Abrams v. DLA Piper US LLP

Filing 33

OPINION AND ORDER DENYING 23 DLA Piper's Motion to Dismiss Counts V And VI Of Fourth Amended Complaint. Signed by Judge Theresa L Springmann on 7/9/14. (kjp)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
DAVID ABRAMS, not individually but
solely as the Liquidating Trustee and
court-appointed manager of Heartland
Memorial Hospital, LLC, and
HEARTLAND MEMORIAL HOSPITAL,
LLC, the Debtor, an Indiana limited
liability company,
Plaintiffs,
v.
DLA PIPER (US) LLP, a Maryland
limited liability partnership,
Defendant.

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CAUSE NO.: 2:12-CV-19-TLS

OPINION AND ORDER
This matter is before the Court on DLA Piper’s Motion to Dismiss Counts V and VI of
Fourth Amended Complaint [ECF No. 23]. DLA Piper, a law firm, has been sued in an adversary
proceeding by the liquidating trustee of a debtor, Heartland Memorial Hospital, LLC. For the
reasons set forth below, the Court denies the Defendant’s Motion.

PROCEDURAL BACKGROUND
The Plaintiff is seeking to avoid and recover from DLA Piper certain fraudulent transfers
and preferences made by the debtor. The Plaintiff also asserted, in a Second Amended
Complaint, claims for legal malpractice and breach of fiduciary duty. Upon motion by the
Defendant, the Court found that these additional counts did not state claims upon which relief

could be granted, and dismissed those counts without prejudice, and with leave to re-file.1
In response, the Plaintiff filed a Fourth Amended Complaint, which added claims for
breach of fiduciary duties (Count VI), and aiding and abetting breach of fiduciary duties (Count
V). The Defendant now seeks to dismiss these claims on grounds that the leave to amend the
Court granted was very specific and did not include the right to re-plead breach of fiduciary duty
claims or to file a claim for aiding and abetting a breach of fiduciary duty. The Defendant also
argues that the claim for breach of fiduciary duty that is asserted in the Fourth Amended
Complaint is no different from the breach of fiduciary duty claim that the Court already
dismissed, and thus fails to state a claim upon which relief can be granted. The Defendant argues
that the aiding and abetting claim is not plausible because it would require that the Defendant
assisted insiders in looting an entity over which its client intended to gain operational control and
had already made a substantial loan to. The Plaintiff counters on the procedural issues, and
points to new facts he alleged to correct the deficiencies noted by the Court in its dismissal order.

COMPLAINT ALLEGATIONS
The Court draws the following facts from the Fourth Amended Complaint. See Hallinan
v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009) (stating that
“for purposes of the motion to dismiss we accept all factual allegations in the complaint and
draw all reasonable inferences from those facts” in favor of the plaintiffs).
Heartland Memorial Hospital (Heartland), a limited liability company organized in

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For a more complete procedural background, see the Court’s June 12, 2013, Opinion and Order
[ECF No. 18].

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Indiana, operated a number of for-profit, physician owned, healthcare practices in Illinois and
Indiana, including a surgery center and hospital in Munster, Indiana. Heartland’s sole member
was its parent corporation, iHealthcare, which was organized in 2002 and was the sole owner of
Heartland’s equity. Heartland was managed by the directors of iHealthcare, who also managed
iHealthcare without apparent regard for the independent corporate statuses of iHealthcare and
Heartland.
In 2002, Heartland began an expansion of its hospital facility. To pay for the expansion,
Heartland entered into a sale/leaseback agreement with Munster Medical Holdings, LLC.
Heartland sold its main hospital facility to Munster Medical Holdings for $30 million and agreed
to lease the facility for almost $300,000 per month for the first five years.
By the middle of 2005, Heartland was insolvent or essentially so. It was unable to pay its
creditors and, by the end of 2005, owed $1.9 million for unpaid taxes on withheld wages.
Members of iHealthcare’s board of directors contacted Wright Capital Partners, an
investment banking firm, who expressed an interest in purchasing the iHealthcare shareholders’
equity interests. In October 2005, certain of the iHealthcare shareholders agreed to sell their
individual shares in iHealthcare to Wright Capital Partners for about $25 million in cash and
debentures. The transaction was never consummated because Wright Capital Partners lacked the
necessary funds.
Meanwhile, Heartland’s financial condition had continued to worsen and, by October
2005, it needed an immediate infusion of cash. Wright Capital Partners offered to lend Heartland
up to $2.5 million in a revolving line of credit, provided that Leroy Wright, the owner of Wright
Capital Partners, was placed in control of Heartland along with Wright’s business associates,

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Alfred Sharp and Allen Hill. On October 10, 2005, Wright became a part of the joint committee
operating Heartland. DLA Piper, which represented Wright Capital Partners, began representing
Heartland as well when Wright took control of the hospital facility. DLA Piper provided a wide
range of legal services to the hospital, frequently billing over $100,000 a month. With broad
access to information about Heartland, DLA Piper was fully aware of Heartland’s perilous
financial state.
The shareholders of iHealthcare, including its directors who managed Heartland agreed
to sell their iHealthcare stock to Wright for $25 million, but because Wright Capital did not have
sufficient cash on hand, the iHealthcare shareholders agreed to a leveraged buyout. In this
transaction, agreed to by the joint managers of Heartland and iHeathcare, Heartland’s assets
were sold and $7 million of the cash generated by the sale was transferred to iHealthcare’s
shareholders in exchange for transferring their iHealthcare stock to Wright Capital. The hospital
leased back the real estate assets that it sold for twice the market rate. After transfer of $7 million
to the equity owners, payment of legal fees, costs of the transaction, and pay-offs on the
mortgages for the sold property, little of the purchase price was left for Heartland to cover its
new monthly lease obligations.
DLA Piper performed all the legal services necessary to negotiate and document the sale
and leaseback transaction. In connection with the leveraged buyout, DLA Piper conducted
extensive due diligence on behalf of Wright Capital. DLA Piper observed that Heartland was
being run by a joint committee that ignored corporate formalities, which put it at risk for actions
seeking to pierce its corporate veil as the mere alter ego of iHealthcare.
Heartland Memorial Holdings, formed by Wright Capital, Wright, Sharp, and Hill,

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became the grandparent organization of Heartland. Among the three entities—Heartland
Memorial Holdings, iHealthcare, and Heartland—only Heartland was an operating entity, and
thus the only entity capable of generating cash.
Within four months after the Wright merger closed, DLA Piper recognized that Heartland
was in financial trouble, and proposed a plan to remove Wright as Heartland’s manager. As part
of the plan, Heartland Memorial Holdings agreed to assume responsibility for payment of over
$883,000 in unpaid legal fees for work DLA Piper had performed for Wright Capital Partners.
DLA Piper sought and received at least partial payment from Heartland.
In October 2006, Heartland sold its main hospital campus and most of its remaining
assets to the Sisters of St. Francis Health Services. DLA Piper received payment around the time
of this transaction, and an additional payment in January 2007.
On January 31, 2007, creditors of Heartland filed an involuntary Chapter 7 bankruptcy
petition in the United States Bankruptcy Court for the Northern District of Indiana, naming
Heartland as debtor. On March 2, 2007, Heartland converted the case to a Chapter 11
proceeding. On November 19, 2008, the bankruptcy court approved Heartland’s liquidating plan
of reorganization and appointed the Plaintiff David Abrams as liquidating trustee, manager, and
designated representative.

DISCUSSION
A.

Opportunity to Amend
The Defendant argues that Counts V and VI of the Fourth Amended Complaint do not fit

within the specific leave to amend the Court granted when it dismissed the Plaintiff’s legal

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malpractice and breach of fiduciary duty claims. In its previous order, the Court acknowledged
that leave should be freely granted following a dismissal unless the amendment would be futile,
and reasoned as follows with respect to the malpractice and breach of fiduciary duty claims:
The Plaintiffs argue that their claims are, in substance, claims that the Defendant
engaged in a conspiracy to loot and defraud the Debtor. As discussed above, the
Plaintiffs have not stated such claims in Counts V and VI of their Second
Amended Complaint, and dismissal of those claims is appropriate. However, it
appears that opportunity to amend the pleadings would allow the Plaintiffs to craft
claims that seek relief more appropriate to the undeveloped record before the
Court, and it does not appear that amendment would be futile. Accordingly, the
Court will dismiss without prejudice and grant the Plaintiffs fourteen days to
amend their claims against the Defendant by raising any claims for conspiracy or
fraud in accordance with the strictures of the Federal Rules of Civil Procedure
and applicable caselaw, if the Plaintiffs choose to pursue such claims.
(6/12/13 Opinion & Order 29–30, ECF No. 18.)
The Plaintiff asserts that it did not interpret the Court’s Order as instructing it to file the
exact claims mentioned, and no others. Instead, it pled the theories that best fit the facts. To this
end, he crafted claims more appropriate to the undeveloped record by simplifying, streamlining,
or enhancing basic factual allegations, and then framing a claim for aiding and abetting a breach
of fiduciary duty to replace the legal malpractice claim, and by adding facts to address the
specific defects the Court had identified in the breach of fiduciary duty claim.
The Plaintiff’s argument is well taken. The Court found the Second Amended Complaint
to be lacking, interpreted the Plaintiff’s legal memoranda to be alleging that the Defendant
engaged in a conspiracy to loot and defraud Heartland, and granted the Plaintiff leave to amend
its pleading in the spirit of Foster v. DeLuca, 545 F.3d 582, 584 (7th Cir. 2008) (“District courts
routinely do not terminate a case at the same time that they grant a defendant’s motion to
dismiss; rather, they generally dismiss the plaintiff’s complaint without prejudice and give the

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plaintiff at least one opportunity to amend her complaint.”) and Barry Aviation Inc. v. Land
O’Lakes Mun. Airport Com’n, 377 F.3d 682, 687 (7th Cir. 2004) (stating that the general rule is
that “the district court should grant leave to amend after granting a motion to dismiss”). The
identification of possible claims for conspiracy and fraud lent support to the Court’s finding that
an amendment did not appear futile, despite there being no plausible claim in the current version
of the pleadings for breach of fiduciary duty or malpractice. The identification was not intended
to be an exhaustive list of possible claims, for even where a court is “skeptical about the
prospects for success” it should generally give the plaintiff one opportunity to try to cure
problems after a successful motion to dismiss. Bausch v. Stryker Corp., 630 F.3d 546, 562 (7th
Cir. 2010). The Court provided that opportunity. If the amendments fail to state a claim upon
which relief may be granted, the procedural mechanism of a Rule 12(b)(6) motion to dismiss,
which the Defendant has invoked, is sufficient to protect the Defendant’s rights. If the matter
were before the Court on a motion for leave to amend, the Court could deny leave if it found the
proposed amendment failed to cure the deficiencies in the original pleading, or could not survive
a second motion to dismiss. Crestville Vill. Apartments v. U.S. Dep’t of Housing and Urban
Dev., 383 F.3d 552, 558 (7th Cir. 2004). Either way, the analysis is the same. The Court, rather
than automatically excluding the Plaintiff’s pleading, will proceed to consider whether the
allegations state a plausible claim for relief.

B.

Sufficiency of the Pleadings
A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint, not

the merits of the case. Requirements for stating a claim under the federal pleading standards are

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straight forward. A pleading that states a claim for relief must set forth “a short and plain
statement of the grounds for the court’s jurisdiction,” “a short and plain statement of the claim
showing that the pleader is entitled to relief,” and “a demand for relief sought.” Fed. R. Civ. P.
8(a). In considering motions to dismiss for failure to state a claim, “[courts] construe the
complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded facts
alleged, and drawing all possible inferences in her favor.” Tamayo v. Blagojevich, 526 F.3d
1074, 1081 (7th Cir. 2008). “A plaintiff . . . must provide only enough detail to give the
defendant fair notice of what the claim is and the grounds upon which it rests, and, through his
allegations, show that it is plausible, rather than merely speculative, that he is entitled to relief.”
Id. at 1083 (quotation marks and citations omitted). Although a complaint does not need detailed
factual allegations, it must provide the grounds of the claimant’s entitlement to relief, contain
more than labels, conclusions, or formulaic recitations of the elements of a cause of action, and
allege enough to raise a right to relief above the speculative level. Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007). Legal conclusions can provide a complaint’s framework, but unless
well-pleaded factual allegations move the claims from conceivable to plausible, they are
insufficient to state a claim. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950–51 (2009) “[W]here the
well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct,
the complaint has alleged—but it has not ‘show[n]’—‘that the pleader is entitled to relief.’” Id.
at 1950 (quoting Fed. R. Civ. P. 8(a)(2)). “[D]etermining whether a complaint states a plausible
claim is context-specific, requiring the reviewing court to draw on its experience and common
sense.” Id.

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1.

Breach of Fiduciary Duty
To state a cause of action for breach of fiduciary duty, a plaintiff must allege: “(1) a

fiduciary duty on the part of the defendant and (2) a breach of that duty that (3) proximately
caused (4) an injury.” Visvardis v. Ferleger, 873 N.E.2d 436, 442 (Ill. App. Ct. 2007) (citing In
re Estate of Lis, 847 N.E.2d 879, 885 (Ill. 2006)). A fiduciary relationship exists between a client
and his attorney, which obligates the attorney to act with fidelity, honesty, and good faith.
Pippen v. Pedersen and Houpt, 986 N.E.2d 697, 704 (Ill. App. Ct. 2013).
The Plaintiff asserts that DLA Piper breached its fiduciary duty to Heartland in two ways:
first, when it preferred the interests of another client, Wright Capital, over the interests of
Heartland; and, second, when it put its own financial interests over the interests of Heartland.
With respect to the first breach, the Plaintiff alleges that Heartland and Wright Capital had
conflicting interests, yet DLA Piper represented both of the entities in transactions related to the
sale and leaseback of Heartland’s assets and the merger with Wright Capital. The Plaintiff
alleges that DLA Piper chose the interests of Wright Capital above Heartland’s interests in these
transactions because Heartland received no benefit to offset the more than $7 million loss it
incurred from the transactions. Instead, Wright Capital and the individual decision makers at
Heartland personally benefitted from the transactions. According to the Plaintiff, DLA Piper did
not protect the interests of Heartland when it provided legal services that were not in its interests
and failed to advise Heartland to obtain independent legal or business advice.
DLA Piper argues that the Plaintiff’s claim is not plausible because it is “entirely
illogical that DLA Piper would assist in looting the assets of the very company to which its client
[Wright Capital] had loaned money, and which its client would obtain through the merger.”

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(DLA Piper’s Reply 2, ECF No. 32.) DLA Piper points to the factual allegations acknowledging
Wright Capital’s $2.5 million loan to the financial struggling Heartland at the very time that an
agreement was reached for Wright Capital to purchase the equity interest in iHealthcare. In
connection with the loan, the owners of Wright Capital were placed in control of Heartland.
When Wright Capital was unable to raise the $25 million purchase price, a leverage buyout was
pursued instead. Thus, DLA Piper argues, the merger and leveraged buyout were not separate
and distinct from the loan. Rather, the loan was required to preserve Heartland’s operations and
was part of the overall strategy of Wright Capital to obtain the equity interests in iHealthcare.
DLA Piper argues that because the loan benefitted Heartland, and because Wright Capital
benefitted from the leaseback transaction, the Plaintiff’s theory that the sole purpose of the
transactions between Wright Capital and iHealthcare was for Heartland’s insiders to loot the
assets of Heartland is not plausible.
This restatement of the Plaintiff’s claim is not entirely accurate. The Plaintiff’s claim is
simply that DLA Piper, when it represented both Wright Capital and Heartland, breached its
fiduciary duty to Heartland because it provided legal services for transactions that provided
Heartland with no benefit to offset the $7 million loss it incurred from the transactions. The
Plaintiff’s position is that the transactions benefitted both Wright Capital, by allowing it to fund
a purchase it could not otherwise finance, and the favored insiders. Whether DLA Piper will be
able to establish that the $2.5 million loan should be viewed as an offset is an issue that extends
beyond a determination of whether the Plaintiff’s claim that DLA Piper put the interests of
others over the interests of Heartland is plausible.
The Plaintiff also alleges that DLA Piper breached its fiduciary duties to Heartland when

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it “maneuvered to have Heartland pay it for work that the firm performed for other clients.”
(Fourth Am. Compl. ¶ 92.) “‘Fiduciaries are not prohibited from having direct dealings with
their beneficiaries, but such transactions are subject to special scrutiny by the courts, and the
burden is on the fiduciary to show that the transaction was fair.’” Janowiak v. Tiesi, 932 N.E.2d
569, 580 (Ill. App. Ct. 2010) (quoting Home Federal Savings & Loan Ass’n of Chi. v. Zarkin,
432 N.E.2d 841, 848 (1982)). Here, DLA Piper did not have dealings with Heartland through the
redemption agreement. Moreover, as DLA Piper argues, if Heartland was not obligated by the
redemption agreement to pay DLA Piper’s fees, then DLA Piper could not have placed its
interests above those of Heartland’s through execution of the agreement. The Plaintiff’s claim,
however, does not rely on such direct dealings, but on the overall structure and relationship of
the entities, as now clarified in the Fourth Amended Complaint. The Plaintiff maintains that
because it has alleged that Heartland and iHealthcare were managed as a single company with
Heartland being the only operating company that could generate money to pay the fees, and
because DLA Piper was aware of these facts when it entered the transaction, that DLA Piper also
knew that Heartland would ultimately be paying the invoices for legal work performed for
Wright Capital. The Fourth Amended Complaint also alleges that DLA Piper indeed received
payment from Heartland. In light of these allegations, the Court finds that the Plaintiff has
plausibly claimed that DLA Piper failed to engage in the fair dealing that is required of a
fiduciary and, in fact, put its interests above those of Heartland.

2.

Aiding and Abetting Breach of Fiduciary Duty
The Plaintiff argues that the DLA Piper knowingly provided substantial assistance to

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insiders who were breaching their fiduciary duties to Heartland by looting the hospital of
valuable assets at a time when it was teetering on the edge of bankruptcy. A claim for aiding and
abetting a breach of fiduciary duty is a theory for holding the person who aids and abets liable
for the tort itself. See In re Nanovation Techs. Inc., 364 B.R. 308, 345 (N.D. Ill. 2007) (citing
Heffman v. Bass, 467 F.3d 596, 601 (7th Cir. 2006)). To state a claim for aiding and abetting, a
party must show: “(1) the party whom the defendant aids must perform a wrongful act which
causes an injury; (2) the defendant must be regularly aware of his role as part of the overall or
tortious activity at the time that he provides the assistance; (3) the defendant must knowingly and
substantially assist the principal violation.” Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756,
767 (Ill. App. Ct. 2003). The Plaintiff’s Fourth Amended Complaint sets forth factual allegations
to plausibly suggest that the iHealthcare stockholders were looting Heartland of its assets during
a time of financial turmoil, that DLA Piper was aware that the iHealthcare stockholders had
conflicts of interest that prevented them from examining whether the Wright Capital merger and
the leaseback transaction through which it was funded were in Heartland’s interests, and that
DLA Piper performed the legal services necessary to negotiate and document the transactions
anyway. In so doing, the Plaintiff has presented “enough details about the subject-matter of the
case to present a story that holds together.” Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th
Cir. 2010). The Court asks “could these things have happened, not did they happen.” Id. DLA
Piper offers argument that it contends undermines the Plaintiff’s claim, but “[f]or cases governed
only by Rule 8, it is not necessary to stack up inferences side by side and allow the case to go
forward only if the plaintiff’s inferences seem more compelling than the opposing inferences.”
Id. The Plaintiff’s story is not implausible simply because DLA Piper was also advising Wright

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Capital on a possible suit against iHealthcare insiders or because Wright Capital loaned money
to Heartland and was acquiring interest in iHealthcare. The Defendant’s objections stray too far
into the merits of the Plaintiff’s case, which is a matter for another day. The Defendant’s
remaining arguments would be relevant if the Plaintiff was still claiming that DLA Piper
committed legal malpractice, but they are not applicable to the aiding and abetting claim.
The Plaintiff has crafted claims that are plausibly supported with specific allegations
regarding the relationships and transactions between the various entities involved. That these
claims may prove, after discovery, to be unsupportable does not warrant dismissal at this stage of
the proceedings.

CONCLUSION
For the reasons stated above, DLA Piper’s Motion to Dismiss Counts V and VI of Fourth
Amended Complaint [ECF No. 23] is DENIED.
SO ORDERED on July 9, 2014.
s/ Theresa L. Springmann
THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT
FORT WAYNE DIVISION

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