In re Verilink Corp.

• Decision Date: 09 April 2009
• Docket Number: Adversary No. 08-AP-80072.,Bankruptcy No. 06-80566.,Bankruptcy No. 06-80567.
• Citation: 408 B.R. 420
• Parties: In re VERILINK CORPORATION, a Delaware, Corporation, and Affiliates, Debtor. Darryl S. Laddin, as Trustee for the Liquidating Trust of the Estates of Verilink Corporation and Larscom Incorporated, Plaintiff, v. Leigh S. Belden, Steven C. Taylor, Timothy R. Anderson, C.W. Smith, Powell Goldstein LLP, and Raymond James & Associates, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

Page 420

408 B.R. 420

In re VERILINK CORPORATION, a Delaware, Corporation, and Affiliates, Debtor Darryl S. Laddin, as Trustee for the Liquidating Trust of the Estates of Verilink Corporation and Larscom Incorporated, Plaintiff, v. Leigh S. Belden, Steven C. Taylor, Timothy R. Anderson, C.W. Smith, Powell Goldstein LLP, and Raymond James & Associates, Inc., Defendants.

Bankruptcy No. 06-80566.

Bankruptcy No. 06-80567.

Adversary No. 08-AP-80072.

United States Bankruptcy Court, N.D. Alabama, Northern Division.

April 9, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

David J. Worley, James M. Evangelista, Page Perry LLC, Rickman P. Brown, Scott A. Schweber, Scott E. Tinnon, Dietrick Evans Scholz & Williams LLC, Atlanta, GA, Glen Marshall Connor, Richard P.

Rouco, Whatley Drake & Kallas, LLC, Birmingham, AL, for Plaintiff.

Caroline A. Fuller, John S. Lutz, Michael R. McCurdy, Fairfield and Woods PC, Denver, CO, Harriot Ivy, Timothy M. Lupinacci, Baker Donelson, W. Patton Hahn, Christopher L. Hawkins, Bradley Arant Rose & White, Birmingham, AL, for Defendants.

Raymond James & Associates, Inc., pro se.

ORDER

JACK CADDELL, Bankruptcy Judge.

Now before the Court for consideration are Defendant Powell Goldstein LLP's Motion to Dismiss Plaintiffs Corrected Amended Complaint [dkt. no. 55] ("Motion to Dismiss") and the Chapter 11 Trustee's Motion for Leave to File Second Amended Complaint [dkt. no. 89] ("Motion to Amend"). After reviewing the record and all briefs submitted in connection with the motions, and after considering the parties' arguments at a hearing held in this matter on March 24, 2009, the Court enters the following Order.

BACKGROUND AND PROCEDURAL HISTORY

Verilink Corporation ("Verilink") and Larscom Incorporated ("Larscom") filed separate petitions for reorganization under Chapter 11 of the Bankruptcy Code on April 9, 2006, and sought joint administration of their petitions. This Court granted the request for joint administration, and also granted Verilink's and Larscom's request for Powell Goldstein to serve as Debtors' counsel in the bankruptcy proceedings. On May 4, 2006, this Court appointed Darryl S. Laddin to serve as counsel to the Official Unsecured Creditor's Committee.

Verilink filed a Second Amended Joint Plan of Reorganization (the "Plan") and related Disclosure Statement on December 7, 2006. On January 31, 2007, this Court entered an order confirming the Plan, which became effective on February 13, 2007. Under the Plan, Mr. Laddin was appointed as the Liquidating Trustee.

Plaintiff Trustee (Mr. Laddin) filed the original complaint in this adversary proceeding on April 8, 2008 against certain former Verilink directors. Plaintiff filed an Amended Complaint on September 29, 2008 (and a Corrected Amended Complaint on October 30, 2008).¹ The Amended Complaint, among other things, added the law firm of Powell Goldstein as a defendant and asserted claims against Powell Goldstein for breach of fiduciary duty (Count XIII), malpractice (Count XIV), civil conspiracy (Count XV), and aiding and abetting breach of fiduciary duty (Count XVI) based upon Powell Goldstein's pre-bankruptcy representation of Verilink in the July 28, 2004 acquisition of Larscom.

On December 17, 2008, Powell Goldstein filed its Motion to Dismiss on the grounds that the claims against it in the Amended Complaint are time-barred by the statutes of repose and limitations and precluded under the doctrine of res judicata. On January 30, 2009, Plaintiff filed a response to Powell Goldstein's Motion to Dismiss and submitted the Affidavits of Darryl Laddin and James Evangelista (collectively, the "Laddin and Evangelista Affidavits") in support of an argument that the statute of limitations should be tolled because Powell Goldstein fraudulently concealed Verilink's claims. On February 12, 2009 (two weeks later), Plaintiff also filed his Motion to Amend and attached a proposed Second Amended Complaint that contained allegations of fraudulent concealment that were included in the Laddin and Evangelista Affidavits. In the proposed Second Amended Complaint, Plaintiff sought to assert additional claims against Powell Goldstein for conflicts of interest (Count XXI), professional malpractice (Count XXII), and fraudulent concealment (Count XXIII).

On March 2, 2009, Powell Goldstein filed a reply brief in support of its Motion to Dismiss, a Notice of Objection to the Laddin and Evangelista Affidavits, and a response in opposition to Plaintiffs Motion to Amend. On March 20, 2009, Plaintiff filed a sur-reply brief in further response to Powell Goldstein's Motion to Dismiss and a reply brief in support of his Motion to Amend. On March 23, 2009, Plaintiff also filed a response to Powell Goldstein's Notice of Objection to the Affidavits. The Court heard oral argument on both Powell Goldstein's Motion to Dismiss and Plaintiffs Motion to Amend on March 24, 2009.

DISCUSSION

I. Powell Goldstein's Motion to Dismiss

A motion to dismiss for failure to state a claim for which relief may be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a complaint. In considering a motion to dismiss, the Court accepts the complaint's allegations as true and construes them in the light most favorable to Plaintiff. Hill v. White, 321 F.3d 1334, 1335 (11th Cir. 2003). Dismissal under Rule 12(b)(6) on statute of limitations grounds is appropriate if it is apparent from the face of the complaint that the claim is time-barred. Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275, 1288 (11th Cir.2005).

A. Plaintiffs Claims Against Powell Goldstein Are Time-Barred.

Accepting all of the allegations in the Amended Complaint as true for purposes of deciding this Motion to Dismiss, the Court finds that Plaintiffs claims against Powell Goldstein are barred by the four-year statute of repose provided by the Alabama Legal Services Liability Act ("ALSLA") and the two-year limitations/extension period set forth in 11 U.S.C. § 108 of the Bankruptcy Code.

1. Under Alabama's Choice of Law Rules, Alabama Law Applies to Plaintiff's Claims Against Powell Goldstein.

A federal court exercising diversity jurisdiction must apply the choice of law rules of the state in which it sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Under Alabama's choice of law rules, the doctrine of "lex loci delicti" applies, and Alabama courts apply the substantive law of the state where the injury occurred. Etheredge v. Genie Industries, Inc., 632 So.2d 1324, 1326 (Ala. 1994); Fitts v. Minn. Mining & Mfg. Co., 581 So.2d 819, 820 (Ala.1991); see also Randolph v. Tenn. Valley Auth, 792 F.Supp. 1221, 1222 (N.D.Ala.1992). Here, the injury to Verilink that is alleged in the Amended Complaint—diminution of Verilink's fair market value as a result of alleged breaches of fiduciary duties and malpractice by Powell Goldstein in connection with the structuring and approval of the Larscom transaction—all occurred in Alabama, where Verilink was headquartered at the relevant time. Therefore, this Court looks to Alabama law to determine the substantive rights of the parties.

The Court rejects Plaintiffs argument that Delaware law, including its statute of limitations, would apply to Plaintiffs claims against Powell Goldstein. First, the Court finds that Alabama's "internal affairs doctrine," which provides that "the internal corporate relationship is governed by the law of the state of incorporation," Massey v. Disc Mfg., Inc., 601 So.2d 449, 454 (Ala. 1992), does not require application of Delaware substantive law to Plaintiffs claims against Powell Goldstein. This choice of law rule is applicable only to determine "the existence and extent of a director's or officer's liability to the corporation." Id. (citing Restatement (Second) of Conflicts of Law § 309 (1971)) (emphasis added). This rule does not apply to lawyers, and Plaintiff did not provide any reason why this rule would extend to the attorney-client relationship, such that the rule would apply to the claims asserted against Powell Goldstein in this case.

Second, even if, for the sake of argument, Delaware substantive law were to apply to the claims against Powell Goldstein, in no circumstances would Delaware's general three-year statute of limitations contained in 10 DEL. C. § 8106 apply in an Alabama court. Under Alabama choice of law rules, even if another state's substantive law may apply, a court sitting in Alabama must apply the procedural law of Alabama. Etheredge, 632 So.2d at 1326 ("Where the statute of limitations [is procedural, and] goes only to the remedy, it seems to be the settled rule here that the lex fori, and not the lex loci, governs."). Alabama law is clear that statutes of limitations and repose are procedural.² Etheredge, 632 So.2d at 1326 ("By legal tradition, most statutes of limitation are deemed procedural rather than substantive."); id. ("Alabama decisions state that a statute of limitations, unless the act specifically declares otherwise, is construed as affecting the remedy only."). Alabama law therefore dictates that Alabama's statutes of limitation and repose apply to Plaintiffs claims against Powell Goldstein.

2. The ALSLA's Statute of Repose, Which Cannot Be Tolled Under Any Circumstances, Is an Absolute Bar to Plaintiff's Claims Against Powell Goldstein.

The sole and exclusive remedy against a legal service provider for claims arising out of the receipt of legal services is a "legal services liability action" under the ALSLA. ALA. CODE § 6-6-573. All of the claims asserted against Powell Goldstein in the Amended Complaint arise out of Plaintiffs receipt of legal services from Powell Goldstein, which is a "legal service provider" under the terms of the ALSLA. Thus, no matter how Plaintiff labels his claims in the Amended Complaint, under Alabama law, Plaintiffs claims for breach of fiduciary duty, civil...