Mosier v. Callister, Nebeker & McCullough

• Decision Date: 13 November 2008
• Docket Number: No. 07-4238.,07-4238.
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: R. Kimball MOSIER, in his capacity as Chapter 11 Trustee of National School Fitness Foundation; School Fitness Systems, LLC, Plaintiffs-Appellants, v. CALLISTER, NEBEKER & McCULLOUGH, a professional corporation; Leland S. McCullough; Bradley E. Morris, Defendants-Appellees.

546 F.3d 1271

R. Kimball MOSIER, in his capacity as Chapter 11 Trustee of National School Fitness Foundation; School Fitness Systems, LLC, Plaintiffs-Appellants, v. CALLISTER, NEBEKER & McCULLOUGH, a professional corporation; Leland S. McCullough; Bradley E. Morris, Defendants-Appellees.

No. 07-4238.

United States Court of Appeals, Tenth Circuit.

November 13, 2008.

George B. Hoffmann, Parsons Kinghorn Harris, Salt Lake City, UT (James E. Morton, S. Brook Millard, and Christopher J. Rogers, Morton and Millard, PLLC, Salt Lake City, UT, on the briefs), appearing for Appellants.

Jefferson W. Gross (Richard D. Burbidge, with him on the brief), Burbidge Mitchell & Gross, Salt Lake City, UT, appearing for Appellees.

Before TACHA and HARTZ, Circuit Judges, and DEGIUSTI,^* District Judge.

TACHA, Circuit Judge.

Plaintiff-Appellant R. Kimball Mosier is the trustee ("Trustee") of the bankruptcy estate of the National School Fitness Foundation ("NSFF"), a not-for-profit corporation that sold physical fitness equipment and programs to school districts across the United States prior to filing for bankruptcy in 2004. Defendants-Appellees are the law firm of Callister, Nebeker, & McCullough, and two of the firm's attorneys, Bradley E. Morris and Leland S. McCullough (collectively, "CNM"). The Trustee filed this suit against CNM for professional negligence, breach of fiduciary duty, vicarious liability, breach of the covenant of good faith and fair dealing, fraud, and civil conspiracy. The Trustee alleged that CNM failed to advise NSFF that it was operating unlawfully and failed to disclose certain conflicts of interest inherent in its representation of NSFF. The district court granted summary judgment in favor of CNM under the doctrine of in pari delicto,¹ holding that the wrongdoing of NSFF was far greater than any wrongdoing of CNM. We have jurisdiction under 28 U.S.C. § 1291, and we AFFIRM.

I. BACKGROUND

In April 2000, NSFF was organized as a Utah not-for-profit corporation. It held itself out as a charitable organization that provided physical fitness programs, including fitness equipment and a curriculum, to schools throughout the United States. It also applied to the IRS for designation as a § 501(c)(3) tax-exempt entity.

From July 2001 through April 2004, NSFF utilized a business model called the "Leasing Model." This model generally worked as follows: (1) NSFF solicited schools to purchase its physical fitness programs; (2) interested schools were directed to enter into a sales contract with a for-profit company organized by NSFF's principals, called School Fitness Systems, LLC ("SFS"); (3) the schools paid SFS directly and financed the purchase by obtaining a three-year, non-recourse lease from an institutional lender; (4) NSFF entered into a "contribution agreement" with each school through which NSFF contracted to make monthly payments to the school in an amount equal to the monthly lease obligation the school owed to its institutional lender; (5) after receiving payment from the schools, SFS kicked back approximately 50% of those proceeds to NSFF; (6) NSFF agreed to repay the schools the full purchase price for the physical fitness program over the course of the three-year lease and advertised the program as "free" to the schools.

Each contribution agreement stated, either expressly or implicitly, that the source of NSFF's monthly payments to the schools would derive from charitable contributions or government grants. NSFF, however, never received charitable contributions or government grants in any appreciable amount. Instead, it paid nearly all of its monthly obligations under its contribution agreements from proceeds it received from sales of physical fitness programs to other schools. Under its Leasing Model, NSFF was therefore operating a fraudulent "Ponzi" scheme.² Because it never had sufficient assets, grants, or charitable contributions to meet its obligations to the schools, and because the stream of revenue from SFS's sales to new schools was insufficient to fund NSFF's continuing obligations to previously solicited schools, NSFF incurred a mounting, unfunded liability that eventually led to its insolvency and petition for bankruptcy on June 1, 2004.

The law firm of Ray, Quinney, & Nebeker ("RQN") represented NSFF from the inception of the Leasing Model until November 2003. During this period, NSFF affirmed to RQN that it was either receiving—or was confident it would soon be receiving—substantial government or charitable funding. As it became clear to RQN that NSFF was having difficulty raising funds, RQN repeatedly warned NSFF that unless it obtained substantial contributions or grant monies, it risked losing its tax-exempt status and would be susceptible to civil and criminal penalties.

In an August 2002 letter to Cameron Lewis, NSFF's chief executive officer, RQN specifically advised NSFF that if at any time it became substantially likely that NSFF would be unable to meet its financial commitments under its contracts with the schools, it should cease its operations immediately and pay off as many of its obligations as possible, rather than expose itself to liability for fraudulent misrepresentations and for operating a Ponzi scheme. During the subsequent fourteen months, RQN repeated this message to NSFF board members until in an October 2003 letter to J. Tyrone ("Ty") Lewis, NSFF's chairman of the board, it counseled NSFF to immediately discontinue enrolling new schools in its fitness program and to pay as many of its financial obligations as it could. RQN again relayed that advice to NSFF during a November 2003 board meeting attended by Cameron and Ty Lewis and seven other directors and officers. NSFF responded by ignoring this counsel, terminating its relationship with RQN, and continuing to solicit its fitness program to more and more schools, even as it careened toward inevitable ruin.

Shortly thereafter, NSFF sought CNM's counsel regarding its tax-exempt status. CNM's representation of NSFF was relatively brief and somewhat limited. It is undisputed, however, that CNM never advised NSFF to change its Leasing Model or otherwise warned NSFF of its potential liability for operating a Ponzi scheme.

After NSFF filed for bankruptcy, the Trustee filed an adversary complaint against nine of NSFF's directors and officers, including Cameron and Ty Lewis. The Trustee alleged that those directors and officers did not heed the advice provided by NSFF's legal counsel and had made numerous misrepresentations to schools and school districts in order to perpetuate NSFF's business operations, all to the detriment of NSFF. The parties ultimately settled, with the defendants disclaiming any liability to the Trustee. Later, however, a Minnesota federal grand jury indicted Cameron and Ty Lewis on multiple charges of fraud in connection with their operation of NSFF. A jury found them guilty of thirty-three and thirty-two felony counts respectively, including mail fraud, wire fraud, bank fraud, and money laundering.

On May 30, 2006, the Trustee filed this suit against CNM in Utah state court, alleging state-law claims of professional negligence, negligent misrepresentation, breach of fiduciary duty, vicarious liability, and breach of the covenant of good faith and fair dealing.³ The complaint sought damages allegedly incurred as a result of CNM's failure to advise NSFF that it was operating an illegal Ponzi scheme. On January 12, 2007, after CNM had removed the case to federal district court, CNM filed four motions for summary judgment. The first motion asserted that the doctrine of in pari delicto barred the Trustee's claims. The Trustee filed its response to the motion on March 19.

After receiving leave to do so, the Trustee filed an amended complaint on April 16, 2007. In it, the Trustee dropped the claim for negligent misrepresentation and added two new claims for fraud and civil conspiracy based on allegations that CNM subordinated NSFF's interests to those of Cameron Lewis, whom CNM purportedly represented in matters adverse to NSFF. On June 29, in accordance with an order from the court, the Trustee filed an amended opposition to CNM's motion for summary judgment. On October 9, 2007 the district court issued a memorandum decision and order granting CNM's motion for summary judgment under the doctrine of in pari delicto. The district court ruled that "[a]s a matter of law, any wrongdoing on behalf of the Defendants was substantially less than that of NSFF. As a result, the Trustee, standing in the shoes of NSFF, is barred from bringing this action under the doctrine of in pari delicto." Mosier v. Callister, Nebeker, & McCullough, 2:06-CV-677TS, 2007 WL 2973264, at *3 (D.Utah Oct.9, 2007). The Trustee appeals the order of summary judgment.

II. STANDARD OF REVIEW

"We review the grant of a summary judgment motion de novo, applying the same standards as the district court." Proctor v. United Parcel Serv., 502 F.3d 1200, 1205 (10th Cir.2007). Summary judgment is appropriate when "there is no genuine issue as to any material fact and ... the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). We view all evidence and draw reasonable inferences therefrom in the light most favorable to the nonmoving party. Stover v. Martinez, 382 F.3d 1064, 1070 (10th Cir. 2004). We may affirm the district court's decision for any reason supported by the record. Amro v. Boeing Co., 232 F.3d 790, 796 (10th Cir.2000).

III. DISCUSSION

The doctrine of in pari delicto "derives from the Latin, in pari delicto potior est conditio defendentis: In a case of equal or mutual fault ... the position of the [defending] party ... is the better one." Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985) (quotations omitted). It "is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and...