In re Friedman's Inc., 407CV041.

• Decision Date: 16 April 2008
• Docket Number: No. 407CV041.,407CV041.
• Citation: 394 B.R. 623
• Parties: In re FRIEDMAN'S INC., et al., Debtors. Alan Cohen, as Trustee of the Friedman's Creditor Trust, Plaintiff, v. Morgan Schiff & Co., Inc., Phillip E. Cohen, Sterling Brinkley, Bradley J. Stinn, Victor M. Suglia, and Alston & Bird LLP, Defendants.
• Court: U.S. District Court — Southern District of Georgia

394 B.R. 623

In re FRIEDMAN'S INC., et al., Debtors Alan Cohen, as Trustee of the Friedman's Creditor Trust, Plaintiff, v. Morgan Schiff & Co., Inc., Phillip E. Cohen, Sterling Brinkley, Bradley J. Stinn, Victor M. Suglia, and Alston & Bird LLP, Defendants.

No. 407CV041.

United States District Court, S.D. Georgia, Savannah Division.

April 16, 2008.

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David W. Adams, Paul W. Painter, Jr., Ellis, Painter, Ratterree & Adams, LLP, Savannah, GA, Eric Kanefsky, William C. Fredericks, Bernstein, Lotowitz, Berger & Grossman, LLP, Glenn B. Rice, Otterbourg, Steindler, Houston & Rosen, PC, New York, NY, for Plaintiff.

D. Brian Dennison, M. Tyus Butler, Jr., Bouhan, Williams & Levy, LLP, Dana F. Braun, Callaway, Braun, Riddle & Hughes, PC, James L. Drake, Jr., James L. Drake, Jr., PC, Savannah, GA, D. Ross Martin, Gregory O. Kaden, Randall W. Bodner, Ropes & Gray, LLP, Boston, MA, Mikal J. Condon, David W. Shapiro, Boies, Schiller & Flexner, LLP, Oakland, CA, Charles Davant, IV, John K. Villa, Michael Sundermeyer, Robert M. Cary, Thomas G. Ward, Williams & Connolly, LLP, Washington, DC, John J. Ossick, Jr., John J. Ossick, Jr., PC, Kingsland, GA, for Defendants.

Victor M. Suglia, pro se.

ORDER

B. AVANT EDENFIELD, District Judge.

I. INTRODUCTION

Friedman's Inc., a large jewelry store chain, financially collapsed and entered Chapter 11 Bankruptcy in 2005. In re Friedman's, Inc., Case No. 05-40129 (Bankr.S.D.Ga. filed 1/14/05). The "Friedman's Creditor Trust" arose from that. Its Trustee filed an Adversary Complaint, Case No. 07-04042 (Bankr.S.D.Ga.1/12/07), since withdrawn to this Court, In re Friedman's Inc., 2007 WL 1541962 (S.D.Ga.5/23/07) (unpublished), alleging 15 counts of wrongdoing on the part of Friedman's directors, officers, a controlling shareholder, and its attorneys. A-doc. # 1.¹ This Court granted in part and denied in part defense motions to dismiss the Trustee's Complaint.² Doc. # 73; In re Friedman's Inc., 385 B.R. 381 (S.D.Ga.1/10/08).³

More specifically, the Court dismissed the plaintiffs preferential transfer (Count XIII) and fraudulent conveyance claims (Count XIV) against defendant Alston & Bird (A & B) on res judicata grounds. Doc. #73 at 67-69. The Trustee now moves the Court to reconsider that portion of its Order. Doc. # 75.

Meanwhile, defendant A & B has filed a Motion to Certify Order for Interlocutory Appeal (doc. # 90) regarding the Court's rejection of A & B's in pari delicto defense. A & B also moves the Court to stay all proceedings pending appeal. Doc. # 90 at 11.

II. ANALYSIS

A. Trustee's Motion for Reconsideration

The Court previously held that the bankruptcy confirmation plan failed to expressly reserve avoidance actions for preferential transfers or fraudulent conveyances (Counts XIII and XIV). Doc. # 73 at 67-69. The Court explained:

Where a claim could have been brought before the confirmation of a bankruptcy plan, it is normally precluded in subsequent litigation unless it was expressly reserved in the bankruptcy plan. Again, the identification must not only be express, but also the claim must be specific. A blanket reservation that seeks to reserve all causes of action reserves nothing.

Id. at 67 (quotes and cites omitted). The Court then explained that

nowhere in the reservation statement or in section VI.G of the Disclosure Statement is there any preservation of claims for preferential transfers or avoidance actions against A & B. See doc. # 35-2 at 15 (exh. 2 attached to A & B's motion to dismiss).

Id. at 67-68. Because the Court found no language in the confirmed bankruptcy plan reserving either preferential transfer Or fraudulent conveyance claims against A & B, it deemed these claims barred by res judicata. See id. at 68; D & K Properties Crystal Lake v. Mutual Life Insurance Company of New York, 112 F.3d 257, 259-60 (7th Cir.1997).

As the Trustee points out, however, the Court relied on an incomplete copy of the confirmed bankruptcy plan. Previously the Court reviewed "Trust Claims" defined as "any and all Causes of Action against any ... attorney, law firm" etc. Doc. # 35-2 at 15 (exh. 2 attached to A & B's motion to dismiss). But A & B inadvertently omitted from the record the page defining "Causes of Action." The Trustee has now supplied that page. See doc. # 75, exh. A.

"Trust Claims," it turns out, includes "any and all Causes of Action against any ... attorney [or] law firm...." Doc. # 35-2 at 15 (exh. 2 attached to A & B's motion to dismiss). And "Causes of Action" includes; "Avoidance Claims." Doc. # 75, exh. A. "Avoidance Claims," in turn, cover both preferential transfers under 11 U.S.C. § 547 and fraudulent conveyances under 11 U.S.C. § 548., Doc. #35-2 at 8 (exh. 2 attached to A & B's motion to dismiss).

Reading these three separate provisions of the confirmed bankruptcy plan in pari materia, the Court agrees with the Trustee that his preferential transfer and fraudulent conveyance claims against A & B were properly reserved. Thus, res judicata does not apply to them.

A & B argues alternatively that the Trustee's fraudulent conveyance claim, Count XIV, should still be dismissed because it is duplicative of his legal malpractice claims found in Count XL⁴ Doc. # 87 at 5. A & B contends that the Trustee's fraudulent conveyance claim "rests upon the assertion that Friedman's did not receive the reasonably equivalent value for the fees it paid A & B because of A & B's alleged malpractice." Id. (quotes omitted).

11 U.S.C. § 548(a)(1) states:

The trustee may avoid any transfer ... of an, interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 1 year⁵ before the date of the filing of the petition, if the debtor voluntarily or involuntarily —

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation ....

Id. (footnote added). The Complaint alleges that between 2002-2004 Friedman's paid A & B over $5 million for legal services, yet did not receive reasonably equivalent value for that amount.⁶ A-doc. # 1 ¶¶ 278, 280. Friedman's also was insolvent by 8/27/02, and for all transfers made after that date. Id. ¶ 281.

Presumably the same facts underlie both the legal malpractice and fraudulent conveyance claims, but F.R.Civ.P. 8(d)(2) allows a plaintiff to plead alternative claims. The two claims are not duplicative because they rest on different legal standards. A legal malpractice claim requires proof of (1) the employment of a lawyer; (2) failure of the lawyer to exercise ordinary care, skill and diligence; and (3) damages proximately caused by that failure. Tante v. Herring, 264 Ga. 694, 694, 453 S.E.2d 686 (1994). In contrast, a § 548 claim requires the plaintiff to show that he "received less than a reasonably equivalent value" for the value he transferred. "Reasonably equivalent value, for constructive fraudulent transfer avoidance purposes, is not an esoteric concept; rather, the party receives reasonably equivalent value, if it gets roughly the value that it gave." 3B BANKRSERVICE L.ED. § 34:260 (Feb.2008) (quotes and cites omitted).

Hence, the standard for finding legal malpractice and finding a debtor "received less than a reasonably equivalent value" is not the same. Theoretically, then, it is possible that the plaintiff could fail to recover under a legal malpractice theory, yet still recover under a § 548 theory. Therefore, the claims are not duplicative.

However, because the same facts underlie each claim, and the damages overlap, at trial the plaintiff would not be allowed to recover on both claims. The Court will thus allow the pleading of alternative theories of recovery, but no double recovery. See 27 Fed. Proc. L.Ed. § 62:28, Inconsistent claims or defenses — No election of remedies (Apr.2008).

Meanwhile, the Court grants the Trustee's reconsideration motion and concludes that his avoidance claims in fact were properly reserved in the confirmed bankruptcy plan. Furthermore, his fraudulent conveyance claim is not duplicative of the legal malpractice claims. Count XIII and Count XIV of the Complaint are therefore reinstated against A & B.

B. Interlocutory Appeal

A & B moves this Court to certify for interlocutory appeal that portion of its previous Order (doc. # 73) rejecting A & B's in pari delicto defense. Doc. # 90. 28 U.S.C. § 1292(b) provides:

When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion /that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state'in writing in such order.

Id. To qualify an issue for interlocutory appeal three requirements must be met: (1) it must involve a controlling question of law; (2) there is substantial ground for difference of opinion; and (3) an immediate appeal would materially advance the termination of the litigation. Id.

The Court previously rejected A & B's in pari delicto defense to the Trustee's claims against A & B. To reiterate, the in pari delicto doctrine basically says that if the company was the wrongdoer, the Trustee cannot pursue others on behalf of the company for victimizing the company, since the company is said to have victimized itself. Here the Trustee had plied what's known as the "adverse interest exception" to the in pari delicto defense. That exception applies, and allows the company to recover, when the company's agents have acted entirely adverse to the company.

A & B argued against that exception, and also raised the "sole actor rule" (a sole actor ran the company, so there...