Opinion
Case No. 09-35789 Adv. No. 14-3106
04-06-2017
In re: D8 2010 Inc. f/k/a DOMIN-8 ENTERPRISES SOLUTIONS, INC., Debtor RICHARD D. NELSON, Plaintiff v. BRICKER & ECKLER LLP ET AL., Defendants
Copies to: Electronically Served Richard D. Nelson (Counsel for the Plaintiff) Donald E. Burton (Counsel for the Defendants) D. Jeffrey Ireland (Counsel for the Defendants)
Chapter 11
Memorandum Decision Granting in Part and Denying in Part Defendants' Motion for Summary Judgment
This matter is before the court on the Defendants' Motion for Summary Judgment. The motion seeks summary judgment dismissing the trustee's claims against a lawyer and his law firm for malpractice and for recovery of attorney fees paid to them. For the reasons stated in this memorandum decision, the Motion is granted in part and denied in part.
I. Factual and Procedural Background
On September 17, 2009 Domin-8 Enterprise Solutions, Inc. and its former affiliates (collectively "Domin-8") filed voluntary Chapter 11 bankruptcy petitions. This adversary proceeding arises out of Domin-8's jointly administered bankruptcy cases. Domin-8 sought and obtained the approval of this court to employ Bricker & Eckler LLP ("Bricker & Eckler") as counsel to them as debtors-in-possession (Est. docs. 112 & 187), with David M. Whittaker ("Whittaker") serving as "lead counsel" for Domin-8 (Est. doc. 112) (collectively, "Bricker").
References to the estate case's docket shall be to ("Est. doc. ___") and references to the adversary proceeding docket shall be to ("Adv. doc. ___").
Domin-8 sought to sell substantially all of its assets under § 363 of the Bankruptcy Code (Est. docs. 19 & 69). After a vigorously contested sale process, the court approved the sale of Domin-8's assets to RealPage, Inc. under an Asset Purchase Agreement ("APA") for a cash purchase price of $14 million (the "Sale Proceeds") (Est. doc. 351). Following the consummation of the sale, Domin-8 proposed and the court confirmed the Third Amended Plan of Liquidation (Est. doc. 550) (the "Plan"). Confirmation Order (Est. doc. 555). The Plan was drafted by Bricker and provided for the liquidation of Domin-8's assets and the distribution of the Sale Proceeds through a liquidating trust (the "Liquidating Trust") established through the Liquidating Trust Agreement. Confirmation Order, ¶ 28 (Est. doc. 555) and Plan, Article V. The "Plan Trustee" was to take possession of and distribute the Sale Proceeds under the Plan and Liquidating Trust Agreement. Plan, Article V. At all relevant times, Tim Hock ("Hock") served as the Responsible Person for Domin-8 under Local Bankruptcy Rule 1074-1 until the Effective Date of the Plan and then upon the Effective Date of the Plan, became the Plan Trustee. Confirmation Order, ¶¶ 30 & 38 (Est. doc. 555). The Plan and the Liquidating Trust Agreement limit the Plan Trustee's and his employed professionals' liability to "acts or omissions resulting from willful misconduct or gross negligence." Plan, Article V § A. 2. e.; Liquidating Trust Agreement, Article IV § 4.4. The Confirmation Order approved the employment of Bricker & Eckler as the Plan Trustee's legal counsel. Confirmation Order at 15, ¶ H (Est. doc. 555).
Section 10.14 of the Liquidating Trust Agreement provided for the posting of a bond by the Plan Trustee. Specifically, that provision states:
10.14. Bond Required. The Plan Trustee (including any Successor Plan Trustee) shall be bonded in an amount at least equal to the value of the Assets of the Trust.Est. doc. 555 at 71. The evidence establishes that this bond requirement was included in the Liquidating Trust Agreement at the request of the United States Trustee. Specifically, MaryAnne Wilsbacher, an Assistant United States Trustee, in the process of the drafting and circulation of the Plan documents, insisted that the bond requirement be included in the Liquidating Trust Agreement. See Transcript of Deposition of David Michael Whittaker ("Whittaker Dep."), Adv. doc. 57 (Exhibit A at 28-29). The emails between Wilsbacher and Whittaker were as follows:
[Wilsbacher:] As I understand the Plan, it calls for a liquidating trust to be set up with an operating account of $300,000 (Plan p. 18). Tim Hock is the proposed Liquidation Trustee and is to be compensated at the rate of $ 75/hour (DST page 40). The Trust is to be governed by the agreement attached to the Plan as Exhibit 2 (page 42 of the Plan). Three issues: (1) We believe the Trustee should be bonded as being in the "best interest" of the estate (Plan, page 52 - ¶ 10.14). If this case were in Ch. 7, the Ch. 7 Trustee would be bonded and the bank account(s) collateralized. What protections do the creditors have without it? [Whittaker, David] This is OK as long as the cost can be paid from the operating reserve account and the amount paid in to the Operating Reserve Account can be increased to cover this expense. [Wilsbacher:] I'm OK with increasing the Operating Reserve for this.Defendants' Motion for Summary Judgment (the "Motion for Summary Judgment"), Adv. doc. 52 (Exhibit A-6 at 2, ¶ 5). In addition, the Plan provided for the Plan Trustee's "obtaining and paying the premiums for liability insurance and bond premium for the Plan Trustee." Plan, Article V § A. 2. d. (22). See also Article III § 3.1. w. of the Liquidating Trust Agreement providing for the Plan Trustee's payment of "the premiums for liability insurance and bond premium for the Plan Trustee[.]" Est. doc. 555 at 64.
On December 8, 2010 Whittaker sent an email to Hock suggesting the name of a bonding company which Hock could pursue to obtain the required bond. Hock responded to that email with the following email reply: "Thanks, meaning to ask you about this." Motion for Summary Judgment, Adv. doc. 52 (Exhibit A, Decl. of David Whittaker ("Whittaker Declaration") at ¶14); Exhibit A-8; and Whittaker Dep. at 31:6-7. The Effective Date of the Plan, at which time the Liquidating Trust became effective, was December 22, 2010. See Est. doc. 570, ¶ 11 and Est. doc. 550 at 6, ¶ 41 and at 16, Art. V § A. 1. Whittaker did not communicate further with Hock about the bond until sometime in February 2011, at which time Hock sent Whittaker an email "indicating that he had explored obtaining a bond, that it was going to take about 30 days and asked if, in view of the fact that the substantial portion of the intended distributions has been made would he still need to obtain a bond. And I had a brief follow-up telephone conversation with him where I said, 'Yes, you must get a bond.'" Whittaker Dep. at 31. This appears to have been the last communication between Whittaker and Hock concerning the acquisition of the bond. See also Motion for Summary Judgment at 5. It is undisputed that a bond was never obtained by Hock.
On December 15, 2010 the court entered an Order Concerning Post-Confirmation Procedures, which required Domin-8 to "file a report pursuant to Local Bankruptcy Rule 3020-2 . . . on June 10, 2011, and every six months thereafter until a final report and motion for final decree is filed." Est. doc. 560.
Domin-8 filed post-confirmation reports every six months (Est. docs. 601, 610, 625, & 626) until July 16, 2013 when Bricker filed a Motion for an Order (1) Removing Timothy Hock as the Trustee of D8 2010 Inc. Liquidating Trust; (2) Appointing a Successor Trustee; (3) Placing an Administrative Freeze on the Bank Account(s) of D8 2010 Inc. Liquidating Trust; and (4) Waiving Notice (Est. doc. 629). The Motion asked for the removal of Hock as the Plan Trustee because he disappeared and stopped communicating with Bricker prior to the final distributions having been made to the creditors under the Plan and Liquidating Trust. On that same date, the court entered an order approving that motion, which removed Hock as the Plan Trustee (Est. doc. 630). Subsequently, Hock pled guilty in the United States District Court for the Southern District of Ohio to embezzlement from the Domin-8 bankruptcy estate and income tax evasion.
After Hock's removal, Richard D. Nelson was appointed as the Successor Trustee under the Liquidating Trust Agreement (Est. doc. 635). Shortly after Nelson was appointed as the Successor Trustee, he moved to convert the Chapter 11 cases to Chapter 7, which the court granted (Est. docs. 662 & 668). Thus, Nelson serves both as the Successor Trustee of the Liquidating Trust and as the Chapter 7 trustee for the Domin-8 bankruptcy estates and shall collectively be referred to as the "Trustee." The Trustee hired his law firm, Cohen, Todd, Kite & Stanford, LLC, to represent him as the Chapter 7 Trustee (Est. docs. 673 & 683).
Section 2.8 of the Liquidating Trust Agreement provides that:
Should the Chapter 11 Cases be converted to proceedings under Chapter 7 of the Bankruptcy Code, then the Chapter 7 trustee (whether by appointment or election) shall immediately be substituted as Successor Plan Trustee hereunder. In such event, the Plan Trustee shall cooperate with the transition to such Successor Plan Trustee and shall be entitled to payment and reimbursement from the Liquidating Trust for any reasonable costs and expenses incurred during such transition.Est. doc. 555 at 63.
The Trustee filed this adversary proceeding against Bricker, asserting claims against Whittaker for malpractice, breach of fiduciary duty, and for recoupment and disgorgement of attorney fees and expenses paid to him and against Bricker & Eckler for vicarious liability on account of Whittaker acting as an agent and employee, or partner of Bricker & Eckler (Est. doc. 660). Bricker filed an answer and counterclaims seeking recovery of $31,821.67 which they claim is still owed to them for services provided to the Liquidating Trust and for declaratory judgment on the Trustee's claim seeking disgorgement of attorney fees. No party has made a jury demand. After discovery was conducted and experts retained, Bricker filed this Motion for Summary Judgment and a separate Motion to Strike the Expert Report of Robert Goering and to Exclude His Testimony (Adv. docs. 53). The Trustee has opposed both of those motions. The court is addressing the Motion to Strike through a separate decision and order being contemporaneously entered with this decision.
II. Bankruptcy Court's Jurisdiction and Constitutional Authority to Enter a Final Judgment
The parties have not disputed this court's jurisdiction, nor its constitutional authority to enter a final order or judgment in this matter. They have asserted that this proceeding is a core proceeding and that "[a] non-core proceeding is not alleged." See Joint Preliminary Pretrial Statement of the Parties (Adv. doc. 21 at 2-3). Further, The Plan, Confirmation Order, and the Liquidating Trust Agreement provide to the maximum extent possible for the continued jurisdiction of this court over the affairs relating to the Plan, Confirmation Order, the Liquidating Trust Agreement, and the Trust.
See the Plan, Est. doc. 550, Article XIII, ¶ 6 (The bankruptcy court shall have jurisdiction to "decide or resolve any . . . adversary proceedings, contested or litigated matters . . . that may be commenced in the future . . . or instituted by the Trust after the Effective Date[.]") and ¶ 13 (The bankruptcy court shall have jurisdiction to "resolve any other matters that may arise in connection with or relate to the Plan . . . or any contract, instrument, release, indenture or other agreement or document adopted in connection with the Plan[.]"); Confirmation Order, Est. doc. 555, ¶ 58 (The bankruptcy court "shall retain exclusive jurisdiction over all matters arising out of, and related to, the Chapter 11 Cases and the Plan to the fullest extent permitted by law and shall also have jurisdiction over the matters set forth in Article XIII of the Plan."); and Liquidating Trust Agreement, Adv. doc. 555, Article X § 10.18 ("The Court shall retain such jurisdiction over all issues related to the enforcement or interpretation of this Agreement, including the determination of all claims, controversies, disputes and issues arising under or in connection with the Liquidating Trust or this Agreement and the management and administration of the Liquidating Trust and for all of the purposes contemplated herein.").
However, consent of the parties cannot create jurisdiction in a federal court if the court does not independently have statutory jurisdiction over the matter and it is always incumbent upon this court to police its own jurisdiction. As this court has previously stated:
The first and fundamental question presented by every case brought to the federal courts is whether the court has subject matter jurisdiction to hear the case before it, even when the parties concede or do not raise the issue. Bender v. Williamsport Area School Dist., 475 U.S. 534, 541, 106 S. Ct. 1326, 89 L.Ed.2d 501 (1986); Harker v. Wells Fargo (In re Krause), 414 B.R. 243, 252 (Bankr. S.D. Ohio 2009). Regardless of whether the parties raise jurisdictional issues themselves—or even attempt to consent to federal jurisdiction—federal courts have an independent obligation to investigate and police the constitutional and statutory limits of their own jurisdiction and counsel, as officers of the court, have an obligation to aid the courts with that duty. Douglas v. E.G. Baldwin & Assocs., 150 F.3d 604, 607 (6th Cir. 1998) (overruled
in part on other grounds); Minority Police Officers Assoc. v. City Of South Bend, 721 F.2d 197, 199 (7th Cir. 1983).Johnston v. City of Middletown (In re Johnston), 484 B.R. 698, 705 (Bankr. S.D. Ohio 2012). The Bankruptcy Appellate Panel for the Sixth Circuit has noted that "[w]hile the effect of [retention of jurisdiction] provisions would not be to deprive the court of jurisdiction otherwise afforded by 28 U.S.C. § 1334, retention of jurisdiction provisions might condition or limit the court's exercise of post-confirmation jurisdiction." Thickstun Bros. Equip. Co., Inc. v. Encompass Servs. Corp. (In re Thickstun Bros. Equip. Co., Inc.), 344 B.R. 515, 522 (B.A.P. 6th Cir. 2006).
This court's jurisdiction over and the ability to enter a final judgment with respect to the Trustee's claim concerning attorney fees and expenses paid to Bricker during the Chapter 11 cases (Count Three) is well-established. See 28 U.S.C. § 157(b)(1) and (2)(A), (B), and (O); 11 U.S.C. §§ 327-331; Nischwitz v. Miskovic (In re Airspect Air, Inc.), 385 F.3d 915, 920 (6th Cir. 2004); and Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 718-19 (6th Cir. 2001). However, the issues relating to whether the court has jurisdiction over and the ability to enter final orders relating to the malpractice (Count One), breach of fiduciary duty (Count Two), and vicarious liability (Count Four) claims require closer scrutiny.
The court must always be cautious when asked to pass judgment on a claim which strays from the ordinary day-to-day matters over which it presides, such as matters pertaining to the administration of bankruptcy cases, determining the extent of the bankruptcy estate, adjudicating proceedings to recover property of the estate, adjudicating avoidable transfer claims to bring property into the bankruptcy estate, determining the extent of the bankruptcy stay and of the debtor's discharge, approval of bankruptcy plans, resolving claims filed in the case, and reviewing and determining attorney fees in bankruptcy cases. After all, federal courts are courts of limited jurisdiction. Michigan Emp. Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1137 (6th Cir. 1991); Robinson v. Michigan Consolidated Gas Co. Inc., 918 F.2d 579, 582 (6th Cir. 1990); Uber v. Nelnet, Inc. (In re Uber), 443 B.R. 500, 504 (Bankr. S.D. Ohio 2011). Bankruptcy courts have specific statutory limits on the cases, proceedings and matters which they may hear, rather than broad general jurisdiction over cases or controversies. As stated by the Supreme Court in Celotex Corp v. Edwards: "The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." 514 U.S. 300, 307 (1995) (quoted in Johnston, 484 B.R. at 705-06).
These types of matters are designated by statute as "core" proceedings. See 28 U.S.C. § 157(b)(2).
The bankruptcy court derives its jurisdiction from 28 U.S.C. § 1334 which provides, in pertinent part:
(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2), and notwithstanding, any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
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(e) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction —
28 U.S.C. § 1334(a), (b), and (e)(1). In Wolverine Radio the Sixth Circuit determined that in considering its jurisdiction, a bankruptcy court need not "distinguish between the second, third, and fourth categories (proceedings 'arising under,' 'arising in,' and 'related to' a case under title 11)" because those "references operate conjunctively to define the scope of jurisdiction." 930 F.2d at 1141 (citing In re Wood, 825 F.2d 90, 93 (5th Cir. 1987)). For purposes of determining its jurisdiction, the bankruptcy court need only determine whether a matter is at least "related to" the bankruptcy. Id.(1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate[.]
Section 157 of Title 28 of the United States Code provides for the district court's referral of cases arising under title 11 and proceedings arising under title 11 or arising in or related to a case under title 11 to the bankruptcy judges of the district, which is implemented locally by General Order 05-02 of the United States District Court for the Southern District of Ohio.
The Sixth Circuit has adopted the Pacor standard for determining whether a matter is "related to" the bankruptcy:
[T]he usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy . . . . [A proceeding is] related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.Lindsey v. O'Brien, Tanski, Tanzer & Young Health Care Providers (In re Dow Corning Corp.), 86 F.3d 482, 489 (6th Cir. 1996) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). Congress intended "to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate." Celotex, 514 U.S. at 308 (citations omitted). Adhering to the Supreme Court's determination in Celotex, the Sixth Circuit has given "related to" jurisdiction a broad interpretation. See Dow Corning, 86 F.3d at 488-95. See also McKinstry v. Sergent, 442 B.R. 567 (E.D. Ky. 2011) (citing Susan Block-Lieb, The Case Against Supplemental Bankruptcy Jurisdiction: A Constitutional, Statutory, and Policy Analysis, 62 Fordham L. Rev. 721, 779-80, 784-85) ("The unqualified breadth of the phrase 'related to'—a phrase elsewhere used to denote supplemental jurisdiction—might even suggest that it is as broad a grant of supplemental jurisdiction as Congress can constitutionally give."). Nevertheless, "'situations may arise where an extremely tenuous connection to the estate would not satisfy the jurisdictional requirement' of Section 1334(b)." Dow Corning, 86 F.3d at 489 (citing Robinson v. Mich. Consol. Gas Co., Inc., 918 F.2d 579, 584 (6th Cir. 1990)).
This definition of "related to" jurisdiction has engendered significant litigation and decisions. One such area of dispute is over Chapter 11 post-confirmation matters. As the Sixth Circuit has stated, "[a]t the most literal level, it is impossible for the bankrupt debtor's estate to be affected by a post-confirmation dispute because the debtor's estate ceases to exist once confirmation has occurred." Papas v. Buchwald Capital Advisors, LLC (In re Greektown Holdings, LLC), 728 F.3d 567, 577-78 (6th Cir. 2013) (quoting Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 165 (3d Cir. 2004)). Nevertheless, courts have frequently found bankruptcy court jurisdiction to exist over some Chapter 11 post-confirmation matters. As noted by the Third Circuit:
[C]ourts do not usually apply Pacor's "effect on the bankruptcy estate" test so literally as to entirely bar post-confirmation bankruptcy jurisdiction. Instead, they apply varying standards that focus on whether the action could conceivably affect the implementation of the confirmed plan.Nuveen Mun. Trust v. Withumsmith Brown, P.C., 692 F.3d 283, 294-95 (3rd Cir. 2012) (quoting Resorts Int'l, Inc., 372 F.3d at 164-65). As noted in In re Regional Diagnostics the "close nexus test" is applied to determine "related to" jurisdiction for post-confirmation Chapter 11 matters. Morris v. Zelch (In re Regional Diagnostics, LLC), 372 B.R. 3, 22-25 (Bankr. N.D. Ohio 2007). The "close nexus" test sweeps in such matters as those "that affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan." Thickstun, 344 B.R. at 521 (quoting Resorts Int'l Fin., 372 F.3d at 167).
Many courts have found jurisdiction to exist over claims relating to post-confirmation trusts established through Chapter 11 plans, such as litigation trusts, liquidation trusts, and settlement trusts. See Mayor and City Council of Baltimore, Maryland v. State of West Virginia (In re Eagle-Picher Indus., Inc.), 285 F.3d 522, 524 (6th Cir. 2002) (post-confirmation jurisdiction existed over dispute involving a settlement trust); McKinstry v. Sergent, 442 B.R. 567 (E.D. Ky. 2011) (related to jurisdiction existed as to claims assigned to a post-confirmation trust involving "pre-petition and mid-bankruptcy conduct"); The New Nat'l Gypsum Co. v. The Nat'l Gypsum Co. Settlement Trust (In re Nat'l Gypsum Co.), 219 F.3d 478, 479, 493 (5th Cir. 2001) (jurisdiction existed over a post-confirmation proceeding when the court had to interpret the plan of reorganization in order to resolve a dispute concerning a settlement trust); Plotner v. AT&T Corp., 224 F.3d 1161, 1171 (10th Cir. 2000) (post-confirmation fraud proceeding involving a trust formed by the plan was related to the bankruptcy proceeding); and United States v. Unger, 949 F.2d 231, 233-35 (8th Cir. 1991) (post-confirmation jurisdiction existed over proceeding to recover trust funds deposited into personal account of a representative of the creditors committee).
However, some courts have been more circumspect with respect to a bankruptcy court's post-confirmation jurisdiction over Chapter 11 bankruptcy trusts, voicing concern that without limits such cases "would . . . raise the specter of 'unending jurisdiction' over continuing trusts." Resorts Int'l Fin., 372 F.3d at 167. Courts, though, have been much less concerned with finding bankruptcy court jurisdiction to exist over claims relating to a liquidating trust, such as is involved in this case, because "the specter of unending" jurisdiction is not present because "by definition [a liquidating trust] cannot reenter the marketplace (unlike a reorganized debtor), and exists only until the debtor's remaining assets have been liquidated." Street v. The End of the Road Trust, 386 B.R. 539, 546 (Del. 2008); Boston Reg'l Med. Ctr., Inc. v. Reynolds (In re Boston Reg'l Med. Ctr., Inc.), 410 F.3d 100, 106-07 (1st Cir. 2005).
Whether a bankruptcy court has jurisdiction over professional malpractice claims has also engendered significant litigation and decisions within and outside the Sixth Circuit. Courts within the Sixth Circuit held that under the circumstances of these cases that the bankruptcy court did not have jurisdiction over the malpractice claims: Stewart v. Henry (In re Stewart), 62 F. App'x 610, 613 (6th Cir. Apr. 7, 2003) (malpractice claim removed from state court against attorney alleged to have "switched sides" from representing the debtors to representing the Chapter 7 trustee in litigating and settling a lender liability claim pursued against the debtors' former lender); Hart v. Logan (In re Hart), No. 05-8001, 2005 Bankr. LEXIS 1187 (B.A.P. 6th Cir. June 24, 2005) (malpractice action filed in state court and removed to bankruptcy court against debtors' former Chapter 12 counsel alleging that counsel misinformed them as to the postponement of a foreclosure sale on some of their real property); Terlecky v. Baruch (In re Baruch), 446 B.R. 844, 848 (Bankr. S.D. Ohio 2011) (malpractice claim against debtors' former Chapter 7 counsel relating to a reaffirmation agreement); Sicherman v. Crosby (In re Rivera), 379 B.R. 728, 731 (Bankr. N.D. Ohio 2007) (debtor's malpractice claim against former personal injury attorney relating to advice given concerning disposition of the proceeds from his personal injury claim); and Newman v. Bamberger (In re Newman), No. 15-3100, 2016 Bankr. LEXIS 579 (Bankr. S.D. Ohio Feb. 17, 2016) (malpractice claim against former Chapter 7 bankruptcy counsel for collecting discharged attorney fees). The key to these decisions is that they all involved malpractice claims which the Chapter 7 or Chapter 12 debtors were pursuing for their individual benefit against their former legal counsel, not as a claim of the bankruptcy estate for the benefit of the estate's creditors. Thus, these claims were not property of estate over which the district court and bankruptcy courts had exclusive jurisdiction under 28 U.S.C. § 1334(e)(1) and there was no basis for them to be administered through the bankruptcy court.
Professional malpractice claims arising out of Chapter 11 bankruptcy cases test the outer limits of bankruptcy court jurisdiction. Thus, the Third Circuit held that the bankruptcy court did not have "related to" jurisdiction over accounting malpractice claims against Price Waterhouse brought by the trustee of a litigation trust when, despite that fact that recovery on the claims would affect the prepetition creditors of the debtor as litigation trust beneficiaries, resolution of the claims would not affect the bankruptcy estate; would only have an incidental effect on the reorganized debtor; and would not interfere with the implementation of the Chapter 11 plan. Resort Int'l, 372 F.3d 154. The Court determined that the prepetition creditors no longer had a close nexus to the bankruptcy plan or proceeding because they "exchanged their creditor status" to obtain rights as beneficiaries of the litigation trust. On the other hand, the Third Circuit also found that the bankruptcy court did have jurisdiction over a municipal trust's malpractice claims against an accountant and attorney when resolution of those claims could reduce the plaintiff's claims against the bankruptcy estate. Nuveen, 692 F.3d at 298. Finally, the Third Circuit found that the bankruptcy court had "arising in" jurisdiction over accountant malpractice claims against Ernst & Young. Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237, 260 (3d Cir. 2007). The Court emphasized that Ernst & Young's services in the bankruptcy case, including preparation of the schedules and its opining on the debtors' insolvency, and the court's review and approval of its fees paid for the work it performed for the debtors "implicated the integrity of the entire bankruptcy process" and was "inseparable from the bankruptcy context." Id. at 260-61 (citation omitted). In Schwab the court synthesized the cases finding bankruptcy court jurisdiction to exist over malpractice claims arising out of Chapter 11 cases as follows:
First, most recognize that bankruptcy malpractice claims, even though based on state law, would not exist outside of the bankruptcy case. Second, several courts link a malpractice claim against a bankruptcy professional as a matter concerning the administration of the estate, thereby creating a core claim under 28 U.S.C. § 157(b)(2)(A). Third, they point to the court's duty to oversee professionals employed during the case, as well as the court's obligation to maintain the integrity of the bankruptcy system.Schwab v. Oscar (In re SII Liquidation Co.), 10-60702, 2012 Bankr. LEXIS 4374, at *9-10 (Bankr. N.D. Ohio Sept. 20, 2012) (finding that the bankruptcy court had "arising in" jurisdiction over malpractice claim against debtors' lead counsel when the claim was "a collateral attack on the bankruptcy case.").
See Schwab v. Oscar (In re SII Liquidation Co.), 10-60702, 2012 Bankr. LEXIS 4374, at *13 (Bankr. N.D. Ohio Sept. 20, 2012) ("The factual underpinning of the claims depends on the bankruptcy case, making it difficult to comprehend how a malpractice action against bankruptcy counsel would not be deemed to 'arise in' the bankruptcy case."). In Schwab the court relied upon the following cases for its jurisdictional conclusion: Baker v. Simpson, 613 F.3d 346, 350 (2d Cir. 2010); Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003); Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237 (3d Cir. 2007); Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir. 1999); and HMT Inv. Corp. v. Kupetz (In re Kahlenberg Lumber Co., Inc.), 95-55645, 103 F.3d 138 (9th Cir. Nov. 7, 1996) (table decision).
The parties have asserted that their claims and counterclaims are core proceedings and no party has disputed this court's jurisdiction over any of the claims. The Plan, Confirmation Order, and the Liquidating Trust Agreement provide to the maximum extent for the continuation of the jurisdiction of this court. The fact that all of those claims, except the Trustee's disgorgement claim, arise out of post-confirmation conduct and that the malpractice, breach of fiduciary duty, and vicarious liability claims are state law claims, sway the jurisdictional analysis towards this court not having jurisdiction over the state law claims. However, the malpractice, breach of fiduciary duty, and vicarious liability claims arise out of the Liquidating Trust Agreement formed through the Plan and Confirmation Order and, specifically, raise issues as to whether Bricker's conduct in relation to the implementation of the Trust and Hock's handling of the Trust funds fell below the standard of care required of legal counsel to such post-confirmation trusts. Those claims, in essence, seek to recover funds which Hock diverted from the bankruptcy estate or the Liquidating Trust which would have been distributed to the beneficiaries of the Trust in lieu of their claims against Domin-8 and the bankruptcy estate.
The Confirmation Order specifically provided for the employment of Bricker & Eckler as counsel to Hock (Est. doc. 555 at 15, ¶ H). The Plan provides that the bankruptcy "[e]state shall survive and be transferred to the Trust and administered by the Liquidating Trust and shall continue to be subject to the jurisdiction of the Court following Confirmation of the Plan until distributed to holders of Allowed Claims in accordance with the provisions of the Plan." Est. doc. 550, Article V § A. 2. f. The Liquidating Trust Agreement has folded all of these claims and the Trust assets back into Domin-8's bankruptcy estate through § 2.8 of that agreement which provides that: "Should the Chapter 11 Cases be converted to proceedings under Chapter 7 of the Bankruptcy Code, then the Chapter 7 trustee (whether by appointment or election) shall immediately be substituted as Successor Plan Trustee hereunder." Est. doc. 550 at 47, § 2.8. Further, § 10.19 of the Liquidating Trust Agreement wraps that Agreement into the Plan, stating that: "The principal purpose of this Agreement is to aid in the implementation of the Plan and, therefore, this Agreement incorporates and is subject to the provisions of the Plan." Est. doc. 550 at 55, § 10.19. Thus, the Liquidating Trust Agreement's creation was not tangential, but central to the confirmation of the Plan. The state law claims relate to the implementation, consummation, execution, and administration of the confirmed Plan. The Trustee has been appointed as the Chapter 7 trustee over the converted bankruptcy estate. Under these circumstances, these claims satisfy the close nexus test and arise in or are related to the Domin-8 bankruptcy case and the court has jurisdiction over them.
The last issue which must be addressed concerning the court's ability to adjudicate this proceeding is this court's authority to issue a final order or judgment. A bankruptcy court's ability to render final judgments over state law claims came into question in Stern v. Marshall, 564 U.S. 462 (2011). In that case the Supreme Court determined that, even if Congress has identified a particular type of proceeding in a bankruptcy case as a "core" proceeding under 28 U.S.C. § 157(b)(2), a bankruptcy court, as an Article I court, does not have the constitutional authority to enter final judgments on the claim if it is a state law claim which would not be resolved in the process of allowing or disallowing claims against the estate. Further, as noted in Waldman v. Stone, mere overlap of the facts involving allowance of a claim and the facts pertaining to the state law claim, such as claims arising out of the same transaction or occurrence, does not allow the court to enter final judgment as to a state law claim which would not be completely resolved through the claims allowance process. 698 F.3d 910, 921 (6th Cir. 2012). "[F]or a bankruptcy court to enter final judgment as to claims that seek an award of money damages to the estate, there must have been, at the outset of the claims-disallowance process, 'reason to believe that the process of adjudicating [the] proof of claim would necessarily resolve' the damages claim." Id. (citing Stern, 564 U.S. at 497).
However, if a Stern claim is involved, the parties may nevertheless expressly or impliedly waive or consent to a bankruptcy court's entering of final judgment on such claims if that consent is knowing and voluntary. Wellness Int'l Network LTD. v. Sharif, 135 S. Ct. 1932, 1939 (2015). "[T]he key inquiry is whether 'the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case' before the non-Article III adjudicator." Id. at 1948 (citing Roell v. Withrow, 538 U.S. 580, 588 (2003)).
The Trustee's malpractice, breach of fiduciary duty, and vicarious liability claims have the trappings of being claims of the nature described in Stern. They are state law claims which would not have been resolved in the process of allowing or disallowing claims against the estate. See In re Renewable Energy Dev. Corp., 792 F.3d 1274, 1279 (10th Cir. 2015) (Malpractice and breach of fiduciary duty claims against former trustee arising out of allegations of conflicts of interest were Stern claims which the district court could not transfer to the bankruptcy court without the parties' consent.). However, in response to an Order from this court, all of the parties to this adversary proceeding have consented to this court's entering of final judgment on all of the claims of the parties. See Adv. docs. 61, 63, and 64.
III. Positions of the Parties
The Trustee alleges that:
a) Whittaker was negligent and breached fiduciary duties to the bankruptcy estate and creditors of the estate and Liquidating Trust in failing to: i) insure that Hock obtained the bond required by the Liquidating Trust Agreement; and ii) oversee and monitor Hock's conduct and detect his improper conduct;Complaint, ¶¶ 22 - 24, 34, and 39 - 58. Bricker, on the other hand, alleges that:
b) The Trustee's losses from Mr. Hock's embezzlement could have been recouped if Hock had obtained the bond;
c) Bricker & Eckler is vicariously liable for Whittaker's asserted failures; and
d) On account of these alleged failures, Bricker & Eckler has been unjustly enriched and should be ordered to disgorge $712,178.07 in fees and expenses paid to it for representation of the bankruptcy estate.
a) Whittaker advised Hock to obtain the bond required by the Liquidating Trust Agreement;Answer and Counterclaims, Adv. doc. 8, ¶¶ 13-29; Motion for Summary Judgment at 1.
b) A client's failure to follow advice is not a sufficient basis upon which to find that an attorney was negligent, let alone grossly negligent;
c) The Liquidating Trust owes it $31,821.67 for legal services provided to the Liquidating Trust; and
d) Bricker & Eckler provided full value through the services it provided to the bankruptcy estate and any alleged negligence on its part occurred post-confirmation, and therefore, it is entitled to declaratory judgment in its favor on the Trustee's claim seeking disgorgement of attorney fees for the pre-confirmation period.
IV. Substantive Analysis
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings through Bankruptcy Rule 7056, sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.
In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the nonmovant at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmovant's claim or 2) demonstrate to the court that the nonmovant's evidence is insufficient to establish an essential element of the nonmovant's claim. Id. at 331-32. Thereafter, the nonmovant "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co.. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 587-88.
B. Summary Judgment is Denied as to Count One Alleging Professional Negligence of Whittaker
Bricker asserts that it is entitled to summary judgment on the malpractice claim against Whittaker because Whittaker advised Hock to obtain the bond required under the Liquidating Trust Agreement and Hock's failure to follow that advice cannot, as a matter of law, constitute gross negligence - the standard provided by the Liquidating Trust Agreement. In addition, Bricker argues that Whittaker had no duty to monitor or supervise Hock's conduct in a manner which would have revealed Hock's misappropriation of funds. These conclusions require an analysis of the standard of care and duties owed by bankruptcy practitioners under such circumstances.
"Gross negligence" is defined as the "failure to exercise any or very slight care." Thompson Elec. v. Bank One, Akron, N.A., 525 N.E.2d 261, 265 (Ohio 1988) (citing Johnson v. State, 63 N.E. 607 (Ohio 1902)).
The Complaint,¶ 38, alleges that "Whittaker had a duty to the bankruptcy estate and Debtor-In-Possession and the Liquidating Trust to exercise that degree of skill and care a reasonably prudent attorney under the same or similar circumstances when performing responsibilities for the estate . . . ." Bricker asserts that a gross negligence standard applies based upon the Liquidating Trust Agreement and Plan provisions limiting the liability of the Plan Trustee and his professionals to acts constituting willful misconduct or gross negligence. However, that standard would at most apply to Whittaker in his role as counsel to the Plan Trustee as of the Effective Date of the Plan when the Liquidating Trust was established. The court is not aware of any reason why Whittaker's conduct prior to the Effective Date of the Plan and the Liquidating Trust would not be governed under a plain negligence standard.
"'[M]alpractice' refers to professional misconduct, i.e. the failure of one rendering services in the practice of a profession to exercise that degree of skill and learning normally applied by members of that profession in similar circumstances." Nat'l Union Fire Ins. Co. v. Wuerth, 913 N.E.2d 939, 942 (Ohio 2009) (quoting Strock v. Pressnell, 527 N.E.2d 1235, 1239 (Ohio 1988)). To establish a cause of action for legal malpractice based on negligent representation, the following must be established: "1) the attorney owed a duty or obligation to the plaintiff; 2) that there was a breach of that duty or obligation and that the attorney failed to conform to the standard required by law; and 3) that there is a causal connection between the conduct complained of and the resulting damage or loss." Envtl. Network Corp. v. Goodman Weiss Miller, L.L.P., 893 N.E.2d 173, 176 (Ohio 2008) (quoting Vahila v. Hall, 674 N.E.2d 1164, syllabus (Ohio 1997)); and Krahn v. Kinney, 538 N.E.2d 1058, 1061 (Ohio 1989). See also Hustler Cincinnati, Inc. v. Cambria, 625 F. App'x 712, 715 (6th Cir. 2015) and Antioch Litigation Trust v. McDermott Will & Emery LLP, 738 F. Supp.2d 758, 764 (S.D. Ohio 2010) (both applying Ohio law and breaking these three elements into five elements).
The existence of a duty is a question of law for the court to determine, at least "in the first instance." Frano v. Red Robin Int'l, Inc., 907 N.E.2d 796, 804 (Ohio Ct. App. 2009); Clemets v. Heston, 485 N.E.2d 287, 290 (Ohio Ct. App. 1985); Studniarz v. Sears Roebuck & Co., No. 2009-L-159, 2010 Ohio App. LEXIS 2551, at *6 (Ohio Ct. App. June 30, 2010). As stated by an Ohio appellate court:
A 'duty' is an obligation imposed by law on one person to act for the benefit of another person due to the relationship between them. When risks and dangers inherent in the relationship or incident to it may be avoided by the obligor's exercise of care, an obligor who fails to do so will be liable to the other person for injuries proximately resulting from those risks and dangers if the injuries were reasonably foreseeable. In negligence cases the duty is always the same: to conform to the legal standard of reasonable conduct in the light of apparent risk. What a defendant must do, or must not do, is a
question of the standard of conduct reasonably required to satisfy the defendant's duty.Wagar v. Brinkman, No. 23019, 2009 Ohio App. LEXIS 2047, at *13 (Ohio Ct. App. May 22, 2009) (citing Prosser & Keeton, Law of Torts (5th ed. 1984) at 356, § 53).
The attorney's duty to a client is to "exercise the knowledge, skill, and ability ordinarily possessed and exercised by members of the legal profession similarly situated, and to be ordinarily and reasonably diligent, careful, and prudent[.]" Pierson v. Rion, No. CA23498, 2010 Ohio App. LEXIS 1492, at *19 (Ohio Ct. App. Mar. 23, 2010) (quoting Marbury v. Schaengold, No. 21120, 2006 Ohio App. LEXIS 1659, at *5 (Ohio Ct. App. Apr. 7, 2006)). See also Harrell v. Crystal, 611 N.E.2d 908 (Ohio Ct. App. 1992). Expert witness testimony is required in a legal malpractice action to establish the attorney's breach of this duty to the client, unless "the breach or lack thereof is so obvious that it may be determined by the court as a matter of law, or is within the ordinary knowledge and experience of laymen." Bloom v. Dieckmann, 464 N.E.2d 187, 188 (Ohio Ct. App. 1983); Carolina Cas. Ins. Co. v. Sharp, 940 F. Supp. 2d 569, 578 (N.D. Ohio 2013) (citing Kreuzer v. Merritt, 18442, 2000 WL 1643794, at *2 (Ohio Ct. App. Nov. 3, 2000)) ("Expert testimony is not required, however, in cases in which the breach is 'so obvious that it may be determined by the court as a matter of law.'") See also Dimacchia v. Burke, 904 F.2d 36, 1990 U.S. App. Lexis, at *2 (6th Cir. June 7, 1990) (table decision) and McInnis v. Hyatt Legal Clinics, 461 N.E.2d 1295, 1297 (Ohio 1984).
An attorney's role as to the client is fiduciary in nature. Tonwe v. Harris-Miles (In re Harris-Miles), 187 B.R. 178, 182 (Bankr. N.D. Ohio 1995). As stated by another Ohio appellate court:
The relation between attorney and client is highly fiduciary in its nature and of a confidential character. The very existence of the relationship of attorney and client raises a presumption that relations of trust and confidence exist between the parties, and a presumption of invalidity arises where an undue advantage is obtained by an attorney over his client. . . . The lawyer's position is not one that can be used as a cloak for the launching of an undue advantage for himself or some third party.
He must be impeccably loyal to his trust to the exclusion of the affairs of others that may create a conflict. If he suspects a conflict he should
completely withdraw or fully advise all parties concerned. The termination of litigation, while it ends the power of the attorney to bind the client, does not necessarily end the duty of the attorney in dealing with the client. There are cases which show that the doctrine of uberrima fides (highest fidelity) may outlast the relationship itself, and that the rule should be applied so long as the influence arising from the relationship is proved to exist.Adams v. Fleck, 154 N.E.2d 794, 799-800 (Ohio Prob. Ct. 1958), aff'd 172 N.E.2d 126 (1961). Thus, in this case, Whittaker's relationship to Domin-8, as the debtors-in-possession, and then Hock as the Plan Trustee was fiduciary in nature.
The fiduciary nature of the attorney-client relationship most frequently is raised in conflict of interest analyses. Of course, an attorney has an obligation to avoid conflicts of interest which may impair the attorney's judgment for the client. See Ohio Rules of Prof. Conduct 1.7 and 1.8.
The Ohio Rules of Professional Conduct are also instructive on the duty of care owed by an Ohio attorney to a client. While violation of such a rule does not give rise to a cause of action against the lawyer, nor give rise to any type of presumption, a lawyer's violation of a Rule of Professional Conduct may be evidence of the breach of an applicable standard of conduct. Ohio Rules of Professional Conduct, Preamble: Scope, ¶ 20. See also Krischbaum v. Dillon, 567 N.E.2d 1291, 1301 (Ohio 1991) (citing Eisenhuth v. Moneyhon, 119 N.E.2d 440, 444 (Ohio 1954)) ("While the failure to comply with general rules of conduct, like the rules of conduct involved in the case before us [the Ohio Code of Professional Responsibility which preceded the Ohio Rules of Professional Conduct], will not ordinarily constitute negligence per se, it is a circumstance that can be considered, along with other facts and circumstances, in determining whether the actor has acted with reasonable concern for the safety and welfare of others - that is, with due care."); and Perin v. Spurney, No. 05AP-428, 2005 Ohio App. LEXIS 6112, at *19 (Ohio Ct. App. Dec. 22, 2005) (Court may consider an attorney's responsibilities under the Rules of Professional Responsibility in determining whether to disqualify the attorney from a matter.). The court will now discuss a few of the Ohio Rules of Professional Conduct which will help to inform the court as to the standard of care owed by Whittaker in this case and whether that standard of care was breached.
However, to the contrary, see Hizey v. Carpenter, 830 P.2d 646, 653 (Wash. 1992) ("Use of the . . . [Rules of Professional Conduct] in the malpractice arena would contravene their purpose."). But see Mainor v. Nault, 101 P.3d 308, 320 (Nev. 2004) (Discussing the split of authority on this issue and noting that "[t]he majority of jurisdictions, however, hold that the violation of professional rules of responsibility does not create a private right of action, but is relevant to the standard of care.).
First, an attorney owes the client the duty to provide competent representation. Ohio Rule of Prof. Conduct 1.1. Factors relevant in determining an attorney's competence on a matter include: "the relative complexity and specialized nature of the matter, the lawyer's general experience, the lawyer's training and experience in the field in question, the preparation and study the lawyer is able to give the matter and whether it is feasible to refer the matter to, or associate or consult with, a lawyer of established competence in the field in question." Ohio Rule of Prof. Conduct 1.1 Comment 1. The competent handling of a matter entails: a) adequate preparation, which varies depending upon the significance of the matter - the more complex and significant the matter is, the greater preparation and attention that is required; b) inquiry into and analysis of the factual and legal components of the matter; and c) utilization of an approach which meets the standards of competent practitioners. Ohio Rule of Prof. Conduct 1.1 Comment 5.
Second, an attorney must act diligently. This requires that the attorney act promptly to address the tasks for which the lawyer has been employed; be committed and dedicated to the task; manage the lawyer's work load to perform all matters competently; and execute the tasks to conclusion unless the attorney-client relationship is terminated prior to the conclusion of those matters. Ohio Rule of Prof. Conduct 1.3 and Comments 1-4.
Third, as an advisor, an attorney must exercise independent professional judgment. This task involves not only the rendering of legal conclusions, but advice on moral, economic, social, and political factors pertinent to the circumstances. In this role, the attorney is to render candid, honest guidance which may be disconcerting to the client. Ohio Rule of Prof. Conduct 2.1 and Comments 1-3.
With respect to the post-confirmation reports filed in this case by Hock and Whittaker, as Hock's counsel, Goering analogizes to Bankruptcy Rule of Procedure 9011(b) regarding the investigation which he asserts that Whittaker should have conducted concerning the information provided by Hock and included in the post-confirmation reports. See also Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 932 (7th Cir. 1989) ("Rule 11 defines a new form of legal malpractice"). Goering points out that under the Rule Whittaker had a duty to conduct a reasonable investigation into the facts supporting any filing made with the court. However, this investigation need only be a "reasonable" one and "[c]ourts must be very, very, very careful not to impose on . . . counsel burdens which are impractical under the circumstances of their representation." In re Withrow, 391 B.R. 217, 227 (Bankr. Mass. 2008). In the preparation of the petition, schedules, and other preliminary filings of a bankruptcy case, the Withrow court noted that any analysis of the attorney's performance under Rule 9011 is an objective one and suggested the following as considerations under that analysis:
(1) did the attorney impress upon the [client] the critical importance of accuracy in the preparation of documents to be presented to the Court; (2) did the attorney seek from the [client], and then review, whatever documents were within the [client's] possession, custody or control in order to verify the information provided by the [client]; (3) did the attorney employ such external verification tools as were available and not time or cost prohibitive (e.g., on-line real estate title compilations, on-line lien search, tax "scripts"); (4) was any of the information provided by the [client] and then set forth in the [client's] court filings internally inconsistent - that is, was there anything which should have obviously alerted the attorney that the information provided by the [client] could not be accurate; and (5) did the attorney act promptly to correct any information presented to the Court which turned out, notwithstanding the attorney's best efforts, to be inaccurate.Id. at 228. See also In re Hanson, No. 8-13-73855-las, 2015 Bankr. LEXIS 607, at *17 (Bankr. E.D.N.Y. Feb. 27, 2015); and In re Mathews, No. 08-10871, 2009 Bankr. LEXIS 2016, at *11 (Bankr. Kan. July 2, 2009) (applying this five-question analysis to determine whether an attorney should be required to disgorge attorney fees under Code § 329(b)).
In Elam v. Hyatt Legal Services, 541 N.E.2d 616 (Ohio 1989), the Ohio Supreme Court held that: a) it is the duty of a fiduciary to serve as a representative to the entire estate; b) the fiduciary owes a duty to the beneficiaries of the estate to act in a manner which protects the beneficiaries' interests; c) the fiduciary's duties to the beneficiaries results in the beneficiaries being in privity with the attorney for the fiduciary; and d) where such privity exists, the attorney has malpractice liability exposure to the beneficiaries. Then in Arpadi v. First MSP Corp., 628 N.E.2d 1335, 1336 (Ohio 1994) the Ohio Supreme Court extended this concept to the partners of a limited partnership. Thus, an attorney retained by a fiduciary owes a duty not only to the fiduciary, but also to those with whom the fiduciary has a fiduciary relationship. Brinkman v. Doughty, 748 N.E.2d 116, 118 (Ohio Ct. App. 2000). The upshot of these principles is that Hock owed his fiduciary duties to the entire Liquidating Trust estate and that Whittaker, when he assumed his role as attorney for the Liquidating Trust upon the Effective Date of the Plan, owed his fiduciary duties and obligations as an attorney not only to Hock as the Plan Trustee, but also to the creditors as the beneficiaries of the Litigation Trust. See also Ohio Rule of Professional Conduct 1.13 (Organization as Client).
Bricker's Motion understates the obligations owed by bankruptcy counsel under the prevailing standards for bankruptcy counsel. Counsel for a Chapter 11 debtor-in-possession owes fiduciary obligations. While there is some debate in the case law and legal literature as to whether those fiduciary obligations flow just to the debtor-in-possession or also to the bankruptcy estate and the creditors, there is no dispute that the role of counsel to a debtor-in-possession creates fiduciary obligations. See In re Count Liberty, LLC, 370 B.R. 259, 280 (Bankr. C.D. Calif. 2007) ("According to the majority of courts addressing this issue, an attorney for a debtor in possession is a fiduciary of the bankruptcy estate."); and Hansen, Jones & Leta, P.C. v. Segal, 220 B.R. 434, 465 (Utah 1998) ("The 'fiduciary duty to the estate' language interspersed throughout the above-cited opinions is no doubt intended to impress on counsel for debtor-in-possession his/her obligation to assist the debtor-in-possession in carrying out its responsibility to act in the best interest of the estate."). As stated in Hansen, Jones & Leta:
Pursuant to the Model Rules of Professional Conduct ("Model Rules"), counsel owes fiduciary duties of loyalty and care to his/her client, the debtor-in-possession. Counsel's duty of loyalty to the debtor-in-possession includes the duty to maintain client confidentiality and prevent any conflict of interest. See Model Rules of Professional Conduct Rules 1.6, 1.7, 1.8, 1.9, 1.10. The duty of care to the client encompasses the attorney's duty to abide by the client's decisions regarding legal objectives of the representation, to act competently
and with reasonable diligence, to zealously represent the client, to keep the client reasonably informed as to the representation, and to exercise independent judgment and render candid advice. See Model Rules of Professional Conduct Rules 1.1, 1.2, 1.3, 1.4, 2.1.Id at 454. See also In re Mushroom Transportation Co., Inc., 366 B.R. 414, 441 (Bankr. E.D. Pa. 2007). In Lee Way Holding the court emphasized not only this fiduciary obligation owed to the bankruptcy estate, but also to the court:
Without question counsel owes a fiduciary duty of loyalty to the estate . . . . This duty requires the exercise of independent professional judgment, unfettered from compromising influences . . . . The professional obligation owed by attorneys to the courts and to the legal system was well observed by the court in Matter of Arlan's Dept. Stores, Inc . . . when it recited the words of the U.S. Supreme Court in case of over one hundred years' vintage. The U.S. Supreme Court expressed that obligation in the following manner:
In re Lee Way Holding Co., 100 B.R. 950, 961 (Bankr. S.D. Ohio 1989) (citations omitted).They are officers of the law, as well as the agents of those by whom they are employed. Their fidelity is guaranteed by the highest considerations of honor and good faith, and to these is superadded the sanction of an oath. The slightest divergence from rectitude involves the breach of all these obligations. None are more honored or more deserving than those of the brotherhood who, uniting ability with integrity, prove faithful to their trusts and worthy of the confidence reposed in them. Courts of justice can best serve both the public and the profession by applying firmly upon all proper occasions the salutary rules which have been established for their government in doing the business of their clients. Arlan's Dept. Stores, 615 F.2d at 944 (quoting Baker v. Humphrey, 101 U.S. 494, 502, 25 L. Ed. 1065 (1879)).
However, Whittaker served as counsel not just for Domin-8, the debtors-in-possession during the pendency of the Chapter 11 case, but also for the Liquidating Trust and through the transition from the debtors-in-possession to the Liquidating Trust. Nevertheless, from a tort duty perspective the standard of care is the same, except that until Whittaker switched hats from serving as counsel to Domin-8 to serving as counsel for the Liquidating Trust, negligence rather than gross negligence is the standard against which his conduct must be measured. Regardless of the hat he was wearing, though, he owed the fiduciary obligations to the clients, whether the clients were the debtors-in-possession or the Plan Trustee and Liquidating Trust.
The Trustee has raised the applicability of Rule 1.8(h)(1) which prohibits a lawyer from making an agreement prospectively limiting the lawyer's liability for malpractice unless the client is independently represented in making the agreement. See Whittaker dep. at 28. The parties should be prepared to address this issue at the trial and in any trial-related briefing. See Ohio Rule of Professional Conduct 1.8(h)(a); In re Thompson, 116 B.R. 679, 682 (Bankr. W.D. Ark. 1990) (finding release of malpractice claim entered into invalid where there was no evidence of compliance with Model Rule 1.8(h)); Feacher v. Hanley, No. 2:13-cv-92-EJF, 2014 U.S. Dist. LEXIS 4526, at *10-12 (Utah Jan. 10, 2014) (noting that a violation of the Rules of Professional Conduct does not necessarily violate the law, but finding that a violation of Rule 1.8(h) was relevant in determining an arbitration provision in an attorney-client fee and representation agreement was unconscionable and unenforceable); Homolka, P.A. v. Clark, No. H-09-151, 2010 U.S. Dist. LEXIS 147484, at *17-18 (S.D. Tex. May 11, 2010) (Fee agreement was unenforceable when it violated the Texas Disciplinary Rules of Professional Conduct); Malone v. Nuber, No. C07-2046RSL, 2009 U.S. Dist. LEXIS 34531, at *16-17 (W.D. Wash. April 16, 2009) (refusing to limit clients' damages at early stages of the litigation in a malpractice action despite the fee agreement limiting damages when there was no evidence of compliance with Washington Rule of Professional Conduct 1.8(h)(1); Cohen v. Radio-Electronics Officers Union, 679 A.2d 1188 (N.J. 1996) ("[A]n otherwise enforceable agreement between an attorney and client would be invalid if it runs afoul of ethical rules governing that relationship."); Castillo v. Arrieta, No. 34,108, 2016 N.M. App. LEXIS 10 (N.M. Ct. App. Feb. 2, 2016) (finding arbitration provision in fee agreement enforceable only if compliance with the Rules of Professional Conduct were met with respect to sufficient disclosure of the meaning and scope of the provision); Hodges v. Reasoner, No. 2012-CC-0043, 2012 La. LEXIS 1962, at *24 (La. July 2, 2012) (finding an arbitration provision in an attorney-client retainer agreement to be unenforceable when full disclosures concerning the impact of the arbitration provision were not made, including that it would cover a malpractice claim); The Tax Authority, Inc. v. Jackson Hewitt, Inc., 898 A.2d 512 (N.J. 2006); and Evans & Luptak, PLC v. Lizza, 650 N.W.2d 364 (Mich. Ct. App. 2002).
Applying all of these principles concerning the duties of counsel, particularly bankruptcy counsel under the context of this case; the principles governing legal malpractice claims in Ohio; and the facts and circumstances of this case as presented through the parties' summary judgment filings, the court must deny Bricker's Motion as to the First Count for malpractice. First, the Motion is largely premised upon the proposition that the standard of care which Whittaker owed in this case did not go beyond advising the Plan Trustee that he was obligated under the Liquidating Trust Agreement to obtain a bond. See Motion for Summary Judgment, Adv. doc. 52 at 1, 7, and 13. However, that issue is a question of fact, and a very contested one in this case. As previously noted, whether an attorney violated the standard of care required of the attorney and, therefore, breached the attorney's duty, must be established by expert witness testimony absent such breach being obvious to a layperson, which it is not in this case. The Trustee's expert, Robert A. Goering, has opined through his expert report that Whittaker's conduct breached that standard of care. Bricker's expert, Kim Martin Lewis, has opined that the conduct did not breach that standard of care.
Bricker's argument that Whittaker simply had a duty to advise, and nothing more, appears to understate the duties owed by attorneys in Ohio, and particularly bankruptcy counsel to fiduciaries. As noted, regardless of what period of time is analyzed and what hat Whittaker was wearing, he owed fiduciary duties. While legal counsel are not insurers, their fiduciary obligations to bankruptcy estates and trusts extend beyond merely giving advice. See County Liberty, LLC, 370 B.R. 259, 287 (Bankr. C.D. Cal. 2007) ("When counsel fails to act diligently to ensure that the debtor in possession's management protect the estate from dissipation, the court may order a reduction, denial or forfeiture of compensation in the case."). As stated in In re Wilde Horse Enterprises, Inc.:
Because the attorney for debtor in possession is a fiduciary of the estate and an officer of the Court, the duty to advise the client goes beyond responding the client's requests for advice. It requires an active concern for the interests of the estate, and its beneficiaries, the unsecured creditors. Consequently, the attorney may not simply close his or her eyes to matters having a legal and practical consequence for the estate—especially where the consequences may have an adverse effect. The attorney has the duty to remind the debtor in possession, and its principals, of its duties under the Code, and to assist the debtor in fulfilling those duties.136 B.R. 830, 840 (Bankr. C.D. Cal. 1991) (citations omitted). See also Zeisler & Zeisler, P.C. v. Prudential Ins. Co. of Am. (In re JLM, Inc.), 210 B.R. 19, 26-27 (B.A.P. 2d Cir. 1997). Counsel "cannot simply close his or her eyes to matters having an adverse legal and practical consequence for the estate and creditors." Grubin v. Rattet (In re Food Mgmt. Group, LLC), 380 B.R. 677, 710 (Bankr. S.D.N.Y. 2008).
The court cannot, as a matter of law, determine that Whittaker had no duty under the circumstances of this case beyond advising Hock to obtain a bond, especially given the following facts established in the summary judgment filings: a) an earlier draft of the Liquidating Trust Agreement failed to contain a provision for a bond (Whittaker Declaration at ¶ 12); b) the United States Trustee requested that the Liquidating Trust Agreement contain a provision requiring the posting of a bond by the Plan Trustee, expressly noting in the email making that request:
(1) We believe the Trustee should be bonded as being in the "best interest" of the estate . . . . If this case were in Ch. 7, the Ch. 7 Trustee would be bonded and the bank account(s) collateralized. What protections do the creditors have without it?Motion for Summary Judgment, Adv. doc. 52 (Exhibit A-6); c) Whittaker is and has been for a substantial period of time a bonded Chapter 7 trustee and, thus, understands the function of such a bond (Whittaker Declaration at ¶ 1; Whittaker Dep. at 14-15); d) Whittaker agreed to inclusion of such a provision in the Liquidating Trust Agreement (Whittaker Declaration at ¶ 12; Whittaker Dep. at 29); e) Whittaker provided the name of a company for Hock to pursue to obtain a bond (Whittaker Declaration at ¶ 14); and f) Hock advised Whittaker that no bond had been obtained and inquired whether it was still necessary and Whittaker confirmed that it was necessary (Motion for Summary Judgment, Adv. doc. 52 (Exhibit A-8)); Whittaker Dep. at 31:9-32). Given all of these facts, there is a disputed material issue of fact whether Whittaker breached the standard of care required of him as counsel to Domin-8, as the debtors-in-possession, the Plan Trustee, and the Liquidating Trust relating to Hock's failure to obtain a bond. Finally, even if the standard is whether Whittaker was grossly negligent, there is a disputed issue of material fact as to whether Whittaker's conduct fell below that standard.
First, the allegations of the Complaint appear to span a period of time commencing when Whittaker was counsel to Domin-8 through the transition from Domin-8 to the Liquidating Trust to his time as counsel for the Plan Trustee and Liquidating Trust. Not until his role switched to counsel for the Plan Trustee and Liquidating Trust would it appear that the higher gross negligence standard might apply. Second, even assuming a gross negligence standard, there is an issue of fact as to whether Whittaker's conduct met that higher standard. In United States v. Liberty Mutual Surety the court found that the Chapter 7 trustee was grossly negligent in failing to recover a probate inheritance which the debtors received and spent after their case was filed, stating that the trustee's failure to act amounted "to more than mere failure to exercise reasonable care. Her failure amounts to 'an act or omission respecting legal duty of an aggravated character as distinguished from a mere failure to exercise ordinary care. It amounts to indifference to present legal duty and to utter forgetfulness of legal obligations so far as other persons may be affected.'" United States v. Liberty Mutual Surety (In re Schooler), 449 B.R. 502, 524 (Bankr. N.D. Tex. 2010) (citing In re Smyth, 207 F.3d 758, 762 (5th Cir. 2000)). Thus, even assuming a gross negligence standard, the court cannot find as a matter of law under the facts of this case that Whittaker did not violate the applicable standard of care.
For similar reasons, there is also a material question of fact as to whether Whittaker was negligent or grossly negligent in failing to detect from the information which Hock provided to him for the post-confirmation operating reports which Whittaker signed under Bankruptcy Rule 9011 that something was awry. Again, there are competing expert reports on this point. The trial will be the proper forum for the experts to explain to the court why they arrived at their respective conclusions and for each party to cross-examine the opposing expert witness. This court has no basis to determine as a matter of law that Whittaker met the standard of care required of him relating to the post-confirmation operating reports.
For these reasons, Bricker's Motion for Summary Judgment as relates to Count One is denied.
C. Summary Judgment is Granted in Favor of Bricker as to Count Two Alleging a Breach of Fiduciary Duty by Whittaker and, Therefore, That Claim Shall be Dismissed
Bricker asserts that the breach of fiduciary duty claim must be dismissed because a party who is pursuing a claim for malpractice may assert a separate claim for breach of fiduciary duty, breach of contract, or fraud only if the conduct underlying those claims is separate and distinct from the conduct underlying the malpractice claim. See Psychiatric Solutions v. Waller Lansden Dortch & Davis, LLP, No. 1:13CV0098, 2014 U.S. Dist. LEXIS 183594, at *19 (N.D. Ohio June 4, 2014); Waite, Schneider, Bayless & Chesley Co., L.P.A., 5 F. Supp. 3d 922, 926 (S.D. Ohio 2014); Sapienza v. Materials Engineering and Technical Support Services Corp., No. 15AP-101, 2015 Ohio App. LEXIS 3229, at *18 (Ohio Ct. App. Aug. 18, 2015). In response, the Trustee asserts that the breach of fiduciary duty claim is separate and distinct because while the malpractice claim is held by the Trustee as the Successor Trustee for the Liquidating Trust, the breach of fiduciary claims are held by the beneficiaries of the Liquidating Trust. See Omega Riggers & Erectors, Inc. v. Koverman, 65 N.E. 3d 210, 220 (Ohio Ct. App. 2016) (citing Elam v. Hyatt Legal Services, 514 N.E. 2d 616, 618 (Ohio 1989)).
The Trustee's argument fails for several reasons. First, under Wait and Psychiatric Solutions, the conduct underlying the malpractice and breach of fiduciary claims must be distinct, not the asserted holders of the claims. The Trustee has not alleged that the conduct underlying the breach of fiduciary claim is separate and distinct from the conduct which underlies the malpractice claim and Count Two, which is the Breach of Fiduciary Duty claim, simply incorporates the general statement of facts described for both the malpractice and the breach of fiduciary claims. Second, Elam and its progeny and similar cases stand for the proposition that beneficiaries of a trust or other stakeholders similarly situated are in privity with the attorney who represents the trustee of the trust, such that the beneficiaries or other such persons similarly situated could sue the trustee or other party in privity for malpractice. Thus, in this case, the beneficiaries of the Liquidating Trust could conceivably sue Bricker directly for any alleged malpractice. That line of cases does not stand for the proposition that the existence of beneficiaries of a trust allows for additional claims against a lawyer to be pursued if those claims would otherwise be subsumed by a malpractice claim. Finally, the very fact that an attorney is a fiduciary who owes fiduciary duties to the client and those in privity with the client, as held in Elam and its progeny, highlights that a malpractice claim and a claim for breach of a fiduciary duty against an attorney in this context are generally indistinguishable. For these reasons, the court is dismissing Count Two of the Complaint through the order entered on this Memorandum .
This is not to say that under some circumstances there could not be independent claims against an attorney for malpractice and breach of fiduciary duty. For instance, if the attorney made a legal error which damaged the client and also misappropriated client funds, separate viable claims for malpractice and breach of fiduciary duty may exist. See Harrison v. Taft, Stettinius & Hollister, L.L.P., 381 F. App'x 432, 437 (5th Cir. 2010) ("A claim for breach of fiduciary duty . . . requires allegations of self-dealing, deception, or misrepresentations that go beyond the mere negligence allegations in a malpractice action."). No such allegations have been made in this adversary proceeding and the allegations against Whittaker do not go beyond that of negligence in his role as attorney for the debtors-in-possession, bankruptcy estate, and Trustee. --------
D. Count Three Alleging an Action for Recoupment and Disgorgement of Fees and Expenses Paid to Bricker Has Been Withdrawn
The Trustee has withdrawn Count Three of the Complaint seeking recoupment and disgorgement of attorney fees. Objection of Plaintiff Richard D. Nelson, Successor Trustee of D8 2010, Inc. Liquidating Trust, To Defendants' Motion for Summary Judgment, Adv. doc. 57 at 26.
E. Summary Judgment is Denied as to Count Four Alleging a Claim for Vicarious Liability of Bricker
In Nat'l Union Fire Ins. Co., on certification of the issue by the Sixth Circuit, the Ohio Supreme Court determined that under Ohio law a law firm cannot be directly liable for legal malpractice. 913 N.E.2d at 944. Rather, the law firm can be held vicariously liable for a member attorney's malpractice under the doctrine of respondeat superior "when one or more of its principals or associates are liable for legal malpractice." Id. at 945. Bricker's argument is solely that this Count should be dismissed "if Plaintiff's claims for malpractice and breach of fiduciary duty do not survive summary judgment." See Motion for Summary Judgment, Adv. doc. 52 at 3 n. 1. Since the Trustee's malpractice claim is surviving summary judgment, his claim for vicarious liability also survives summary judgment.
F. Summary Judgment is Denied as to the First and Second Counterclaims Alleging a Breach of Contract and Quantum Meruit against the Trustee
Bricker asserts that it is entitled to judgment on its claim for $31,821.67 in attorney fees for post-confirmation legal services rendered to the Trustee and Liquidating Trust. The Trustee asserts that nothing is owed to Bricker on this claim because: a) the Trustee disputes that Bricker has earned any such legal fees; b) if Bricker is awarded judgment for any fees, that judgment should be set off against any judgment which the Trustee obtains against Bricker; and c) under the Liquidating Trust Agreement, Bricker may only be paid to the extent the Liquidating Trust has funds in its Operating Reserve or from proceeds of a Litigation Claim, neither of which the Liquidating Trust has at the present time. There is a genuine issue of material fact as to whether Bricker is owed any funds by the Successor Trustee or Liquidating Trust, both from a performance standard and due to the Liquidating Trust having no funds from which to pay those fees, which is a condition precedent to Bricker being paid under the Liquidating Trust Agreement. Accordingly, the order on this decision will deny summary judgment to Bricker on its First and Second Counterclaims for breach of contract and quantum meruit.
G. Summary Judgment is Denied as Moot as to the Third Counterclaim
Based upon the withdrawal of Count Three of the Trustee's Complaint, Bricker's request for summary judgment as to its Third Counterclaim is denied as moot.
V. Conclusion
For the reasons explained in this Memorandum, the Defendants' Motion for Summary Judgment is granted in part and denied in part. The court is contemporaneously entering an order incorporating this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: April 6, 2017 Copies to:
Electronically Served
Richard D. Nelson (Counsel for the Plaintiff) Donald E. Burton (Counsel for the Defendants) D. Jeffrey Ireland (Counsel for the Defendants)