Kapila v. Davis, Graham & Stubbs LLP et al

Filing 20

Order on Report and Recommendations from Bankruptcy Court; Overruling Objections; Adopting Bankruptcy Court's Report and Recommendation; Granting Defendants' Motion for Partial Summary Judgment; Closing Case. Signed by Judge Robert N. Sco la, Jr. on 12/7/2017. (ls) NOTICE: If there are sealed documents in this case, they may be unsealed after 1 year or as directed by Court Order, unless they have been designated to be permanently sealed. See Local Rule 5.4 and Administrative Order 2014-69.

United States District Court
for the
Southern District of Florida
Soneet R. Kapila, Plaintiff,
v.
Davis, Graham & Stubbs LLP and
S. Lee Terry, Defendants.

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)
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) Civil Action No. 15-61016-Civ-Scola
)
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Order on Report and Recommendations from Bankruptcy Court
This matter is before the Court upon the Plaintiff’s Objections (ECF No. 8)
to the Bankruptcy Court’s Report and Recommendation to the District Court to
Grant Defendants’ Cross-Motion for Final Summary Judgment (Report, ECF No.
9-1). The Defendants Davis, Graham & Stubbs LLP and S. Lee Terry filed a
response (ECF No. 15), and the Plaintiff filed a reply (ECF No. 16). Having
considered the supporting and opposing submissions, the record and the
applicable law, the Court overrules the Plaintiff’s objections and accepts and
affirms the bankruptcy court’s Report.
1. Background
This case arises within the larger context of a bankruptcy proceeding
involving SMF Energy Corporation. SMF provided mobile fuel services to
companies that had fleets of vehicles, either by delivering the fuel to storage
tanks, or by directly fueling the vehicles owned by its customer companies. SMF
employed a billing practice called incremental volumetric allowance (“IVA”),
whereby SMF added a charge for fuel it delivered, by billing certain customers for
fuel that the customers did not actually receive. The Defendants were retained to
provide advice and opine upon the legality of the IVA. Ultimately, it was
determined that the IVA charge was not lawful, and after eight years of utilizing
the billing practice, SMF incurred sufficient unrecorded liabilities to cause its
insolvency. As a result, SMF filed for bankruptcy under Chapter 11 of the
Bankruptcy Code. The Plaintiff is the trustee appointed to spearhead the
liquidation of SMF’s assets.
In this adversarial case, the Plaintiff contends that the Defendants were
negligent in providing legal advice regarding the legality of the IVA, and that SMF
relied upon that advice. Thus, the Plaintiff asserts a claim against the
Defendants for legal malpractice. In addition, in a related adversarial proceeding
(Case No. 14-61194-Civ-Scola, the “GT Case”), the Plaintiff asserted professional

negligence and accounting malpractice claims against Grant Thornton, LLP, the
accounting firm that audited SMF’s financial statements.
In the GT case, the Plaintiff alleged that the IVA billing occurred with
knowledge of at least some of SMF’s officers and directors. (See e.g., Case No. 1401162-RBR, ECF No. 1 ¶¶ 114, 127-129.) This Court determined that summary
judgment was proper upon the professional negligence and accounting
malpractice claim on the basis that such claims are barred by the in pari delicto
defense. (GT Case, ECF No. 20.) In pertinent part, this Court found that the
alleged overbilling was intended to and did benefit SMF to the detriment of
outsiders, that SMF and Grant Thorton were engaged in the same wrongdoing,
and that SMF’s responsibility for the overbilling scheme was at least equal, if not
greater than, Grant Thornton’s alleged wrongdoing in allowing the overbilling to
continue and assisting the breaches of fiduciary duty. (See id. at 5-6.)
Based upon this Court’s findings in the Grant Thornton case, the
bankruptcy court determined that the doctrines of issue preclusion and judicial
admissions apply to this proceeding, and therefore, that the Defendants in this
case are entitled to rely upon the in pari delicto doctrine as a bar to the Plaintiff’s
claim. See Report, ECF No. 9-1. The Plaintiff objects on several grounds
discussed below.
2. Standard of Review
The Court reviews de novo those portions of the bankruptcy judge’s report
and recommendation to which the parties have objected. Fed. R. Bankr. P.
9033(d). In evaluating the parties’ underlying motions for summary judgment,
the Court applies the familiar legal standard. “Summary judgment is appropriate
where the pleadings, affidavits, depositions, admissions, and the like show that
there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1050
(11th Cir. 2015) (punctuation & citation omitted). “[T]o survive summary
judgment, the nonmoving party must . . . make a showing sufficient to permit
the jury to reasonably find on its behalf.” Id.
3. Discussion
The Plaintiff raises five objections to the bankruptcy court’s report and
recommendation: (1) there is a genuine issue of material fact as to whether SMF
knew that the IVA was unlawful, precluding application of the in pari delicto
defense; (2) the order in the GT case does not have preclusive effect in this case;
(3) the Plaintiff’s allegations in the GT case are not admissions under the
exception permitting inconsistent pleadings; (4) Florida’s comparative fault
statute precludes the application of in pari delicto to legal malpractice claims;

and, (5) the bankruptcy court failed to properly weigh policy considerations that
preclude the application of in pari delicto in this case.
Upon review, the Court agrees with the bankruptcy court’s reasoning in its
Report, and finds that the Plaintiff’s objections should be overruled. The
common law defense of in pari delicto is based on “[t]he principle that a plaintiff
who has participated in wrongdoing may not recover damages resulting from the
wrongdoing.” Earth Trades, Inc. v. T & G Corp., 108 So. 3d 580, 583 (Fla. 2013)
(quoting Black’s Law Dictionary 806 (8th ed. 2004)). The defense is applied
where the plaintiff is at least as at fault as the defendant for the injury for which
the plaintiff seeks compensation. Official Comm. of Unsecured Creditors of PSA,
Inc. v. Edwards, 437 F.3d 1145, 1154 (11th Cir. 2006) (quoting Bateman Eichler,
Hill Richards, Inc. v. Berner, 472 U.S. 299, 306–309 (1985) (“in its classic
formulation, the in pari delicto defense was narrowly limited to situations where
the plaintiff truly bore at least substantially equal responsibility for his injury,”
and “where a plaintiff truly bore at least substantially equal responsibility for the
violation, a defense based on such fault . . . should be recognized.”)). The
doctrine serves two purposes: precluding courts from entangling “their good
offices [in] mediating disputes among wrongdoers” and “deterring illegality” by
“denying judicial relief to an admitted wrongdoer.” O’Halloran v.
PricewaterhouseCoopers LLP, 969 So. 2d 1039, 1044 (Fla. 2d DCA 2007). The
Plaintiff maintains that in order for in pari delicto to apply in this case, the
Defendants must show that SMF knew that the IVA was unlawful. However, as
the bankruptcy court correctly held, the Plaintiff has conceded as much in his
allegations in the GT case.
The bankruptcy court relied primarily upon In re Gosman, 382 B.R. 826
(S.D. Fla. 2007) (Gold, J.), the applicability of which the Plaintiff dismisses in a
footnote. (See ECF No. 8, n.3.) However, the Plaintiff’s objections amount to
nothing more than disagreement with the bankruptcy court’s decision, and the
Plaintiff provides no authority to persuade the Court that the principles in
Gosman should not apply in this case, especially where the Plaintiff concedes the
factual inconsistencies between the GT case and the instant case. While Rule 8
encompasses pleading of inconsistent theories, the Rule does not otherwise
permit pleading of inconsistent facts, particularly in an adversary proceeding
within a bankruptcy. See Gosman, 382 B.R. at 843 (“A party is bound by the
admissions in its pleadings, and judicial admissions are proof possessing the
highest possible probative value.”) (internal quotations and citation omitted).
Furthermore, the Plaintiff provides no support for his contention that the
2011 amendment to Florida’s comparative fault statute eliminated the in pari
delicto defense in legal malpractice claims, and the Court has found none.
Finally, the Plaintiff urges the Court to consider that permitting the in pari

delicto defense to bar the claim in this case would essentially prevent all
potential legal malpractice claims against corporate counsel advising on
commercial practices in cases like this. However, the other policy to consider in
this case is not permitting a party to plead inconsistent facts based upon the
particular cause of action the party attempts to assert. The Court finds that in
this case, the latter far outweighs the former.
4. Conclusion
Accordingly, the Court overrules the Plaintiff’s objections. The bankruptcy
court’s Report (ECF No. 9-1)is affirmed and adopted. The Defendants’ motion
for partial summary judgment is granted, and the remaining motions are denied
as moot. The Clerk of Court is directed to close this case.
Done and ordered at Miami, Florida, on December 7, 2017.
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Robert N. Scola, Jr.
United States District Judge