Case No. 98-09525-PHX-SSC, Adversary No. 98-00893.United States Bankruptcy Court, D. Arizona.
June 12, 2006
Mark I. Harrison, Dawn R. Sinclair, BRYAN CAVE LLP, Phoenix, Arizona, Attorneys for Squire Sanders Dempsey L.L.P.
Robert J. Shely, Rodney W. Ott, Bryan Cave LLP, Phoenix, Arizona, Attorneys for Squire Sanders Dempsey, LLP.
Gerald J. Strick, Curt W. Clausen, Lucia Stark Williamson Phoenix, Arizona, Attorneys for Plaintiffs.
James E. Cross, Osborn Maledon, P.A., Phoenix, Arizona, Attorneys for Debtor.
Dan Collins, Leonard Collins Kelly, P.C., Phoenix, Arizona, Attorneys for Trustee.
United States Trustee, Phoenix, Arizona.
UNDER ADVISEMENT DECISION RE: MOTION TO CLARIFY, REQUEST FOR LEAVE TO AMEND, AND HEALTH FOR LIFE BRANDS OF MOTIONS FOR SUMMARY JUDGMENT NO. 2 AND 3 AS FILED BY SQUIRE, SANDERS DEMPSEY
CHARLES CASE II, Bankruptcy Judge
I. Introduction
There are two matters before the Court: 1. Squire, Sanders
Dempsey’s (“SSD”) Motion to Clarify this Court’s December 16, 2005, Under Advisement Decision; and 2. Debtor’s Request for Leave to Amend Third Answer, Counterclaim and Complaint. Both pleadings arise from this
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Court’s December, 2005, Under Advisement Decision (“Decision”). SSD seeks clarification that the Court’s Decision granted SSD summary judgment on all claims brought against it by Debtor, thereby resolving this case against SSD in its entirety. Debtor seeks leave to allege that SSD breached a fiduciary duty it owed to Debtor’s creditors. To resolve these two motions, we must step back considerably and review not only the various motions for summary judgment that were filed, but also the claims pled in this case.
II. Factual History
There were three claims pending against SSD at the time it filed its motions for summary judgment pursuant to Debtor’s Third Amended Answer, Counterclaim and Complaint:
1. Count Four: Breach of Fiduciary Duty
In Count Four, Debtor alleged that Weber, HFL, and SSD breached their fiduciary duties to Debtor and that such breaches were the proximate cause of damages to Debtor (“Fiduciary Duty Claim”).
2. Count Five: Assisting in the Breach of Fiduciary Duties
In Count Five, Debtor alleged that Weber, HFL and SSD “assisted each other in breaches of fiduciary duties previously stated” and that “[t]he assisting of the breaches were the proximate cause of Debtor’s damages” (“Assisting Claim”).
3. Count Six: Legal Malpractice
In Count Six, Debtor alleged that SSD’s “conduct in representing Debtor fell below the standard of care for attorneys practicing law in the State of Arizona and elsewhere” (“Malpractice Claim”). Such malpractice included “not properly advising Debtor, not acting in the best interests of Debtor, not providing material information to Debtor and officers of Debtor, participating in a plan and scheme to strip assets from Debtor and rendering Debtor insolvent, drafting documents in a manner not beneficial to Debtor, and failing to maintain records and files of Debtor.”
On these claims, SSD filed three separate motions for summary judgment and Debtor cross-moved. In its first motion, SSD stated that it was seeking summary judgment on Counts Four and Six — Breach of Fiduciary Duty and Malpractice — arguing that Debtor had failed to
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present any expert evidence of the relevant standard of care applicable to Arizona attorneys performing transactional work under circumstances similar to those presented in this case. In its second motion, SSD sought summary judgment “on all claims against it” because Debtor failed to demonstrate any proximate cause between any of SSD’s alleged conduct and any alleged harm to Debtor. In its third motion, SSD sought summary judgment on all claims against it arising out of the alleged transfer of the Apani trademarks on the ground that the trademarks were never transferred as that term is defined under fraudulent transfer law. As a result, there can be no claim for fraudulent transfer, legal malpractice, breach of fiduciary duty or aiding and abetting a breach of fiduciary duty.
Debtor filed responses to each motion and cross-moved on SSD’s first motion. The Court granted SSD summary judgment on its first motion, declined to address the remaining two and denied Debtor’s cross-motion.
III. Analysis
1. Motion to Clarify
The question raised by SSD’s motion to clarify is whether the Court granted SSD summary judgment on all counts pending against in granting SSD’s first motion. It would appear that the Court did, as it declined to address SSD’s other two motions, stating they were now moot. Upon review, however, this was incorrect.
By its own terms, SSD’s first motion sought summary judgment against Debtor solely on the Fiduciary Duty and Malpractice Claims: “SSD moves for partial summary judgment dismissing the breach of fiduciary duty and legal malpractice claims against it.” The Court notes, however, that considerable confusion was created by Debtor in its response and cross-claim, in which Debtor seemed to confuse, or combine, the Assisting Claim with the Fiduciary Duty Claim: “[A]s for its claim for breach of fiduciary duty, . . . this Court does not need an expert to opine that a lawyer should not knowingly assist in the transfer of an insolvent client’s assets to one unsecured creditor to the detriment of the other unsecured creditor. . . . [A] duty in this matter is imposed by law and does not depend upon expert opinion.” Debtor went further, arguing that
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“[l]awyers for insolvent corporations owe a fiduciary duty to treat all unsecured creditors equally.” (Emphasis added). Therefore, according to Debtor, as counsel to an insolvent debtor, SSD owed a fiduciary duty to Debtor’s creditors and breached that duty by assisting Debtor in the transfer of Debtor’s assets to Larry Weber, an unsecured creditor of Debtor.
These statements did two things. First, it changed the nature of Debtor’s original breach of fiduciary duty claim. Debtor went from claiming that SSD owed Debtor a fiduciary duty to SSD owe Debtor’s creditors a fiduciary duty. Second, it muddled the Fiduciary Duty Claim with the Assisting Claim and appeared to bring Debtor’s Assisting Claim to the surface during these summary judgment proceedings. In fact, SSD filed a supplemental response specifically addressing Debtor’s Assisting Claim after the Court had already heard oral argument on the motions and three days before this Court issued its Decision.[1] The supplemental response, however, did not address the question of whether expert testimony is needed to establish an Assisting Claim, but rather discussed the knowing and substantial assistance elements of the claim. Tellingly, SSD made no request in that supplemental response for summary judgment on the Assisting Claim.
When the parties did discuss whether expert testimony is or is not required, moreover, it appears the parties were not talking to the same point. The Court rejected Debtor’s argument that expert testimony is not needed to prove that SSD breached a fiduciary duty it owed to Debtor: Expert testimony is required under Arizona law to prove that SSD breached its fiduciary duty to Debtor. The question left unanswered, and not argued on point by either party, is whether expert testimony is required to prove that Weber and/or HFL breached a fiduciary duty, before SSD can be found to have assisted Weber and/or HFL in breach.
The bottom line, therefore, is that the Court did not and could not, based on this record, grant summary judgment on the Assisting Claim. The Assisting Claim remains
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2. Request to Amend
As mentioned supra, the Court concluded that Debtor was attempting to raise a new Fiduciary Duty Claim in its response and cross-motion when it argued for the first time that SSD owed a fiduciary duty to Debtor’s creditors. Because this duty differed from the one pled in Debtor’s Third Amended Answer, Counterclaim and Complaint, the Court summarily denied Debtor’s cross-motion “[u]ntil this claim is properly before this Court, either by way [of] a motion to amend the complaint or some other proceeding.” That motion to amend has now been filed and Debtor alleges that “[b]y reason of being legal counsel to Debtor, Squires owed fiduciary duties to Debtor and Debtor’s creditors.” (Emphasis added). SSD objects to the request, arguing that with the exclusion of Professor Winer, Debtor lacks any expert testimony to establish the standard of conduct and breach thereof. In addition, SSD stated that Arizona does not recognize such a cause of action.
This dispute, however, need not be resolved. At the hearing on the motions to clarify and amend, Debtor stated that it was withdrawing its request to amend provided the Court concluded that Debtor’s Assisting Claim still remained at issue and was not part of the Court’s earlier decision granting SSD summary judgment. Presumably, this was to overcome the clear hurdle Debtor faced as a result of the Court’s Decision granting SSD summary judgment on the earlier-pled breach of fiduciary duty claim. If Debtor’s expert was not qualified to testify regarding Debtor’s original breach of fiduciary duty claim as owed to Debtor, it likewise would not be qualified to testify regarding a breach of fiduciary duty owed to Debtor’s creditors.
So, the question is now where does this leave us. Debtor’s Fiduciary Duty and Malpractice Claims are dismissed as pled in its Third Amended Answer, Counterclaim and Complaint. Summary judgment was granted on these two claims. Debtor’s attempt to amend and allege that SSD owed a fiduciary duty to Debtor’s creditors is moot, as Debtor has not only withdrawn the motion to amend, but it is clear to the Court that it would meet the same end as the original Fiduciary Duty Claim. Without expert testimony, Debtor’s direct breach of fiduciary duty claims against SSD cannot be proven, whether the fiduciary duty was owed to Debtor or Debtor’s
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creditors. Debtor’s Assisting Claim remains; however, even with that claim there is a further wrinkle.
3. Assisting in the Breach of Fiduciary Duty Claim
In its Third Amended Answer, Counterclaim and Complaint, Debtor alleged that Weber owed a fiduciary duty to Debtor HFLAZ and that SSD assisted Weber in breaching this duty. During the hearing on the motions to clarify and amend, however, Debtor requested the opportunity to amend this claim if the Court did not find that Debtor had adequately or specifically stated that Weber owed a fiduciary duty to Debtor HFLAZ and its creditors.
Such a claim was not alleged. This again appears to be a new twist on the original Assisting Claim. This was also neither the relief sought in Debtor’s request for leave to amend nor what the Court anticipated when it instructed Debtor to seek leave to amend if it wanted to add a claim that SSD breached a fiduciary duty to Debtor’s creditors.
The Court is troubled by this new attempt to orally “clarify” its claims yet again. The fact is these are not simply clarifications, but instead are repeated attempts to allege new claims that should have been pled long ago. This case has been pending since 1998. It appears that each time Debtor faces a hurdle to proceeding with its claims as pled, it changes tack and brings a new twist on its original underlying claims. Debtor has had ample time to solidify its causes of action. This continual restating of its claims must stop. For this reason, the Court denies any request by Debtor to clarify or amend its complaint.
The sole remaining claim before the Court with respect to SSD is whether SSD assisted Weber and/or HFL in the breach of its fiduciary duty as owed to Debtor HFLAZ. A claim for assisting in the breach of a fiduciary duty does not require a fiduciary duty to be owed by the party allegedly assisting in the breach: “[A]iding and abetting liability does not require the existence of, nor does it create, a pre-existing duty of care. . . . Rather, aiding and abetting liability is based on proof of a scienter . . . the defendants must know that the conduct they are aiding and abetting is a tort.” Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust, 201 Ariz. 474, 485, 38 P.3d 12, 23 (2002) (quotin Witzman v. Lehrman, Lehrman
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Flom, 601 N.W.2d 179, 186 (Minn. 1999)). Therefore, the question is not whether SSD owed a fiduciary duty on its own, but whether it assisted Weber or HFL in the breach of Weber or HFL’s fiduciary duties. Upon this, the parties appear to agree.
Debtor argues, however, that expert testimony is not required to determine whether Weber or HFL breached any fiduciary duty. In support of this argument, Debtor cites to a handful of cases from Arizona and other courts that, “as a matter of law, officers and director of an insolvent company owe a fiduciary duty to manage the insolvent corporation for the benefit of its creditors.” While SSD argues that this misses the point, it is incorrect. While those cases do establish that a fiduciary duty exists as a matter of law, they go further and specifically set forth what officers and directors cannot do: They cannot “appropriate the assets of the corporation to secure or pay a past unsecured indebtedness to the prejudice of other creditors.” See Dunseath v. Tucson Golf Country Club, 51 Ariz. 14, 23, 74 P.2d 43, 47
(1937); see also Master Records, Inc. v. Backman, 133 Ariz. 494, 652 P.2d 1017 (1982). To a large extent, courts have defined what the standard of care is and what constitutes a breach. SSD has not provided this Court with any authority to the contrary, and this Court has been unable to find any itself.
While expert testimony is generally required under Arizona law in the context of an attorneys’ breach of fiduciary duty,[2] no such similar requirement is set forth in Arizona law or the Restatement. This is due to the fact that the law has set forth what a director or officer cannot do and the breach of a fiduciary duty by a director or officer of a corporation does not involve knowledge beyond the skill of a normal layperson: As the Fourth Circuit stated in D’Addario v. Geller, 129 Fed. Appx. 1 (4th Cir. 2005),
Although experts may be needed in complicated cases, in the present case it should not be unduly difficult to determine whether or the defendants’ action constitute
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breaches of their fiduciary duties. . . . For example, expert testimony is not essential to establish that a kickback scheme engaged in by a director at the expense of the corporation constitutes a breach of the director’s fiduciary duties. Nor is expert testimony needed to determine the amount of damages suffered if $750,000 worth of stock is wrongfully exchanged for essentially worthless rights.
Therefore, for this reason, the Court denies SSD’s request for summary judgment on the ground that Debtor lacks expert testimony on the standard of care owed by Weber to Debtor HFLAZ. Expert testimony is not required. Further, the Court denies without prejudice SSD’s additional request in its motion for clarification to dismiss Debtor’s Assisting Claim on the ground that Debtor does not have an expert to testify as to valuation for purposes of reasonably equivalent value and damages. Such request relief has not been properly brought before this Court and briefed by the parties.
For these reasons, the Assisting Claim still remains. As a result, SSD’s second and third motions for summary judgment also remain. Because these two motions were fully briefed and argued during the original summary judgment proceedings, the Court will decide them now.
4. Motion for Summary Judgment No. 2
In its second motion for summary judgment, SSD seeks summary judgment on all claims against it because Debtor “has failed to demonstrate any proximate causation between any alleged conduct by SSD and any alleged harm to HFLAZ.” According to SSD, the purchaser’s of Debtor’s stock, David Powley and Brian Beyer, ignored their own lawyer’s advice counseling them against the purchase and with full knowledge that they were signing false warranties in the purchase documents: “They would have signed any transactional documents placed in front of them just to have the opportunity to own the rights to perform the Japanese contract.”
The Court declines to grant summary judgment on this issue for two reasons. First, the only claim remaining is the Assisting Claim, which requires proof of the following: 1. Weber and/or HFL, as the primary tortfeasor, must have committed a tort that causes injury to Debtor; 2. SSD must have known that Weber’s and/or HFL’s conduct constituted a tort or a breach of duty; and 3. SSD must have substantially assisted or encouraged Weber and/or HFL in the achievement of the breach. See Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement
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Masons Local No. 395 Pension Trust, 201 Ariz. 474, 38 P.3d 12
(2002). There is no requirement under these elements that SSD have proximately caused the damage alleged. Causation is only required to be proven with respect to the primary tortfeasor.
Further, what the purchasers knew and believed and when they knew it all involve questions of what was going on in Powley and Beyer’s minds at various stages of the transaction. As SSD itself characterizes in its brief, “[t]his sequence of events is important to understanding Powley’s and Beyer’s mind set about the transaction.” Like issues of a person’s intent, these are questions of fact inappropriate for determination on summary judgment. Fact questions exist as to what Powley and Beyer really knew and whether they really would have gone through with the transaction no matter what. The reasons why the parties went through with the sale, even in the face of a variety of adversities, including significant financial problems, may be many and the record does not clearly foreclose the contention that SSD’s conduct may have played a part in it being consummated. Further, the fact that Powley and Beyer’s own counsel advised them against deal does not change that potential.
5. Motion for Summary Judgment No. 3
Last, SSD seeks summary judgment on the question of whether SSD can be liable for any damages claims arising in connection with the Apani Trademarks. According to SSD, Debtor has maintained throughout this case there never was a transfer of the Apani Trademarks. In fact, Debtor sought summary judgment on this issue, arguing that the Apani Trademarks were never assigned to HFL and licensed back to Debtor. Instead, the transaction was simply a sophisticated financing agreement whereby Debtor continued using the trademarks and at the end of the transaction’s term, the trademarks were to be owned by Debtor without any further consideration. In addition, Debtor argued that a transfer could not have occurred under trademark law because there was no simultaneous transfer of the goodwill of the business. Without an actual transfer, therefore, this transaction involving the Apani Trademarks cannot give rise to a fraudulent transfer claim. And, if there was no fraudulent transfer, SSD cannot be liable for any assisting in the transfer.
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Debtor responds, acknowledging that it did indeed seek summary judgment over six years ago on this issue as SSD states. However, it notes that it appears a decision was never rendered by the Court at that time.[3] Regardless, however, SSD ignores the fact that whether the transaction was a transfer or security interest, the bottom line is it was fraudulent as to Debtor’s creditors, because Debtor received no consideration in return. Under the Bankruptcy Code, “transfer” is defined broadly and includes the giving of security interests or the incurring of liens.
Based on this record, the Court will not grant summary judgment. A review of the docket indicates that Debtor’s motion apparently was never ruled on by the Court. Therefore, there is no judicial estoppel argument at this time as SSD infers. Further, Debtor’s Assisting Claim is not limited solely to a claim that SSD assisted HFL and/or Weber in a fraudulent transfer. The Assisting Claim states that SSD assisted Weber and/or HFL in breaching its fiduciary duties. The fiduciary duty claim in turn does not hinge solely on the fraudulent transfer claim
IV. Conclusion
In sum, the Court grants SSD’s motion to clarify and concludes summary judgment was not granted to SSD on Debtor’s assisting in the breach of fiduciary duty claim. Debtor’s request for leave to amend is denied. The only remaining claim before the Court is Debtor’s claim that SSD assisted in Weber and/or HFL in the breach of their fiduciary duty as owed to Debtor HFLAZ. The Court further denies SSD’s request for summary judgment on the issues of proximate cause and the Apani Trademarks.
Debtor is to lodge a form of order consistent with this decision for the Court’s signature. The parties are ordered to appear on August 1, 2006, at 10:00 a.m. for a Rule 16(b) Scheduling Conference to determine how to proceed in this case.
(Ct.App. 1988).
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