Brown Media Corp. v. K&L Gates, LLP

Appeals court was reluctant to let lawyers off the hook for allegedly unethical conduct.

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Case Type:
Business
Case Status:
Reversed
Citation:
15-4185-cv (2nd Circuit, Apr 14,2017) Not Published
Tag(s):
Ruling:
The 2nd Cir Ct of App held that res judicata did not bar plaintiff claims of breach of fiduciary duty, tortious interference and fraud against defendant law firm in connection with plaintiff’s failed purchase of debtor assets in a bankruptcy because (a) the causes of action in the current case were not of the type that were required to have been brought, and were not brought, during the bankruptcy and (b) a judgment against the defendants based on such claims would not invalidate the reorganization plan in the bankruptcy, vacating lower court judgment.
Procedural context:
Plaintiffs appealed district court’s dismissal of their action asserting claims for breach of fiduciary duty, tortious interference and common law fraud against defendants in connection with plaintiffs’ unsuccessful bid to purchase assets in a bankruptcy sale. The district court dismissal was based on a finding of res judicata, as these claims were not raised during the bankruptcy and allowing plaintiffs’ action to go forward would call into question the integrity of the bankruptcy court’s final orders.
Facts:
Plaintiff Roy Brown was the former CEO, shareholder and manager of Brown Publishing Company, Brown Media Holdings Company and their affiliates (collectively, “Brown Publishing”). Brown Publishing received financing from a company named Windjammer Capital (“Windjammer”) with an equity option as part of the arrangement. In late 2008, concerned that Windjammer would exercise the equity option, Brown, Joel Dempsey (Brown Publishing’s general counsel) and other managers of Brown Publishing (collectively, the “Managers”) sought legal advice from defendants K&L Gates (K&L) and Edward Fox regarding a potential purchase of the assets of Brown Publishing by one or more of the Managers. Defendants advised Brown and Dempsey and, in March 2009, upon the advice of K&L, entered into an agreement to execute a non-bankruptcy purchase transaction. When the transaction did not have the desired result, Dempsey again sought the advice of Fox, who advised the Managers that the sale of Brown Publishing’s assets in bankruptcy was the best way to retain control of the company. The earlier transaction was unwound, and Brown Publishing hired K&L to assist in their bankruptcy process. Notably, when seeking to provide such services to Brown Publishing, K&L did not seek or obtain a waiver or consent from the Managers. In April 2010 filed for Chapter 11 bankruptcy. During the bankruptcy, K&L’s disclosure statement did not include K&L’s representation of the Mangers or its relationships with members of PNC Bank Group (PNC), a rival bidder for Brown Publishing’s assets. In addition, K&L delayed in filing a motion to enforce the automatic stay in connection with a related foreclosure action by Huntingon Bank, a member of PNC, over real estate assets leased by Brown Publishing and owned by CRJ Investments, a company owned by certain of the Managers. Based on the facts as reviewed by the court, K&L’s delay was intended to assist PNC to win the bid for the Brown Publishing assets. As a result of the delay, the Managers’ source of financing for the purchase of Brown Publishing withdrew, and the Managers lost the bid to PNC, who ultimately purchased Brown Publishing in a 363 sale approved by the bankruptcy court. The Plaintiffs filed a lawsuit asserting, among other things, breach of fiduciary duty, tortious interference with contract and common law fraud by the defendants and sought an unspecified amount of damages but asserted that damages would include a calculation based in part on the value of the assets plaintiffs were unable to purchase due to the breach of fiduciary duty and where plaintiffs would have been financially with respect to the assets had they succeeded in obtaining the assets. Defendants moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim arguing that res judicata barred the claims because of the preclusive effect of the bankruptcy orders approving procedures for the eventual sale of Brown Publishing’s assets, authorizing the sale of such assets and confirming the Chapter 11 Plan of Liquidation of Brown Publishing. The district court found that res judicata barred plaintiffs’ claims. Plaintiffs appealed to the second circuit court of appeals.
Judge(s):
Hall, Livingston, Circuit Judges, and Garaufis, District Judge, sitting by designation

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