Alexander v. DeLong, Caldwell, Novotny, & Bridgers, L.L.C. et al

Filing 16

MEMORANDUM OPINION AND ORDER that Count I of the Second Amended and Restated Complaint in Adversary Proceeding 04-3135-WRS (Doc. 161 ) is dismissed with prejudice. Signed by Honorable William Keith Watkins on 3/17/09. (Attachments: # 1 appeals checklist)(vma, ) Modified on 3/17/2009 - to show - (furn: Bankruptcy Clerk) (vma, ).

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA NORTHERN DIVISION J. LESTER ALEXANDER, III T r u s te e for Terry Manufacturing Co., a n d Terry Uniform Co., LLC, P l a in tif f , v. D E L O N G , CALDWELL, NOVOTNY, & BRIDGERS, L.L.C., et al., D e f e n d a n ts . ) ) ) ) ) ) ) ) ) ) ) )

CASE NO. 2:07-CV-585-WKW [WO]

M E M O R A N D U M OPINION AND ORDER O n May 29, 2007,1 Bankruptcy Judge William R. Sawyer submitted proposed findings o f fact and conclusions of law, pursuant to 28 U.S.C. § 157(c)(1).2 (Findings (Doc. # 1-3 ).) P la in t if f J. Lester Alexander III ("Trustee") objects to the findings and conclusions. (O b je c tio n (Doc. # 1-4).) Defendants have responded to the objection. (Resp. (Doc. # 1-9).) " [ T ]h o s e matters to which any party has timely and specifically objected" are reviewed de n o v o . § 157(c)(1). The findings and conclusions address Count I of a four-count complaint the Trustee f ile d against Defendants in an adversary proceeding in Bankruptcy Court (Adv. Pro. No. 043 1 3 5 ). (Findings 1.) Count 1 alleges attorney malpractice, a non-core issue. (Findings 1.)

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The Bankruptcy Clerk transmitted the case to the district court on June 26, 2007.

Under 28 U.S.C. § 157(c)(1), a bankruptcy judge may hear a non-core proceeding otherwise related to a case under Title 11. The bankruptcy judge submits proposed findings of fact and conclusions of law to the district court, which submits the final order or judgment. Id.

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T h e other counts were part of a core proceeding. The Bankruptcy Court entered judgment in favor of the Trustee on Count Two (fraudulent transfer), and dismissed Count Three (f ra u d u le n t conveyance) and Count Four (voidable preferences) with prejudice. (Findings 1 .) After the filing of the Bankruptcy Court's findings and conclusions in the non-core p roc ee d ing , however, this court reversed the Bankruptcy Court's ruling in the core p r o c e e d in g ("Core Proceeding Opinion"), and judgment was entered in favor of Defendants. (C o re Proceeding Op., 07cv620, Sept. 30, 2008 (Doc. # 27).) The Trustee's adversary proceeding sought the recovery of monies Terry M a n u f ac tu rin g Co. paid Defendant Earnest H. DeLong, Jr. ("DeLong") for legal services he p ro v id e d in state court litigation in Georgia. (Objection ¶ 2.) The Trustee pursued this re c o v ery under two theories: (1) as an avoidance action under federal and state-law f ra u d u le n t transfer statutes; and (2) as a legal malpractice action under Georgia law for D e L o n g ' s simultaneous representation of Terry Manufacturing Co. and one of its sh are h o lders, Rudolph Terry, because their interests were in direct conflict, and the former's in te re sts were sacrificed for the latter's.3 (Objection ¶ 3.) The Bankruptcy Court concluded th a t the malpractice claim should be dismissed with prejudice. (Findings 4.) The Bankrutpcy C o u rt found an actual conflict of interest with respect to the simultaneous representation, but f o u n d that the conflict had been waived by the parties. (Findings 3.) On the basis that the m a lp ra c tic e claim was "predicated solely on the theory that DeLong breached an ethical

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See the Core Proceeding Opinion, at pages 2-7, for details on the underlying representation.

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d u ty," the Bankruptcy Court concluded that the malpractice claim necessarily must fail. (F in d in g s 3.) T h e Trustee does not object to the findings of fact ­ that there was a waived conflict o f interest (Objection ¶ 1) ­ but to three subsections of the Bankruptcy Court's conclusions o f law. The portions of the legal conclusions the Trustee opposes are: (1) that the Georgia C o d e of Professional Responsibility plays no role in the basis of a malpractice claim, which re q u ire s a failure to exercise ordinary care, skill and diligence (Findings 3); (2) that the m a lp ra c tic e claim was solely predicated on a breach of an ethical duty (Findings 3); and (3) th a t the oral waiver "insulated" Defendants from breaches of a duty of care and a duty of lo ya lty (an implied legal conclusion). (Objection ¶ 6.) The Trustee argues that instead: (1) D e f e n d a n ts failed to exercise ordinary care, skill and diligence, and that failure was not a b so lv e d by the waiver; (2) it was impossible for DeLong to comply with his duty of loyalty to both clients despite the waiver; and (3) the failure to exercise ordinary care, skill and d i lig e n c e proximately caused damages, namely, Terry Manufacturing Co.'s litigation costs. (O b jectio n ¶¶ 7, 10, 19, 23, 33.) The Trustee's arguments primarily rely, however, upon the Bankruptcy Court's rulings in the core proceeding,4 which since have been reversed. The Core Proceeding Opinion not
(See, e.g., Objection ¶ 10 ("The Bankruptcy Court erred in concluding that the Trustee did not establish the Defendants' failure to exercise `ordinary care, skill and diligence.' The Memorandum Decision [of the Bankruptcy Court] is replete with findings related to the failure of the Defendants to `exercise ordinary care, skill and diligence' in their representation of Terry Manufacturing. Those findings include [several findings and quotations from that opinion]."); Objection ¶ 19 ("The findings of fact in the Bankruptcy Court's Memorandum Opinion clearly establish that Defendants' breach of their duty of loyalty to Terry Manufacturing.").)
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o n ly found the Bankruptcy Court's conclusions faulty as a matter of law, but also did so on the basis that those conclusions rested on clearly erroneous findings of fact. (Core

P r o c e ed in g Op. 10.) The Core Proceeding Opinion rehearses the facts as this court finds th e m , and the facts do not support the Trustee's claims that DeLong breached his duty of lo ya lty to Terry Manufacturing Co. or failed to exercise ordinary care, skill and diligence.5 T h e re f o re , this court agrees with the Bankruptcy Court that the malpractice count should be d is m is s e d with prejudice. A c c o rd in g ly, it is ORDERED that Count I of the Second Amended and Restated C o m p lain t in Adversary Proceeding 04-3135-WRS (Doc. # 161) is DISMISSED with p re ju d ic e . An appropriate judgment will be entered. D O N E this 17th day of March, 2009. /s/ W. Keith Watkins UNITED STATES DISTRICT JUDGE

Because the Bankruptcy Court's proposed findings of fact and conclusions of law have been compromised by the intervening Core Proceeding Opinion, this court agrees with the Bankruptcy Court but based upon the facts and conclusions discussed in that opinion.

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