The First Circuit Court of Appeals held that plaintiffs may not proceed with class action lawsuits against lawyers and auditors who worked for the defendants in an earlier class action suit. The decision came in the consolidated appeals of Zimmerman v. Epstein Becker & Green (No. 10-2174) and Zimmerman v. BDO Seidman LLP (No. 10-2275) (1st Cir. Sept. 22, 2011). The Court held that a constructive trust established by the lower court in the first action could not reach payments made by the defendants to lawyers and accountants in exchange for services rendered.
In the underlying litigation, the plaintiffs brought suit under the Credit Repair Organization Act (“CROA”) against two individual defendants and the defendants’ credit repair companies. The lower court entered judgment in favor of the plaintiffs and established a constructive trust over all fees that consumers paid to the defendants’ companies. The plaintiffs found that the judgment was “largely uncollectable” and so sued the defendants’ auditors and also the defendants’ attorneys, bringing a claim for enforcement of a constructive trust seeking the return of the plaintiffs’ money that was allegedly taken by the credit company defendants in the underlying case and transferred to the auditor and attorney defendants. A second claim asserted that the auditor and attorney defendants provided material assistance to the credit company defendants in violation of the CROA.
The Court of Appeals stated that the purported trust “cannot be read as intended to claw back monies expended, prior to the imposition of the trust, by the [defendants] in the ordinary course of business and in exchange for fair value.” The Court noted that a constructive trust is established to prevent unjust enrichment, and “it can hardly be ‘unjust enrichment’ for lawyers and accountants hired by companies to be paid for their services.”
The Court also held that the plaintiffs’ CROA claims were deficient because the plaintiffs had failed to certify a new class for the action against the attorneys and auditors, stating that “a certified class in one action is not a free floating entity entitled to conduct new and separate lawsuits against new defendants – unless and until it is certified in the new action.”