bill Gallion and Shirley Cunningham, were convicted of stealing some $94 million from their clients and received 20 year plus federal prison sentences. One of their co-counsels and one of our nation's truly great lawyers, Stan Chesley, was disbarred. Lexington lawyer Angela Ford did remarkable Javert-like work and recovered some $23 million and other assets for the persons victimized by Gallion, Cunningham etc. But Ford couldn't keep the money either; it would seem that the Kentucky Supreme Court regards that as no one's fault but her own.
Turns out that Ford entrusted some of the fen-phen money she earned to another lawyer, Seth Johnston. Johnston, it also turned out, had his own flim-flam going for which he also joined Gallion and Cunningham in federal prison. Johnston, as part of his dealings, stole money from Harold and Kathleen Baerg. To cover this up, Johnston, in turn, stole money from Ford and gave it to the Baergs, who apparently did not know what Johnston had been up to. For reasons unclear from the opinion, Johnston also stole money from Ford that he paid by cashiers check to a Zafir Nasir, who later passed the money by way of another cashiers check to a man named Faisal Shah.
When Ford found out what had happened, she sued Johnston, the Baergs and Shah claiming that they had tortiously converted her money to their own. The Fayette Circuit Court ruled for Ford, but the Kentucky Court of Appeals went the other way, and the Kentucky Supreme Court decided to get involved, granting Ford's motion for discretionary review.
The elements under Kentucky law of the tort of conversion are as follows: (1) the plaintiff had legal title to the converted property; (2) the plaintiff had the right to possess the property at the time of the conversion; (3) the defendant exercised dominion of the plaintiff's property in a way that deprived the plaintiff of its use and enjoyment; (4) the defendant intended to interfere with plaintiff's possession; (5) the plaintiff demanded return of the property and the defendant refused; (6) the defendant's act was the legal cause of the plaintiff's loss of the property; and, (7) the plaintiff suffered damages from the loss of the property.
The Kentucky Supreme Court ruled that Ford had not established the first two elements; that she lacked both legal title to and possessory interest in the money at the time it was converted. The Court's rationale was that Johnston, who had signatory power on Ford's accounts, had "apparent authority" to transfer money out of Ford's account. With all due respect to the Court, its analysis and reasoning of Johnston's "apparent authority" misses the mark widely and can only make logical sense if the Baergs and/or Shah had some contact or communication with Ford that could have led them to believe that she was okay with Johnston paying them her money.
The Court tells us this about an agent's "apparent authority":
Apparent authority ... is not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to rely. An agent is said to have apparent authority to enter transactions on his or her principal's behalf with a third party when the principal has manifested to the third-party that the agent is so authorized, and the third-party reasonably relies on that manifestation.
This is a correct description of an agent's "apparent authority". However, when applied to the facts, at least as revealed by the Court's opinion, the cloudiness of its "apparent authority" analysis becomes, well, becomes apparent. Johnston's apparent authority arises "when the principal [Ford] has manifested to the third-party [the Baergs and/or Shah] that the agent [Johnston] is so authorized, and the third-party [the Baergs and/or Shah] relies on that manifestation." So for the "apparent authority" doctrine to help either the Baergs or Shah, Ford had to make some representation to them that Johnston was authorized to pay them money out of her accounts. This didn't happen it appears, since the Court's opinion gives no indication that either the Baergs or Shah had any contact with Ford or any idea that Johnston was paying them with money that was Ford's. In other words, there is no evidence that Ford made any manifestation to either the Baergs or Shah that Johnston was authorized to act in any way on her behalf.
The Court went one further and did so amazingly: it asserted that "Johnston cannot be considered a 'thief' in this context." So Johnston stole Ford's money and paid it to the Baergs and Shah, who, by all accounts, received it in good-faith from Johnston. In other contexts, however, one being the context of Kentucky criminal law, Johnston is a "thief," since his conduct constitutes theft by failure to make required disposition, a violation of KRS 514.070.
As a final measure, the Court essentially revives the contributory negligence doctrine under the guise of the "'cheapest cost avoider' economic principle" to blame Ford for the whole mess: "Had [Ford] properly vetted Johnston or monitored her accounts, she could have terminated his status as a signatory or never even have bestowed upon him sole signatory status, preventing her own loss. Ford status as the cheapest cost avoider in this case further cements our holdings." In other words, Ford should have known better and must bear the costs of her own mistakes.
Bad facts make bad law; the Court did not want to rule against some clients that had been victimized by some lawyer controlling the fen-phen money. That sentiment would seem beyond blame after all these years: enough is enough.
The Court's opinion was unanimous and authored by Chief Justice Minton.
Robert L. Abell
www.RobertAbellLaw.com
