Opinion ID: 3012374
Heading Depth: 2
Heading Rank: 1

Heading: The Underlying Case, Lakens v. Fryer Group

Text: In July 1997, the Lakens filed suit against attorney Ronald Bayer and several other defendants to recover money lost in a Ponzi-type confidence scheme, in which the perpetrators of the fraud paid interest to early investors using money received from later investors.2 In February 2000, Westport filed the instant declaratory judgment action. After some initial confusion resulting from Westport’s failure to note that its declaratory judgment action was related to the Lakens’ suit against Bayer, both cases proceeded separately before the same district court judge. In September 2000, after the conclusion of the nonjury trial in Lakens v. Fryer Group, but before the district court issued its decision, the court ordered that Westport’s declaratory judgment action would be determined on the basis of the record in Lakens v. Fryer Group.3 A brief recitation of the factual background of that underlying case is therefore a necessary part of our opinion here. _________________________________________________________________ 2. The district court found that Bayer was not criminally involved in the fraudulent scheme. 3. The order provided that Westport counsel receive a transcript of the trial testimony in Lakens v. Fryer Group and that Westport have ten days to request leave to produce additional testimony. Westport made no such request. 3 In November 1990, Leonard Brown, a friend and sometime client of Bayer’s, invested $500,000 with Keith Fryer, who claimed to run a secondary mortgage business in England. Fryer gave Brown a ten-year promissory note bearing twenty-seven percent interest. Fryer told Brown that the very high second-mortgage financing rates in England allowed him to pay investors high rates of interest. Fryer did not, in fact, run a mortgage business. Rather, he used some of Brown’s money to make the interest payments to Brown and kept the rest for himself. Brown was pleased with the payments he received on his investment and proposed to Fryer that Brown bring in other investors in return for a commission. Brown recruited another finder and retained Bayer as his attorney to negotiate a commission arrangement with Fryer. Bayer negotiated an agreement that paid the finders a five percent commission each year on the additional money invested with Fryer as a result of the finders’ activities. Bayer received one-third of the commissions. Bayer himself invested heavily with Fryer. For the next several years Fryer maintained the pretense that he ran a real mortgage business. Brown hosted gatherings to which he invited prospective investors and at which Fryer would present his nonexistent business as an investment opportunity. Bayer attended these gatherings, sometimes introduced Fryer, and generally promoted the investment. Morton and Alan Laken, father and son, attended such a gathering. They each purchased installment notes issued by one of Fryer’s dummy corporations, Park Securities, Ltd. They made their initial investments at Bayer’s law office. Together they purchased a total of $678,009.59 worth of installment notes.4 Fryer’s confidence scheme lasted until 1996, when some new investors insisted on an independent audit of Fryer’s accounts. This audit exposed Fryer’s fraud. _________________________________________________________________ 4. Morton Laken purchased installment notes totaling $425,540.84. These notes were made out variously to Morton Laken, to Morton and Evelyn Laken (his wife), and to Morton Laken in trust for a third party. Alan Laken purchased installment notes totaling $252,468.75. 4 The Lakens sued Bayer, the Fryer Group of Companies, and several other defendants for misrepresentation and fraud, among other things. Over time the Lakens learned that all defendants except Bayer were fictitious, bankrupt, or otherwise judgment proof. Bayer himself filed for bankruptcy before the Lakens’ action against him reached trial. The bankruptcy filing automatically stayed the trial in the Lakens’ suit against Bayer. The Lakens eventually obtained an order lifting the stay when they agreed to limit any damages they might receive to those available under Bayer’s professional liability insurance policy with Westport. Westport then filed this action seeking a declaratory judgment that Bayer’s Westport policy provides no coverage for the Lakens’ claims against Bayer. The Lakens’ suit against Bayer finally came to trial before the district court on September 11, 2000. On November 16, 2000, the court issued its decision. The court found for the Lakens and against Bayer on the Lakens’ negligent misrepresentation claims and entered judgment in the Lakens’ favor for $678,009.59. In its decision, the district court found the following facts regarding Bayer’s actions and his relationship to the Lakens. Bayer was Fryer’s point of contact in America. Bayer introduced Fryer to potential investors at investment presentations. Bayer enthusiastically endorsed the investment opportunity offered by Fryer. He received funds from American investors and forwarded them to Fryer in England. Bayer received one-third of the finders’ commissions on investments they solicited. He was authorized to draw checks on Fryer’s American business account in emergencies. At one point, Bayer suggested that arrangements be made to give investors greater security in their loans, such as blanket debentures covering all assets of the Fryer Companies, but the idea was dropped when Fryer said that any such arrangement would require a reduction in the interest rates paid to the investors. The court also found that the Lakens never retained Bayer to act as their attorney, but Bayer (a longtime attorney of the Lakens’ friend, Brown) created the impression that he was looking out for the Lakens’ interests. He permitted the Lakens to believe that he had 5 checked out Fryer’s activities and claimed to have performed a due diligence investigation. He let it be known that he had gone to England as part of the investigation. The Lakens relied on the information they received from Bayer. The trial court concluded that these facts provided a basis for Bayer’s liability: In my view, the circumstances give rise to the legal obligation on the part of Mr. Bayer, either to make clear that he was not protecting plaintiffs’ interests and that they should seek legal advice elsewhere, or to exercise reasonable care to avoid misrepresentations to them. Since he did neither, he is liable for their losses if their reliance upon his misrepresentations was reasonable. The issue of justifiable reliance is a close one, but I believe the balance tips in favor of the plaintiffs on that issue. Although they did no independent investigation of their own, they were led to believe, by persons they trusted, that the proposed investment had been thoroughly investigated by others more knowledgeable than themselves. Lakens v. Fryer Group, slip op. at 9.