DeLong et al v. Alexander et al
MEMORANDUM OPINION AND ORDER that the Bankruptcy Court's 5/29/07 Judgment is VACATED, and the case is REMANDED. The Bankruptcy Court is INSTRUCTED to enter Judgment in favor of Defendants. Signed by Honorable William Keith Watkins on 9/30/08. (sl, )
IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA N O R T H E R N DIVISION IN RE: T E R R Y MANUFACTURING COMPANY, INC., D eb tor. IN RE: T E R R Y UNIFORM COMPANY, LLC, D eb tor. J. LESTER ALEXANDER, III, T R U S T E E OF TERRY M A N U F A C T U R IN G COMPANY, INC. A N D TERRY UNIFORM C O M P A N Y , LLC, C r o s s - A p p e lla n t/A p p e lle e , v. D E L O N G , CALDWELL, NOVOTNY, & BRIDGERS, L.L.C., DELONG C A L D W E L L LOGUE & WISEBRAM, D E L O N G & CALDWELL, L.L.C. A N D EARNEST H. DELONG, JR., A p p e lla n ts /C r o s s - A p p e lle e s ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
C A S E NO. 03-32063-WRS C H A P TE R 7
C A S E NO. 03-32213-WRS C H A P TE R 7
C A S E NO. 2:07-CV-620-WKW
M E M O R A N D U M OPINION AND ORDER T h is cause is before the court on appeal from the United States Bankruptcy Court for the Middle District of Alabama in an adversary proceeding brought by J. Lester Alexander,
I I I, Trustee ("Trustee") of Terry Manufacturing Company, Inc. ("TMC"), against attorney E a rn e st H. DeLong, Jr. ("DeLong") and his predecessor law firms. The Trustee sought to h a v e DeLong disgorge $476,233.67 in legal fees paid by TMC to DeLong for legal services h e rendered in a Georgia civil case litigated prior to TMC's bankruptcy. DeLong appeals the Bankruptcy Court's judgment finding the attorney's fees in full to be avoidable transfers u n d e r Georgia law. The Trustee cross-appeals the Bankruptcy Court's finding that only D e L o n g individually is liable to disgorge the fees. This is a core proceeding over which ap p ellate jurisdiction is exercised pursuant to 28 U.S.C. § 158(a)(1).1 I . FACTUAL BACKGROUND T M C was an Alabama corporation with facilities in Alabama, Arkansas, and Georgia. F o r decades, it was in the business of making uniforms and sportswear. Brothers Roy and R u d o l p h Terry were the company's sole officers, sole directors, and sole voting shareholders. R o y Terry was the president and owned fifty-one percent of the outstanding shares. Rudolph T e rry was the company's vice-president and chief financial officer and owned forty-nine p e rc e n t of the outstanding shares. Rudolph Terry was primarily responsible for the operation o f TMC's Atlanta facility. F r o m outward appearances, TMC was successful and well positioned to compete for lu c ra tiv e contracts to supply uniforms to large industrial purchasers. Customers included
In a related non-core proceeding, the Bankruptcy Court has filed a recommendation with this court finding that DeLong did not commit malpractice in his representation of TMC in the Georgia litigation. See Alexander v. DeLong, Caldwell, Novotny, & Bridgers, L.L.C., No. 2:07-cv-00585-WKW (M.D. Ala).
M c D o n a ld 's and the United States Department of Defense. At some time prior to the 1996 A tla n t a Olympic Games, TMC began purchasing T-shirts from Floodgates, Ltd. (" F lo o d g a te s" ), which was owned and operated by Jon L. Pouncey ("Pouncey").2 Floodgates b e g a n factoring TMC invoices with Commercial Factors of Atlanta, Inc. ("Commercial F a c to r s " ) prior to the 1996 Olympics.3 S e v e ra l years later, Pouncey and Rudolph Terry entered into a factoring scheme on b e h a lf of their respective companies, Floodgates and TMC. This scheme worked as follows: F lo o d g a te s would submit to Commercial Factors invoices indicating that it had shipped Ts h ir ts to TMC, and Commercial Factors would make payments to Floodgates on the invoices. In fact, those T-shirt deliveries did not exist and the invoices were bogus. Rudolph Terry and T M C cooperated in the scheme, and Rudolph later testified that he considered this a rra n g e m e n t a "loan" to Floodgates, admitting that TMC dollars were used to pay invoices f o r product it never received. Over eleven million dollars in accounts were factored in this manner, with over ten m illio n dollars paid back to Commercial Factors. In September 1999, Floodgates issued m u ltip le invoices to TMC representing 2.3 million dollars of product. Rudolph Terry had
Pouncey was later indicted with Rudolph Terry in the Northern District of Georgia for conduct arising out of these transactions. See United States v. Pouncey, No. 1:03-cr-55-CC (N.D. Ga.). Both Pouncey and Rudolph Terry plead guilty. In this factoring arrangement, Floodgates sold products to TMC on credit, creating an account receivable from TMC in favor of Floodgates. Floodgates discounted the account receivable to Commercial Factors, receiving instant, but discounted, payment. Commercial Factors expected payment of the full account receivable from TMC.
s ig n e d a document from Commercial Factors on September 10, 1999, acknowledging d e liv e ry of the product, stating that "[t]he above signed acknowledges receipt and acceptance o f the goods reflected in the invoices attached. I am aware that Commercial Factors of A tla n ta is relying on my verification to advance [funds to] Floodgates Ltd . . . ." (Pl. Trial E x . # 18.) By the fourth quarter of 1999, TMC was seriously delinquent on its obligation to C o m m e rc ia l Factors. Commercial Factors contacted TMC and Rudolph Terry to demand p a ym e n t . Having confirmed in writing the validity of the invoices to Commercial Factors, R u d o lp h Terry caused TMC to make payments on those invoices while he attempted to n e g o tia te a settlement. Commercial Factors was holding TMC invoices reflecting unpaid b a la n c es totaling over 3.3 million dollars. TMC, through Rudolph Terry, its vice president a n d chief financial officer, admitted that it owed approximately 2.1 million dollars for Ts h irts Rudolph Terry knew did not exist. Rudolph was negotiating for payment terms, which h e expected Pouncey and Floodgates to fund. R u d o lp h Terry's attempt to resolve the Commercial Factors' claim in the fourth q u arter of 1999 failed. During those negotiations, which were conducted by Rudolph Terry w ith o u t the assistance of counsel, Commercial Factors filed suit against TMC, Floodgates, an d Pouncey in the Superior Court of Gwinnett County, Georgia ("the Georgia litigation").4 A t that point, it was a routine commercial collection case. W h e n TMC was served with the complaint in the Georgia litigation, the Terry brothers
Case number 99-A-10650-5. 4
c o n ta c te d attorney Jerry Thomas ("Thomas") for litigation assistance. Thomas, in turn, in tro d u c e d the Terrys to DeLong, who is an Atlanta commercial litigator. DeLong had never h e a rd of the Terrys or TMC before he was engaged to work on the Georgia litigation, and he h a d no prior business dealings with them whatsoever. In early January 2000, DeLong issued a n engagement letter on the letterhead of DeLong & Caldwell, L.L.C., to Rudolph Terry that re f e re n c e d the Georgia litigation, confirming the following engagement: This letter is intended to memorialize the understanding we have reached. J e rry Thomas and I [DeLong] have been engaged to represent the interests of T e rry Manufacturing Company, Inc., its officers, directors and shareholders in the defense of the above-referenced matter. (P l. Trial Ex. # 10.) DeLong and Thomas continued to represent TMC in the Georgia l i ti g a t i o n until TMC's Chapter 11 filing on July 7, 2003, a period of more than forty-two m o n th s . At the time of its initial complaint in December 1999, Commercial Factors was not a w a re of the factoring fraud scheme. There is no evidence that DeLong or Thomas was a w a re of the scheme either. On instructions of Rudolph Terry, there was an early attempt by D e L o n g to settle the case. TMC and DeLong thought the case was settled in August 2000, w h e n in fact it was not, and DeLong attempted but failed to enforce the purported settlement in court. The complexion of the case changed when Rudolph Terry testified during his d e p o sitio n on October 31, 2000, that he had been advancing and loaning TMC's money to P o u n c e y and Floodgates, in effect, using TMC's money in the factoring arrangement. R u d o lp h Terry claimed the dealings with Pouncey and Floodgates were "something [he] did 5
p e rs o n a lly. And so it had nothing to do with the company." (Pl. Trial Ex. # 47, 466:15-21.) " [ H e ] was loaning Jon Pouncey Terry Manufacturing Company dollars . . . ." (Pl. Trial Ex. # 47, 486:7-15.) Not surprisingly, in December 2000, the complaint was amended to include R u d o lp h Terry individually as a defendant with allegations against all defendants for c o n sp ira c y to defraud, fraud and deceit, and conversion, claims that Commercial Factors had p re v io u s ly asserted only against TMC, Floodgates, and Pouncey. On February 20, 2002, Commercial Factors amended its complaint again to assert a c la im under Georgia's RICO statute against Floodgates, Pouncey, TMC, and Rudolph Terry. T h e newly amended complaint specifically alleged theft by deception, theft by conversion, t h e f t by receiving stolen property, "and the use of the United States postal system to p e r p e tu a t e and continue the fraudulent scheme to obtain money from Plaintiff under false p re te n s e s ." (Def. DeLong, Caldwell, Novotny, & Bridgers, L.L.C. Ex. # 6 ¶ 58). The RICO c la im s sought treble damages and punitive damages. Defenses asserted by DeLong included: (1 ) TMC was not indebted to Commercial Factors in any amount; (2) TMC was not a party to the creation of the invoices that Floodgates sold to Commercial Factors; (3) TMC did not g e n e ra lly purchase goods from Floodgates after the 1996 Olympics; (4) TMC did not p u rc h a se goods as reflected in the invoices at issue in the litigation; (5) the acts alleged a g a in s t Rudolph Terry, if they occurred, were not acts committed within the scope of R u d o lph Terry's employment at TMC; and (6) the acts alleged against Rudolph Terry were u ltr a vires with regard to TMC. Before the Georgia case could be tried, TMC filed for
C h a p te r 11 protection in bankruptcy on July 7, 2003, and Chapter 7 protection in bankruptcy o n May 13, 2004. Meanwhile, the Terry brothers pleaded guilty to various federal criminal o f f e n se s in Georgia and Alabama and went to prison, and according to counsel, the Georgia litig a tio n was eventually dismissed with Commercial Factors receiving no recovery.5 D u rin g the course of the Georgia litigation, DeLong billed and was timely paid a total o f $476,233.67 as legal fees at a rate of $250 per hour. His undisputed testimony is that he p a id one third of the fees to Thomas, who fully participated in the litigation. There is no d is p u te that the hourly rate of $250 was reasonable, nor did the Bankruptcy Court find that th e work claimed to have been done by DeLong was not actually done. I I . PROCEDURAL BACKGROUND T h e Trustee brought suit against DeLong and his predecessor firms seeking to avoid a s fraudulent conveyances all the legal fees paid by TMC in the Georgia litigation. The th e o ry of recovery was that those payments constituted fraudulent conveyances under the re le v a n t fraudulent transfer statutes of Alabama and, in the alternative, Georgia, as well as u n d e r the bankruptcy code. The Trustee also sought damages arising out of the legal m a lp ra c tic e allegedly committed by DeLong and for breach of the legal duties owed to TMC b y DeLong's simultaneous representation of TMC and Rudolph Terry when their interests w e re in direct conflict. Because the legal malpractice claim was not a core proceeding, the B an k rup tcy Court entered proposed findings of fact and conclusions of law, which are
Commercial Factors did subsequently file a proof of claim with the Bankruptcy Court.
c u rre n tly pending before the court as a recommendation in another case, finding no m a lp ra c tice on DeLong's part. Only the Trustee's fraudulent transfer claims are at issue in th is appeal. The Bankruptcy Court conducted a four and one-half day trial and entered an m e m o r a n d u m decision on May 29, 2007. The court entered judgment in favor of the Trustee a n d against DeLong individually in the amount of $476,233.67, representing all of the legal f e e s incurred by TMC in the Georgia litigation. The Bankruptcy Court found that TMC did n o t receive valuable consideration or reasonably equivalent value in exchange for the a tto rn e y's fees that it paid DeLong. The findings of the Bankruptcy Court rested significantly on what it perceived as a sim p le defense for TMC to the civil action: Terry Manufacturing filed a pleading in court to the effect that it owed $ 2 .1 million, when in fact it had never received the first tee shirt, and for th a t reason owed nothing. As Terry Manufacturing in fact owed nothing o n the invoices, the defense of the civil action should have been a re la tiv e ly straightforward matter. .... . . . Terry Manufacturing never received the first tee shirt. This f a c t could have been easily established with a modest amount of effort. H o w e v e r, this fact could not be proven without also establishing that R u d o lp h Terry had lied to Commercial Factors about the Floodgates inv o ices. Thus, the thrust of DeLong's efforts was not to defend Terry M a n u f a c tu rin g in the Commercial Factors civil action. Rather, it was to s h ie ld Rudolph Terry from criminal liability, using Terry Manufacturing to fund the effort and refusing to produce Terry Manufacturing documents w h ich would have gotten it off the hook, while placing Rudolph Terry in jeo p a rd y of a criminal indictment. 8
.... . . . Terry Manufacturing did not benefit from DeLong's services in the Commercial Factors litigation. As Terry Manufacturing did not re c e iv e the tee shirts represented by the Commercial Factors invoices, it h a d a simple, straight-forward defense, which DeLong could not raise w ith o u t also establishing that Rudolph Terry falsely certified the C o m m e r c ia l Factors invoices. .... . . . Terry Manufacturing did not receive adequate consideration f o r the cash transfers in suit, and therefore, this Court finds that the tra n s f e rs are voidable as constructively fraudulent. In re Terry Mfg. Co., No. 03-32063, 2007 WL 1560087, at *2, *7 & *8-9 (Bankr. M.D. A la. May 29, 2007). H av in g determined that the transfers in issue were avoidable as fraudulent transfers u n d e r Georgia law, the Bankruptcy Court found that the transfers were also fraudulent c o n v e ya n c es under 11 U.S.C. § 548, but then stated the court need not reach the § 548 issue b e c a u s e it found the transfers fraudulent under Georgia law. In re Terry Mfg. Co., 2007 WL 1 5 6 0 0 8 7 , at *9. The Bankruptcy Court also refused to find the attorney's fees voidable p ref ere n ce s within the meaning of 11 U.S.C. § 547(b) because it found the transfers "were m a d e in the ordinary course of business." Id. at *11. I I I . ISSUE ON APPEAL T h e issue on appeal is whether the Bankruptcy Court abused its discretion in finding th a t the Trustee met his burden of proving that the transfers from TMC to DeLong for his l e g a l services were constructively fraudulent under Georgia law. Resolution of this issue 9
t u r n s on the narrower question of whether the Bankruptcy Court abused its discretion in f in d in g that TMC did not receive valuable consideration or reasonably equivalent value for a n y of DeLong's legal services in the Georgia litigation. For the reasons set forth in this m e m o r a n d u m opinion and order, the court finds that the Bankruptcy Court's factual findings a re clearly erroneous and that its legal conclusions are de novo wrong. The court finds the B a n k ru p tcy Court's premise for deciding the case was faulty as a matter of law, resulting in a n analysis of the facts that led to a clearly erroneous finding of fact. IV. STANDARD OF REVIEW A reviewing court reverses a bankruptcy court's decision only if it was an abuse of d is c re tio n . In re Mandalay Shores Coop. Hous. Ass'n, 21 F.3d 380, 383 (11th C i r. 1994). A court abuses its discretion when it applies an "improper" legal standard or bases its d e c is io n on factual findings "that are clearly erroneous." Id. Both the federal district and a p p e lla te courts reviewing bankruptcy appeals use the "clearly erroneous" and de novo s ta n d a rd s of review for factual and legal findings respectively. In re Club Assocs., 951 F.2d 1 2 2 3 , 1228 (11th Cir. 1992). The "clearly erroneous" standard of review for factual findings is "limited and d e f ere n tia l." Id.; see also Fed. R. Bankr. P. 8013 (stating that for bankruptcy appeals, " [ f ]in d in g s of fact, whether based on oral or documentary evidence, shall not be set aside u n le ss clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy c o u rt to judge the credibility of the witnesses"). "[The] deference to the [trial] court is not
u n lim ited , however, and [reviewing courts] will hold a finding of fact clearly erroneous if th e record lacks substantial evidence to support it." Lincoln v. Bd. of Regents, 697 F.2d 928, 9 3 9 (11th Cir. 1983) (emphasis added). A finding is clearly erroneous if the reviewing court " o n the entire evidence is left with the definite and firm conviction that a mistake has been c o m m i tt e d ." United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). The district c o u r t' s review of a bankruptcy court's legal conclusions, on the other hand, is de novo, In re C lu b Assocs., 951 F.2d at 1228; the court must "independently examine the law and draw its o w n conclusions after applying the law to the facts," In re Norris, 239 B.R. 247, 249 (M.D. A la. 1999) (internal quotation marks omitted). V . DISCUSSION D e L o n g is appealing the Bankruptcy Court's finding that TMC's payments for legal s e rv ic e s he rendered during the Commercial Factors litigation were fraudulent conveyances u n d e r § 18-2-22(3) (repealed 2002) of the Georgia Code for payments made prior to its re p e a l, and § 18-2-74(a)(2) of the Georgia Code for payments made after the repeal.6 (A p p e lla n t Br. 12 (Doc. # 13).) Under both the former and current fraudulent conveyance s ta tu te s, payments are considered fraudulent if they were made by a debtor with insufficient a s s e ts in exchange for insufficient value as defined by each statute respectively, and the b u rd e n is on the plaintiff, here the Trustee, to make this showing. Central to this appeal,
DeLong has also appealed the Bankruptcy Court's finding that he was not acting as a conduit for the payments TMC made to Thomas (Appellant Br. 13), and as already noted, TMC cross-appealed the Bankruptcy Court's finding that no other defendants were liable (Cross-Appellant Br. 3 (Doc. # 21)). Because the court finds DeLong is not liable, the court need not, and declines to, decide those issues.
th e re f o re , is the Bankruptcy Court's determination that TMC received insufficient value for D e L o n g 's legal services. The court holds that the Bankruptcy Court's finding that TMC re c eiv e d insufficient value for DeLong's legal services was an abuse of discretion, and that T M C 's payments were not fraudulent conveyances under Georgia law. T h e Former and Current Georgia Statutes on Fraudulent Conveyances T M C 's payments to DeLong prior to July 1, 2002, fall under Georgia's repealed s ta tu te on fraudulent conveyances, § 18-2-22, which defines three types of fraudulent tran sfe rs.7 The third type of fraudulent transfer is relevant here and is defined as a "voluntary d e e d or conveyance, not for a valuable consideration, made by a debtor who is insolvent at th e time of the conveyance." § 18-2-22(3). A plaintiff must prove the indebtedness, the d e b to r's insolvency, and that the conveyance was voluntary; when those facts are proven, " th e law conclusively presumes a fraudulent intent and declares the instrument void" with re s p e c t to creditors that had demands at the time of the conveyance. Chambers v. Citizens & S. Nat'l Bank, 249 S.E.2d 214, 217 (Ga. 1978) (describing elements); Stokes v. McRae, 2 7 8 S.E.2d 393, 395 (Ga. 1981) (establishing burden of proof). "[A] voluntary conveyance . . . is one without any valuable consideration," which the G e o rg ia Supreme Court has defined as a conveyance not "founded on money, or something c o n v e rtib le into money, or having a value in money." Stokes v. McRae, 278 S.E.2d at 395
See Chepstow Ltd. v. Hunt, 381 F.3d 1077, 1081 (11th Cir. 2004) ("[W]e do not agree with the district court that the repeal [of this statute] extinguished causes of action that had arisen under the repealed section but had not yet made it to final judgment.").
(c ita tio n s omitted). The performance of services can qualify as consideration. Lionheart L e g e n d , Inc. v. Norwest Bank Minn. Nat'l Ass'n, 560 S.E.2d 120, 124 (Ga. App. 2002) (c itin g Avary v. Avary, 41 S.E.2d 314, 322-23 (Ga. 1947)). Whether a conveyance is v o lu n ta ry "depends upon the intention of the parties," Pharr v. Pharr, 57 S.E.2d 177, 180 (G a . 1950), but intention goes to whether the conveyance was for valuable consideration, and n o t to whether the purpose of the transfer was to defraud creditors; in other words, proof of fr a u d u le n t intent is not required, Mercantile Nat'l Bank v. Aldridge, 210 S.E.2d 791, 793 (G a . 1974). A conveyance for valuable consideration on its face is valid unless rebutted by s u f f ic ie n t evidence that the conveyance was without any valuable consideration. Pharr, 57 S .E .2 d at 180. Georgia courts have found that if the consideration involves any money or h a s any value in money, the transfer is facially valid. In Pharr, a deed was voluntary because th e claimants had not offered enough evidence to sufficiently rebut a facially valid transfer f o r a consideration of $5 and love and affection. Id. (citing Lifsey v. Mims, 20 S.E.2d 32, 33 (G a. 1942), a case finding $1 and love and affection a voluntary conveyance on its face)). In d e e d , in a case before the Southern District of Georgia, the court stated that if a transferee " re c eiv e d any money, even a dollar, the conveyances would not be facially invalid." United S ta tes v. Reid, 127 F. Supp. 2d 1361, 1369 (S.D. Ga. 2000) (noting that an example of a f a c ially invalid conveyance is one only for love and affection); see also In re Holmes, 296 B .R . 567, 573 (Bankr. M.D. Ga. 2003) (that a party paid a high price for land does not mean
th a t the party did not receive "something of value"); Stokes, 278 S.E.2d at 395 (affirming a d ire c te d verdict for finding no fraudulent deed when at least part of the consideration was f o r money or the value of money); McDonald v. Taylor, 37 S.E.2d 336, 338 (Ga. 1946) ("A v o lu n tar y conveyance is a conveyance without any valuable consideration." (emphasis a d d e d )). With respect to the sufficiency of evidence to overcome a presumption of validity, if a party opposing liability fails to show additional consideration, that absence does not itself e lim in a te the presumption that the consideration was valuable. See Pharr, 57 S.E.2d at 358. A n d if the evidence offered by a party burdened with overcoming the presumption attempts o n ly to show that the value of the property was higher than the monetary consideration e x c h an g e d between the parties, that showing is not enough to overcome the presumption of v o lu n ta rin e s s . See id. at 357-58. Thus, under Georgia's former fraudulent transfer law, a tra n sf e r for some value is not fraudulent unless the prosecuting party proves that the parties d id not intend valuable consideration. Effective July 1, 2002, Georgia repealed § 18-2-22, and adopted the Uniform F ra u d u le n t Transfer Act ("UFTA"), see § 18-2-70, and codified the new fraudulent transfer la w as § 18-2-74. Under the new law, a transfer is fraudulent if the debtor "made the transfer o r incurred the obligation . . . (2) [w]ithout receiving a reasonably equivalent value in e x c h an g e for the transfer or obligation" regardless of when the creditors' claims arose, but w ith certain conditions with respect to the debtor's near insolvency or intention to be
in s o lv e n t.8 § 18-2-74(a)(2).9 That a bona fide creditor existed at the time of the transfer and th a t the debtor's insolvency requirements are met are undisputed in this case. In re Terry M fg . Co., 2007 WL 1560087, at *7. The disputed element is whether the legal services were o f "reasonably equivalent value" to TMC's payments. No court has interpreted the language "[w]ithout receiving a reasonably equivalent v a l u e ," § 18-2-74(a)(2), as it appears in this Georgia statute.1 0 Courts in other jurisdictions, h o w ev er, have interpreted the UFTA's language. Courts have also held that the UFTA's " re a so n a b ly equivalent value" language was derived from the Bankruptcy Code's similar p ro v is io n 11 U.S.C. § 548(a)(1)(B)(I),1 1 and have appropriated glosses on § 548 for
In one sense, "intention" remains a part of the analysis. If the transfer was without "reasonably equivalent value," and the debtor "[w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were `unreasonably small' . . . . [or] intended to incur, or believed or reasonably should have believed that he or should would incur, debts beyond his or her ability to pay as they became due," the transfer was fraudulent. § 18-2-74(a)(2) (emphasis added). The "intention," however, describes the debtor's scienter with respect to the status of insolvency and not to the value of the transfer. Additionally informative of the role of intention under the current law is § 182-78 of the Georgia Code, which provides for a good faith defense (requiring good faith and the exchange of reasonably equivalent value) but only for defendants subject to § 18-2-74(a)(1) the provision for transfers that are actually fraudulent, see infra note 9 (describing § 18-2-74(a)(1)). If a transferee acted in good faith but the value was not reasonably equivalent, the transferee is protected to the extent of value that was given by a reduction in the amount of liability at judgment, but that determination is irrespective of the voidability of the transfer. § 18-2-78(d)(3). A transfer also can be fraudulent because the debtor "made the transfer or incurred the obligation (1) [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor." Ga. Code Ann. § 18-2-74(a)(1). Georgia law does define "reasonably equivalent value" with respect to receiving an interest in the debtor's asset through sales, Ga. Code Ann. § 18-2-73(b), but that provision does not cover the circumstances in this case. Section 548 states, in relevant part, that a "Trustee may avoid any transfer . . . if the debtor voluntarily or involuntarily . . . (B)(I) received less than a reasonably equivalent value in exchange for such transfer or obligation."
11 10 9
in te rp re ta tio n s of the UFTA. See, e.g., VFB LLC v. Campbell Soup Co., 482 F.3d 624, 6303 1 (3d Cir. 2007) (using the same definition of "reasonably equivalent value" as used under § 548 for interpreting the UFTA provision when there was no state law on the language); In r e Image Worldwide, Ltd., 139 F.3d 574, 577 (7th Cir. 1998) (stating that "the UFTA is a u n i f o rm act, and it derived the phrase `reasonably equivalent value' from 11 U.S.C. § 548(a)(2)" and for that reason, looking to interpretations of § 548 when state law provided n o interpretation of the UFTA in the context of transfers that benefitted third parties). The F if th Circuit has recently stated that "[t]he primary consideration in analyzing the exchange o f value for any transfer is the degree to which the transferor's net worth is preserved." Secs. E x c h . Comm'n v. Res. Dev. Int'l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) (internal quotation m a rk s omitted) (noting additionally that commentary from the UFTA states that "value is to b e determined in light of the act's purpose, in order to protect the creditors." (internal q u o ta tio n marks omitted)). In Resource Development International, the court found no re a so n a b ly equivalent value when the debtor transferred money to fund the legal defense of a "major organizer" of the fraud scheme, citing case law that payments made solely for thirdp a rty benefits are not for reasonably equivalent value. Id. The Third Circuit has applied a " c o m m o n sense" approach that "a party receives reasonably equivalent value for what it g iv e s up if it gets `roughly the same value it gave,'" VFB LLC, 482 F.3d at 631 (citation o m itte d ). See also Creditor's Comm. of Jumer's Castle Lodge v. Jumer, 472 F.3d 943, 947 (7 th Cir. 2007) ("determin[ing] the value of what was transferred and  compar[ing] it to
w h a t was received") (internal quotation marks omitted). And the Ninth Circuit has made the p o in t that "reasonably equivalent value" is determined from the perspective of the debtor and n o t the giver. In re Lucas Dallas, Inc., 185 B.R. 801, 807 (B.A.P. 9th Cir. 1995). Assuming that § 548 does shed light on the meaning of "reasonably equivalent value," th e court turns to the Eleventh Circuit's interpretation of "reasonably equivalent value" under § 548. The Eleventh Circuit has incorporated into its interpretation of § 548 case law in te rp re tin g the phrase "fair consideration" from an earlier version of the Bankruptcy Code. In re Chase & Sanborn Corp., 904 F.2d 588, 593 n.11 (11th Cir. 1990). "Fair consideration" re q u ire s "(1) a fair equivalent, and (2) good faith on the part of the transferee." In re S. Land T itle Corp., 474 F.2d 1033, 1036 (5th Cir. 1973).1 2 Thus, under § 548, a trustee can avoid tra n sf e rs that were not "fair equivalents" and were not received in good faith by the tr a n s f e re e . The UFTA's language, however, is slightly different, in that under the UFTA, good f a ith alone will not prevent a transfer from being constructively fraudulent. A good faith tra n sf e re e is instead protected up to the amount of value it transferred, notwithstanding the f a ct that the amount of value was not of "reasonably equivalent value." 1 3 A "good faith"
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh Circuit adopted as binding precedent all decisions handed down by the former Fifth Circuit prior to October 1, 1981.
Section 18-2-78(d) states specifically: Notwithstanding voidability of a transfer or an obligation under this article, a good faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to:
d e f e n s e , on the other hand, requires both good faith and reasonably equivalent value to r e n d e r a transfer not voidable, and thus applies only to actual fraud cases. See § 18-2-78. T h e re f o re , a transfer is voidable under the constructive fraudulent provision under Georgia la w regardless of whether the transferee has good faith, but good faith will afford the tra n sf e re e protection on the amount that was given in transfer. That procedural step of d e te rm in in g voidability before the transferee's judgment matters in this way: The part of the d e f in itio n from "fair consideration" that requires "good faith" can enter the analysis of " re a s o n a b ly equivalent value" under the UFTA only after a transfer is considered fraudulent. S e e United States v. Estate of Kime, 950 F. Supp. 950, 955 n.6 (D. Neb. 1996) (noting that th e "[n]otwithstanding voidability" language "is not a defense to a judgment" but only d im in ish e s the judgment); In re Brun, 360 B.R. 669, 673 (Bankr. C.D. Cal. 2007) (describing f ra u d and a good faith inquiry, in summarizing another case, as a two-step process of d e te rm in in g a fraudulent transfer and determining an amount in liability). This distinction w ill factor into the court's analysis of the facts. In In re Rodriguez, 895 F.2d 725 (11th Cir. 1990), the Eleventh Circuit defined § 548 o n constructively fraudulent transfers slightly differently as a provision that does "not a u th o riz e voiding a transfer `which confers an economic benefit upon the debtor,' either d ire c tly or indirectly." Id. at 727 (quoting the Second Circuit). The court linked its
(1) A lien on or a right to retain any interest in the asset transferred; (2) Enforcement of any obligation incurred; or (3) A reduction in the amount of the liability on the judgment.
c o n s tru c tio n of § 548 to the statute's specific purpose, which is to protect creditors. Id. The U F T A 's purpose mirrors that of § 548, see supra p. 16. And in a later, more recent case, In r e Friedman's Inc., No. 407CV041, 2008 WL 1758815 (S.D. Ga. Apr. 16, 2008), the district c o u rt defined "reasonably equivalent value" as receiving "`roughly the value that [a party] g a v e .'" Id. at *2 (quoting Bankr. Service L.Ed. § 34:260 (Feb. 2008)). These alternative in te rp re ta tio n s of § 548 "an economic benefit" and "roughly the value" are not as strin g e n t for the party facing liability as the "fair equivalent" definition; an economic benefit ca n be less than a fair equivalent, as can a rough approximate of the value. Thus, if the court fin d s a "reasonably equivalent value" under the "fair equivalent" definition, the court n e c e s s a rily finds it under those others. The consideration at issue under both the former and current laws is DeLong's legal s e rv ic e s. Other courts have addressed the value of legal services in just this context though n o n e of the cases is directly on point or binding. One case that is illuminating, however, is In re Armstrong, 234 B.R. 899 (Bankr. E.D. Ark. 1999), where the court examined whether p a ym e n ts to criminal defense attorneys were constructively fraudulent transfers under § 548. " In determining reasonably equivalent value," the court stated, "the [c]ourt looks not only to the hours performed by the attorney, but to the contract as a whole." Id. at 904 (referring to a retainer). The court emphasized that a determination of reasonably equivalent value m u st be based on the value of the transfer at that time; "subsequent appreciation or dep re c ia tio n in the value does not transform [a transfer] with reasonably equivalent value into
a fraudulent transfer." Id. at 905. In determining whether the fee was reasonable, albeit a re ta in e r fee, the court considered "the subjective factors of securing a particular attorney, that a tto rn e y's time, the importance and/or prominence enjoyed by the attorney, the importance a n d /o r notoriety of the client, and the mere fact that the client's freedom may be at stake [in th a t criminal case]." Id. "[T]he fact that neither [the attorney] nor the trustee [could] add up [ th e attorney's] hours to equal [the amount paid in the retainer] [did] not alone negate re a so n a b ly equivalent value." Id. The court refused to conclude that the attorney's work did n o t contribute to the case's outcome. Id. The court was clearly deferential to the subjective f a cto rs that shape the character of the particular legal representation. Standard of Review for the Fraudulent Transfer Claims The questions of valuable consideration and reasonably equivalent value are largely q u e s tio n s of fact. In re Chase & Sanborn Corp., 904 F.2d at 593 ("It has long been e s ta b lis h e d that `[w]hether fair consideration has been given for a transfer is `largely a q u estio n of fact, as to which considerable latitude must be allowed to the trier of the facts.'" (q u o tin g Mayo v. Pioneer Bank & Trust Co., 270 F.2d 823, 829-30 (5th Cir. 1959)) (applying th e standard of review to findings of "reasonably equivalent value" under § 548). The B a n k ru p tc y Court's findings must be "clearly erroneous." In re Bardwell, 610 F.2d 228, 230 (5 th Cir. 1980). In this case, the court reverses the Bankruptcy Court's findings on whether valuable c o n s id e ra tio n or legal services of reasonably equivalent value were exchanged between TMC
a n d DeLong. The review of the Bankruptcy Court's findings of fact is more complicated th a n merely a review of the record because the findings of facts were framed by what this co u rt finds were erroneous assumptions of law. More precisely, the Bankruptcy Court's f in d in g s of fact relied on its interpretation of TMC's legal exposure at various points in the litig atio n an interpretation based on incorrect assumptions of law. The Bankruptcy Court's c ritic a l finding was that the "thrust of DeLong's efforts was not to defend [TMC] in the C o m m e rc ia l Factors civil action [but] [r]ather, . . . to shield Rudolph Terry from criminal lia b ility," 2007 WL 1560087, at *7, and the basis for that claim was that TMC had "a simple, s tra ig h t-f o rw a rd defense" that TMC never received any T-shirts a defense "DeLong c o u ld not [have] raise[d] without establishing that Rudolph Terry falsely certified the C o m m e rc ia l Factors invoices," id. at *8. To assert TMC's defense was mutually exclusive o f Rudolph Terry's is not so much an over-simplification but rather a failure to apprehend th e legal liability hovering over TMC before DeLong ever commenced the representation. T h at misapprehension shaped how the Bankruptcy Court determined the value of DeLong's le g a l services to TMC. T M C 's Legal Exposure During the Georgia Litigation What matters for determining the value of DeLong's legal services is not TMC's actual lia b i lity but its potential liability. An ex ante perspective of TMC's potential and developing lia b ility during the Georgia litigation must shape the analysis. TMC's legal exposure during th e Commercial Factors litigation was considerable even prior to DeLong's representation.
W h e n Commercial Factors pressed TMC to pay the bogus invoices, TMC through Rudolph T e rr y confirmed the invoices and caused TMC to make payments on them. See supra pp. 34 . When DeLong began the representation, the facts before him included invoices with T M C 's approval, payments on the invoices, and the representation of the Terry brothers im p lic a tin g corporate liability. For DeLong to conclude that TMC had no liability based on th o s e facts would have been imprudent. Even if, assuming arguendo, DeLong were aware o f the fraudulent scheme (and there is no evidence or allegation that he was), TMC's defense w a s not a simple contract argument. The determination of whether Rudolph Terry's actions w e re unauthorized and not imputed to the principal, TMC, involved a hairy question of law d e p e n d e n t on as yet undiscovered facts. DeLong's explanation of this predicament in his tria l testimony is illustrative. When asked why he waited until 2003 to assert a defense on b e h a lf of TMC that Rudolph Terry's actions were outside the scope of employment, DeLong a n sw e re d that asserting the defense earlier would have been "a very bad idea," and he added: Y o u don't file summary judgments or motions for summary judgment u n til discovery has been completed. The facts that had come out, the evidence that Commercial Factors had presented, just the bare fact that there were inv o ices that Commercial Factors had purchased that were Terry M a n u f ac tu rin g Company invoices, that were signed by Rudolph Terry, meant th a t there were an awful lot of things going against the company. And I had to develop a basis to go to the court and say to the court, look, this is very lik e ly a situation where Terry Manufacturing has no involvement. A n d so what I had to do is develop the theory very carefully and, when it was too late for Commercial Factors to come back and do the things that it m ig h t otherwise do to get around it was the right time to file the motion.
( T r ia l Tr. vol. 1, 196:9-25 (emphasis added).) DeLong needed a basis for presenting a case f o r why TMC was not liable on theories of outright fraud and ratification. TMC would have been liable for fraud if TMC had been complicit in the scheme all a lo n g , as the acknowledged invoices could have initially suggested. Whether TMC was, at a n y point, liable on a ratification theory is not necessary for this court to decide. The relevant q u e s tio n is instead whether TMC could have faced liability based on a ratification theory and w h a t issues remained for DeLong to reach that determination. At the very least, the question is whether TMC's legal exposure extended beyond that which would exist under a mere c o n tra c t claim. Under Georgia law, a corporation can be liable under the agency principle of ra tif ic a tio n . See, e.g., Potts-Thompson Liquor Co. v. Potts, 69 S.E. 734 (Ga. 1910); Ely & W a lk e r v. Dux-Mixture Hardware Co., 582 F. Supp. 285, 292 (N.D. Ga. 1982). " [ R ]a tif ic a tio n is the confirmation by one of an act performed by another without authority." G r ig g s v. Dodson, 154 S.E.2d 252, 256 (Ga. 1967). Under Georgia's statute on ratification, t h e ratification will relate back to the ratified act. Ga. Code Ann. § 10-6-52. Ratification a ls o requires knowledge on the part of the ratifying principal of the material facts of the a g e n t's actions. Computel, Inc. v. Emery Air Freight Corp., 919 F.2d 678, 683 (11th Cir. 1 9 9 0 ). That TMC acknowledged the invoices for the T-shirts at least raised the possibility o f liability because TMC arguably ratified the financial arrangement by that a c k n o w le d g m e n t. Furthermore, if TMC was on notice of the fraud, by reason of the fact that
it certified invoices for merchandise it never received, liability for Rudolph Terry's tort w o u ld have also factored into TMC's legal exposure. Ga. Code Ann. § 51-1-12 ("By ra tif ic a tio n of a tort committed for his own benefit, the ratifier becomes as liable as if he had c o m m a n d e d that it be committed."); Hobbs v. Principal Fin. Group, 497 S.E.2d 243, 244 (G a . App. 1998) ("Generally, an employer may be held responsible for the tortious act of an e m p lo ye e where the act was . . . ratified (by the employer) after its commission . . . ."). (See A p p e lla n t Br. 19 ("TMC knew when it acknowledged the invoices, when it paid on the in v o ic e s, and when it attempted to settle [Commercial Factors'] claim that it had received no t e e shirts[,] [and] [u]nder Georgia law this was strong evidence that TMC had ratified R u d o lp h Terry's conduct.").) For liability to attach to the principal, the tort must have been c o m m itte d for the ratifier's benefit. § 51-1-12; e.g., Travis Pruitt & Assocs., P.C. v. Hooper, 6 2 5 S.E.2d 445, 449 (Ga. App. 2005). But at the time DeLong was handling the case, it was n o t clear whether Rudolph Terry participated in the Floodgates scheme in order for it to inure to the benefit of TMC, for Rudolph Terry's sole benefit, or for the benefit of both. The determination of liability by ratification was thus wrapped up with a series of f a ct-b o u n d legal determinations, including if, how, and when the principal "ratified" the o f f ic e r' s actions, whether and when the principal had knowledge of the material facts, the lega l and practical effect of the fact that the ratifying officer was one of the only two officers a n d directors of the principal and that they were brothers, and other details relevant to w h e th e r the ratification would prevent TMC from arguing that it owed no money. To distill
T M C 's position at the beginning of the litigation to that of an innocent contract party and to fault DeLong with not recognizing that fails to take into account the fact that TMC a p p e a re d to have confirmed the invoices, DeLong was outside counsel and unfamiliar with t h e company, the officers were also the sole shareholders and directors, and the potential m o n e ta ry damage from TMC's apparent liability was significant. Even aside from the question of ratification, DeLong had undertaken a collection case, a n d his task included sifting through invoices to ensure the amount of money owed. It seems n aive to assume that DeLong should have initially suspected massive fraud as the primary re a s o n for why the invoices were unpaid. Furthermore, the unraveling of fraud requires time a n d carefully considered investigative work to discover the truth while preserving the v ia b ility and reputation of the company. It also seems naive to assume that TMC would have h a d success in asserting from the beginning a defense that it owed nothing. Commercial F a c to rs was interested in retrieving the alleged millions of dollars it lost and TMC by all a p p e a ra n c e s had the money to pay that back. Absent from the Bankruptcy Court's analysis is an appreciation for Commercial Factors' pragmatic interest to get paid. As the litigation progressed, TMC faced liability counts on conspiracy, fraud, c o n v e rsio n , and RICO. TMC's liability remained tied to Rudolph Terry's unless and until T M C could prove that it was disconnected from the fraud, or that Rudolph Terry acted o u ts id e the scope of employment and that TMC's acknowledgments were not a ratification o f Terry's actions. A recitation of the entire record and all of the steps DeLong took to
p ro te c t TMC in litigation is not necessary. The burden of proof is on the Trustee, Stokes, 2 7 8 S.E.2d at 395, and as explained below, the Trustee has failed to show that DeLong's le g a l services were not for valuable consideration or reasonably equivalent value. Value of DeLong's Legal Services B e c au s e the Bankruptcy Court inaccurately assessed TMC's legal exposure during the C o m m e rc ia l Factors litigation, the finding derived from that error that TMC received no b e n e f i t from the defense was clearly erroneous. The Bankruptcy Court approached the e v a lu a tio n of DeLong's legal services from the standpoint that TMC's clear defense was to a rg u e TMC owed nothing. If TMC could have successfully weathered the Commercial F ac tors litigation with that defense, DeLong's legal strategy would have been, at the very le a st, perplexing. The court's understanding of TMC's legal predicament, however, yields a different finding of fact. Because TMC's legal exposure was complex, serious, unclear, a n d unsettled during DeLong's representation, particularly at the beginning, the court finds th e Bankruptcy Court abused its discretion in finding the legal services were of insufficient v a lu e to TMC. Under the former Georgia law, TMC received "valuable consideration." The transfer w a s clearly facially valid. TMC received at least some value in the form of legal services f ro m DeLong. For one, DeLong filed an Answer when Commercial Factors sued TMC; that p ro te c te d TMC from a default judgment. The pleadings DeLong filed for TMC asserted a n u m b e r of arguments that comported with a plausible understanding of the facts. DeLong
a ls o attempted, on instructions from his client, to settle the case for TMC. The argument that T M C derived no benefit from these negotiations underestimates the realities of litigation. E v e n if TMC was innocent, TMC had little choice at that stage in the litigation. Through its o f f ic e r, TMC had acknowledged prior to DeLong's representation that it owed Commercial F a c to rs money. TMC could fight or settle the claims. The sun does not stand still when a c o m p a n y faces a strategic decision of this nature. Settlement is not synonymous with liability a company can have perfectly rational and valuable reasons to settle a case in the face of u n c e rta in liability. The Bankruptcy Court adjudged DeLong's legal fees "astonishing," 2007 WL 1 5 6 0 0 8 7 , at *7, but a finding that the transfer should have been valued lower does not rebut a facially valid transfer under prior Georgia law, see supra p. 13. The Trustee failed to rebut th e facially valid transfer with sufficient evidence. Perhaps from the starting point of the B ankruptcy Court's understanding of TMC's legal predicament, TMC's payments could have c irc u m sta n tially suggested that the parties intended not to benefit TMC but to benefit R u d o lph Terry. Starting from this court's position that TMC faced real liability, however, D e L o n g protected TMC from potential and eventual claims of fraud, which benefitted TMC. G iv e n TMC's potential liability, the nature of the payments no longer supports a conclusion im p licit in the Bankruptcy Court's findings that TMC intended to receive less than valuable c o n s id e ra tio n .
T h e re is also insufficient direct evidence of DeLong's intent to render insufficient lega l services to TMC, or that TMC's payments were intended to benefit Rudolph Terry in s te a d of TMC. Neither is the consideration insufficient because Rudolph Terry benefitted f ro m the TMC-paid representation in his individual capacity. In fact, because the question o f fraud for both defendants remained interrelated until DeLong could sift the facts and f o rm u late a strategy, any benefit to Rudolph Terry was an indirect benefit to TMC until T M C 's liability could be analytically severed from Rudolph Terry's.1 4 Only under the B a n k ru p tc y Court's assumption that TMC had one simple defense do the legal services D e L o n g rendered to TMC fail to confer valuable consideration to TMC. U n d e r the current Georgia law, the legal services were also of reasonably equivalent v a lu e to TMC's payments. Only the payments after July 1, 2002, fall under this standard. T h e Bankruptcy Court's rationale for finding the legal services were not reasonably e q u iv a le n t under the current law depended entirely on its findings of fact under the former G e o rg ia law. 2007 WL 1560087, at *9. The Bankruptcy Court did not attempt to analyze th e payments after 2002 to determine if, beginning at that point, the legal services were of re a so n a b ly equivalent value. In all likelihood, the Bankruptcy Court would have detailed
A case from the Southern District of Florida touches upon this point. The court found reasonably equivalent value in legal services provided by an attorney even though the attorney's representation was for parties in a litigation matter involving the debtor but not for the debtor. In re Trauger, 105 B.R. 120 (Bankr. S.D. Fla. 1989). Counsel was engaged and paid by the debtor, id. at 12122, 123, and represented two employees, their spouses, and two companies in a litigation matter involving the debtor, these, and other parties, id. at 122. The court decided, given the conflicting evidence, that the debtor's decision to engage and pay for counsel for others "was not a gratuitous selfless act of generosity." Id. at 123. Based on the record in that case, the court concluded that "a benefit to these litigants represented a benefit to the debtor's position in that trial." Id.
h o w the payments were not reasonably equivalent based on its position that from the b e g in n in g , TMC's defense should have pursued an entirely separate trajectory from Rudolph T e r r y' s . This court, again, has based its findings of fact on a different assumption about T M C 's legal exposure, and for that reason, the Bankruptcy Court's finding of fact on whether D e L o n g ' s legal services were "reasonably equivalent" was clearly erroneous. T h e Trustee has failed to prove that the legal services after July 2002 were not re a s o n a b ly equivalent to TMC's payments, i.e., not for fair consideration, see supra pp. 171 9 . The evidence is voluminous and, at best, conflicting. As discussed above, see supra pp. 1 7 -1 8 , "good faith" is not a consideration in determining whether a conveyance is c o n stru c tiv e ly fraudulent. Under Georgia's current law, "good faith" factors into only the lia b ility amount of the transferee should the conveyance be found fraudulent. Thus, any e v id e n c e concerning DeLong's alleged knowledge after July 2002 of Rudolph Terry's and T M C 's conflicting defenses that supports a scienter argument is not directly relevant. T h e evidence clearly does not weigh in favor of finding that DeLong failed to provide fa ir consideration. By July 1, 2002, TMC was facing several serious counts which were s ta te d in terms of the collective behavior on the part of Defendants. The record demonstrates su b sta n tiv e and voluminous work performed on behalf of TMC after 2002 in an effort to p r o te c t it from liability. Those efforts are evidenced in the billing records (see Pl. Trial Ex. # 13), in the partial summary judgment (Def. Trial Ex. # 15), in the pleading in which TMC arg u ed that Rudolph Terry's actions were unauthorized and not in furtherance of TMC's
b u s in e ss based on an affidavit submitted by Roy Terry (Def. Trial Ex. # 27), and the amicus b rief filed in the interlocutory appeal of a trial court's order compelling TMC's accountant's tes tim o n y (Pl. Ex. # 129). This work was beneficial to TMC if the baseline assumption is th a t TMC in some way could be on the hook for Rudolph Terry's actions. The Bankruptcy C o u rt points to Roy Terry's affidavit as evidence that TMC and Rudolph Terry's defenses w e re necessarily inconsistent, 2007 WL 1560087, at *8, but the affidavit was dated in June 2 0 0 3 (Defs. Trial Ex. # 27). The Court seems to discount the possibility that Roy Terry's p o sitio n on TMC's knowledge or ratification was not clear, discoverable, or admitted to D e L o n g until later in the case. In fact, the entire discussion regarding DeLong's strategy in representing TMC loses s ig h t of a principle at the root of this court's determination. For various and well-honed p o lic y reasons, courts have refused in other areas of law to microscopically dissect the strateg ic professional decisions made by attorneys in their representation. Part of the court's re lu c tan c e to recreate hypothetical routes TMC's representation could have taken is in f lu e n c ed by this chief concern: that courts should afford attorneys a certain degree of d e f ere n c e when it comes to their representation of clients. Attorneys representing a company lik e TMC, a closely-held corporation facing tremendous liability and, as it later turned out, c rim in a l liability for its officers' conduct, not to mention bankruptcy, need as much flexibility a n d discretion as attorneys in other cases. Though allowing professional discretion in the c o n te x t of ineffective assistance of counsel claims, for example, is in part distinguishable as
b a s e d on a primary concern for the accuracy of the adversarial process, see White v. S i n g le ta r y , 972 F.2d 1218, 1221 (11th Cir. 1992), the underlying principle runs beyond that c o n c e rn . When courts play Monday morning quarterback with respect to litigation strategy, th e y are risking not only reaching the wrong outcome but also affecting the behavior of law ye rs anticipating that review. The subsequent chilling effect on future representation is u n d e sira b le . "We [the courts] are not interested in grading lawyers' performances," id., and th e courts "should always avoid second guessing with the benefit of hindsight," id. at 1220, a n d instead "allow lawyers broad discretion to represent their clients by pursuing their own s tra te g y," id. at 1221. The insulation afforded lawyers reverberates in the area of malpractice claims as well. " [ T ]h e tactical decisions made during the course of litigation require, by their nature, that the a tto rn e y be given a great deal of discretion." Hudson v. Windholz, 416 S.E.2d 120, 124 (Ga. C t. App. 1992) (explaining the doctrine of "judgmental immunity," which Georgia and other ju risd ictio n s have adopted). One of the policy justifications for protecting lawyer's strategic d e c is io n s from malpractice liability is because "[o]therwise every losing litigant would be a b le to sue his attorney if he could find another attorney who was willing to second guess the d e c is io n s of the first attorney with the advantage of hindsight," Paul v. Smith, Gambrell & R u ss e ll, 599 S.E.2d 206, 208 (Ga. Ct. App. 2004). Even more fundamentally, "[t]he honest exercise of professional judgment is d e p e n d en t upon the reasonable exercise of discretion free from outside influence." Paul, 599
S .E .2 d at 209. The court recognizes that legal malpractice review involves a lower threshold f o r evaluating an attorney's decisions that of satisfying minimum duties than ascertaining w h e th e r legal services are sufficiently valuable for fraudulent conveyance purposes. But p a rtic u la rly in the determination of constructive fraud where the assessment depends not o n fraudulent intent but on the objective evaluation of value to the debtor an evaluation of v a lu e should focus on whether the fees match up to the amount of work accomplished, and n o t on how the representation could have been conducted differently, as was the Bankruptcy C o u rt's focus, see, e.g., 2007 WL 1560087, at *8 ("The proper comparison is not DeLong's s e r v i c e s with no services, but rather the services rendered by DeLong with those of an atto rne y not encumbered with the defense of Rudolph Terry."). It is not an exoneration of the Terry brothers to conclude that the Bankruptcy Court a b u se d its discretion in finding that DeLong's legal services were of insufficient value and th a t TMC's payments to DeLong were constructively fraudulent. Nor is the court expressing a p p ro v a l of Delong's representation outside of this context. The court recognizes that the B an k rup tcy Court's assessment of the circumstances surrounding the Commercial Factors litig a t io n should be deferentially credited not only because of the standard of review, but also b ec au se of the unique circumstances of the Terry proceedings. As the Bankruptcy Court rig h tly pointed out in another of the many related proceedings arising out of the July 2003 b a n k ru p tc y of TMC, [ t]h e Terry Manufacturing bankruptcy proceedings have been of unusual c o m p l e x ity. The Court has struggled with the bankruptcy case and dozens of 32
a d v e r sa r y proceedings . . . spun off in all directions for more than three years. I f one thing can be said with any certainty at all, it is that nothing in this case is as it [at] first glance seems. In re Terry Mfg. Co., 345 B.R. 377, 381-82 (Bankr. M.D. Ala. 2006). Not uncommon in the b an k rup tcy proceedings were creditors victimized by the criminal activities of the Terry b ro th e rs , creditors who "screamed long and loud about fraud perpetrated by Roy and R u d o lp h Terry, check kiting, destruction of records, and the rest of a now familiar litany of d e p re d a tio n s ." Id. at 382. Certainly the record in the case sub judice is replete with proof o f perfidy on the part of the Terry brothers in their dealings with creditors. The difficulty is sep ara tin g , if indeed they should be separated, the actions and motives of the Terry brothers f ro m those of other players in the drama, in particular, their attorneys in certain preb a n k ru p tc y civil litigation in Georgia. That is this case. Despite so massive an underlying f ra u d u len t scheme, DeLong must be separated from that scheme. TMC's payments to D e L o n g for his legal services were not fraudulent under Georgia law. VI. CONCLUSION F o r the foregoing reasons, it is ORDERED that the Bankruptcy Court's May 29, 2007 Ju d g m e n t is VACATED, and the case is REMANDED. IN S T R U C T E D to enter Judgment in favor of Defendants. DONE this 30th day of September, 2008. /s/ W. Keith Watkins UNITED STATES DISTRICT JUDGE The Bankruptcy Court is
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