In re Fuzion Technologies Group, Inc.

• Citation: 332 B.R. 225
• Decision Date: 02 March 2005
• Docket Number: Bankruptcy No. 01-28967-BKC-RBR.,Adversary No. 03-2198-BKC-RBR-A.
• Parties: In re FUZION TECHNOLOGIES GROUP, INC., et al., Debtor. Marika Tolz, Trustee, as Chapter 7 Trustee of the bankruptcy estates of Fuzion Technologies Group, Inc. and Fuzion Wireless Communications, Inc., Plaintiff, v. Proskauer Rose LLP, Defendant.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida

332 B.R. 225

In re FUZION TECHNOLOGIES GROUP, INC., et al., Debtor.

Marika Tolz, Trustee, as Chapter 7 Trustee of the bankruptcy estates of Fuzion Technologies Group, Inc. and Fuzion Wireless Communications, Inc., Plaintiff, v. Proskauer Rose LLP, Defendant.

Bankruptcy No. 01-28967-BKC-RBR.

Adversary No. 03-2198-BKC-RBR-A.

United States Bankruptcy Court, S.D. Florida.

March 2, 2005.

COPYRIGHT MATERIAL OMITTED

Bart Alan Houston, Ft. Lauderdale, FL, for Debtor.

ORDER DENYING PROSKAUER ROSE LLP'S MOTION FOR SUMMARY JUDGMENT ON THE IN PARI DELICTO DEFENSE

RAYMOND B. RAY, Bankruptcy Judge.

THIS MATTER came before the Court for hearing on Tuesday, November 30 2004. The Court has heard the argument of counsel for the respective parties, has considered the record in this cause and the memoranda filed therein, and is otherwise fully advised. The Court finds as follows.

Background

Fuzion Technologies Group, Inc. and Fuzion Wireless Communications, Inc. (collectively "Fuzion") filed for Chapter 11 protection on December 7, 2001. Fuzion Wireless Communications, Inc. was formed in March 1999. In September 1999, Fuzion Technologies Group, Inc. became the holding company for Fuzion Wireless Communications, Inc. During its existence, Fuzion created and operated regional broadband wireless networks in the United States, Canada and Panama.

At Fuzion's inception, the directors were Gary Boyce ("Boyce") and David Frank ("Frank"). Boyce was the Chairman and Chief Executive Officer and was responsible for raising and managing the finances of Fuzion. Capital Investment Group, Inc. ("CIG") is a company owned and controlled by Boyce. In addition, Boyce owned or controlled the following entities including, Capital Group Investment, Inc., Investment Capital Group, Inc., Capital Aviation Group, Inc., Capital Three Aviation, Inc., and Infinity Investment International, Inc. (collectively the "Boyce Companies").

Fuzion's president, David Frank, had an engineering background and developed a potential wireless communication network, which ultimately became Fuzion's technology. Frank had no money, had no experience raising money, and could not find any investors. In 1999, he met Boyce, an experienced fundraiser who promised to raise millions to get the company off the ground. Boyce took 50 percent of the stock of the company, gave Frank the balance.

From its inception in 1999, Fuzion was dominated and controlled by Boyce. Boyce used his position as a majority stockholder, chairman and chief executive officer to misappropriate millions of dollars from Fuzion.¹

At various times, Fuzion engaged several accounting firms to audit its financial statements. McGladrey & Pullen was engaged from January 1, 2000 through June 2000. From August 2000 through November 2000, Fuzion engaged Adair Fuller Witcher & Malcolm. Then, in November 2000, Rachlin Cohen & Holtz ("RCH") was engaged to audit Fuzion's financial statements. RCH worked on the audit until approximately March 2001. Despite months of trying to confirm, non of the accountants could confirm that Boyce or his company held millions of Fuzion's funds.

On June 15, 2000 Larry Schone ("Schone") and Walter Mortimer ("Mortimer"), two directors of Fuzion and, respectively, its in-house counsel and chief financial officer, sent a notice to each of the other members of Fuzion's board of directors requesting a meeting to discuss key issues involving CIG. Immediately thereafter, Schone and Mortimer were informed that they were removed as directors of Fuzion. On June 21, 2000 Schone and Mortimer sent a letter to Fuzion's remaining board members, which were Boyce, Frank, Bruce Godwin ("Godwin"), and Felix Maduro ("Maduro"), setting forth certain facts, discovered in connection with a pending audit, which they had intended to bring to the board's attention (the "Whistle Blower Letter"). The Whistle Blower Letter contained details concerning transfers of funds from Fuzion to CIG and therefore Boyce without the knowledge or authorization of the board, including dates and amounts.

On June 27, 2000 defendant Proskauer Rose LLP ("Proskauer") was engaged by Fuzion to provide general corporate representation and to assist Fuzion with the placement of its securities. Proskauer also represented Fuzion in connection with the termination of Schone's employment agreement as well as a claim by Mortimer for wrongful termination. Proskauer provided other services to Fuzion, including preparing a Reg S document to be used to raise additional funds from investors, conducting due diligence, responding to claims raised by a group of potential investors who maintained that they were defrauded by Boyce, and advising the company in connection with an offer for rescission of sales of stock allegedly made in violation of the securities laws.

In the summer of 2001 it was discovered that Fuzion's bills were not being paid. An analysis of Fuzion's financial records revealed that Boyce had transferred millions of dollars to CIG. After repeated demands to Boyce to return the money failed, the other three members of the board of directors, Maduro, Godwin, and Frank, called an emergency meeting on September 11, 2001. At this meeting they: retained new counsel, opened a new bank account over which Boyce had no signatory authority; directed Boyce to instruct CIG and all of his other affiliated companies holding Fuzion funds to immediately transfer all such funds to Fuzion's new operating account; rescinded Boyce's check-writing authority, took corrective measures to establish a clean banking environment; terminated Boyce's relationship with Fuzion as an officer and director; and sealed his office pending legal review of his activities. At that time the board believed CIG still was holding approximately $30 million of Fuzion's money.

In early October 2001 it was discovered that Boyce had diverted millions of dollars of Fuzion's money to himself, his family members, and companies owned and controlled by them. The Trustee claims that Proskauer was negligent in its representation of the company because it failed to render appropriate advice concerning the Whistle Blower Letter. The Trustee claims that, had the board members learned of Boyce's activities in July 2000, they immediately would have acted as they did on September 11, 2001, thereby preventing Boyce from looting an additional $25 million dollars after July 2000.

Fuzion filed for Chapter 11 protection on December 7, 2001. On March 26, 2002, the case was converted to Chapter 7 and Marika Tolz was appointed as Trustee. On March 20, 2003, Trustee Marika Tolz ("Trustee" or "Plaintiff") initiated the present adversary proceeding by filing a complaint ("Complaint") against defendant Proskauer Rose LLP ("Proskauer" or "Defendant"). In January 2003, the Trustee settled her claims of negligence and breaches of fiduciary duty against all of Fuzion's officers and directors (except as to fraudulent transfers). This Court approved the settlement, through which Zurich American Insurance Company, Fuzion's directors' and officers' liability carrier, paid the Trustee $1.8 million out of a $2 million policy.

Proskauer admits for purposes of this motion that it was negligent but seeks to avoid liability for its negligence under the doctrine of in pari delicto on grounds that Boyce's knowledge of his own thievery must be imputed to the Trustee, thereby barring her from pursuing her claims. For the reasons stated below, Proskauer's motion for summary judgment is denied.

ANALYSIS

An analysis of equitable defenses, such as in pari delicto does not include an analysis of standing.² "Whether a party has standing to bring claims and whether a party's claims are barred by an equitable defense are two separate questions, to be addressed on their own terms."³

As for standing, several bankruptcy courts have recognized the Trustee's standing to bring such actions.⁴ Standing stems from injury to the debtor, now represented by the trustee.⁵ This Court rejects the Second Circuit's Wagoner rule and its progeny, where "[a] claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation."⁶ The Wagoner court reasoned that because "a class of creditors had suffered harm, the corporation itself had not."⁷ The Wagoner court ignores the fact that the corporation is a creature of law conferred with standing to sue and to be sued in its own corporate name for injuries to the corporate entity and that the corporation itself can in fact be harmed. "[A] corporation can suffer an injury unto itself, and any claim it asserts to recover for that injury is independent and separate from the claims of shareholders, creditors, and others. We think it is irrelevant that, in bankruptcy, a successfully prosecuted cause of action leads to an inflow of money to the estate that will immediately flow out again to repay creditors."⁸

The Trustee claims that Fuzion suffered great financial loss as a corporate entity due to the negligence of Proskauer. The trustee is now the representative of Fuzion. As such, the Court finds that Trustee Tolz has standing to bring this claim. The Court's analysis will now turn to whether the claim is barred by the in pari delicto defense.

In pari delicto is a common law rule, an equitable principle and defense, that prevents a plaintiff who has participated in the wrongdoing from recovering damages resulting from the wrongdoing.⁹ Normally, under agency principles, if the plaintiff acted wrongfully through an agent in the scope of that agency relationship, then the wrongdoing of the agent is attributed to the plaintiff.

However, under the adverse interest exception to the in pari delicto defense, when an agent is acting adversely to the interest of the principal, the knowledge and conduct of the agent are no longer imputed to the principal unless the principal benefitted from the wrongdoing.¹⁰ But, the sole...