Mark G. DeGiacomo v. Holland and Knight, et al

Filing 44

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER. "For the foregoing reasons, defendants motions for summary judgment (Docket No. 20) and to strike (Docket No. 36) are ALLOWED." See Attached Order Associated Cases: 1:14-cv-10483-NMG, 1:16-cv-10528-NMG(Caruso, Stephanie)

United States District Court
District of Massachusetts
)
)
)
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INOFIN INCORPORATED,
)
)
Debtor.
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MARK G. DEGIACOMO, Chapter 7
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Trustee of the Estate of Inofin )
Incorporated,
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Plaintiff,
)
)
v.
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HOLLAND & KNIGHT, LLP and
)
RICHARD J. HINDLIAN,
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)
Defendants.
)
)
In re:

Chapter 7 Case No.
11-11010-JNF

Civil Action No.
16-10528-NMG
14-10483-NMG

MEMORANDUM & ORDER
GORTON, J.
Defendants Holland & Knight, LLP (“H&K”) and Richard J.
Hindlian (“Hindlian”) (collectively, “defendants”) move for
summary judgment on plaintiff’s claim of legal malpractice
brought in his capacity as Bankruptcy Trustee of the Estate of
Inofin, Incorporated.

Defendants also move to strike the

deposition testimony of Michael Cuomo.

For the reasons that

follow, defendants’ motions will be allowed.

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I.

Factual and Procedural Background
Inofin, Incorporated (“Inofin”) was established in 1994.

It was in the business of acquiring and servicing subprime loans
for used automobiles.
controlled Inofin.

Michael Cuomo and Kevin Mann owned and

Mr. Cuomo was its president and Mr. Mann was

its Chief Executive Officer.

Inofin raised capital through

investor loans with terms of three years and fixed interest
rates.

Although Inofin executed investor loan agreements and

promissory notes, most of the loans were unsecured.
A. Inofin’s Questionable Loan Practices
Inofin made loans to startups and also factored loans as
follows:
First, in the early 2000s, Messrs. Cuomo and Mann began to
loan Inofin investor funds to affiliated automobile and real
estate startups (“the startups”).

Very few Inofin investors

knew of the startups and Mr. Cuomo specifically told his
assistant not to advise investors about them.

The Trustee

admits that the startups were “financial disasters” and that the
loans were a “significant cause” of Inofin’s insolvency.
The Massachusetts Division of Banks (“the Division”)
required Inofin to be licensed in order to operate.

To maintain

such a license, Inofin had to submit a report and financial
statement to the Division each year.

Pursuant to Division

regulations, companies must maintain a net worth of $20,000.
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In 2004, the Boston law firm Sullivan & Worcester (“S&W”)
advised Mr. Cuomo that, for the purpose of measuring net worth
for Division reports, the loans to the startups were not
“assets”.

Nevertheless, from 2005 to 2009, Inofin included the

startup loans as assets in its financial reports.

Defendants

submit that, had the reports properly reflected the loans, they
would have shown a negative net worth and the Division would
likely have shut down Inofin.

The Trustee does not dispute that

contention.
From the late 1990s until 2006, the accounting firm
Sharkansky & Company, P.C. (“Sharkansky”) prepared Inofin’s
annual financial statements that were submitted to the Division.
As Sharkansky advised, Inofin’s statements in 2003 and 2004 were
combined with the startups’ statements.

In 2005, the principals

of Inofin became concerned that if it continued such accounting,
it would result in the showing of a negative net worth for
Inofin.

Consequently, Messrs. Cuomo and Mann purportedly sold

some of the startups as part of a scheme to separate the
startups’ losses from Inofin.

After the sham sale, however,

Inofin still controlled the startups, the CFO for Inofin
continued to handle the books for the startups, their personnel
continued to be employees of Inofin and Cuomo and Mann continued
to hold themselves out as the owners of the startups.

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Mr. Cuomo subsequently tried to persuade Sharkansky that,
because some of the startups had been divested, separate
financials statements were appropriate.

In 2007, Sharkansky

told Inofin that if it did not consolidate the financial
statements of Inofin and the startups, the firm would include a
$5 million bad-debt reserve for the startup loans on Inofin’s
balance sheet, resulting in a negative net worth for the
company.

Inofin terminated Sharkansky’s services and hired a

solo certified public account, Richard Tobin, who treated the
startup loans as assets in the financial statements.

If the

startup loans had been properly accounted for in the reports
from 2005 to 2009, they would have accurately reflected Inofin’s
negative net worth.
Inofin’s second questionable loan practice began in 2007.
Because it was experiencing cash flow difficulties, Inofin began
factoring auto loan receivables with Mid-Atlantic Finance
(“MAF”).
loans.

That allowed Inofin to receive instant cash for the

Taking into account discounts and commissions, however,

Inofin lost 8% of the value of the loans.

Even so, Inofin

continued to record the factored loans as assets and to report
interest income from them.

That falsely inflated Inofin’s

stated income and assets and understated its expenses.

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B. SEC Investigation and Bankruptcy Petition
Inofin admits that 1) in 1994 Robert Allison, an attorney
from the law Firm of Sherburne, Powers & Needham, P.C. (“SPN”),
advised it to treat its promissory notes as securities and to
comply with the applicable laws by using a private placement
memorandum (“PPM”) and 2) in 2003 Ed Woll, an attorney from S&W,
forewarned that the notes were securities.

Despite such advice,

Inofin did not file an SEC registration statement with respect
to the notes or use Form D as required by the Securities Act of
1933 for unregistered securities.
In September, 2009, the Securities and Exchange Commission
(“SEC”) notified Inofin that it was under investigation.

In

May, 2010, the investigation revealed that Inofin had factored
approximately $26 million of its loans to MAF.

When Inofin’s

financial statement was accurately updated in December, 2010, it
revealed a negative net worth of $29 million.

The Division

issued a cease and desist order against Inofin shortly
thereafter.
Creditors of Inofin filed an involuntary Chapter 7
bankruptcy petition against it in the United States Bankruptcy
Court for the District of Massachusetts in February, 2011.

The

Bankruptcy Court entered an order for relief under Chapter 7 and
appointed Mark D. DeGiacomo (“the Trustee”) as Trustee of the
bankruptcy estate.
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The SEC investigation culminated in a civil complaint
alleging that Inofin, Mr. Cuomo and others violated anti-fraud
securities laws by, among other things, making fraudulent
representations to investors.

As a result of that lawsuit,

Cuomo and Mann entered into consent orders with the SEC.

The

government also brought criminal charges against them for wire
fraud, mail fraud and conspiracy which are still pending.
C. Alleged Legal Malpractice
In September, 2013, the Trustee began an adversary
proceeding in the Bankruptcy Court alleging one count of legal
malpractice under Massachusetts law.

Defendants answered in due

course.
According to the Trustee, H&K and Hindlian, who was then a
partner at H&K, were Inofin’s primary outside counsel from
August, 2006 until the bankruptcy petition was filed in 2011.
Hindlian also previously worked at SPN which represented Inofin
from 1993 through 1998.

The Trustee alleges that, as of August,

2006, Hindlian “knew the details of Inofin’s operations,
including its sources and manner of financing”.

The Trustee

also claims that in 2007 and 2008, Hindlian prepared two
preferred stock offerings for Inofin and, in so doing, he
“familiarized himself with the relevant securities laws”.
The parties agree upon the following facts with respect to
defendants’ legal advice.

In November, 2008, Inofin requested
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Hindlian’s advice on whether it could sell its notes to
investors with 401k plans.

In seeking his advice, the

principals forwarded to Hindlian an email from the broker-dealer
who had proposed the investment which stated that the notes
would be unregistered securities.
Although Inofin did not then pursue the investment
opportunity, the parties agree that after the exchange
concerning 401k plans, Hindlian requested authorization from Mr.
Cuomo to prepare a PPM to use with future promissory notes.
Hindlian prepared a PPM that referred to the notes as securities
and sent it to Inofin in or about February, 2009.

Inofin admits

that as of that time Hindlian had advised it that its notes were
securities.
It is also undisputed that Mr. Cuomo then told Attorney
Hindlian to stop working on the PPM and that Inofin would not
use a PPM for its notes.

Hindlian then dropped the matter.

H&K

and Hindlian continued to provide legal advice to Inofin until
February, 2011 but did not again advise it to comply with
securities laws.
The Trustee alleges that, in breach of their duty of care,
H&K and Hindlian inadequately advised Inofin with respect to
securities laws.

Specifically, after Mr. Cuomo rejected the

PPM, defendants purportedly failed to advise Inofin that 1) its
notes were securities, 2) the SEC would likely categorize the
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notes as securities, 3) it was violating securities law and
4) it was risky not to use PPMs.

The Trustee contends that

defendants’ negligence enabled Inofin’s business wrongfully to
continue after January, 2009 thus exacerbating its promissory
note debt and other expenses between January, 2009 and February,
2011.

The Trustee claims defendants are therefore liable for

millions of dollars of damages.
Defendants moved to withdraw the reference of the adversary
proceeding in March, 2016 and this Court allowed that motion.
Shortly thereafter, defendants moved for summary judgment and on
June 21, 2016, they moved to strike the deposition testimony of
Mr. Cuomo.
II.

This memorandum addresses both motions.

Motion to Strike
A. Legal Standard
At the summary judgment stage, the Court may consider only

evidence that would be admissible at trial. Fed. R. Civ. P.
56(c)(2).

It is “black-letter law” that impermissible hearsay

cannot be considered for the purpose of summary judgment. Fed.
R. Evid. 802; Davila v. Corporacion De Puerto Rico Para La
Difusion Publica, 498 F.3d 9, 17 (1st Cir. 2007).
Prior testimony of a witness is admissible as an exception
to the hearsay rule under Fed. R. Evid. 804(b)(1) if 1) the
witness is unavailable and 2) the party against whom the
testimony is offered had “an opportunity and similar motive to
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develop it” through cross examination. Fed. R. Evid. 804(b)(1).
A witness is considered unavailable in the Rule 804 context if
he invokes the Fifth Amendment and refuses to testify. United
States v. Zurosky, 614 F.2d 779, 792 (1st Cir. 1979).
Witnesses may not, however, offer direct testimony and then
deny the opposing party the opportunity for cross examination by
invoking the Fifth Amendment. S.E.C. v. Ficken, 546 F.3d 45, 5354 (1st Cir. 2008).

Therefore,

[a] trial judge may strike a witness's direct testimony
if he flatly refuses to answer cross-examination
questions . . . .
United States v. Bartelho, 129 F.3d 663, 673 (1st Cir. 1997).
Although a judge may permit direct examination testimony even if
a witness invokes the Fifth Amendment on cross examination as to
collateral issues, see id. at 673-74, or if counsel “ma[kes] a
tactical decision” to refrain from cross examination, such
circumstances are distinct from "being blocked from crossexamination . . . .” Zurosky, 614 F.2d at 793 (internal
quotation and citation omitted).
B. Analysis
The Trustee deposed Mr. Cuomo for about five hours and
defendants conducted their first hour of cross examination on
December 17, 2014.

Due to conflicts with Mr. Cuomo’s work

schedule and the infamous snow storms of that winter, the
deposition (and thus the cross examination) was not able to be
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continued until February 27, 2015.

By that time, however, Mr.

Cuomo had been criminally charged and declined to answer any
questions, invoking his Fifth Amendment privilege.
Defendants contend that, because they were unable to
complete Mr. Cuomo’s cross examination, his testimony is
inadmissible under Fed. R. Evid. 804(b)(1) and should be
stricken.

The Trustee responds that Mr. Cuomo’s testimony is

admissible with respect to the topics on which defendants were
able to conduct cross examination.

Alternatively, he requests

that the Court stay this case until the criminal case is
resolved.
Mr. Cuomo’s invocation of his Fifth Amendment right
satisfies the unavailability requirement of Fed. R. Evid. 804.
Zurosky, 614 F.2d at 792.

Consequently, the crucial question is

whether the single hour of questioning constituted an adequate
opportunity for cross examination. Id.

Defendants’ inability to

complete the cross examination was not limited to collateral
issues and was not a tactical decision. See Bartelho, 129 F.3d
at 673-74; Zurosky, 614 F.2d at 793.

Instead, without any

forewarning on the first day of his deposition, Mr. Cuomo
completely stifled the remainder of the cross examination on the
second day of his deposition. See Zurosky, 614 F.2d at 793.
Therefore, defendants were not afforded an adequate opportunity

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to cross examine Mr. Cuomo and his testimony will be stricken
from the summary judgment record.
The Trustee’s request for a stay of this civil action due
to a related criminal case lies solely within this Court’s
discretion. Microfinancial, Inc. v. Premier Holidays Int'l,
Inc., 385 F.3d 72, 77 (1st Cir. 2004).

In determining if a stay

is appropriate, the key question is whether “the interests of
justice counsel in favor of such a course.” Id. at 78.

Here,

the interest of justice weighs against a stay because defendants
are not parties to the criminal proceedings and would be
unfairly inconvenienced, and perhaps prejudiced, if the instant
action were allowed to linger until the criminal action is
resolved. See id.

Moreover, the stage of litigation and public

and third party interests also weigh against a stay because,
even if Mr. Cuomo’s testimony were admissible, defendants would
be entitled to summary judgment pursuant to the doctrine of in
pari delicto as addressed below. Id.

Accordingly, plaintiff’s

request for a stay will be denied.
III.

Motion for Summary Judgment
A. Legal Standard
The role of summary judgment is “to pierce the pleadings

and to assess the proof in order to see whether there is a
genuine need for trial.” Mesnick v. Gen. Elec. Co., 950 F.2d
816, 822 (1st Cir. 1991).

The burden is on the moving party to
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show, through the pleadings, discovery and affidavits, “that
there is no genuine dispute as to any material fact and that the
movant is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(a).

A fact is material if it “might affect the outcome of

the suit under the governing law.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986).

A genuine issue of material

fact exists where the evidence with respect to the material fact
in dispute “is such that a reasonable jury could return a
verdict for the nonmoving party.” Id.
If the moving party has satisfied its burden, the burden
shifts to the non-moving party to set forth specific facts
showing that there is a genuine, triable issue. Celotex Corp. v.
Catrett, 477 U.S. 317, 324 (1986).

The Court must view the

entire record in the light most favorable to the non-moving
party and indulge all reasonable inferences in that party’s
favor. O’Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993).
Summary judgment is appropriate if, after viewing the record in
the non-moving party’s favor, the Court determines that no
genuine issue of material fact exists and that the moving party
is entitled to judgment as a matter of law.
Defendants contend that summary judgment should be granted
on the grounds of in pari delicto and because proximate cause is
lacking.

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B. In Pari Delicto
1. Legal Standard
Because the Massachusetts legal malpractice claim in this
case is in federal court pursuant to the Court’s bankruptcy
jurisdiction, the law of the Commonwealth controls the
applicable defenses. Baena v. KPMG LLP, 453 F.3d 1, 6 & n.4 (1st
Cir. 2006).

The Trustee “stands in the shoes” of Inofin and any

defenses that could be raised against Inofin also apply to him.
See Gray v. Evercore Restructuring L.L.C., 544 F.3d 320, 322 n.1
(1st Cir. 2008).
In pari delicto, which means “in equal fault”, is a defense
based on public policy considerations. Baena, 453 F.3d at 6.
Massachusetts applies the in pari delicto defense to torts,
including legal malpractice, Choquette v. Isacoff, 65 Mass. App.
Ct. 1, 2 (2005), with the goal of “prohibit[ing] plaintiffs from
recovering damages resulting from their own wrongdoing.”
Nisselson v. Lernout, 469 F.3d 143, 151 (1st Cir. 2006).
The United States Supreme Court has limited the in pari
delicto defense to circumstances where 1) the plaintiff and
defendant have “substantially equal responsibility for the wrong
[plaintiff] seeks to redress” and 2) barring the claim would not
“interfere[] with the purpose of the underlying law or otherwise
contravene the public interest.” Nisselson, 469 F.3d at 152
(citing Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S.
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299, 310–11 (1985)).

Massachusetts courts have adopted these

restrictions. Id. (citing Choquette, 65 Mass. App. Ct. at 4–5).
2. Analysis
Defendants contend that they are entitled to summary
judgment on the grounds of in pari delicto because the
fraudulent behavior of the bankrupt corporation, not the
purported deficit in defendants’ legal advice, extended Inofin’s
existence and resulted in the precipitous loses incurred from
2009 to 2011.

The Trustee replies that the defense is

inapplicable because, when a claim derives from a professional’s
negligent advice, the in pari delicto doctrine requires that the
plaintiff be affirmatively involved in formulating the advice.
Because it is agreed that Inofin engaged in questionable
accounting practices and failed to treat the notes as securities
despite repeated legal advice to do so, the pertinent question
is whether, when the record is viewed in the light most
favorable to plaintiff, defendants are entitled to judgment as a
matter of law. Fed. R. Civ. P. 56(a).
Defendants’ contention that all of the alleged misconduct,
including Inofin’s dubious accounting practices and defendants’
legal advice or lack thereof, must be considered in evaluating
whether in pari delicto applies is correct.

As another Session

of this United States District Court has observed, the parties’
responsibility as to the “overall wrongful conduct” is relevant
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for an in pari delicto defense, not their ownership of “the
individual wrongs comprising the greater wrong.” Gray v.
Evercore Restructuring L.P., No. 06-cv-11444-RWZ, 2007 WL
3104597, at *8 (D. Mass. Sept. 19, 2007), aff'd sub nom. Gray v.
Evercore Restructuring L.L.C., 544 F.3d 320 (1st Cir. 2008).
When the “overall wrongful conduct” is considered,
defendants are entitled to summary judgment on the grounds of in
pari delicto.

The First Circuit Court of Appeals (“First

Circuit”) has determined that, pursuant to the law of the
Commonwealth, if a plaintiff is the primary wrongdoer, in pari
delicto precludes claims against a secondary accomplice for
aiding in the wrong.

Baena, 453 F.3d at 7 (1st Cir.

2006)(citing Choquette, 65 Mass. App. Ct. at 3–4).

In the

present case, Inofin was the primary wrongdoer with respect to
both the duplicitous bookkeeping that allowed it to retain a
license from 2009 to 2011 and the failure to treat the notes as
securities despite legal advice to the contrary in 1994, 2003
and 2009.
The First Circuit has specifically found that
“sophisticated professionals” are still entitled to the in pari
delicto defense when the plaintiff is “at least equally
responsible” for the alleged wrongdoing. Gray, 544 F.3d at 323.
This is illustrated by the First Circuit’s decision in Baena,
453 F.3d at 6.

That case involved claims against KPMG
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accountants who knew about inaccurate accounting practices at a
company and warned certain managers about them but refrained
from notifying the company’s directors of the practices and
provided financial statements that allowed the company to
increase its debt by $340 million before going bankrupt. Id.
at 4.

Applying Massachusetts law, the Court found that in pari

delicto prevented the company, whose senior managers were
primarily at fault for the fraudulent records, from recovering
from KPMG even though the accountants were aware of and
facilitated the wrongdoing. See id. at 7.
Similarly here 1) defendants informed Inofin that its notes
were securities and that it should issue the notes in
conjunction with a PPM, and 2) when the company elected to
ignore the advice, defendants continued to act as its counsel
without raising objections.
wrongdoers.

Yet defendants are not the primary

Those principally responsible for the fraudulent

accounting that enabled Inofin to avoid detection and to
precipitate huge loses from 2009 to 2011 were Messrs. Cuomo and
Mann, and thus Inofin itself. See Baena, 453 F.3d at 7.
Likewise, the officers of Inofin are responsible for its
repeated failure to treat the notes as securities despite advice
of counsel to the contrary.

Accordingly, even when the

undisputed facts are viewed in the light most favorable to

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plaintiff, defendants are entitled to summary judgment on the
grounds of in pari delicto.
C. Proximate Cause
1. Legal Standard
Pursuant to Massachusetts law, attorneys have a duty to use
reasonable care when advising clients. Glob. NAPs, Inc. v.
Awiszus, 457 Mass. 489, 500 (2010).

To prevail on a legal

malpractice claim, a plaintiff must show that the attorney
breached his duty and the breach proximately caused damages to
the client. Id.

Courts often determine whether causation

existed “as matter of law at the summary judgment stage.”
Girardi v. Gabriel, 38 Mass. App. Ct. 553, 559 (1995).
Proximate cause requires more than mere “conjecture or
speculation.” Borden v. Betty Gibson Associates, Inc., 31 Mass.
App. Ct. 51, 55 (1991).

To show proximate cause, a plaintiff

must
demonstrate the probability that he would have reached a
more favorable outcome . . . had [the attorney] exercised
adequate skill and care.
Shimer v. Foley, Hoag & Eliot LLP, 59 Mass. App. Ct. 302, 309
(2003).

On the other hand, if the outcome would remain

unchanged regardless of the degree of care the attorney
exercised, proximate cause is not shown. McCann v. Davis, Malm &
D'Agostine, 423 Mass. 558, 561 (1996).

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2. Analysis
The undisputed facts show that successive counsel
repeatedly advised Inofin that the promissory notes should be
treated as securities and that it repeatedly ignored such
advice.

In 1994, Attorney Robert Allison told Inofin that the

notes were securities, worked with Cuomo and Mann to draft a PPM
and advised Inofin that the notes were subject to securities
laws.

In 2003, Attorney Ed Woll indicated to Inofin that the

notes were securities.

In 2008, one of Inofin’s investors

identified the promissory notes as unregistered securities,
likely subject to SEC regulation D.

In 2009, Attorney Hindlian

advised Inofin that the notes were securities and asked Mr.
Cuomo to authorize a draft PPM for future notes.
In sum, principals of the bankrupt corporation were wellaware that the notes were securities and that, in order to
comply with SEC regulation D, they had to be offered in
conjunction with a PPM.

Yet, in contravention to recurring

advice of counsel, Inofin chose to avoid compliance with
securities regulations. See McCann, 423 Mass. at 561.
The sole evidence that plaintiff offers to show that the
outcome would have been different if defendants had been more
diligent is Mr. Cuomo’s inadmissible testimony.

Even if that

testimony were considered, it is belied by the repeated warnings
to Inofin that the notes were securities which warnings it
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doggedly ignored.

Thus, even if defendants were not entitled to

summary judgment on the grounds of in pari delicto, they would
be entitled to it because proximate cause is lacking.

ORDER
For the foregoing reasons, defendants’ motions for summary
judgment (Docket No. 20) and to strike (Docket No. 36) are
ALLOWED.

So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated November 28, 2016

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