Law Firm Assets Frozen to Protect Victims of Lawyers’ Fraud (Corrected)

In a case that has so far led to the conviction of two lawyers and the permanent disbarment of three more and a judge, the U.S. Court of Appeals for the Sixth Circuit affirmed a preliminary injunction freezing a law firm’s assets.

The injunction prevents Ohio law firm Waite, Schneider, Bayless, & Chesley L.P.A. (WSBC), from transferring any property. A group of plaintiffs is suing the firm to recover tens of millions of dollars transferred to it by a disbarred lawyer hoping to render himself “judgment proof” from the plaintiffs’ $42 million award.

Stanley Chesley was co-counsel in a suit brought in Kentucky by a class of plaintiffs against American Home Products for injuries stemming from their use of the notorious diet drug known as “fen-phen.”

In 2001 the suit settled for more than $200 million, which was delivered to the lawyers to “divvy up” to the class members. “So the fraud began,” Senior Judge Richard F. Suhrheinrich wrote in his May 31 opinion.

Although the attorneys were supposed to earn a contingency fee of a third of the settlement, they kept 63 percent. They “made out like bandits,” Suhreheinrich said.

Chesley somehow convinced the Kentucky state judge to sign an order altering the fee agreement and sealing the record. This secret deal included creating a charitable organization for which the judge would serve as a paid director. The judge was later disbarred.

After the scheme was discovered, the plaintiffs won a $42 million judgment against the lawyers, and the lawyers were disbarred by the Kentucky Supreme Court. Two of them were convicted for fraud. Chesley avoided prosecution by testifying against them, Suhrheinrich said.

A series of transactions designed to keep the money out of the plaintiffs’ hands followed. Chesley gave ownership of WSBC to another lawyer and funneled $59 million of his personal funds to the firm, leaving Chesley “with empty pockets to show his judgment creditors when they inevitably came knocking.”

Chesley is married to Judge Susan J. Dlott of the U.S. District Court for the Southern District of Ohio. According to the Cincinnati Business Courier, the couple owns “the most expensive home for sale in Greater Cincinnati.” Some of the alleged fraudulent transfers were made to Dlott.

The various fraudulent transfers reduced Chesley’s net worth from $29 million in 2011 to $2 million a year later, Suhreheinrich said.

The plaintiffs sued in federal court to recover the transferred money and put a halt to all Chesley’s machinations. The court granted the injunction prohibiting WSBC from moving the assets pending their suit to recover them to satisfy their $42 million judgment.

Judges Julia Smith Gibbons and Raymond M. Kethledge joined the decision.

WSBC and the other defendants were represented by Cohen, Todd, Kite & Stanford, Cincinnati. The plaintiffs were represented by Dinsmore & Shohl LLP, Cincinnati.

The case is McGirr v. Rehme , 2018 BL 192030, 6th Cir., No. 17-3519, 5/31/18.

— (Corrected to accurately reflect counsel for parties.)

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com