Browning v. Levy
| Decision Date | 12 March 2002 |
| Docket Number | No. 00-4275.,00-4275. |
| Citation | 283 F.3d 761 |
| Parties | Christopher BROWNING; Jeffrey Rademan; Nationwise Automotive Inc. Employee Stock Ownership Plan; and NW Liquidating, Inc., Plaintiffs-Appellants, v. Saul LEVY, Defendant, Squire, Sanders & Dempsey, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Gary D. Greenwald (argued and briefed), Anne Marie La Bue (briefed), Shayne & Greenwald Co., LPA, Columbus, OH, for Plaintiffs-Appellants.
Steven W. Tigges (argued and briefed), John W. Zeiger (briefed), Stuart G. Parsell (briefed), Zeiger & Carpenter, Columbus, OH, for Defendants-Appellees.
Before MARTIN, Chief Circuit Judge; GILMAN, Circuit Judge; EDMUNDS, District Judge.*
Nationwise Automotive, Inc.'s Employee Stock Ownership Plan (ESOP), ESOP participants Christopher Browning and Jeffrey Rademan, and NW Liquidating, Inc. (NW), the successor to Nationwise, appeal the district court's grant of summary judgment in favor of the law firm of Squire, Sanders, & Dempsey (SSD). The ESOP, Browning, and Rademan claimed that SSD breached its fiduciary duties and engaged in prohibited transactions under the Employment Retirement Income Security Act (ERISA). NW, on the other hand, sued SSD for legal malpractice and other breaches of duty under Ohio law. All of these claims arise from SSD's representation of Saul Levy, Nationwise's majority shareholder and Chairman of the Board, before Nationwise filed for reorganization under Chapter 11 of the Bankruptcy Code.
The plaintiffs argue that the district court erred in holding, first with respect to the ESOP and NW, and then in a later ruling with respect to Browning and Rademan, that their claims against SSD were barred by res judicata and judicial estoppel. These rulings were based on the plaintiffs' failure to raise or reserve their claims against SSD before the 1996 confirmation of Nationwise's Plan of Reorganization. For the reasons set forth below, we AFFIRM the judgments of the district court.
This case arises out of a 1992 dispute between the ESOP and Saul Levy over control of the corporation. Nationwise is an Ohio corporation engaged in the retail sale of auto parts. Levy owned the majority of the company's voting stock in 1992, based in part upon shares that were allocated to him pursuant to a 1986 "Subscription Agreement." Under the Agreement, Levy was granted $9.1 million in Nationwise shares without having to make immediate payment. Nationwise, however, could "call" the subscription upon demand and require Levy to pay the purchase price for the subscribed shares. But Levy could terminate his obligations under the Agreement at any time, so long as doing so would not leave Nationwise without adequate funds to operate effectively. Without the shares that Levy owned pursuant to the Subscription Agreement, the ESOP would have had majority control of the corporation.
The dispute in question arose from a difference of opinion between Levy and the ESOP Trustees over what steps should be taken to remedy the serious financial difficulties facing Nationwise in 1991 and 1992. Kent Brown, James Leggett, and Lee Tenenbaum were the ESOP Trustees. Brown was also a member of Nationwise's Board of Directors, along with Levy and Edward A. Schrag, who was then Nationwise's corporate counsel and a partner in the law firm of Vorys, Sater, Seymour & Pease.
On January 7, 1992, the three ESOP Trustees and Nationwise's Board of Directors proposed an "Organization and Expense Reduction Plan" that recommended eliminating certain employee positions, selling the corporate jet, and restricting travel and entertainment expenses. Levy, in an apparent change of position, rejected the Expense Reduction Plan on January 17, 1992. Acting without authorization from the Board of Directors, Levy attempted to stop implementation of the Plan by firing Brown, suspending Leggett, assuming the positions of President and Chief Operating Officer in addition to those of Chairman of the Board and Chief Executive Officer, and purporting to rescind the Expense Reduction Plan.
In response, the ESOP Trustees, acting upon the advice of their lawyer, Elizabeth B. Mayo, a partner in the law firm of Porter, Wright, Morris & Arthur, recommended that the Board of Directors call Levy's Subscription Agreement in order to raise $9.1 million in needed cash for the corporation and to implement the Expense Reduction Plan. A majority of the Board of Directors (Brown and Schrag) voted on January 20, 1992 to make the cash call upon Levy pursuant to the Subscription Agreement. When Levy was unable to pay, the majority of the Board considered the Subscription Agreement null and void, and viewed the ESOP, rather than Levy, as having voting control of Nationwise.
Soon thereafter, a dispute arose between Levy and the majority of the Board (Brown and Schrag), who then caused Nationwise to sue Levy in state court. The complaint alleged fraud in connection with the Subscription Agreement. Levy was represented in this litigation by SSD, Nationwise was represented by Schrag, and the ESOP was represented by Mayo. In February of 1992, SSD, as counsel for Levy, repeatedly requested that the ESOP Trustees approve a settlement agreement that would involve a call on Levy in the reduced amount of $1.6 million and would include a complete release of the ESOP's potential claims against him.
On March 18, 1992, the Board of Directors unanimously voted to partially rescind the call, requiring Levy to pay for only $1.6 million worth of the shares he owned under the Subscription Agreement. The Board also approved a new employment agreement for Brown as President of Nationwise. Tenenbaum and Leggett then resigned as ESOP Trustees, leaving Brown as the sole remaining Trustee.
Finally, on April 16, 1992, the ESOP, Nationwise, Levy, and the other affected parties entered into a settlement agreement and release. Under the terms of the Settlement Agreement, Levy paid Nationwise approximately $1.6 million and remained the majority shareholder. The state court entered a final judgment approving the settlement on May 27, 1992.
Nationwise filed for Chapter 11 bankruptcy protection on August 18, 1995. Five days later, Christopher Browning and Jeffrey Rademan, both of whom were Nationwise employees and participants in the ESOP, brought suit against Levy. Their complaint alleged that the 1992 settlement was procured by fraud, and they asked the district court to set aside the settlement and allow the 1992 suit to be relitigated.
In 1997, the ESOP and NW intervened as plaintiffs in Browning's and Rademan's suit, joining SSD as an additional defendant. Browning and Rademan then amended their complaint to also sue SSD. The ESOP alleged that in procuring the 1992 settlement, SSD breached its fiduciary duties under ERISA, 29 U.S.C. §§ 1001-1461. NW alleged that SSD committed legal malpractice and other breaches of duty under Ohio law. According to the ESOP and NW, SSD's wrongdoing "remained latent until mid 1997, when discovery conducted in the instant litigation revealed the depth and character of SSD's involvement in forcing acceptance of the settlement agreement upon Nationwise and ESOP."
The ESOP and NW specifically contend that in February and March of 1992, SSD coerced Schrag and the Vorys firm into approving the proposed settlement by threatening to sue them on behalf of Levy for malpractice in connection with Schrag's drafting of, and advice to Levy regarding, the Subscription Agreement. According to the ESOP and NW, SSD later pressured the ESOP Trustees to approve the settlement and to persuade Mayo to support the proposed settlement by, among other things, offering Brown an enhanced employment package. SSD also allegedly induced Leggett and Tenenbaum to resign as trustees by falsely telling them that an independent successor trustee had been arranged to replace them, when in fact SSD was lining up Brown to serve as the sole ESOP trustee on an interim basis until after the settlement was concluded.
The plaintiffs contend that as a result of the settlement, the value of the shares owned by the ESOP was diluted and that Nationwise received substantially less cash than it needed to remain financially viable. According to the plaintiffs, the bankruptcy of Nationwise resulted in part from the financial hardships caused by the fraudulently induced, and therefore void, settlement and release.
Upon the filing of the Chapter 11 bankruptcy petition, Nationwise began to operate as a debtor-in-possession. Nationwise changed its name to NW Liquidating, Inc. following confirmation of the Plan of Reorganization in 1996. NW then succeeded Nationwise, functioning as the debtor-in-possession of the bankruptcy estate and presiding over the liquidation of the corporation's assets with all the powers and duties of a trustee.
At the time Nationwise filed its Chapter 11 petition, and during the first month of the bankruptcy proceeding, Nationwise was represented solely by SSD. The law firm of Arter & Hadden replaced SSD on September 26, 1995 as Nationwise's general counsel from that point forward, with SSD continuing to represent Nationwise as special counsel only.
Star Bank Trust Financial Services (Star Bank) entered its appearance on August 25, 1995, one week after Nationwise filed its petition, for the purpose of representing the ESOP in the bankruptcy proceeding. In September of 1995, Star Bank filed documents stating that it "is a party in interest herein as the Trustee of the Employee Stock Ownership Plan," and "is a party in interest herein as the representative of the debtor's minority shareholders." Star Bank also filed several separate objections and motions during the bankruptcy proceeding. On December 18, 1995, Star Bank filed a "Proof of Claim" that...
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