BRONCO HAZELTON CO. et al v. BRYCE DOWNEY & LENKOV LLC

Filing 40

ORDER granting in part and denying in part 37 Motion for Leave to File First Amended Complaint. Plaintiffs have 7 days from entry of this order in which to file their amended pleading. Signed by Judge Richard L. Young on 12/20/2011. (TMD)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
EVANSVILLE DIVISION

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vs.
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BRYCE DOWNEY & LENKOV LLC, f/k/a )
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BRYCE DOWNEY LLC,
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Defendant.
BRONCO HAZELTON CO., HAZELTON
MINING, LLC, HAZELTON WASH
PLANT, LLC, and WHITE RIVER COAL,
INC.,
Plaintiffs,

3:09-cv-132-RLY-WGH

ENTRY ON MOTION FOR LEAVE TO FILE AMENDED COMPLAINT

On September 7, 2011, this court entered an order granting in part and denying in
part the Defendant’s Rule 12(b)(6) motion to dismiss. Counts III and IV of the Complaint
were dismissed, while Plaintiffs were allowed to continue their prosecution of Counts I &
II. Subsequent to that order, the parties have engaged in settlement efforts, but have yet
to reach a resolution of the litigation. Before the court now is Plaintiffs’ Motion For
Leave To File First Amended Complaint (Docket # 37), which amended pleading is a
prerequisite to further settlement negotiations, according to Plaintiffs.

Defendant has not denied that its insurance carrier has suggested that an amended
pleading is necessary in order to continue further settlement discussions, but it has filed
an objection to allowing Plaintiffs to pursue Counts IV and V of their proposed First
Amended Complaint, which counts Defendant claims are simply re-labeled versions of

the previously dismissed Counts III and IV of the original Complaint.

Factual Background

The four Plaintiffs in this lawsuit consist of three entities which were purchased in
2005, along with the company that purchased them. Hazelton Mining, LLC (“HM”),
Hazelton Wash Plant, LLC (“HWP”) and White River Coal, Inc. (“WRC”)(hereinafter
collectively the “Targets”) were the entities purchased by Bronco Hazelton Co.
(“Bronco”). HM owned the Hazelton Coal Mine in Hazelton, Indiana. WRC operated
that coal mine and HWP owned the facility responsible for washing the coal coming from
that mine. The ownership of these three companies was split between: Blankenberger
Brothers Holdings, LLC; Hoosier King Coal Company; Black Rush Mining LLC; Donald
Blankenbeger; David Blankenberger; Patrick Blankenberger and Rick Blankenberger
(collectively hereinafter the “Sellers”).

In early 2005, the Targets were losing money and having difficulty meeting day to
day expenses. At that time, an affiliate of Bronco entered into discussions with a
representative of the Targets regarding the possibility of Bronco acquiring the three
companies. After those initial discussions, the Defendant in this lawsuit, Bryce, Downey
& Lenkov, LLC (“BDL”), began working on the sale of the equity interests in the Targets
on behalf of both the Targets and the Sellers. BDL billed HM for its services but the bills
were paid by WRC.

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On July 1, 2005, Bronco entered into an acquisition agreement with the Targets
and Sellers for the purchase of 100% of the equity ownership interests for $25,000,000.
The deal closed on December 29, 2005, and, in compliance with the terms of the
acquisition agreement, BDL provided an opinion letter to Bronco’s Board of Directors
confirming, as corporate counsel to each of the three Targets, the validity and authority of
each to enter into the transaction and to continue operating its business. Each letter
stated: “We have acted as counsel to the Company [HML, HWP, WRC] in connection
with the transaction contemplated by the Acquisition Agreement.” The letters all stated
that Bronco could rely on the opinion letter only with respect to the acquisition
transaction.

After the equity sale, Bronco and the Targets continued to have problems paying
their bills and debts as they became due. Eventually, Bronco and the Targets filed for
bankruptcy under Chapter 11. On May 23, 2008, in connection with litigation related to
the bankruptcy, the Targets wrote to BDL, as their former corporate counsel, to arrange
for a review of files and a discussion of events related to the acquisition agreement. BDL
declined the request, stating in a letter dated May 27, 2008, that it had represented the
Sellers and not the Targets in connection with the acquisition. Subsequent similar
requests from the Targets continued to be denied. This resulted in the Targets filing an
adversary proceeding in bankruptcy court to establish that BDL had acted as their legal
counsel and to obtain the documents and information they were seeking from BDL.

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In defense of the adversary proceeding, BDL, and specifically Geoffrey Bryce as
one of the firm’s principals, maintained that despite the language of certain
correspondence from the firm and Bryce’s own prior sworn testimony in related litigation,
Bryce and BDL had always understood that BDL was representing the Sellers and not the
Targets in connection with the sale of the Targets. Bryce claimed to have never met with
anyone from the Targets other than the Sellers. Nevertheless, the bankruptcy court ruled
conclusively that BDL’s actions rose to the level of representation of the Targets. That
ruling prompted this lawsuit, wherein the Targets and Bronco seek damages from BDL
and, in an order dated September 7, 2011, this court expressed its agreement with the
bankruptcy court’s ruling that BDL had represented the Targets as a matter of law.

Standard For Allowing Leave To Amend

Rule 15(a) of the Federal Rules of Civil Procedure directs that leave to amend
pleadings “should be freely given when justice so requires.” Trial courts should grant
leave to amend “unless there is ‘undue delay, bad faith or dilatory motive on the part of
the movant, repeated failure to cure deficiencies by amendments previously allowed,
undue prejudice to the opposing party by virtue of allowance of the amendment, [or]
futility of amendment.’” Ferguson v. Roberts, 11 F.3d 696, 706 (7th Cir. 1993) (quoting
Foman v. Davis, 371 U.S. 178, 182 (1962)).

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Discussion

Count IV of the proposed First Amended Complaint is a claim for constructive
fraud brought on behalf of Bronco. It is alleged that, in addition to confirming the
validity of the Targets’ corporate existence and each company’s authority to continue
doing business as they were at that time, BDL represented in the opinion letter it provided
to Bronco that it had acted as legal counsel to the Targets in connection with the
acquisition transaction. According to Plaintiffs, this latter representation was made with
reckless disregard for Defendant’s actual belief and also failed to disclose that the firm
had not actually performed any legal work for the Targets in connection with the
transaction.

BDL argues that Count IV is a rehash of Count III in the original Complaint which
was dismissed; and, therefore futility would bar its inclusion as part of any amended
pleading.

Plaintiffs titled Count III of the original complaint as a claim for “Conspiracy

To Defraud Bronco.” Its primary focus was on the representation in BDL’s opinion letter
that it had reviewed the books and records of the Target companies and based its
opinions, in part, on that review. Count III of the original Complaint alleged that any
review of the company books and records would have revealed that the Targets were
insolvent, but despite that fact, BDL favored the interests of the Sellers as opposed to the
Targets by failing to reveal the insolvency in the opinion letter, thereby better assuring
that the $25,000,000 transaction would move forward.
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When dismissing Count III in the September 7, 2011, order, this court stated
(footnotes omitted):
First, the opinion letters are not misleading. Plaintiffs offer no
authority and the court finds none to support a conclusion that insolvency
destroys the legal ability of a company to continue conducting business as it
is at that moment. Furthermore, as BDL points out in its reply brief, the
letter specifically references that it is issued consistent with the terms of the
Accord adopted by the American Bar Association in 1991, which Accord
indicates that the letter cannot be relied upon for any legal analysis other
than what is specifically included. Whether or not the Targets were solvent
was not an opinion offered in the letter and the insolvency exception in the
letter and the Accord must be read to prevent any reliance by Bronco on the
letter as a hedge against the insolvency of any of the Targets.
Finally, the elements of constructive fraud include the existence of a
duty based upon the relationship between the parties and an advantage
gained by the party to be charged. Mullen v. Cogdell, 643 N.E.2d 390, 401
(Ind.App. 1994). BDL did not gain any advantage here and, most
importantly, stood in no type of relationship with Bronco which would
establish a duty to do anything other than what it did, which was to provide
the opinion letter in conformance with the terms of the acquisition
agreement. In short, if Bronco wanted an assurance of the solvency of the
companies it should have established terms in the acquisition documents
that would have required BDL or, more likely, an accounting firm to
provide such assurance. Count Three will be dismissed.

Plaintiffs point out that Count IV in the amended pleading is not based on any
misrepresentation regarding the alleged insolvency of the Targets; rather, it is focused on
the representation by BDL to Bronco that it had represented the Targets in connection
with the transaction when the firm was actually of the opinion that it was not representing
the Targets. According to Plaintiffs, Bronco would not have been loaned the funds to
complete the deal if it had been known that BDL was not providing legal counsel to the

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Targets in connection with the transaction. BDL maintains that this court has already
found that BDL owed no duty to Bronco other than to provide its opinion relative to the
corporate validity and authority of the three Target companies and, therefore, a
constructive fraud claim such as is set forth in Count IV is futile.

The court finds that it would be futile to allow Plaintiffs to include Count IV in
their amended pleadings. Included in paragraph 31 of Count III of Plaintiff’s original
Complaint is the same assertion that Bronco would not have bought the three Target
companies at such a high price if BDL had revealed that it did not believe it was actually
representing the Targets. However, as the court noted in its September order, for there to
be constructive fraud, there must be representations or omissions made in violation of a
duty which exists based upon the relationship of the parties. Mullen v. Cogdell, 643
N.E.2d 390, 401 (Ind.App. 1994). Here, the only relationship between Bronco and BDL
was the one created by the provision in the acquisition agreement that required BDL to
provide the opinion letters regarding the corporate authority of each of the Targets to
enter into the acquisition agreement. BDL complied with that duty.

Under Indiana law BDL clearly owed much more extensive fiduciary duties to the
three Targets.
The elements of constructive fraud are a duty existing by virtue of the
relationship between the parties, representations or omissions made in
violation of that duty, and a reliance on the representation or omission by
the individuals to whom the duty is owed to the detriment of those
individuals. In constructive fraud, the law infers fraud from the relationship
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of the parties and the circumstances which surround them. This special
relationship is shown when the parties have fiduciary duties to each other,
such as in the relationship between lawyer and client.
Comfax Corp. v. North American Van Lines, Inc., 587 N.E.2d 118, 125 (Ind.App. 1992)
(citations omitted).

The gist behind Count IV of the proposed amended complaint, as it was with
Count III of the original, is clearly Bronco’s belief that it had a right to expect that BDL
did what a good corporate counsel would have done for its clients, the three Targets. No
such coattails are provided by the law.1 BDL’s professional and ethical obligations
flowed to its clients, not Bronco, and therefore the required element of duty in a
constructive fraud claim cannot be established. Where an essential element of the claim
sought to be pursued through an amendment cannot be established, the claim is doomed
to fail at the summary judgment stage and is, therefore, an exercise in futility. Wilson v.
American Trans Air, Inc., 874 F.2d 386, 392 (7th Cir. 1989). Plaintiffs may not amend
their complaint to include a claim on behalf of Bronco for constructive fraud.

Proposed Count V asserts a common law claim of deceit. BDL asserts Count V is

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Plaintiffs’ reliance on Seevers v. Arkenberg, 726 F.Supp. 1159 (S.D.Ind. 1989), as
support for the proposition that it can bring a constructive fraud claim under the circumstances
alleged in the proposed amended complaint, is unavailing. As Judge Sarah Evans Barker pointed
out in Seevers, there was confusion as to whether or not the defendant attorney represented the
plaintiff. Id. at 1170. In this case, Bronco was unequivocally not BDL’s client and any
obligation BDL had for forthrightness to Bronco was limited to providing an opinion regarding
the Targets’ corporate validity and authority to continue doing business and enter into the
acquisition transaction.
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no different than the claim Plaintiffs made in Count IV of the original complaint for
violation of the Indiana Attorney Deceit Statute, Indiana Code § 33-43-1-8, which claim
was dismissed. The court dismissed Count IV of the original complaint because the
Indiana statute did not provide a separate cause of action and because a common law
deceit claim for the damages associated with the purchase of the Targets could not be
premised on Bronco’s reliance on Geoffrey Bryce’s testimony regarding what he and the
law firm believed about its representation which was given during litigation that postdated the acquisition.

Plaintiffs have now pled a common law deceit claim based upon BDL’s
representation to Bronco that it was acting as corporate counsel to the Targets in
connection with the acquisition. It is alleged that BDL purposefully mislead Bronco with
respect to whether it was providing legal advice to the Targets in order that Bronco would
rely on BDL having actually fulfilled that role. According to Plaintiffs’ allegations, this
was all with the intent that Bronco complete the acquisition and pay far more for the
Targets than any fair value they may have had. The legal elements of a common law
deceit claim are: 1) an untrue representation of fact, 2) known to be untrue or recklessly
made by the party making it, 3) made for purposes of inducing another party’s reliance
thereupon, and 4) actual inducement of such reliance to the detriment of that other party.
Connor v. Howe, 344 F.Supp.2d 1164 (S.D.Ind. 2004). Those elements have been pled
and, unlike the constructive fraud claim, a duty premised on the parties’ relationship is

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not a prerequisite to recovery.

The court finds that the factual allegations upon which Plaintiffs’ common law
deceit claim is founded, as compared to those Plaintiffs maintained supported their
dismissed statutory claim, are distinct. That is not to say that reliance will not be an
extremely difficult element for Bronco to prove, in light of the fact that the size of the
transaction would suggest that it employed its own professionals to assist it in conducting
its due diligence and in constructing the deal; nevertheless, that difficulty does not come
into play at the pleading stage. Accordingly, the amendment will be allowed and leave is
granted for Plaintiffs to file a First Amended Complaint that contains a common law
deceit claim.

Conclusion

For the reasons explicated in this entry, Plaintiffs’ Motion For Leave To File First
Amended Complaint (Docket # 37) is GRANTED IN PART and DENIED IN PART.
Plaintiffs are granted leave to file a First Amended Complaint which includes all claims
set forth in the proposed pleading attached to their motion, except that no claim for
constructive fraud, such as that in Count IV of the proposal may be pled. Plaintiffs have

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seven (7) days from entry of this order in which to file their amended pleading.

SO ORDERED this 20th day of December 2011.

__________________________________

RICHARD L. YOUNG, CHIEF JUDGE
RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
United States District Court
Southern District of Indiana
Southern District of Indiana

Electronic Copies to:
F. Dean Armstrong
ARMSTRONG LAW FIRM
[e-mail]
Claude Ray Bowles Jr.
GREENBAUM DOLL & MCDONALD PLLC
[e-mail]
Cynthia M Locke
STEWART & IRWIN, P.C.
[e-mail]
Richard H. Riegner
STEWART & IRWIN P.C.
[e-mail]

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