In re Internet Navigator Inc.
| Decision Date | 22 April 2003 |
| Docket Number | No. 01-02353.,01-02353. |
| Citation | 293 B.R. 198 |
| Parties | In re INTERNET NAVIGATOR INC., Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
James H. Arenson, James E. Bennett, Dan Childers, Dennis Currell, Susan Daufeldt, Thomas G. McCuskey, Joseph A. Peiffer, H. Raymond Terpstra, II, Cedar Rapids, IA, Terry L. Gibson, Julie Johnson McLean, G. Mark Rice, Des Moines, IA, for Creditor.
John M. Titler, Cedar Rapids, IA, for Debtor.
This matter came before the undersigned on February 26, 2003. Claimant Bradley & Riley was represented by H. Raymond Terpstra II. Objector On Line Services, Inc. was represented by Thomas McCuskey. After hearing evidence and arguments of counsel, the Court took the matter under advisement. The time for filing briefs has now passed and this matter is ready for resolution. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B).
Internet Navigator, Inc. [hereinafter "INI"] was incorporated in Iowa. The directors began to disagree about management of the corporation. Three directors/shareholders eventually filed two lawsuits against the other three director/shareholders. In the first lawsuit, (Suit 1), the three shareholders, Glick, Lohff, and Walden, [hereinafter "Plaintiffs"] sued INI and the other director/shareholders Bennett, Letsche, and Elbert [hereinafter "Defendants"], for improper accounting methods and corporate practices, breach of fiduciary duty, and fraud. Bradley & Riley represented Defendants and INI in Suit 1, which ended in settlement and release of Plaintiffs' claims. As part of the settlement, INI confessed judgment to Plaintiffs. Plaintiffs then filed Suit 2, a derivative action. The Iowa District Court dismissed this suit as being duplicative of Suit 1, but not before Plaintiffs filed a motion to dismiss counsel. Bradley & Riley voluntarily ceased representation of INI in Suit 2.
INI failed to pay Plaintiffs under the Suit 1 settlement and eventually filed a Chapter 11 petition. By then, Plaintiffs had formed their own corporation, On-Line Services, Inc. [hereinafter "OLS"]. Plaintiffs assigned their claims to OLS. OLS and INI filed competing reorganization plans and this Court confirmed OLS' plan in January, 2003. In re Internet Navigator, Inc., 289 B.R. 128, 133 (Bankr.N.D.Iowa 2003). Under OLS' plan, all creditors are to be paid in full. OLS objects to Bradley & Riley's claim for attorney's fees in its representation of INI and Defendants in both state court suits. A hearing on the validity of Bradley & Riley's claim was held on February 26, 2003.
INI was founded as an Iowa corporation on June 20, 1995 and opened for business as an internet service provider in September, 1995. Its initial articles of incorporation provided for a four-member board of directors. The initial board consisted of Royce Bennett (45,000 shares), Michael Glick (45,000 shares), Terry Letsche (30,000 shares), and Von L. Elbert (30,000 shares). As part of INI's acquisition of IA Net, Inc., Geoffrey Lohff became a member of INI's board of directors in February, 1997. New stock was issued to Geoffrey Lohff (30,000 shares) and George Walden (7,500 shares).
Royce Bennett has been president of INI since 1995. Terry Letsche was vice-president from 1998-99. Michael Bell served on INI's board of directors from 1997-2001. On September 11, 1997, the Articles of Incorporation were amended to delete Section D, which allowed preemptive rights to stockholders.
Plaintiff Glick alleges that conflict first emerged among the board members in 1997 on the issue of preemption of shareholder rights. Beginning in June, 1998, Glick and Lohff repeatedly inquired into INI's financial records at board meetings. Glick testified via affidavit that he asked for Brad Hart's (INI's attorney and a partner at Bradley & Riley) assistance in obtaining copies of INI's financial records. According to Glick, Hart acknowledged his entitlement to the records but did not assist in their procurement. Glick later received some of the financial information in August, 1998.
Also in August, 1998, Glick, through counsel, contacted Brad Hart regarding the need to file suit on behalf of INI against other members of the board of directors. Hart stated that if Glick did wish to pursue the action, it would not be filed by his firm.
Glick testified that INI's Board of Directors instructed Hart to release the legal billing records for INI, but that other persons at Bradley & Riley repeatedly told Glick that the firm was in the middle of its billing cycle. Glick testified that he did not receive a copy of the corporate billing records until post-petition. Plaintiff Loehff also testified that Hart at one time notified him that he would receive the corporate billing records and later was denied the records.
Donald Thompson, Bradley & Riley's litigation counsel, notified James Bennett, attorney for Plaintiff Lohff, on January 6, 1999, that Bradley & Riley would provide him with a client ledger report for the fees billed to INI. Bradley & Riley believed that the actual itemized billing statements were protected by the attorney-client privilege.
On November 3, 1998, Plaintiffs Glick, Lohff, and Walden filed suit in Iowa District Court against INI and Defendants Bennett, Letsche, and Elbert. The initial claim sought the administrative dissolution of INI and complained that Defendants (a) improperly eliminated preemptive rights, (b) improperly booked approximately $110,000 in debt to INI, (c) improperly diluted Plaintiffs' percentage interests, (d) failed to give Plaintiffs access to INI corporate records, (e) breached their fiduciary duty, and (f) committed fraud. Plaintiffs Lohff and Walden also claimed breach of fiduciary duty in regard to Defendants' misrepresentation of INI's financial condition in connection with the issuance of their shares. Count III of the petition claimed entitlement to INI's financial records.
Because of their concerns regarding director mismanagement, Plaintiffs applied for an injunction or appointment of an auditor/receiver on November 17, 1998. On November 18, 1998, the Linn County District Court granted the injunction. Hearing on the appointment of an auditor/receiver was initially set for December 7, 1998, and then reset for December 21, 1998 and ultimately for January 14, 1999.
Bennett approached Bradley & Riley to represent all Defendants in this action ("Suit 1"). Bradley & Riley met with each Defendant and disclosed the potential for conflict of interest. The record contains the disclosure forms, but only one of the documents is signed by a Defendant. Bradley & Riley disclosed that (a) it was retained by INI to represent all Defendants, (b) while it did not appear there was any conflict of interest among the Defendants, there was that potential, (c) each Defendant must be willing to permit Bradley & Riley to disclose any information obtained from one Defendant to all other Defendants, (d) INI had the right to object to Bradley & Riley's continuing representation for any reason, including a perceived conflict, and (e) each Defendant had to consent to Bradley & Riley's continued representation.
On January 14, 1999, Plaintiffs released their claims against the individual Defendants, Bennett, Letsche, and Elbert. The release included all claims, known or unknown, "both at law and in equity, arising or related in any way, directly or indirectly, to their relationship and association with the Plaintiffs ..." The Court approved the parties' written stipulation on January 15, 1999. The Order further provided that INI provide Plaintiffs with reasonable access to financial records.
Plaintiffs did not release their section 490.1330 claims against INI. Iowa Code section 490.1330 provides for a fair valuation (and accrued interest) of a dissenting shareholder's shares in a dissenter's rights action. The value of the Plaintiffs' stock remained the sole issue in Suit 1 until its settlement in 2000.
On February 18, 1999, INI moved for a protective order in regard to discovery of billing records. Plaintiffs sought access to INI's billing records on the grounds that the records were relevant to the valuation of their shares. On February 26, 1999, the Iowa District Court sustained INI's motion for a protective order regarding customer names, addresses, telephone and circuit identification numbers, and fee statements of Defendant's counsel. Upon Plaintiff's motion to reconsider the order, the court, on April 13, 1999, ordered an in camera inspection of Bradley & Riley's itemized statements of fees to ascertain which portions were covered by the attorney/client privilege.
On the same day that INI filed its Motion for Protective Order, Plaintiffs filed another lawsuit, EQCV034675 ("Suit 2"). Plaintiffs, on behalf of INI, alleged breach of fiduciary duty by the Defendants, specifically citing (a) Defendants allowing the corporation to be administratively dissolved in 1997 and 1998, (b) Defendants' failure to pay Iowa sales tax when due, (c) Defendants' failure to comply with Iowa law regarding the elimination of preemptive rights, (d) Defendants' failure to provide Plaintiffs with INI documentation as requested, (e) Defendants' wasting of corporate assets, (f) Defendants' usurping of corporate opportunities for their own gain, and (g) Defendants' improper accounting practices. Plaintiffs also alleged negligence in performance of Defendants' duties as officers. Bennett, on behalf of INI, again retained Bradley & Riley to represent all named Defendants in this action. Bradley & Riley, after reviewing Plaintiff's claims and concluding they were without merit, disclosed potential conflict issues and obtained each Defendant's consent to representation.
INI moved for summary judgment in Suit 2 on April 2, 1999, claiming that the release in Suit 1 barred Plaintiffs'...
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...83 F.3d at 1025 n.3. The validity of and defenses to a claim are generally determined under state law. In re Internet Navigator Inc., 293 B.R. 198, 204 (Bankr. N.D. Iowa), aff'd 301 B.R. 1 (B.A.P. 8th Cir. Section 543 relates to duties of custodians, which include receivers appointed in a n......
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