Appeals court deals Dorsey a victory in casino lawsuit

A federal appellate court panel awarded a legal victory to Dorsey & Whitney in a complicated and long-running conflict-of-interest case brought by a bankruptcy court trustee and 30 banks concerning a collapsed gambling-casino deal.

A split decision by a three-judge panel of the U.S. Circuit Court of Appeals this month overturned decisions by federal bankruptcy and district court judges who found that Dorsey lawyers were guilty of legal malfeasance. The appellate decision dovetails with a Minnesota Supreme Court decision in the same case that found in Dorsey's favor.

"We're very pleased with these results," said Tom Tinkham, a senior partner at Dorsey. "This is a vindication of the position we had all along: Dorsey had no conflict of interest and we're delighted the matter is concluded."

Bremer Bank, the biggest of the plaintiff banks that bought about $12 million in casino bonds, expressed disappointment with the decision. A lawyer for the trustee overseeing the bankruptcy of Dorsey's former client, investment bank Miller & Schroeder, said that he may ask for a review by the full Eighth U.S. Circuit Court of Appeals.

"All the Eighth Circuit panel did was determine the banks did not have standing to sue Dorsey, because they were not technically clients and because the Minnesota Supreme Court ruled that, in order to sue for malpractice, you have to be a client or third-party beneficiaries of Dorsey's work," said Ed Gale, the lawyer who brought suit against Dorsey on behalf of the bankruptcy trustee. "We believe the appellate court panel failed to consider critical evidence and that it reached a conclusion that turned Minnesota ethics law on its head."

The upshot? We may not have heard the last of this case.

The appellate court decision also spares Dorsey what could have been as much as a few million bucks in malfeasance-related judgments.

In 2006 U.S. Bankruptcy Judge Nancy Dreher found evidence that Dorsey lawyers knew of a potential malpractice claim involving questionable advice that the law firm had given to casino underwriter Miller & Schroeder in 1999. In 2007, U.S. District Judge Donovan Frank confirmed Dreher's decision.

Dorsey advised Miller & Schroeder in the underwriting of about $12 million in bonds to finance a casino project by the St. Regis Mohawk Tribe of New York. Specifically, Dorsey advised that parties to the underwriting didn't need approval from the National Indian Gaming Commission. Miller & Schroeder immediately sold the casino loan to 32 Minnesota banks, including Bremer. The casino-management company defaulted in 2000.

In October 2000, Miller & Schroeder retained Dorsey to go after the management company. Dorsey won a $15 million judgment. But the tribe refused to pay, saying the pledge between the tribe and the management company was unenforceable because it hadn't been approved by the gaming commission.

Dorsey says it gave what it thought was the right advice, but didn't need to share with Miller & Schroeder discussions within the firm about the accuracy of the advice. That internal argument came to light during the bankruptcy-related suits.

In December 2000, Bremer sued Miller & Schroeder concerning the now-worthless bonds. Miller & Schroeder retained Dorsey to defend against the Bremer suit. Miller & Schroeder declared bankruptcy in 2002. The bond house's bankruptcy trustee then sued Dorsey, alleging that it committed malpractice by failing to disclose to Miller & Schroeder that its legal advice was bad on the casino transaction. Dorsey said it acted in good faith and wasn't required to disclose internal concerns.

Bremer sued Dorsey for failing to represent it and the other banks against the casino management company. Dorsey argued that Miller & Schroeder was its only client.

The federal appeals panel, citing the Minnesota Supreme Court decision, found that Bremer should have done its own due diligence concerning the casino loan and that it had an "arms-length" relationship with Miller & Schroeder and lacked standing to sue Dorsey for legal malpractice or breach of contract.

In a dissent from the appellate court majority, Judge Steven Colloton cited evidence submitted during the federal trial of a "direct attorney-client relationship between Bremer and Dorsey" based on "underlying facts," including Dorsey letters and correspondence.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com