In re Finley, Kumble, Wagner, Heine, Underberg
| Decision Date | 15 July 1994 |
| Docket Number | Bankruptcy No. 88-B-10377(PBA). |
| Citation | 192 BR 342 |
| Parties | In re FINLEY, KUMBLE, WAGNER, HEINE, UNDERBERG, MANLEY, MYERSON & CASEY, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Christy & Viener by John Cambria, New York City, for Malpractice Claimants Malpractice Representative.
Togut, Segal & Segal by Susan Balaschak, New York City, for the Successor Chapter 11 Trustee.
Skillman E. Siewert, Atlanta, Georgia, Pro Se.
There has been no lack of diligence by the claimant in pursuing his claim. Unfortunately for the claimant, mere tenacity is not a basis for the allowance of a claim. To the extent that the claim is one for malpractice, it must be disallowed because the claimant was neither a client of the debtor law firm nor within the scope of those third parties entitled under Georgia law to assert a malpractice claim. To the extent the claim is one for common law fraud, the claim must also be disallowed because the claimant is unable to prove two required elements: first, that the debtor had the required scienter and, second, that his reliance on the debtor was justifiable. The discussion of the legal issues follows the findings of fact.
1. The claimant is Skillman E. Siewert (the "Claimant"). He is a certified public accountant and the President, Registered Principal and majority stockholder of Skillman Siewert Incorporated, a Georgia corporation (the "Corporation").1 The Corporation did not file a proof of claim in this case.
2. The debtor, Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey (the "Debtor"), was a prominent national law firm. At its height, the Debtor was the fourth largest law firm in the United States with 240 partners, 450 associates and 1000 support personnel. The Debtor had offices in New York, California, Florida, Maryland, Texas, Louisiana, Washington D.C. and London. The Debtor ceased its active operations in late 1987 and prior to the commencement of this case.
3. This case was commenced on February 24, 1988 by the filing of an involuntary Chapter 7 petition. Thereafter the Debtor filed a Chapter 11 petition. On March 4, 1988, the court converted the Chapter 7 case to a Chapter 11 case and directed the appointment of a Chapter 11 trustee.
4. The Chapter 11 trustee (the "Trustee") was appointed on March 7, 1988. Francis Musselman was the Trustee until shortly after the Chapter 11 liquidation plan was confirmed on December 9, 1991. Albert Togut was appointed as successor trustee.
5. The court also directed the appointment of a malpractice claimants' representative (the "Malpractice Representative") to deal with the malpractice claims and the malpractice insurance. On February 14, 1990, Arthur H. Christy was appointed as the Malpractice Representative. Among the duties of the Malpractice Representative is the obligation to review and object to malpractice claims.
6. The Claimant filed a claim which has been designated as Claim No. 281 (the "Claim") in which he states that the Debtor is contingently liable in the amount of $500,000. The grounds of liability are stated as two pre-petition lawsuits, Achecar v. Renaissance, and Pignatelli v. Renaissance (collectively the "Renaissance Litigation"), in which the Debtor, the Claimant, and a number of other entities and persons were named as defendants.
7. In his subsequent submissions, the Claimant has asserted that he suffered damages as the result of (i) the Debtor's legal malpractice in the preparation of private placement memoranda (the "PPMs") for two real estate projects located in Atlanta, Georgia involved in the Renaissance Litigation and (ii) the Debtor's common law fraud in failing to disclose material information in the PPMs. The Claimant has computed his damages to be in the amount of $4,615,290 consisting of $1,350,000 in litigation-related expenses and $3,265,290 in business losses. The litigation-related expenses are for the Renaissance Litigation in which he appeared pro se. The Claimant computed his litigation-related expenses on the basis of a rate of $150 for the 11,000 hours he estimates he has spent defending the Renaissance Litigation. The business losses consist of the Claimant's calculation of the loss of business that he asserts has resulted from the failure of the projects, resulting litigation and adverse publicity.
8. The Malpractice Representative filed an objection (the "Objection") to the Claim and sought to have it expunged or, alternatively, estimated at $0.00. The Objection was based on the following grounds: (i) the Claimant did not have standing to assert a malpractice claim against the Debtor; (ii) the Debtor did not contractually agree to indemnify the Claimant; (iii) the Claimant's alleged damages were not caused by any alleged negligence by the Debtor; and (iv) assuming, arguendo, that the Debtor committed fraud, the Claim was therefore not allowable as a malpractice claim. Since an issue remained as to whether the Claim would be allowable as a general unsecured claim if it were disallowed as a malpractice claim,2 the Trustee was directed to appear and be heard with respect to the Objection. The Trustee supported the Objection. The Objection based on the Debtor's alleged legal malpractice requires this court to determine whether a stockholder of a corporation which is a third party as to the Debtor law firm is within the limited class of persons to whom the Debtor law firm could be held liable for malpractice. The court is also called upon to determine whether the Debtor's actions constituted common law fraud against the Claimant. Although the common law fraud claim would be classified in a different category than the malpractice claim, in the context of this case, the court finds that due to the commonality of facts and in the interests of judicial economy, the court will address both of these claims in a single opinion.
9. This is a contested matter within the meaning of Bankruptcy Rule 9014. All parties have made extensive factual and legal submissions. No evidentiary hearing has been held. The court has advised the parties that it will treat the present submissions as a motion for summary judgment under Bankruptcy Rule 7056.
10. These findings of fact are based on either the record of this bankruptcy case or the submissions of the parties in this contested matter.3 As to those facts based on the submissions of the parties, the court makes these findings based on its extractions of the material undisputed facts after a careful examination of the voluminous papers filed by both parties.4 The court finds the limited facts this court views as material are undisputed. These findings of fact are intended to be read only in conjunction with the court's conclusions of law in this contested matter.
11. Renaissance Investment Corporation ("Renaissance"), a Georgia corporation, was the general partner of three limited partnerships: Granada, 696 Peachtree ("Peachtree") and St. Andrews. These three partnerships were formed to acquire, renovate and operate historic or preservation-worthy real estate in Atlanta, Georgia.
12. In November 1985, the Corporation entered into broker/dealer sales agreements (the "Sales Agreements") with Renaissance to market Granada, Peachtree and St. Andrews limited partnership interests. The Corporation was one of twenty-four broker/dealers for these limited partnership interests. It was the only one of the broker/dealers located in Atlanta.
13. Renaissance hired the Debtor to serve as special securities and tax counsel and to prepare the PPMs for Granada and Peachtree. The Debtor did not prepare the PPMs for the St. Andrews offering.
14. The PPMs prepared by the Debtor for Granada and Peachtree did not disclose any material judgments, liens, claims or proceedings against Renaissance, the partnerships or their properties. Some time after distribution of the PPMs, but before the closing of either transaction, the existence of a 1975 cease and desist order against one of the Renaissance principals for violations of Georgia securities law became known to the Debtor. The Debtor subsequently prepared addenda to amend the PPMs.
15. The Granada and Peachtree offerings closed in December of 1985.
16. The Claimant relied on an indemnification clause in the Sales Agreements for his original assertion that the Debtor agreed to indemnify him for any damages resulting from his participation in the marketing of the Granada and Peachtree partnerships. The Claimant has subsequently abandoned this basis for his Claim since the Debtor was not a party to any of the Sales Agreements. Indeed, although the Claimant signed the Sales Agreements on behalf of the Corporation, the Claimant himself was not a party to the Sales Agreements in his individual capacity. The indemnification clause provides that the respective partnerships will indemnify their sales agents for certain losses.
17. By mid-1986 Granada and Peachtree had defaulted on construction and rehabilitation loans. Renaissance, due to its own insolvency, was unable to cover the partnerships' liabilities to the lenders. Granada and Peachtree were placed into bankruptcy and the lenders foreclosed on their real estate.
18. In 1987, a large group of the persons who had invested in the limited partnership interests (the "Investors") instituted the Renaissance Litigation in the United States District Court for the Northern District of Georgia (the "Georgia Court"). The defendants included Renaissance, both its related entities, the Corporation and the Claimant, as well as other broker/dealers and various Renaissance legal and financial advisors, including the Debtor.
19. The Investors alleged that the defendants intentionally failed to disclose the true financial...
To continue reading
Request your trial