KDC Foods, Inc. v. Gray, Plant, Mooty, Mooty & Bennett, P.A.

Decision Date25 October 2013
Docket Number12-cv-636-bbc
CourtU.S. District Court — Western District of Wisconsin

In this civil action, plaintiff KDC Foods, Inc., has brought multiple claims against defendants Gray, Plant, Mooty, Mooty & Bennett, P.A., plaintiff's former law firm; three lawyers from the firm who worked with plaintiff, Phillip Bohl, Jennifer Dasari and Daniel Tennenbaum; and Attorneys' Liability Assurance Society, Inc., defendants' malpractice insurance company. (The insurance company plays no part in this opinion; all references to "defendants" are to the individual defendants.) Plaintiff alleges that defendants participated in a conspiracy with plaintiff's former chief financial officer, Don Johnson, and other actors, to make plaintiff insolvent or bankrupt in order to steal from and defraud it. Plaintiff brought a state court suit against Johnson and others; it won its case against Johnson and some of the others it had sued, settled with others and dismissed the case as to still other defendants. Plaintiff brought a second state action, this time against the lawyerswho represented it during Johnson's tenure. Defendants removed this action to this court. Diversity jurisdiction is present under 28 U.S.C. § 1332.

Plaintiff asserts seven claims against defendants: (1) fraud; (2) civil action under the Wisconsin Organized Crime Control Act; (3) conspiracy to commit theft by fraud under Wis. Stat. §§ 939.31, 943.20 and 895.446; (4) breach of contract; (5) negligent provision of legal services; (6) breach of fiduciary duty; and (7) civil conspiracy. Plt.'s Amended Cpt., dkt. #12, at 34-38. Plaintiff has abandoned a breach of contract claim it alleged in its original and amended complaints. Plt.'s Opp. Br., dkt. #108, at 23.

Both parties have moved for summary judgment. Dkts. ##29 & 30. I find as a matter of law that plaintiff brought most of its claims after the statutes of limitations had run and has failed to prove the elements of its remaining claims. Consequently, defendants are entitled to summary judgment on all plaintiff's claims. Defendants have also moved to strike 11 of plaintiff's filed declarations, dkt. #155, and plaintiff has moved for leave to amend its complaint for a second time, to reflect its error in citing Wis. Stat. § 943.20(b) rather than Wis. Stat. § 943.20(d), dkt. #157. Because I have not relied on any of the additional declarations filed by plaintiff and because I am granting defendants' motion for summary judgment as to all of plaintiff's claims, these motions are moot.

From the parties' proposed findings of fact, I find that the following facts are undisputed.

A. The Parties

KDC Foods, Inc. was founded in 1996 to create and sell baking products and related manufacturing techniques. Plaintiff is a Wisconsin corporation with its principal place of business in Wisconsin. Defendant Gray, Plant, Mooty, Mooty, and Bennett, P.A. is a Minnesota corporation with its principal place of business in Minnesota. Defendants Bohl, Dasari and Johnson are all Minnesota citizens. Defendant Attorneys' Liability Assurance Society, Inc. is a Vermont corporation with its principal place of business in Illinois.

B. Defendants' Representation of Plaintiff

On March 1, 2004, plaintiff hired Don Johnson as its chief financial officer with a six month contract. On the same day, Johnson contacted Daniel Tenenbaum of the Gray Plant law firm, who represented another business with which Johnson was affiliated, and asked whether Gray Plant would represent plaintiff.

Gray Plant sent a signed engagement letter on June 22, 2004. Tenenbaum and Gray Plant's general counsel, Michael Flom, discussed the addition of conflict waiver language. Tenenbaum informed Flom that Johnson "has been and continues to be a client of [his]." Flom Dep., exh. 23, dkt. #22. Conflict waiver language was added to the letter regarding Johnson and Consolidated Interest Corporation, a company affiliated with Johnson.

During 2004, plaintiff was having financial problems and retained Gray Plant for legal services related to corporate restructuring, intellectual property and recapitalization matters. By the end of summer in 2004, plaintiff had not realized any recapitalization ordebt-reduction efforts.

On September 14, 2004, Johnson sent a resignation letter, but did not actually leave his post until November 5, 2004. On October 1, 2004, Gray Plant wrote plaintiff, demanding payment for fees. By letter dated November 9, 2004, Gray Plant resigned as counsel for plaintiff, citing unpaid fees.

C. Plaintiff's Bankruptcy and Asset Sale

On December 21, 2004, plaintiff filed for bankruptcy, pursuant to a December 3 board of directors' vote. In re KDC Foods, Inc., Case No. 04-18931 (W.D. Wis.). On April 15, 2005, plaintiff sold its assets to First Products, Inc. in an asset sale approved by the bankruptcy court.

First Products, Inc. was incorporated in Minnesota on September 29, 2004 by Paul A. Zimmer, with Johnson and his associate Jeff Covelli in charge. During the bankruptcy asset sale, the Reinhart law firm represented First Products, Inc. No one from Gray Plant communicated with that firm regarding its representation of First Products, Inc.

From March 2007 until February 2010, Gray Plant represented First Products, Inc. during plaintiff's litigation against the company. Gray Plant did not inform plaintiff of its representation of First Products, Inc., and it did not obtain conflict waivers from either corporation's representatives. Tenenbaum says that he was not aware of any litigation between plaintiff and First Products, Inc. before becoming counsel for First Products, Inc. and that once he did become counsel he did not represent First Products, Inc. on any mattersinvolving plaintiff. Gray Plant collected more than $80,000 in legal fees during its representation of First Products, Inc..

D. Plaintiff's First Suit

On November 12, 2004, plaintiff's shareholders filed a derivative suit in the Circuit Court for Eau Claire County against certain corporate insiders. On June 27, 2006, the plaintiffs in that case amended their complaint to convert it from a derivative to direct action suit, replacing shareholder plaintiffs with plaintiff and adding Johnson, Jeff Covelli, First Products, Inc. and others as defendants. Plaintiff alleged that defendants in that case had conspired to defraud plaintiff of its intellectual property by driving plaintiff out of business and then purchasing its assets at bargain prices. In addition, plaintiff alleged that defendants inappropriately issued an IRS Form 1099 to plaintiff's former board member and shareholder, Stanley Popko. Plaintiff based its claim of defendants' liability in part on defendants' wrongful issuance of stock at below market prices. The case was removed to this court where its federal claim was dismissed and the matter was remanded to the state court in Eau Claire County for lack of subject matter jurisdiction. A state judge entered judgment in January 2010, finding some defendants liable to plaintiff.

E. Information Known by Plaintiff

On January 20, 2005, the bankruptcy court appointed Dennis Sullivan as receiver to pursue plaintiff's claims, including those asserted in the state court suit discussed above. OnMarch 10, 2006, during his investigation of plaintiff's claims, Sullivan requested the company's file from Gray Plant, asking specifically for notes. Gray Plant responded on April 7, 2006, with documents from plaintiff's file, for which Sullivan signed and sent an acknowledgment of receipt on April 13, 2006.

The file contained emails, memoranda and time records outlining what defendants did and did not do during the course of their representation of plaintiff. For example, Dasari indicated that she worked on the issuance of 1099 forms and on the issuance of stock certificates. Cpt., dkt. #1, at ¶ 95. In addition, a Gray Plant paralegal's time sheet was available in the file, indicating that the paralegal had spent time preparing stock certificates for plaintiff. Bohl noted in his time sheets emails and discussions he had with plaintiff's employee Kim Myers about issuing 1099 forms for other shareholders. The file also contained email exchanges between Tenenbaum and Johnson in which capitalization, financing and debt reduction opportunities were discussed. The file contained a June 7, 2004 email from Johnson to Tenenbaum, discussing four options for dealing with plaintiff, one of which read as follows: "(4) Form as you suggested a new acquisition company and buy the assets." Rectanus Aff., exh. 1c, dkt. # 51.

Plaintiff had at its disposal a memorandum drafted after a meeting between plaintiff and defendants, listing ways to "handle" the shareholders with whom plaintiff was having trouble. These methods included hiring a lawyer to bring claims against the shareholders for various claims, including violating confidentiality and trade secret protection provisions of their contracts.

On April 24, 2006, Sullivan inquired about emails from Tenenbaum and Dasari that were missing from the file. Gray Plant supplied those emails on May 19, 2006. On November 26, 2006, Sullivan requested another missing document, a proposal from Van Clemens for $ 1 million in financing for plaintiff, which Gray Plant provided on the same day as requested.

Other than four pages of handwritten notes produced originally, the file sent in April 2006 did not contain notes. As part of their Rule 26 disclosures for this case, defendants produced 77 pages of handwritten notes that had not been disclosed with the file sent to Sullivan in 2006. By policy, Gray Plant did not include any handwritten attorney notes in normal client file transfers.

After the file transfer, on May 6, 2006, a shareholder of plaintiff, Richard...

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