David B. Lilly Co., Inc. v. Fisher
| Citation | 18 F.3d 1112 |
| Decision Date | 16 March 1994 |
| Docket Number | No. 93-7061,93-7061,G,No. 93-7036,93-7036 |
| Parties | DAVID B. LILLY COMPANY, INC., v. G. Robert FISHER; Smith, Gill, Fisher and Butts, a Missouri Professional Corporation; Cadwalader, Wickersham and Taft, A Partnership, David B. Lilly Company, Inc., Appellant inRobert Fisher; Smith, Gill, Fisher and Butts, Appellants in |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Victor F. Battaglia, (Argued), Francis S. Babiarz, Biggs & Battaglia, Wilmington, DE, for David B. Lilly Co., Inc. appellant in No. 93-7036.
Phebe S. Young, Howard M. Handelman, (Argued), Bayard, Handelman & Murdoch, Wilmington, DE, for G. Robert Fisher; and Smith, Gill, Fisher and Butts, appellants in No. 93-7061.
Stephen E. Herrmann, (Argued), Richards, Layton & Finger, Wilmington, DE, for appellee.
Before: BECKER, NYGAARD and ALITO, Circuit Judges
In this diversity case, David B. Lilly Company, Inc. sued attorney G. Robert Fisher and the law firms of Smith, Gill, Fisher and Butts, and Cadwalader, Wickersham and Taft for professional malpractice. On December 4, 1991, the district court granted Cadwalader's motion for summary judgment and dismissed the Lilly Co.'s claims against it. The district court held that under either New York law or Delaware law, the relationship between the Lilly Co. and Cadwalader was insufficient to give rise to a duty of care. Additionally, it found that the Lilly Co. would be unable to demonstrate reliance on Cadwalader. On July 27, 1992, the district court granted Cadwalader's motion for summary judgment on Mr. Fisher and Smith, Gill's cross-claims, dismissing them as legally insufficient and time-barred. These two judgments will be affirmed. On December 2, 1992, the district court granted Mr. Fisher and Smith, Gill's motion for summary judgment on the ground that the Lilly Co.'s action was barred by the applicable Delaware statute of limitations. We will reverse this judgment.
The transaction from which this cause of action arose occurred in December 1983 and January 1984 when the Jordan Company acquired a controlling interest in the Lilly Co., a Delaware corporation wholly owned by David B. Lilly, Sr. The Lilly Co.'s primary business was to manufacture practice bombs under a federal set-aside program. To be eligible under this program, the Lilly Co. had to be a "small business" as defined by applicable federal regulations. Jordan was a private investment partnership comprised of John W. Jordan, David Zalaznick and Leucadia Investors, Inc. Jordan, through Mr. Zalaznick, negotiated with Mr. Lilly to acquire the Lilly Co. stock. Later, Zalaznick retained attorney G. Robert Fisher and the law firm of Smith, Gill, Fisher and Butts, a Missouri corporation, to structure the transaction and draft the necessary documents. Mr. Lilly did not retain separate counsel.
Fisher had recently represented Jordan and its partners in a potential stock acquisition that also involved a small business eligibility issue. Knowing that the Lilly Co. relied on small business set-aside contracts, he was reluctant to render an opinion on its continued eligibility after the proposed acquisition. After discussing with Zalaznick how best to proceed, Fisher contacted David W Feeney, a partner at the New York law firm of Cadwalader, Wickersham and Taft, who had worked on several matters for Jordan in the past.
Fisher sent Feeney a letter stating that:
I am writing to you at the request of David Zalaznick of The Jordan Company relative certain issues we are encountering in the acquisition of the stock of the above company.
More specifically, we would like you to review the attached December 1982 balance sheet relative tax structuring. This company is in the business of manufacturing practice bombs (very similar to Accudyne). We are paying approximately $14,500,000 for the stock of the company. With respect to the taxation, I would like you to call Jeb Boucher at The Jordan Company and give him the benefit of your thoughts on writeup possibilities. My own view is that we will encounter the same problems that we did in Accudyne and that the recapture cost cannot be offset by future tax benefits. We need at least your preliminary thoughts on a relatively prompt basis.
In Accudyne, we encountered a "small business set aside" problem discussed in our memorandum of June 9, 1983. Our firm has not had any substantial experience in government contracting and we are not in a position to advise promptly on proper structuring of the stock ownership of the acquiring company to avoid the attribution to the acquired company of the sales and employees of other companies in which The Jordan Company, Leucadia, or the individuals are involved.
Could you please also have someone in your firm examine this company on a preliminary basis and then call me so we can discuss my concerns.
After receiving Fisher's letter, Feeney called Zalaznick to clarify the scope of Cadwalader's role in the Lilly transaction. Feeney was left with the impression that Fisher and his firm were representing Jordan and that Cadwalader's role was limited to reviewing the transaction generally and discussing with Fisher the concerns raised in this letter. Feeney then asked Dudley Clapp, an attorney in Cadwalader's Washington, D.C. office, to review the small business eligibility issue, but not to spend the time or effort that an opinion would require. On December 21, 1983, Clapp sent Feeney a research memorandum discussing the eligibility issue, but they did not forward a copy to Fisher. Indeed, Fisher was not even aware of its existence until 1989. The memorandum neither stated an opinion on the Lilly stock acquisition nor recommended a specific proposed structure. It questioned "whether the inclusion of a large corporation in the owning group negates the classification of the A Company as a small business concern," and concluded only that the inference of control by a large corporation which threatens small business eligibility "can probably be rebutted if certain guidelines are followed." Cadwalader never provided Jordan or Fisher with any formal opinion on the Lilly stock acquisition, nor was it paid for work on the proposed transaction. In total, Clapp billed only 6.17 hours of time on this matter.
Ultimately, Fisher structured the acquisition so that Mr. Jordan and Zalaznick did not control the board and were not operating officers. Mr. Lilly testified during his deposition that Fisher had assured him that the small business eligibility issue had been researched and there was no problem. Similarly, Zalaznick viewed the eligibility question as having been answered by the attorneys; he believed that the transaction had been structured to meet all the rules and regulations. Smith, Gill submitted a bill to Jordan in the amount of $51,620.77 for services rendered, including "research and advice regarding impact of government contracts on structure of acquisition." Jordan remitted a check to Smith, Gill from an account held in the name of Lilly Holdings.
The transaction was structured by forming a new corporation, Lilly Holdings, Inc., which purchased all of the Lilly Co. stock from Mr. Lilly. Fisher incorporated Lilly Holdings, which issued a 70% interest to Jordan, a 20% interest to Mr. Lilly, and a combined 10% interest to William T. Ramsey, the Lilly Co.'s then-President, and David B. Lilly, Jr. Lilly Holdings was then merged back into the Lilly Co. Fisher sent an opinion letter to Manufacturers Hanover Trust Co., which financed the transaction, stating that he and his firm represented both Lilly Holdings and the Lilly Co. The letter asserted that Lilly Holdings and the Lilly Co. "have the power and authority and the legal right to own and operate their property, to lease the property they operate and to conduct the businesses in which they are currently engaged." Cadwalader was never asked to review the closing documents, nor did it participate in the closing.
Five years later, while the Lilly Co. and Abbott Products, Inc. were competing for a small business contract, Abbott challenged the Lilly Co.'s small business status. When he learned of the problem, Zalaznick faxed a letter to Fisher stating that a competitor had
filed a complaint alleging that the David B. Lilly Company is not a small business. I'm sure you remember this issue because we addressed it when we bought the company. All the stock is held by individuals, except Leucadia's piece, so no one stockholder has a majority interest. If there is an issue, it would be between Jay, Leucadia and myself being considered a group and whether we had a controlling interest. Since each party acts independently of each other and there are no pre-arrangements with regard to how each party votes its stock, I think we have a decent case. Furthermore, the Board of Directors is controlled by the Management Group.
Mr. Lilly consulted with separate counsel from Arent, Fox, Kintner, Plotkin and Kahn, and he called Fisher and Zalaznick. Coralyn Mann, an attorney with Arent, Fox, stated during her deposition that:
Mr. Fisher basically admitted that he had given bad advice.... Everyone agreed, and Mr. Fisher did say that his firm had done extensive research that prior week on the issues of SBA [Small Business Administration], had consulted with various other experts in the area and everyone, all the experts including the Fisher people working on it, all the experts that they had consulted and Arent, Fox concluded that there was no chance of winning the size appeal. We had no credible argument.
According to Matthew Perlman, another Arent, Fox attorney,
The Lilly Co. then decided to...
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