Bingham Greenebaum Doll LLP v. Liquidating Trustee of Appalachian Fuels Creditors Trust

Filing 39

MEMORANDUM OPINION AND ORDER by Judge David J. Hale on 11/19/15. Defendant Bingham Greenebaum Dolls motion for partial summary judgment (D.N. 28) is GRANTED. Plaintiff Paonia Resourcess legal malpractice claim against Bingham is DISMISSED with prejudice. Pursuant to Federal Rule of Civil Procedure 54(b), this is a final and appealable order and there is no just reason for delay. A separate judgment will be entered this date.cc:counsel (TLG)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
PAONIA RESOURCES, LLC,

Plaintiff,

v.

Civil Action No. 3:14-cv-95-DJH

BINGHAM GREENEBAUM DOLL, LLP,

Defendant.

* * * * *
MEMORANDUM OPINION AND ORDER
This is a professional malpractice case. The defendant argues that the plaintiff’s claim
was obtained in violation of Kentucky law, which prohibits assignment of legal malpractice
claims. Because the Court concludes that there was a de facto assignment, the defendant’s
motion for partial summary judgment (Docket No. 28) will be granted, and the plaintiff’s claims
will be dismissed.
I.

FACTUAL BACKGROUND

The operative facts are stipulated (see D.N. 28-2) and convoluted. First, a brief outline of
the basic facts: the Appalachian Fuels Creditors Trust (the Trust) became the owner of Paonia in
2013. (D.N. 28-1, PageID # 148) Before it owned Paonia, however, the Trust sued Paonia, then
a corporate shell, and others for more than $15 million in April 2011 in the aftermath of a
settlement agreement that resolved an earlier lawsuit. (Id.; D.N. 28-2, PageID # 168) Bingham’s
predecessor had represented Paonia in the underlying dispute that led to the Trust’s 2011 lawsuit.
Paonia’s owners revived it as a corporate entity, “agreed to a judgment against it, transferred
ownership and control of Paonia to the Trust, and accepted a release of any claims against
[Paonia’s owners].” (D.N. 28-1, PageID # 148) Then Paonia filed this suit in February 2014.
(Id.; D.N. 28-2, PageID # 169) According to Bingham, Paonia’s suit hinges on two flawed

1

contentions: (1) that the transfer of ownership of Paonia to the Trust is not a de facto assignment
of a legal malpractice claim; and (2) that a corporate shell “with no assets, no operations and no
business prospects can suffer actual harm from a judgment that it will never be required to pay.”
(Id.) Paonia disputes that there was an assignment, claims that Paonia alone is “directing this
litigation through its own duly authorized fiduciary,” and says that, if successful in this suit,
Paonia will use the judgment to pay its existing liabilities (the agreed judgment). (D.N. 29,
PageID # 184)
Next, a more detailed history of the various entities and relevant transactions: Paonia was
formed in 2008 solely to acquire “the assets of Bowie Resources, LLC . . . from Energy Coal
Resources, LLC . . . and Colorado Holding Company.” (Id., PageID # 166) Several other
business organizations owned Paonia, and, in turn, numerous individuals owned those other
business organizations. (Id.) In September 2008, Energy Coal and Colorado Holding sued in
Boyd County, Kentucky Circuit Court to stop Paonia’s acquisition of Bowie (the “TRO Suit”).
(Id., PageID # 167) Bingham represented Paonia in the TRO Suit. (Id.) Three months later, the
parties settled (the “TRO Settlement”). Energy Coal and Colorado Holding agreed to pay Paonia
$4,740,220 by late December 2008. (Id.) (The stipulated facts do not explain why the parties
that tried to enjoin Paonia ultimately agreed to pay Paonia a settlement.)
Despite the agreement, neither Energy Coal nor Colorado Holding paid the settlement
amount. Instead, the $4,740,220 was actually paid to Paonia by Appalachian Fuels, LLC, an
entity owned by Energy Coal, even though Appalachian Fuels was neither a party to the TRO
Suit nor to the TRO Settlement. (Id.) In subsequent transactions, Bingham advised Paonia’s
former principals regarding possible claims that the Appalachian Fuels transaction “constitute[d]
a fraudulent conveyance under state law.” (Id., PageID # 168)

2

Paonia remitted the settlement funds to its owners and creditors, including a $223,000
transfer to Bingham’s predecessor, Greenebaum Doll & McDonald, PLLC.

(Id.)

These

disbursements left Paonia with “no assets, no liabilities, and no business operations or business
prospects.” (Id.) In April 2009, the Nevada Secretary of State dissolved Paonia as a business
entity. (Id.)
In June 2009, an involuntary bankruptcy petition was filed against Appalachian Fuels in
the Bankruptcy Court for the Eastern District of Kentucky. (Id.) In April 2011, the Trust
replaced Appalachian Fuels’ officers. Then the Trust sued Bowie, Paonia, and several others
(the “Adversary Suit”).

(Id.)

The Adversary Suit alleged that Appalachian Fuels, while

insolvent, paid the TRO Settlement even though the settlement did not benefit Appalachian
Fuels. (Id.) Thus, the Trust alleged that the TRO Settlement was “a fraudulent transfer which
could be recovered from Paonia.” (Id.) The parties settled the Adversary Suit in January 2013
(the “Bankruptcy Settlement”). (Id., PageID # 169)
Under the Bankruptcy Settlement, Paonia agreed to a judgment in the amount of
$4,247,200, and the Trust agreed not to collect on the judgment from anyone but Paonia. (Id.,
PageID # 169-70) Notably, the Bankruptcy Settlement also made the Trust the “majority owner
and managing member of Paonia.” (Id., PageID # 169) The bankruptcy court approved the
Bankruptcy Settlement in February 2013. (Id.) Paonia had been reinstated as a corporate entity
one day before the Bankruptcy Settlement was approved. (Id., PageID # 170) It has no assets,
employees, or business operations or prospects. Its only liability is the agreed judgment. (Id.)
In fact, the parties agree that “Paonia was reinstated solely to consummate the Bankruptcy
Settlement.” (Id.)

3

One year later, the reconstituted Paonia sued Bingham, alleging that Bingham failed to
advise Paonia that the TRO Settlement could be considered a fraudulent transfer. (Id., PageID #
169) The Trust has never had an attorney-client relationship with Bingham and so has no
malpractice claims against Bingham. (Id., PageID # 170) “The Trust, through its ownership
interest and status as managing member of Paonia, is ultimately in control of the Malpractice
Claim litigation, though only Paonia—and not the Trust—is a party to this case.”

(Id.)

Bingham’s motion turns on whether Paonia is merely a defunct entity that exists only to pursue a
judgment for the Trust’s benefit.
II.

STANDARD

To grant a motion for summary judgment, the Court must find that there is no genuine
dispute as to any material fact and that the moving party is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(a). The moving party bears the initial burden of identifying the basis for
its motion and the parts of the record that demonstrate an absence of any genuine issue of
material fact.

See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The Court must

determine whether “the evidence presents a sufficient disagreement to require submission to a
jury or whether it is so one-sided that one party must prevail as a matter of law.” Patton v.
Bearden, 8 F.3d 343, 346 (6th Cir. 1993) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 251-52 (1986)).
III.

DISCUSSION

This case does not present genuine issues of material fact. From the stipulated facts, the
Court concludes that Paonia and the Trust have affected an impermissible legal malpractice
assignment. Therefore, the Court will grant partial summary judgment. Because the Court

4

reaches this conclusion, it need not consider the parties’ arguments regarding whether Paonia has
shown sufficient damages to pursue a malpractice claim.
Kentucky law prohibits the assignment of legal malpractice claims. See, e.g., Davis v.
Scott, 320 S.W.3d 87, 90 (Ky. 2010). Many jurisdictions disfavor such assignments out of the
fear that, if “permitted . . . they would become an important bargaining chip in the negotiation of
settlements—particularly for clients without a deep pocket. An adversary might well make a
favorable settlement offer to a judgment-proof or financially strapped client in exchange for the
assignment of that client’s right to bring a malpractice claim against his attorney.” Picadilly Inc.
v. Raikos, 582 N.E.2d 338, 343 (Ind. 1991). The worry is that allowing assignments would
incentivize collusion and convert “legal malpractice into a commodity.” Kenco Enter. Nw., LLC
v. Wiese, 291 P.3d 261, 263 (Wash. Ct. App. 2013); see also Alcman Servs. Corp. v. Samuel H.
Bullock, P.C., 925 F. Supp. 252 (D.N.J. 1996); Gurski v. Rosenblum & Filan, LLC, 885 A.2d
163 (Conn. 2005).
Paonia could not have directly assigned its legal malpractice claim to the Trust. Instead,
Bingham argues, the parties to the Adversary Suit schemed to provide an end-run around
Kentucky’s assignment prohibition. (See D.N. 28-1, PageID # 155) Bingham contends that
reviving Paonia solely to pursue a malpractice claim, entering the agreed judgment, and releasing
Paonia’s owners and the other defendants from liability had only one practical effect: assignment
of Paonia’s malpractice claim. (Id.) Bingham marshals several cases to support its proposition
that Kentucky and other jurisdictions have disallowed similar “de facto assignments.” See, e.g.,
Gen. Sec. Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F. Supp. 2d 951, 959 (E.D. Va. 2005);
Davis, 320 S.W.3d at 91. And though these particular facts are novel in Kentucky, Bingham
cites two other courts that faced similar facts and concluded that the transactions were invalid

5

assignments. See Kenco, 291 P.3d at 263-64; Trinity Mortg. Cos. v. Dreyer, No. 09-cv-551TCK-FHM, 2011 WL 61680 (N.D. Okla. Jan. 7, 2011).
In Kenco, the Washington Court of Appeals dealt with a situation where one entity took
ownership of a former litigation adversary, which had only one asset—a malpractice claim
against the adversary’s former counsel. 291 P.3d at 264. Unlike the Trust in this case, the
acquiring entity in Kenco disputed that the former adversary had only one asset: It argued that it
also took over the former adversary because of the adversary’s existing name value. Id. The
Kenco court disagreed; it decided that the acquisition was driven solely by the desire to take
control of the malpractice claim, and the court refused to let the rule against assignment “be
obfuscated by clever lawyers and legal subtleties.” Id. at 265. In Trinity Mortgage, there had
been a settlement agreement that gave a litigant, Junker, a fifty-percent ownership interest in his
former adversary, Trinity. 2011 WL 61680, at *3. To the court, it became clear that “Trinity
gave Junker an ownership interest for the specific and sole purpose of permitting Junker to
litigate Trinity’s claims against [its former counsel]. Id. The Trinity Mortgage court disallowed
the de facto assignment because it was “clearly against public policy.” Id. at *4.
The Court agrees with the analysis in Kenco and Trinity Mortgage. Given the facts to
which Paonia has stipulated, the Court concludes that there was a de facto assignment of
Paonia’s legal malpractice claim to its new owner, the Trust.
In briefing (see, e.g., D.N. 29, PageID # 189-99) and at the November 2015 summary
judgment hearing, Paonia argued that its corporate structure should be respected. That is, Paonia
claims that actual assignment has not happened, because Paonia Resources, LLC “has never
‘divested itself of control’ over its legal malpractice claim.” (Id., PageID # 191) (citing Davis,
320 S.W.3d at 90) True, but this misses Bingham’s point that this transaction was an assignment

6

in form, if not in name. Consistent with the theme of respect for corporate structure, Paonia next
argues that the Court should not look behind the corporate veil and prevent Paonia from pursuing
this claim. (See, e.g., D.N. 29, PageID # 191-94) It also takes issue with Bingham’s cited cases.
(See id., PageID # 194 (“The Cases Cited By Greenebaum are Distinguishable or Not
Controlling”))
Yet those cases were decided as they were based upon fact patterns that are nearly
identical to the facts in this matter. Paonia exists solely to pursue this malpractice claim. (See
D.N. 28-2, PageID # 170) And if it recovered on that claim, the money would be used to satisfy
its agreed judgment with its new owner (the Trust). Paonia had no assets when the Bankruptcy
Settlement was reached; the Trust agreed not to collect from anyone but Paonia. (Id.) Letting
this claim proceed merely to respect the contrived corporate structure would require the Court to
ignore the obvious. In fact, the Court need not look behind the corporate veil; the impermissible
assignment is front and center.
IV.

CONCLUSION

Ultimately, this case presents a scenario where a limited liability company, Paonia, was
brought back from the dead solely so its former adversary and new owner, the Trust, could
potentially profit from a malpractice claim against Bingham. The Trust wanted Paonia to pursue
its malpractice claim so that the Trust could recover money for its agreed judgment. The
stipulated facts establish that this was a de facto assignment of Paonia’s malpractice claim.
Summary judgment is therefore appropriate.1 Accordingly, and being otherwise sufficiently
advised, it is hereby

1

The Court’s order granting Bingham’s request for partial summary judgment resolves all of
Paonia’s claims. It does not, however, resolve the Trust’s claims from the companion case that
7

ORDERED that Defendant Bingham Greenebaum Doll’s motion for partial summary
judgment (D.N. 28) is GRANTED. Plaintiff Paonia Resources’s legal malpractice claim against
Bingham is DISMISSED with prejudice.
Pursuant to Federal Rule of Civil Procedure 54(b), this is a final and appealable order and
there is no just reason for delay. A separate judgment will be entered this date.

November 19, 2015

David J. Hale, Judge
United States District Court

was consolidated with this action by order of the late Senior Judge John G. Heyburn II. (See
D.N. 17)
8