H3GM JONATHAN HARWELL* JOHN M. BRITTINGHAM ALIX COULTER CROSS JONATHAN STANLEY
LiN S. HOWARD* SUSAN V. SIDWELL KRISKEMP J. DAVID MCDOWELL
ERNEST E. HYNE II JOHN F. BLACKWOOD J. GREG GiFFEN D. MATTHEW FOSTER
CRAIG V. GABBERT, JR. D. ALEXANDER FARDON LESLIE B. WILKINSON, JR.* JACOBA. FELDMAN
MARK MANNER MICHAEL R. HILL DAVID P. CANAS MICHAEL J. MILLS
HARWELL HOWARD HYNE GLEN ALLEN CiVJTTS DAVID Cox TRACY M. LUJAN LARA A. FLATAU
GABBERT & MANNER, P. C. GLENN B. ROSE CURTIS CAPELING JEFFREY J. MILLER ELIN M. HENNINGSSON
JOHN N. POPHAM IV BARBARA D. HOLMES WM. JAY HARRELSON*
* OfCounsel
Robert M. Garfinkle
July 14, 2011 ~~c )'"' J<1 ~~;~
Garfinkle, McLemore & Young, PLLC 2000 Richard Jones Road, Suite 250 Nashville, TN 37215
Sarah H. Hiestand 0;}1>-o ./ & . '~ Lyndsay F. Sanders ~t110,(1'~y. <'<?tl ' Office of the Attorney General ~< 0~ <>'<&-.t P.O. B.ox 20207 0si, <$';)1-1: Nashville, TN 37202-0207 01' ~
Re: Julie Mix McPeak, Commissioner ofthe Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner) v. Smart Data Solutions, LLC, and others
Dear Counsel:
Chancery Court- 20th Judicial District- Part III Case No. 10-507-III
Please find enclosed your service copy of a Motion to Dismiss the Petition for Failure to state a Claim which has been filed this same date in the above-referenced matter.
Should you have any questions, please do not hesitate to contact this office.
Enclosure
Sincerely,
HARWELL HOWARD HYNE GABBERT & MANNER, P.C.
~'--In~~
Linda Montalbano Legal Assistant to Alex Fardon
315 DEADERICK STREET, SUITE 1800 NASHVILLE, TENNESSEE 3 7238-1800 · - - · · -~----- - - -plion:e··-6-15:.-25Q;05DO- faxor5;L:S1:1o5-9- -w-ww--:h3 gm.com - -- -- -
IN THE CHANCERY COURT FOR THE STATE OF TENNESSEE 20th JUDICIAL DISTRICT, PART III
JULIE MIX McPEAK, Commissioner of the Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner),
) ) ) ) ) ) ) ) )
Petitioner, No. 10-507-111
v.
SMART DATA SOLUTIONS, LLC, and others,)
"Damages Petition Against Evans Petree PC and William L. Hendricks, Jr."
Respondents. ) )
MOTION TO DISMISS THE PETITION FOR FAILURE TO STATE A CLAIM
The Commissioner has filed a "Damages Petition" against Evans Petree PC and William
Hendricks. The Commissioner filed the Petition on behalf of Smart Data Solutions, LLC
("SDS"), a former client of Evans Petree and Mr. Hendricks that has been seized by the
Commissioner. The Petition accuses Evans Petree and Mr. Hendricks of breaching a duty to
SDS by (1) advocating SDS's position that it was not an insurance company instead of accepting
the contrary position asserted by various state agencies; (2) not stopping SDS from continuing to
make premium payments even after they and SDS knew that at least one state agency was
claiming that the insurance pr0duct SDS was buying was "bogus"; and (3) not preventing SDS, a
for-profit company, from making distributions to, or for the benefit of, its owner.
The Commissioner's position radically departs from long-standing Tennessee law. If
adopted, that position would expose Tennessee lawyers to liability for fulfilling their ethical duty
to advocate their clients' positions rather than adopt the positions of their clients' adversaries and
would make Tennessee lawyers guarantors of their clients' informed business decisions, as well
as financially responsible for their business clients' distributions to their owners.
The Petition against SDS's former lawyers not only fails to state a claim under existing
law, but it also contradicts the position that the Commissioner had SDS take in successfully
obtaining relief against other parties in two other lawsuits filed as part of this same liquidation.
Evans Petree and Mr. Hendricks move for dismissal pursuant to Tennessee Rule of Civil
Procedure 12.02(6). The movants have filed a memorandum in support of their motion.
Respectfully submitted,
HARWELL HOWARD HYNE
GABB~P.C. -
By: __ +~------------------------Craig V. Gabbert, Jr. (Tenn. 4702) D. Alexander Pardon (Tenn. 13787) 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Telephone: 615-256-0500 cvg@h3 gm.com; daf@h3 gm.com
Counsel for Evans Petree PC and William L. Hendricks, Jr.
NOTICE OF HEARING: This motion will be heard during the Court's motion docket that starts at 9 a.m. on August 26, 2011. If you fail to timely file and serve a written response to this motion, the Court may grant the motion without further hearing.
Certificate of Service
On July 14, 2011, I caused this document to be sent by first-class mail to:
Robert M. Garfinkle Garfinkle, McLemore & Young, PLLC 2000 Richard Jones Road, Suite 250
. Nashville, TennessGe 37215
D. Alexander Fardon
Sarah H. Hiestand Lyndsay F .. Sanders
· Office of the Attorney General ·P.O. Box 20201 Nashville, Tennessee 37202-0207
2
IN THE CHANCERY COURT FOR THE STATE OF TENNESSEE 20th JUDICIAL DISTRICT, PART III
JULIE MIX McPEAK,. Commissioner of the Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner),
Petitioner,
v.
) ) ) ) ) ) ) ) )
No. 10-507-111
SMART DATA SOLUTIONS, LLC, and others, )
"Damages Petition Against Evans Petree PC and William L. Hendricks, Jr."
Respondents. ) )
MEMORANDUM IN SUPPORT OF MOTION TO DISMISS THE PETITION FOR FAILURE TO STATE A CLAIM
The Commissioner has filed a "Damages Petition" against Evans Petree PC and William
Hendricks. The Commissioner filed the Petition on behalf of Smart Data Solutions, LLC
("SDS"), a former client of Evans Petree and Mr. Hendricks that has been seized by the
Commissioner. The Petition accuses Evans Petree and Mr. Hendricks of breaching a duty to
SDS by (1) advocating SDS's position that it was not an insurance company instead of accepting
the contrary position asserted by various state agencies; (2) not stopping SDS from continuing to
make premium payments even after they and SDS knew that at least one state agency was
claiming that the insurance product SDS was buying was "bogus"; and (3) not preventing SDS, a
for-profit company, from making distributions to, or for the benefit of, its owner.
The Commissioner's position radically departs from long-standing Tennessee law. If
adopted, that position would expose Tennessee lawyers to liability for fulfilling their ethical duty
·. to advocate their clients' positions rather than adopt the positions of their clients' adversaries and
would make Temiessee lawyers guarantors of their clients' informed business decisions, as well
as financially responsible ·for their business clients' distributions to their owners.
The Petition against SDS's former lawyers not only fails to state a claim under existing
law, but it also, as shown below, contradicts the position that the Commissioner had SDS take in
obtaining relief against other parties in two other lawsuits filed as part of this same liquidation.
Evans Petree and Mr. Hendricks move for dismissal pursuant to Tennessee Rule of Civil
Procedure 12.02(6).
THE LEGAL STANDARD FOR THIS MOTION
A Rule 12.02(6) motion tests the legal sufficiency of the well-pled factual allegations in a
complaint. "The· basis for the motion is that the allegations contained in the complaint,
considered alone and taken as true, are insufficient to state a claim as a matter of law." Daniel v.
Hardin Co. Gen. Hospital, 971 S.W. 2d 21, 23 (Tenn. Ct. App. 1997). Allegations of fact- not
mere conclusions--' are needed to state a claim. See Jasper Engine and Transmission Exchange
wMills, 911 S.W. 2d. 719, 720 (Tenn. Ct. App. 1995) ("While we recognize that the adoption of
the Tennessee Rules of Civil Procedure greatly relaxed the requirements as to pleadings,
pleading of some facts giving rise to a claim for relief is still a necessary requirement.").
THE COMMISSIONER'S PETITION1
"ATA" is an association people could join to obtain certain benefits, including health
insurance benefits (Petition~ 12). Until late 2009, ATA purported to have a master health and
accident insurance policy that covered its members and that was underwritten by Serve America
Assurance, a South Carolina company("SAA") (id. ~~ 10, 12-13, 23)? SAA "may be and has
sometimes been described as a wholly-owned alien captive insurance company subsidiary of
1 Evans Petree and 11r. Hendricks accept the Petition's allegations of fact as true for purposes of this motion only.
2 The Petition inconsistently alleges both that "[t]he Liquidator has not been able to verify whether that SAA master policy or any SAA master policy was ever issued to ATA" (id. ~ 14) and that "[t]here never was any insurance covt<rage issued to ATA by SAA" (id. ~ 18).
2
Beema-Pakistan Conipany, Limited" ("Beema") (id. 'j[10). William Worthy, II, a resident of
South Carolina, represented himself to be an authorized agent ofBeema/SAA (id. 'i[74).
SDS acted as ATA's administrator, collecting premiums from ATA members and
processing and paying claims submitted by those members (id. 'j[12 & Ex. 1 p. 18 at 'if 48 ("SDS
acts as the third party administrator for the ATA.")). SDS is a Tennessee limited liability
company (an "LLC") (id. 'i[2). Bart Posey was SDS's president and/or managing member (id.).
The Petition 'sAllegations I Assertions Regarding SDS 's Premium Payments
In early 2008, the North Carolina Department of Insurance ("NCDI") began to
investigate SDS, Posey; ATA and others regarding the marketing and administration of certain
insurance policies (id., 33). SDS and Posey hired Mr. Hendricks, a Memphis lawyer, to assist
them with responding to that investigation (id. 'j['j[3, 18, 32-33, 66-67).3
Posey had concerns about Worthy when the NCDI investigation began (id. 'if 75).
(Indeed, in a brief filed with the Court of Appeals in this proceeding, the Commissioner cites a
March 2008 email in which Posey implies to Worthy that the Beema/SAA insurance Worthy was
providing was not "with a rated, licensed· carrier" and an April2008 email to Worthy in which
Posey expresses doubt as to whether "this plan through Beema is even legal" (see Tab A p. 27).)
SDS nevertheless chose to continue doing business with Worthy and making premium payments
· for the Beema/SAA co~;erage (id. 'j['j[35, 75-77).
3 The Petition creates unnecessary confusion by, among other things, defming "the receivership entities" to include SDS, ATA, and SAA (id. , 9) and then alleging that Evans Petree and Mr. Hendricks represented the "the receivership entities" in the North Carolina proceedings (id. ~ 35). As the Petition makes clear els~where (~, id. ~ 32 & p. 10 (section entitled "EVANS PETREE AND HENDRICKS' LEGAL REPRESENATION OF SDS AND POSEY")), however, and as is the case, Evans Petree and Mr. Hendricks haye never represented SAA, which is a Worthy-affiliated entity that, as the Commissioner herself has stated in the lawsuit against Worthy described below, helped Worthy defraud SDS of most of the premium payments at issue.
3
In August 2008, the NCDI issued an Emergency Cease and Desist Order in an
administrative case filed against SDS, Posey, ATA and others (id. ~~ 18, 68 & Ex. 1). That
August 2008 Order stated that Beema was "an unauthorized, alien insurer" and described the
Beema insurance .productsold by Worthy as "bogus" (id. ~~ 18, 68-69 & Ex. 1 p. 6 at~ 19).4
SDS nevertheless continued doing business with Worthy and making premium payments for the
Beema/SAA insurance coverage (id. ~~ 35, 75-77).
In February 2009, after an October 2008 hearing, the NCDI issued a Final Decision and
Order (id. ~~ 34, 71 & Ex. 2). That Order stated in part that SDS had marketed and sold "bogus
health insurance coverage," ihcluding under the plan purportedly issued by Beema/SAA (id. Ex.
2 pp. 16-17 at~~ 71-79, p. 27 at~ 132, p. 34 at~ 176, p. 35 at~~ 180-81). This Court has held
that SDS and Posey knew: or should have known by no later than the issuance of the NCDI Final
Decision and Order that the Beema/SAA insurance product was "a sham" (id. ~~ 34, 71, 73).
SDS nevertheless chose to continue doing business with Worthy arid paying premiums for the
Beema/SAA insurance after the February 2009 NCDI Order (id. ~~ 35, 75-77).
Mr. Hendricks joined Evans Petree in early 2009 (id. ~~ 32, 78). At the same time, SDS
asked Mr. Hendricks to respond to a new investigation of SDS, ATA, and Posey by the
Tennessee Department of Commerce and Insurance ("TNCf') (id. ~ 78).5 Mr. Hendricks told the
TNCI that SDS 'planned to appeal the~NCDIFinal Decision and Order (id.).
Several more state aget1.cies began investigating SDS and Posey during 2009 {id. ~~ 31,
79). Many of these agencies took the position that, despite paying millions of dollars in
., . -4 The August 2008 NC.DI Order concerned niany more issues and parties than just Worthy and
Beema/SAA and suggested t,ttat SDS had served as administrator for another "bogus" insurance plan, called NAA, since 2006, which is long before SDS retained Mr. Hendricks (see, M., id. Ex. 1 p. 13 at~ 7) ..
5 The Commissioner and her former law firm actually represented "bogus" insurer Beema in connection with the TNCI proceedings (See Tab B).
4
premiums for Beema/SAA to insure AT A members, SDS was itself engaged in an unauthorized
insurance business (id. ~~ 14, 31). SDS hired Evans Petree and Mr. Hendricks to advocate
SDS's position that it was a third-party administrator, not an insurer (id. ~ 37).
In October 2009, SDS and Posey stopped doing business with Worthy and Beema/SAA
(id. ~ 20). From the time Mr. Hendricks joined Evans Petree in early 2009 through late 2009,
SDS paid Worthy $2,106,944 in premiums for the "unauthorized, bogus" Beema/SAA insurance
(id. ~ 84). In March 2010, Evans Petree filed suit for ATA against Worthy and companies he
controlled, alleging that they had obtained these premiums through fraud (id. ~ 19).
SDS ·and Posey began searching for a new insurance provider for AT A after SDS stopped
paying premiums to Beenia/SAA (id. ~ 88). In December 2009, SDS wired $582,967 to First
Risk - Andone ("Andone") "at the instructions of an individual named Gary Ketchum to obtain
·insurance that did not exist" (id. ~ 90). The Petition does not allege that Evans Petree or Mr .
. ·Hendricks even knew about SDS 's payment to Andone (see id. ~~ 87-91 ).
SDS then turned to Atlantic Surety Holdings, S.A. ("Atlantic Surety") (id. ~ 93). Atlantic
Surety had confirmed·by email·that PT Prudential Life "would bind coverage and provide an
admitted carrier so thatbusiness could be conducted legally in Tennessee" (id. ~ 95). Mr.
Hendricks was told 6fthistrimsaction before it occurred (id. ~ 94). In March 2010, SDS wired
Atlantic Surety $125,000 rot this coverage (id. ~ 93). SDS's payment to Atlantic Surety also
proved to be for "bogus cover:agethat did not exist" (id. ~ 96).
The Petition asserts that "the negligence of Hendricks" was the cause of SDS' s premium
payments to Beema/SAA ($2,106,944), Andone ($582,967), and Atlantic Surety ($125,000)
. between early 2009 and March 2010 (id. ~~ 19, 85, 90, 96). The Petition does not allege that
Evans Petree or Mr. Hendricks advised SDS to make these payments. Nor does the Petition
5
allege that SDS asked. Evans Pet~ee or Mr. Hendricks to give such advice, or to even investigate
any insurer or pot~ntial: insurer. Nor does the Petition allege that Evans Petree or Mr. Hendricks
failed to tell SDSanything that SDS and its owner Bart Posey did not already know. Instead, the
Petition asserts that Evans Petree and Mr. Hendricks should have known that SDS was paying
premiums for insurance that was "bogus" and, somehow, should have prevented SDS from
paying those premiums (id. ~~ 34-36, 44, 80-82, 89-90, 96).
The Petition's Allegations I Assertions Regarding Advocating SDS's Position
. The Commissioner contends, as she has since the March 2010 ex parte seizure, that SDS
and ATA "constituted ah unlicensed, unregulated insurance entity" (id. ~~ 11, 13-16).6 The
Commissioner 'faults .Evans Petree and Mr. Hendricks for previously having advocated SDS's
position to the contrary· (id. ~~ 31-:32, 42-43, 101).7 The Commissioner claims SDS's former
· lawyers breached their duty to their client when "[t]hey took the position that [SDS and ATA]
-did nothing wrong and were not engaged in an insurance business that subjected them to
regulation" (id. ~ 101). According to the Commissioner, by advocating their client's position
rather than agreeing with their client's adversaries, Evans Petree and Mr. Hendricks "facilitated
the operation of art unliCensed, unauthorized, illegal busi:hess" and should themselves have to
pay "ail valid claimsiri the Liquidation" (id. ~~50, 99, 105).
6 Before taking the position that SDS is an unlicensed insur~r to justify seizing SDS, the Commissioner had filed an administrative action against SDS in which the Commissioner accurately claimed that SDS
. was not an insurer hut a third:.party administrator processing insurance claims (TNDCI No. 10-004 12.04-106294J). The <Petition against Evans Petree and Mr. Hendricks reflects this on-going contradiction between thy reality that SDS paid millions of dollars in premiums to third parties to buy insurance coverage for A TA members (even if that coverage proved to be "unauthorized" or "bogus") and the Commissioner's position before this Court (which, admittedly, has been successful) that SDS itself was providing insurance coverage. In short, the Commissioner was able to reach this point only by successfully asserting that SDS was the insurer and, having reached this point, is now bringing claims that focus on the reality that SDS was a purchaser of insuran.ce.
7 As the Court knows and as the record already reflects, SDS and A TA eventually had other counsel argue their position on this issue to both this Court and to the Court of Appeals.
The Petition's Allegations I Assertions Regarding Posey's Control o(SDS Funds
From August 2009 through March 2010, Bart Posey transferred over $1.2 million of SDS
money to himself or to his family "for his personal benefit" (id. ~~ 30, 61). These transfers
included $144,000 Posey wired from an SDS account to an Evans Petree trust account in August
2009 to be used to buy a home (id. ~~ 30, 53-54). The Petition labels these transfers from SDS to
its owner as "fraudulent," "conversion," and "embezzlement," but the Petition contains no
factual allegations to support these labels (id. ~~ 30, 47, 54, 56-57, 60-63, 101). The Petition
nevertheless asserts that Evans Petree and Mr. Hendricks are liable to SDS for not "recognizing"
and, presumably, notstoppi1ig SDS from making, the transfers (id. ~~56-57, 62-63).8
THE WORTHYIBEEMA LAWSIDT AND JUDGMENT
The Court's record shows that this malpractice action is not the first lawsuit the
. Commissioner has pursued concerning the premiums SDS paid to obtain insurance coverage
from Beema/SAA. In fa.ct, the Colilmissioner has already obtained a judgment to recover those
premiums based on the Commissioner's assertion that SDS paid the premiums in reasonable
reliance on William Worthy's false representations.
The Con:imiss1ciner filed Newman v. William Worthy, U and others (the "Worthy/Beenia
Lawstiit") as part of this ·liquidation (9/30/10 Liquidator's Petition to Recover Damages from
William M. Worthy, II, Caroline H. Worthy, Southeast Insurance Advisors, LLC, and
Nationwide Administrators, LLC (No. 10-507-III)(the "Worthy Petition")). The Commissioner
alleged in the Worthy Petition: (1) Worthy represented to SDS and Posey that he was an agent of
8 The movants have not tried to repeat here every allegation in the 25-page Petition, as many of those allegations do not even .relate to any claim asserted against Evans Petree and Mr. Hendricks, but rather just seek to criticize the businessofthese lawyers' former clients (see,~ Petition~ 24 ("Further, the benefits purportedly being prpv~de,d by the receivership entities were not reasonable in relation to the premium charge~.") The Commissioner's opinion of a business, whether right or wrong, is not a basis for suing the business's l~:twyers. See, M, Tenn. Rule of Prof. Conduct 1.2 at Comment 6 ("[R]epres(mting a Client does not constitute approval of the client's views or activities.").
7 ~
Beema and Beema' s off-shore captive SAA and that Beema/SAA would provide insurance
coverage for ATA members effective January 1, 2008 (Worthy Petition~~ 9-10, 27 & Exs. 1, 2);
(2) these representations were false (id. ~ 28); (3) even though SDS and Worthy were "at odds
about ... [the] existence of coverage" by April 2008, SDS reasonably relied on Worthy's false
representations iil paying over $2.8 million in premiums between early 2008 and late 2009 for
insurance for ATA members (id. ~~ 12, 14, 20, 29); (4) rather than use the premiums SDS had
paid to provide the insurance coverage promised, Worthy and the other defendants named in the
Worthy Lawsuit stole the money (id. ~~ 16-17). The Commissioner asserted claims in the
Worthy/Beema Lawsuit for, among other things, fraud and conversion (id. ~~ 26-32).
The Court's record shows that, at the Commissioner's request, the Court entered
judgment against three of the defendants in the Worthy/Beema Lawsuit on all claims and for all
, relief sought (5/5/11 Order of Judgment by Default).
THE KETCHUM/ANDONE LAWSUIT AND JUDGMENT
This malpractice action also is not the first lawsuit the Commissioner has pursued
concerning the pteniium· SDS paid to obtain insurance coverage from: Andone. In fact, the
Commissioner ·has already obtained a judgment to recover that payment based on the
Commissioner's assertion that SDS paid the premium in reasonable reliance on others' false
representations.
The Corhhlissioner. filed Newman v. William Gary Ketchum and others (the
. ! .
"Ketchum/Andon~Lawsuit") as part of this liquidation (8/13/10 Liquidator's Petition to Recover
Damages from Gary L Ketchum, Donald Choi, and First Risk Holdings, LLC (No. 10-507-III)
(the "Ketchum Petition")). The Commissioner alleged in the Ketchum Petition: (1) Ketchum and
Choi represented to SDS and Posey that Ketchum was a principal in Andone, which is a licensed
8
insurance company, and that Andone would provide insurance coverage for AT A members
(Ketchum Petition~~ 8, 24); (2) these representations were false (id. ~~ 9-10, 25); (3) Ketchum
sent Posey a coverage binder and wiring instructions (id. ~ 11); (4) relying on Ketchum's and
Choi's representations, and pursuant to Ketchum's instructions, Posey had SDS wire
$582,966.85 to an account in the name of First Risk- Andone (id. ~~ 12, 26); (5) rather than use
SDS's premium payment to pay Andone for insurance coverage for ATA members, Ketchum,
Choi, and First Risk stole the money (id. ~~ 15-16). The Commissioner asserted claims in the
Ketchum/Andone Lawsuit for fraud and conversion (id. ~~ 23-30).
The Court's record shows that, at the Commissioner's request, this Court entered
judgment against all defendants in the Ketchum/ Andone Lawsuit on all claims and for the full
amount sought (1/7/11 Agreed Order ofJudgment).
ARGUMENT
A client accusing a lawyer of malpractice must prove: (1) that the lawyer breached a duty
to the client; and (2) that the breach proximately caused the client damage. Lazy Seven Coal
Sales, Inc. v. Stone & Hinds, P.C., 813 S.W.2d 400, 403 (Tenn. 1991). Given these elements,
the Petition fails to state a viable malpractice claim against Evans Petree and Mr. Hendricks.
I. . THE PETITION FAILS TO IDENTIFY ANY DUTY TO SDS THAT EVANS PETREE AND MR. HENDRICKS BREACHED.
The Commissioner asserts_that Evans Petree and Mr. Hendricks are liable to SDS for (1)
advocating SDS 's position that it was not an insurance company instead of accepting the
contrary position asserted by various state agencies; (2) not stopping SDS from continuing to
make premium payments even after SDS knew that at least one state agency was claiming that
·the insurance for which SDS was.paying was "bogus"; and (3) not preventing SDS, a for-profit
9
company, from making distributions to, or for the benefit of, its owner. As a matter of law, none
of these alleged "failures" by SDS's former lawyers constitutes a breach of duty to SDS.
A. A LAWYER DOES NOT COMMIT MALPRACTICE BY ADVOCATING HIS CLIENT'S POSITION TO IDS CLIENT'S ADVERSARIES.
Various state agencies have a dispute with a business. The business hires lawyers to
advocate its position in that dispute. One of the agencies then seizes the business and sues the
business's lawyers for not having adopted the state agencies' position rather than advocating
their client's position. Are the lawyers liable to their former client for having advocated for the
client's position? The answer is obvious. Yet this is the very scenario and claim the
Commissioner presents in this .case (see,~' Petition~ 101 (Evans Petree and Mr. Hendricks
liable for having taken "the position that the receivership entities.did nothing wrong and were not
engaged in an insurance busmess that subjected them to regulation")).
Evans Petree and Mr. Hendricks did not breach a duty to SDS by advocating SDS's
position that it was not an insurance company to the state agencies investigating SDS. In fact,
Evans Petree and Mr. Hendricks would have violated their ethical duty to SDS if they had done
otherwise. See, ~' Tenn. Rules of Prof. Conduct at Preamble ~ 3 ("As an advocate, a lawyer
zealously asserts the client's position under the rules of the adversary system.").
B. A LA,VYER IS NOT A GUARANTOR OF A CLIENT'S BUSINESS DECISIONS.
Lawyers <rre not guarantors of the matters their clients ask them to handle, let alone of
their client's businesses generally. See, ~' Strauss v. Wyatt, Tarrant, Combs, Gilbert &
Mi1om, 911 S.W.2d 727, 729 (Tenn. Ct. App. 1995) (rejecting malpractice claim that "would
impose ... a guarantor's duty"); 3 Tenn. Jur. "Attorney and Client" § 12 (2011). "It is
axiomatic ... that the duty .of the attorney to act does not extend to the business of the client in
10 ~-~-
general.. .. The obligation of the attorney is to provide the service for which he was hired."
Somma v. Gracey, 544 A.2d 668, 672 (Conn. Ct. App. 1988) (citations omitted) (Tab C). Yet, in
suing Evans Petree and Mr. Hendricks for the premiums SDS chose to pay for coverage from
Beema/SAA, Andone, and Atlantic Surety in 2009 and early 2010, the Commissioner is seeking
to make SDS's lawyers guarantors ofSDS's business decisions.
The Beema/SAA Premium Payments
SDS did not hire Mr. Hendricks to advise SDS on whether to enter into a business
relationship with Worthy and Beema/SAA. SDS hired Mr. Hendricks in early 2008 because the
NCDI was already investigating that relationship (see Petition~~ 3, 18, 32.;33, 66-67). Indeed,
according to the Commissioner's own filings, by early 2008 SDS and its principal, Bart Posey,
were themselves suggesting that Beema/SAA was not a licensed carrier and challenging Worthy
as to whether "this plan through Beema is even legal" (id. ~ 75;-Tab A p. 27; Worthy Petition~
20 ("As early as April; 2008, Worthy and the ATA entities/SDS were at odds about payment of
premiums and existence of coverage, as shown in [the attached e-mails].")).
The Commissioner suggests that the NCDI administrative orders put Evans Petree and
Mr. Hendricks on notice "that the Beema!SAA insurance product was a sham" and that SDS was
therefore paying for "bogus" instirance (Petition ~~ 34, 80). But the Commissioner ignores the
critical legal significance oftlie fact that SDS and Posey (as well as ATA) were named parties in
the NCDI investigation and the NCDI's orders resulting from that investigation (see id. Ex. 1 p.
6 at~ 19, pp. 21-22 at ,168 (8/15/08 NCDI Order stating that SDS has been enrolling individuals
in a group health insurance policy issued by Beema, that Beema is an unauthorized alien insurer,
and that SDS is selling "bogus insurance") & Ex. 2 p. 2, p. 5 at~ 14, pp. 16-17 at~~ 71-79, p. 27
at~ 132, p. 34 at~ 176,-p. 35 at~~ 180-81 (2/26/09 NCDI Order noting thatPosey appeared for
~-- 11
first day of hearing without counsel and finding that SDS had marketed and sold "bogus health
insurance coverage," including under the policy Worthy purportedly had Beema/SAA issue)) .
. The NCDI administrative orders thus did not convey to Evans Petree and Mr. Hendricks
anything that SDS and its principal, Posey, did not also know (see,~; id. ~ 73 (quoting from
this Court's 4/14/10 Memo. and Order to effect that NCDI order had put SDS on notice that
Beema!SAA product was a sham that posed significant risk of nonpayment of ATA member
claims). Yet, even though the information known to SDS had put SDS and Worthy "at odds
about payment of premiums and existence of coverage" by April 2008, SDS chose to continue
making premium payments to Worthy for the purported Beema!SAA insurance until late 2009
(id. ~~ 20, 35, 75-77; Tab A p. 27; Worthy Petition~ 20 & Ex. 7).
Given these allegations, SDS has not stated a viable claim against its former lawyers for
SDS's decision to continue to pay premiums for the Beema!SAA insurance. See, M.,., Strauss v.
Wyatt, Tarrant, 911 S.W.2d at 728-29 (clients' lawyers not liable for malpractice where clients
knew and understood investment transaction and its risks, were not misled by lawyers, and
decided to proceed With transaction without asking lawyers for advice on whether to engage in
transaction).9
· The Andone· and Atlantic Surety Premium Payments
The ColJllllissioiler also wants SDS to blame its former lawyers for the $582,967 SDS
wired to First Risk- Andone in December2009 "at the instructions of an individual named Gary
9 Note that SDS's daim relate.dto the. premiums it paid for the Beema/SAA insurance is also time-barred given that, if the Commissioner's allegations are accurate, SDS knew no later than by the February 2009 NCDI Order that it was paying for, and marketing, a "bogus" insurance product. See Woods & Wodds v. Lewis, 9()2 S.W.:id 914, 917-18 (Tenn. Ct. App. 1994) (client had one year from discovery of negligence to sue lawyer, and initiation of action by third party put client on notice of lawyer's allegedly deficient advice to client); Tenn. Code Ann. §§ 56-9-304; 56-9-313(b)(1) (indicating that rehabilitation and liquidation orders do not revive claims on which the limitations period has already expired by the time the rehabilitation and/or liquidation petition is filed).
·-·--------. ·---------- --------------------~~
Ketchum" (Petition fl~ 87-91), as well as for the $125,000 SDS wired Atlantic Surety in March
2010 for coverage through PT Prudential Life (id. ~~ 92-97).
Here, again, the Petition does not allege that SDS asked its lawyers to investigate Mr.
Ketchum, Andone; or Atlantic Surety; that SDS asked its lawyers to advise SDS on whether to
make these payments; or that SDS 's lawyers in fact gave SDS advice (let alone deficient advice)
on whether to make these payments (see id. 'j['j[87-97). The Petition does not even allege that
Evans Petree and Mr. Hendricks evenknew about the Andone premium payment (see id. ~~ 87-
91). The Commissioner's Petition instead merely relies on the implied proposition that, once a
client hires a lawyer for ariy purpose, that lawyer is liable for anything bad (including a third
. party's fraud) that happens to the client. That is not the law. See,~' Jamison v. Norman, 771
S.W.2d 408, 409-10 (Tenn. 1989) (lawyer hired to handle- client's personal injury claim not
.liable for client's own failure to file worker's compensation claim in Georgia where client chose
not to consult lawyer on the latter claim); Strauss v. Wyatt, Tarrant, 911 S.W.2d at 728-29
(lawyers not liable for client's decision to enter into transaction where lawyers were asked only
for advice on how to structure transaction).
· C. A LAWYER DOES NOT HAVE A DUTY TO PREVENT A FOR-PROFIT ENTITY FROM MAKING DISTRIBUTIONS TO ITS OWNER. . . .
The Commissioner also seeks to have SDS sue its former lawyers for over $1.2 million of
SDS funds that SDS' s ovmer, Posey, allegedly transferred to himself or his family members in
2009 and e<;~.rly 2010 (Petition~~ 30, 61). These allegations also fail to state a claim for legal
malpractice .
.. SDS is a Tennessee LLC (id. 'if 2). A Tennessee LLC, like other for-profit business
entities, is permitted to tr~sfer money, whether directly or indirectly, to or for the benefit of its
owner-members. See Tenn. Code Ann. § 48-249-102(7) ("distribution" definition) & § 48-249-
305 (rights to distributions). 10 This is true unless, upon making the distribution, the LLC would
be insolvent urider the statutory definition, in which case those who vote for and those who
receive the excess distribution are personally liable. See Tenn. Code Ann. §§ 48-249-306 to -
307.
The Commissioner's Petition labels the alleged SDS transfers to Posey as "fraudulent,"
"conversion," and "embezzlement" (id. ~~ 30, 47, 54, 56-57, 60-63, 101). But the Petition
contains no factual allegations to support any of those labels. The Petition, in short, fails to make
allegations that would support a claim under Section 48-249-307 to recover SDS funds from
SDS's owner, let alone from SDS's former lawyers. In addition, Evans Petree and Mr.
Hendricks have not been able to find any precedent for a claim that a business entity's lawyers
commit malpractice by not preventing the entity's owner from causing the entity to make
transfers to or for the benefit of that owner. This part of the Petition thus appears to be yet
another application of the legally-defective "lawyer as guarantor" proposition that generally
underlies the Commissioner's theories against SDS's former counsel.
II. THE COMMISSIONER AND SDS ARE ESTOPPED FROM CLAIMING THAT EVANS PETREE AND MR. HENDRICKS PROXIMATELY CAUSED SDS TO INCUR THE BEEMA/SAA AND ANDONE PREMIUM LOSSES.
Evans Petree a:lld Mr. Hendricks have already shown that the Commissioner's Petition
fails to state a claim against them as to the premium payments SDS made seeking insurance
coverage for ATA members (see Section I(B) above). The Petition, however, suffers from a
second fatal defect \vith respect to the premium payments SDS made for the Beema/SAA and
Andone coverage: it contraqicts the position the Commissioner took in previously obtaining
judgments in two other actions.
10 A single-owner LLC is even presumptively treated as if the LLC and its owner are one entity for federal taxation purposes (that is, the LLC's revenue "passes through" to its owner). See IRS Treasury Regulation§ 301.7701-3.
As described above, the Commissioner has already obtained judgments against several
parties who induced SDS to pay premiums for coverage from Beema/SAA and Andone (see
description ofWorthy/Beema Lawsuit and Ketchum/Andone Lawsuit at pp. 7-9 above). In both
of those cases, the Commissioner, acting on behalf of SDS, took the position that SDS had made
the premium payments at issue in justifiable reliance upon the defendants' false representations
to SDS (see Worthy Petition~~ 9-10, 12, 14, 20, 27-29; Ketchum Petition~~ 8-12, 23-28)Y
A plaintiff may not obtain a judgment (including a default judgment) on one theory and
then separately pursue a claim for the same loss using an inconsistent theory. See, M, Morris v.
Esmark Apparel, Inc., 832 S.W.2d 563, 565 (Tenn. Ct. App. 1991) (under rule of collateral
estoppel, party may notre-litigate a particular dispositive issue that was necessarily decided in a
.previous lawsuit involving that party); Phillips v. General Motors Corp., 669 S.W.2d 665, 668-
69 (Tenn. Ct. App. 1984) (same). See also Beare v. Burnett, 39 S.W.2d 737 (Tenn. 1931) ("A
judgment by default is as conclusive as one rendered in a case where defendant appears as to all
. matters properly in issue."); State v. Chapman, 922 S.W.2d 516, 518 (Tenn. Ct. App. 1996)
(same). Having successfully taken the position that SDS was justified in paying the premiums at
issue to parties who deceived SDS andthen stole the money rather than providing the promised
insurance, the Commissioner and SDS are estopped from now claiming that any alleged failure
of SDS 's lawyers caused the same loss.
11 .The Commissioner may object that, in bringing fraud claims against the defendants in those cases, the Worthy and Ketchum Petitions allege only "reliance," and not ''justifiable" or "reasonable" reliance (see Worthy Petition~. 29; Ketchum Petition~ 26). Such an objection would not overcome the reality that a judgment cannot be obtained on a fraud claim absent the victim's "justifiable reliance" on the defendant's misrepresentations. See, £:.&, McNeil v. Nofal, 185 S.W.3d 402, 409 (Tenn. Ct. App, 2005) Gustifiable reliance necessary element in any cause of action based on negligent or fraudulent misrepresentation); Allied Sound v. Neely, 58 S.W.3d 119, 122-23 (Tenn. Ct. App. 2001) (plaintiff cannot prove reasonable reliance element of fraud claim where plaintiff had opportunity to discover the fraud); Security Fed. Sav. & Loan Ass'n v. Riviera, Ltd., 856 S.W.2d 709, 712 (Tenn. Ct. App. 1992) (the claimant's reliance must be reasonable under the circumstances).
CONCLUSION
The Commissioner has made convoluted and contradictory assertions but has not stated a
viable claim for malpractice under Tennessee law. Evans Petree and Mr. Hendricks respectfully
move for dismissal of the Petition pursuant to Tennessee Rule of Civil Procedure 12.02(6).
Respectfully submitted,
HARWELLHOWARDHYNE GABBERT MANNER, P.C.
-By: I ~,---------------------------
Craig V. Gabbert, Jr. (Tenn. 4702) D. Alexander Fardon (Tenn. 13787) 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Telephone: 615-256-0500 [email protected]; [email protected]
Counsel for Evans Petree PC and William L. Hendricks, Jr.
Certificate of Service
On July 14, 2011, I caused this document to be sent by first-class mail to:
Robert M. Garfinkle Garfinkle, McLemore & Young, PLLC 2000 Richard .Tones Road, Suite 250 Nashville, Tennessee 37215
D.bGk::
449595-1
Sarah H. Hiestand Lyndsay F. Sanders Office oftheAttomey General P.O. Box 20207 Nashville, Tennessee 37202-0207
-16 --- -----
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.1
IN THE COURT OF APPEALS OF TENNESSEE MIDDLE SECTION
COMMISSIONER OF COMMERCE AND ) INSURANCE FOR THE STATE OF TENNESSEE, )
) No. :M2010-01938-COA-R3-CV Petitioner/ Appellee, )
) Davidson County Chanceiy Court v. ) No. 10-507-lll
) SMART DATA SOLUTIONS, LLC, a Tennessee limited ) liability company, AMERICAN TRADE ASSOCIATION, ) INC, an Indiana nonprofit corporation with its principal ) place ofbusiness in Tennessee, AMERICAN TRADE ) ASSOCIATION, LtC, an Arkansas limited liability ) company, SERVE AMERICA ASSURANCE, a ) corporation with an unknown location, BART S. POSEY, ) Sr. ap. individual, ANGIE POSEY, an individual, OJ?ED ) W. KIRKPATRICK, Sr., an individual, LINDA . )' KIRKPATRICK, an individual, RICHARD H. ) BACHMAN, an individual, WILLIAM M. WORTHY, ) II, an individual, COLIN YOUELL, an individual, )
) Respondents/ Appellants. . )
ON APPEAL FROM THE JUDGMENT OF THEDA VIDSON COUNTY CHANCERY COURT
BRIEF OF APPELLEE COMMISSIONER OF. COMJ.\1ERCE AND INSURANCE FOR THE
STATE OF TENNESSEE
ROBERT E. COOPER, JR (BPR 10934) Attoniey General and Reporter
SARAH A. IDESTAND (BPR 14217) Senior Counsel, Financial Division L YNDSAY F. SANDERS (BPR 22849) Assistant A,ttomey General Law Enf. & Special Prosecutions Division LAURA T. KIDWELL (BPR 14632) Senior Counsel, Financial Division 425 5th Ave. N., 2nd Floor Nashville, 1N 37243-3200 (615) 741-6035
ORAL ARGUMENT REQUESTED
l
t --,..l
B. Posey's knowledge that Beema and Serve America are unauthorized insurers
Even before the North Carolina final agency order was issued on February 19, 2009,
correspondence between Bart Posey and William Worthy reveals that Posey had doubts that
Beema and Serve America were authorized insurers. On March 7, 2008, Worthy forwards Posey
the following emails that he exchanged with Dave Clark, RBA Chairman:
Dave,
I want you to understand that Bart and Rick are two outstanding guys and very determined to grow this block of business to 25,000 lives quickly. With Beema's input with systems and products, the poteD:ti.al is unlimited.
As far as the captive, we decide~ to use the name Serve America Limited. This be [sic] an Offshore Captive. It will not be admitted in any states, which will allow it to write business in all 50 st;ates. Beema will obtain from an outside legal
· firm to give us an opinion that agents can legally market the captive in the US.
William
Clark responds to each of the septences in Worthy, s emaiL (The bolded language was contained
in Worthy's original email to Clark.)
William,
I want you to understand that Bart and Rick are two outstanding gU.ys and very determined to grow this block_of business to 25;000 lives quicldy. I certainly applaud that effort and will diligently work to assist in any way I can. With Beema's input with systems and products, the potential is unlimited. Not knowing what that contribution will be from Beema, it is difficult for me to comment.
As far as the captive, we decided to use the name Serve America Limited. Nice name.
This be [sic] an Offshore Captive. It will not be admitted in any states, which will allow it to write business in all 50 states. As you learned in our brief conversation, that is precisely what we accomplished with the formation of
26
RBA. 13 Beema will.obtain from an outside legal finn to give us an opinion that agents can legally market the captive in the US. I will be very curious to learn of this "opinion letter" and its content. This is a vital issue in the long term development of our mutual business interest ....
Dave
(Jaquish Aff. R XVIII, p. 2549, 'i[4, e~. A, R. XVIII, p. 2550-2551).
On March 12, 2008, Posey emails Worthy, "William, I think at this time I just need to
' refund all collected premium back to the accounts we have hit until we get all things in place. Or . .
I need to place it with a rated, licensed carrier." (Posey Supp. Aff. R. XIV, p. 1874, ~13, exh. 12,
R XIV, p. 1935a). Nevertheless;Po1?eY writes Clark on March 19,2008, and states, "we would
like to become part of the RBA .... [I]t is our understanding that all m~r contracts [for p1ans]
will be issued directly to the RB.t?- from Beema/ Serve America Assurance." (King Af;f. R. VIII,
p. 1058, ~6, exh. B, R. VIII, p. 1 083).
OnA.pril. 22, 200$, Posey emails Worthy, "To date I still do not have sufficient paper
work and or evidence that 1h.is plan throughBeema is even leg;ll .... " (Posey Supp. Aff. R. XIV,
p. 1874, ~1i, exh. 13, R XIV, p. 1934a).
On February 19, 2009, North Carolina !ssued the final agency order described earlier. It
puts Posey on direct notice that "Beema . . . is not licensed as an insuraJ;t'Ce company in North
) J Carolina or any other state" and that "Serve America ... is not li~ed in any state." (Rill,
p. 449, ~132). After the issuance of this order, Posey emailed Worthy about the legitimacy of
Beema and Serve America. The only assurances Posey received were from Worthy. (Posey
Supp. Aff. R. XIV, p. 1874, 1[13, exh. 12, R. XIV, p.l914-1914a; R. XIV, p. 1874-1875, ~14,
13 The RBA asserted that it was a Taft--Hartley Union Association. The United States Department of Labor investigated this assertion and informed Clark that it was not a "labor organization." (R. III, p. 446-447, ffll9-l22; R. :rrr, p. 447-448, Wl25-26).
27
l [
j
l I
exh. B; R. XIV, p. 1937-1937a; KingMf. R. VIII~ p. 1058, 15, exh. A, R. VIII, p. 1062-1063
and 1066-1067, R. VII; p. 1068-1071). According to a lawsuit eventually filed by ATA against
Worthy, "[t]he one letter that W9S allegedly produced,by Beema and sent to SDS in fact stated
that Beema has never issued a policy to an entity in the Unites States and that Beema does not
own any subsidiary, company or other leg~ entity outside of Pakistan." (Heisse Aff. R. I, p. 89,
122, R. IV, p. 479 ~22, exh. 9, R. N, p. 535-536; Posey Supp. Mf. R. XIV, p. 1875, 11~,
exh.·15, R. XIV, p. 1946-1947) (emphasis added). While the SDS/ATABrieftriesto back off its
earlier assertion by ~guing that Beema made "conflic~g statements" about its CO?fiections with
Serve America and William Worthy, most of the statements set forth in their brief occurred after
the instant action had been brought. (SDS/ATA Brief, p. 8-9).. More bnportantly;none of these
statements addresses, much less disproves, the statements in the North Carolina February 19,
2009 final agency order that neither Beema nor Serve America is licensed as an insurance
company in any state. (HeisseA:ff. R. I,p. 89, ~22, Rill, p.449, ~132).
On October 21, 2009, Posey notified Worthy of SDS' s intent to cancel its agreement with ·
Beemal Serve America, and he informed Worthy that .SDS would not be forwarding any more
premiums to Beemal Serve America. (Heisse Aff. R. I, p. 89, 122, R. IV, p. 479 ~23, exh. 10,
R. IV, p. 529-531; Posey Supp. Aff. R. XIV, p. 1875, ,16, exh. 15, R. XIV, p. 1946-1947). Not
only had Worthy failed to adequately respond to Posey's inquiries about Beema and ·Serve
. America, he had also failed to wire monies to pay delinquent claims of ATA members, many of
which were months old. (Posey Supp. Aff. R XIV, p. 1874, ~13, exh. 12> R. XIV,
p. 1908-1936).
28
Jeff Jacobs - RE: Beema-Pakistan Co. Ltd.
From: To; Date: Subject: CC: Attachments:
Mr. Jacobs,
"Doherty, Kevin M." <[email protected]>
[email protected]; [email protected]
06/22/2010 6:26 PM
RE: Beema-Pakistan Co. ltd.
[email protected]; [email protected]
emailsig.jpg
Page: I
We will be in touch as soon as we can on this. Please understand that we represent only 6eema-P<;lkisti!'ln Company Limited, and only in connection with Lesffe A. Newman v. Smart Data Solutions, LLC, eta!., No. 10-507-III, currently pending iii Davidson County, Tennessee.
Please note I have also learned that you received a letter, dated June 17, 2010, from attorney Glennon J. Karr in Ohio claiming that we represent Beema-Bahamas in connection with a purported lawsuit against U.S. Contractors Trust and Phoenix Insurance Company. We have no knowledge of any such lawsuit and do not in fact represent Beema-Bahamas.
Sincerely,
Kevin M. Doherty
Kevin M. Doherty Attorney at Law
Direct: (615) 724-3211 Cell: (615) 974-2587 Main: (615) 724-3200 Fax: (615) 724-3311 [email protected]
700 Two American Center 3102 West End Avenue Nashville, Tennessee 37203 v'vv,Nv .burr. com
r·~----~----·-···-·-···---·-···-·----~----------···------------··--· .. ····1
! x Burr & Forman .. results matter
L~-··· -····~- ·------~-- .... ·-· ·-·-· ..... -. ___ ., __ .. - ---·--···- ---- -·
CONFIDENTIAL: ATIORNEY/CLIENT PRIVILEGED; ATIORNEY WORK PRODUCT The information contained in this emarl is intended for the individual or entity above. This emaH is protected by the Electronic Communications Privacy Act, 18 U.S.C. Sections 2510-2521 and is legally protected by the attorrieyfclient privilege andlor work product doctrine. !f you are not the intended recipient, please do not read. copy, use, forvvard or disclose this communication to others; also, please notify the sender by repiying to this message. and then delete this message from your system. Thank you.
Circular 230 Notice - Regulations adopted by the Internal Revenue Service require us to inform you that any federal tax advice contained in this communication (including attachments)(!) is not intended or written by Burr & Forman LLP to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. and (It) is not written to support the promotion or marketing of any transaction(s) or matter(s) addressed in this communication.
--~~~--~~~-~----~~~---A-1-1~-ct,~~~~-~~--file://C:\Documents and Settings\user\Local Settings\Temp\XPgrpwise\4CA0739BSCDL.. 03/10/2011
From: Jeff Jacobs [mailto:[email protected]] Sent: Thursday, June 17, 2010 9:31AM To: f\1cPeak, Ju{ie; Doherty, Kevin M. Cc: Gwen McGriff Subject: Beema-Pakistan Co. Ltd.
Mr. Doherty and Ms. McPeak,
Gwen McGriff inform&d me of your telephone conversation yesterday afternoon, in which you offered, on behalf of your client Beema-Pakistan Co. Ltd., you cooperation to us.
We would very much like to interview Shanawaz Agha, Mirza "Zeke'' Agha, and Co!fn Youell, preferably under oath pursuant to South carolina statute, regarding their knowledge of and involvement in the events outlined in the cease and desist order we issued on May 11. We are particularly interested in Beema's and the Aghas' relationship to and dealings with William Worthy, Kathleen cauthen, and David Clark; the role of CoHn Youell; the circumstances behind the issuance of fraudulent insurance policies issued in the name of Phoenix Insurance Company and US Contractors Trust; and the details surrounding the formation of Beema Oceanic Re, to include the deposit of $500,000 in escrow in a california account and the issuance of a fraudulent letter of credit to Oceanic Indemnity. We would also be interested in obtaining any documents your client may have relating to the issues in our C&D order, especially documents evidencing financial transactions related to the events described in our C&D.
I look forward to hearing from you.
Jeffrey A. Jacobs Chief Legal Counsel So\.lth Carolina Department of Insurance P.O. Box 100105 Columbia, SC 29202-3105 (803) 737-5913
file://C:\Documents and Settings\user\Local Settings\Temp\XPgrpwise\4CA0739BSCDI... 03il0/2011
668 Conn. 544 ATLANTIC REPORTER, 2d SERIES
spondents were not aware that the hearings could result in the total loss of their parental rights.
[1, 2] The parties have not addressed in their briefs the fact that the purported petition for a new trial was not instituted as a separate civil action. The trial ended on May 6, 1987, and the purported petition for a new trial was filed on July 16, 1987, within the confines of the original proceeding for termination of parental rights, and not as a separate action. A petition for a new trial is properly instituted by a writ and complaint served on the adverse party; although it is collateral to the action in which the new trial is sought, it is by its nature a distinct and separate proceeding. State v. Asherman, 180 Conn. 141, 144, 429 A.2d 810 (1980). The respondents thus deprived the trial court of subject matter jurisdiction, and the court should have dismissed the petition. See State v. Servello, 14 Conn.App. 88, 101~102, 540 A.2d 378 (1988).
There is error in the form of the judgment, the order denying the petition for a new trial is set aside and the case remanded with direction to dismiss that petition.
In this opinion the other Judges concurred.
15 Conn.App. 371
...U.nEdward SOMMA, et al.
v. Jerome B. GRACEY, et al.
No. 5120.
Appellate Court of Connecticut.
Argued Nov. 17, 1987. Decided Aug. 2, 1988.
Clients brought legal malpractice action against attorneys who represented
them in the sale of their business. The Superior Court in the Judicial District of Waterbury, O'Brien, J., found for clients and attorneys appealed, clients cross-appealed damage award. The Appellate Court, Norcott, J., held that: (1) attorney's alleged malpractice was question for jury; (2) whether actions of buyers constituted superseding cause was for jury; and (3) comparative negligence defense presented issue for jury.
Affirmed.
1. Attorney and Client ¢:::>129(2) In a legal malpractice action, the plain
tiff must produce expert testimony that a breach of a professional standard of care has occurred and that the breach was a proximate cause of the injury suffered by the plaintiff.
2. Attorney and Client ¢:::>129(3) Whether attorneys were negligent in
failing to conduct or advise client/sellers to conduct an adequate investigation of the buyers, failing to conduct an audit or to request sufficient financial information about the buyers and their guarantees and to advise clients not to accept nonnegotiable promissory notes was for jury.
3. Attorney and Client ¢:::>129(3) Whether actions of buyers of business,
in misappropriating company assets, constituted superseding cause insulating attorneys for secured sellers from malpractice liability, was for jury, where attorneys were aware that sellers; by entering into the contract, might be subject to the type of thievery that occurred.
4. Negligence ¢:::>97 In situations where the claim of legal
malpractice sounds in negligence, defense of comparative negligence should be made available. C.G.S.A. § 52-572h(b).
5. Attorney and Client ¢:::>129(3) In legal malpractice action, whether
obligation of attorneys for sellers of business, extended to investigation of buyers and, if not, whether sellers were negligent
SOMMA v. GRACEY Conn. 669 Cite as 544 A.2d 668 (Conn.App. 1988)
in conducting the investigation, was for ness by his brother, the plaintiff Raymond jury. Somma.
6. Negligence <S=97 Pleading existence of agency relation
ship between two clients was not a prerequisite to attorneys' special defense of comparative negligence, because attorneys al· leged that both clients were negligent.
The two brothers continued to work at the tool shop as employees untH 1960 when their father died. Upon the father's death, Edward Somma became president of the company and Raymond Somma became vice-president. At this time, the company employed approximately twenty people. In 1963, the brothers sold the company. The brothers were represented in the sale by
Paul E. Pollock, Bridgeport, for appel- the law firm of Reid and Riege. The Som-lants-appellees (defendants). mas first became acquainted with the firm
Richard A. Fuchs, Bridgeport, for appel- in 1952, when they had consulted it about lees-appellants (plaintiffs). some estate matters .
Before DUPONT, C.J., and DALY and NORCOTI', JJ.
.J.§.7~0RCOTI', Judge.
The defendants appeal from the judgment rendered on a jury verdict in favor of the plaintiffs in an action for legal malpractice. The defendants claim that the trial court erred (1) in submitting certain of the claims of negligence to the jury, and (2) in denying the defendants' motion for judgment notwithstanding the verdict. In their cross appeal, the plaintiffs claim that the trial court erred (1) in instructing the jury that they could reduce the amount of the damage award to the plaintiffs if they found the plaintiffs to be comparatively negligent, and (2) in allowing the jury to reduce the amount of the damage award to Raymond Somma in the absence of any evidence of an agency relationship between Raymond Somma and Edward Somma. We find no error in either the appeal or the cross appeal.
This case involves the sale of a family business. In 1941, the plaintiffs' father opened a small tool shop in Waterbury. The plaintiff Edward Somma began working at the tool shop when it opened. At the time, he was fourteen years of age. Edward Somma continued to work at the shop until 1944 when he went away to college. After spending some time in the Navy and fmishing college, Edward went back to work at the family business in 1950. In 1952, Edward was joined in the family busi-
.J!!sln the years that followed the sale of the business, Edward Somma worked as an estate planner for an insurance compan,y. In 1967, the plaintiffs .opened a sign making company. When the company proved to be unprofitable, the plaintiffs dissolved the company. The plaintiffs were represented in the dissolution action by the law firm of Reid and Riege.
The plaintiffs then purchased another small company located in Waterbury. The plaintiffs were represented in this action by the law firm of Reid and Riege, particularly, Jerome Gracey. Thereafter, Edward Somma, acting without representation, sold his interest in this company, and he, along with his brother Raymond, repurchased the family business. The company's name had been changed to Gradel, Inc.
In 1978, the plaintiffs were approached about the sale of Gradel, Inc. At that time, the plaintiffs owned 90 percent of the shares in the company, the other 10 percent having been purchased by other people. Following some preliminary talks with the prospective purchasers, the plaintiffs agreed to the sale. After receiving a letter of intent from the prospective purchasers, Edward Somma engaged the services of the defendants, Reid and Riege, P.C., and particularly Jerome Gracey, to represent the plaintiffs in the sale of the company.
After Edward Somma had consulted with Gracey on several occasions and after Gra· cey had taken some action on the matter, the sale was consummated on October 4, 1978. The terms of the sale were that
670 Conn. 544 ATLANTIC REPORTER, 2d SERIES
Grodel, Inc., would be sold for a price of $2,182,000. This amount was to be paid over a period of years, with $109,022.72 to be paid at closing, $1,491,008.88 to be paid by a series of promissory notes, and $582,· 000 to be paid to Edward Somma pursuant to a consulting contract. As security for this sale, the purchasers pledged ...1§.74the stock they received in Grode], Inc. Further, the promissory notes were guaranteed by an entity known as THFIT, Inc., a trust of the purchaser.
After the closing, the plaintiffs received the first payment due on the promissory notes, but the buyers thereafter defaulted. The plaintiffs, however, did not get their stock back as they believed they would, the company went into bankruptcy, and the plaintiffs suffered a financial loss. Within one year, the buyers of the company had misappropriated over $1,000,000 from the assets of the company. The plaintiffs thereafter instituted the underlying action for malpractice against the defendants.
I The defendants' first claim is that the
trial court erred in submitting the following issues to the jury: (1) whether the defendants were negligent in failing to conduct, or advising the plaintiffs to conduct an adequate investigation of the buyers; (2} whether the defendants were negligent in failing to conduct an audit or to request sufficient financial information about the buyers and their guarantees; · and (3) whether the defendants were negligent in failing to advise the plaintiffs not to accept nonnegotiable promissory notes. We disagree.
[1, 2] The defendants' claim is one of evidentiary sufficiency. "It is established law that it is error for a court to submit to the jury an issue which is wholly unsupported by the evidence. State v. Rose, 169 Conn. 683, 687, 363 A.2d 1077 [ (1975) ]." Novak v. Anderson, 178 Conn. 506, 508, 423' A.2d 141 (1979). In determining whether the evidence is sufficient to support the submission of an issue to the jury, we must review the evidence produced by the plaintiff in the light most favorable to
him. Hoyt v. Connecticut Company, 107 Conn. 160, 161, 139 A. 647 (1927). In a legal malpractice action, the plaintiff must produce expert te.!£mony876 (1) that a breach of the professional standard of care has occurred, and (2) that the breach was the proximate cause of the injuries suffered by the plaintiff. Pearl v. Nelson, 13 Conn.App. 170, 173, 534 A.2d 1257 (1988); Campbell v. Pommier, 5 Conn.App. 29, 32, 496 A.2d 975 (1985). We find that the plaintiffs produced sufficient expert testimony to have these issues submitted to the jury.
The plaintiffs produced two witnesses who were qualified as experts in the field of business· and corporate law. Each of the expert witnesses testified as to a lawyer's standard of care in a business purchase situation. Each of the witnesses also testified that the defendants had breached that standard of care, and that the defendants' breach was the proximate cause of the losses incurred by the plaintiffs. One of the expert witnesses specifically testified that the defendants had been negligent in allowing the security note to be nonnegotiable and in failing to conduct or failing to instruct the plaintiffs to conduct an investigation of the prospective purchasers. While this evidence was far from overwhelming on the issues of negligence in question, it was sufficient to support the submission of those issues to the jury. As we have noted before, "[a] party has the same right to submit a weak case as he has to submit a strong one .... " Strickland v. Vescovi, 3 Conn.App. 10, 16, 484 A.2d 460 (1984); see also Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 548, 447 A.2d 406 (1982).
II The defendants' second claim is that the
trial court erred in failing to grant their motion for judgment notwithstanding the verdict. Specifically, the defendants contend that their motions should have been granted because the actions of the purchasers constitut~d a superseding, intervening cause which insulated them from liability. We disagree.
SOMMA v. GRACEY Conn. 671 Cite u 544 A.2d 668 (Conn.A.pp. 1988)
[3] ...J.w60ur review of the trial court's felt that the security offered by the buyers denial of the defendants' motion for judg- was insufficient to protect the plaintiffs' ment notwithstanding the verdict is limited. interests. He further testified that one of "'We must consider the evidence, including the dangers of having insufficient security reasonable inferences which may be drawn was that the plaintiffs would lose a great therefrom, in the light most favorable to deal of money if the buyers were thieves. the parties who were successful at trial; Accordingly, we find that the actions of the Bleich v. Ortiz, 196 Conn. 498, 501, 493 buyers did not constitute a superseding A.2d 236 (1985); giving particular weight cause as a matter of law and that the trial to tl_le "concurrenc~ of the judgments ?f court did not err in denying the defendants' the Judge and the JUry, who ~aw the ~t: motion for judgment notwithstanding the nesses and heard the testimony. . . . verdict. Bound Brook Assn. v. Norwalk, 198 Conn. 660, 667, 504 A.2d 1047, cert. denied, 479 U.S. 819, 107 S.Ct. 81, 93 L.Ed.2d 36 (1986), quoting Chanosky v. City Building Supply Co., 152 Conn. 642, 643, 211 A.2d 141 (1965). The defendant{s] can prevail on this claim only if we find that the jury could not reasonably and legally have reached its conclusion. Bound Brook Assn. v. Norwalk, supra." Aksomitas v. Aksomitas, 205 Conn. 93, 100, 529 A.2d 1314 (1987). In this case, the defendants claim that the actions of the buyers were a superseding cause as a matter of law and that the jury could not reasonably have concluded as it did.
. The Restatement of Torts provides that ''[t]he act of a third person in committing an intentional tort or crime is a superseding cause of harm to another resulting therefrom, although the actor's negligent conduct created a situation which afforded an opportunity to the third person to commit such a tort or crime .... " 2 Restatement (Second) Torts, § 448. The Restatement further provides, however, that the criminal acts of a third party will not constitute a superseding cause if "the actor at the time of his negligent conduct realized or should have realized the likelihood that such a situation might be created, and that a third person might avail himself of the opportunity to commit such a tort or crime." Id.
.,.W7In this ease, it is clear that the actions of the buyers were criminal in nature. It is also clear, however, that the defendants were aware that the plaintiffs, by entering into this contract for sale, might be subject to exactly the type of thievery that occurred. Attorney Gracey testified that he
III
The plaintiffs' first claim on cross appeal is that the trial court erred in instructing the jury on the defense of comparative negligence. Specifically, the plaintiffs claim that there was insufficient evidence to support the submission of this defense to the jury. Before we can rule on whether the evidence was sufficient, we must first resolve what appears to be an issue of first impression in this state; whether the defense of comparative negligence may be properly pleaded in an action for legal malpractice .
Other jurisdictions which have considered this issue have either directly or implicitly held that the defense of comparative or contnbutory negligence is available in an action for legal malpractice. Cicorelli v. Capobianco, 89 App.Div.2d 842, 453 N.Y.S.2d 21 (1982), aff'd, 59 N.Y.2d 626, 449 N.E.2d 1278, 463 N.Y.S.2d 195 (1983); see Theobald v. Byers, 193 Cal.App.2d 147, 13 Cal.Rptr. 864 (1961); R. Mallen & V. Levit, Legal Malpractice (2d Ed.) § 351. In so holding, the courts have recognized that the use of this defense has long been sanctioned .,.Wain medical malpractice actions. See Cicorelli v. Capobianco, supra, 22, citing Dunn v. Catholic Med. Center of Brooklyn & Queens, 55 App.Div.2d 597, 889 N.Y.S.2d 123 (1976). The courts have noted that there is nothing in the nature of a legal malpractice action which would preclude the use of this defense. Hansen v. Wightman, 14 Wash.App. 78, 538 P.2d 1238 (1975); see also annot., 45 A.L.R.2d 5, 17, 18.
672 Conn. 544 ATLANTIC REPORTER, 2d SERIES
[4] We agree with the analysis of the other jurisdictions. In situations where the claim of malpractice sounds in negligence; see Shuster v. Buckley, 5 Conn.App. 473, 478, 500 A.2d 240 (1985); the defense of comparative negligence should be made available. Our own statute dealing with comparative negligence, General Statutes § 52-572h(b), provides that in causes of action based on negligence "[a]ny economic or noneconomic damages allowed shall be diminished in proportion of the percentage of negligence attributable to the person recovering .... " We see no basis for distinguishing between actions for legal malpractice and other claims sounding in negli-· gence.
[5] We must now determine whether there was sufficient evidence in this particular case to support the submission of the defense of comparative negligence to the jury. We find that there was.
In their complaint, the plaintiffs alleged that the defendants were negligent in sev· era! respects. Specifically, the plaintiffs alleged (1) that the defendants failed to conduct an adequate investigation of the buyers, and (2) that the defendants failed to inform the plaintiffs that they should not have gone through with the deal because there was inadequate security. At trial, the plaintiffs produced expert testimony th~;~.t, indeed, the defendants had been negligent in those respects.
The defendants produced evidence, however, that they had not agreed to conduct an investigation of thti§:r9buyers. Gracey testified that it was the plain.tiffs' responsibility to conduct the investigation of the buyers. Gracey further testified that any obligationS he might have had in this area were satisfied when he informed the plaintiffs that if he were in their position he would do a more thorough check on the buyers.
The evidence produced by the defendants raised questions about the scope of the attorney-client relationship. An attorneyclient relationship is established when the advice and assistance of the attorney is sought and received in matters pertinent to his profession. 7 Am.Jur.2d, Attorneys at
Law § 118. Once the relationship is estab· lished, the attorney "is bound to discharge his duties to his client with the strictest fidelity, to observe the highest and utmost good faith towards him, and to inform his client promptly of any known information important to him." Id., § 120; Gay v. Heller, 252 F.2d 313 (5th Cir.l958). It is axiomatic, however, that the duty of the attorney to act does not extend to the business of the client in general. Erickson v. Civic Plaza Nat. Bank, 422 S.W.2d 373 (1967). The obligation of the attorney is to provide the service for which he was hired. 7 Am.Jur.2d, Attorneys at Law § 129.
In this case, the defendants testified that they were not engaged to conduct an inves· tigation of the buyers. Although the plaintiffs disputed the extent of the representation, there was sufficient evidence to present to the jury the question of what the attorneys' obligations were. R. Mallen & V. Levit, supra, § 659 (the scope of the attorney's duty is a question of fact for the jury to determine). If the attorneys' obligations did not include conducting an investigation of the buyers, then the attorneys could not have been negligent in that respect. The plaintiffs, then, would have been responsible for conducting the investigation, and it would have been their negligence in conducting that investigation which would have been partly responsible for the losses JJ.80they incurred. At the same time, the jury could reasonably have found that the defendants were negligent in not telling the plaintiffs . not to go through with the deal without more security. Accordingly, this is a situation in which both parties could have been found negligent in· some respect and, therefore, the court did not err in instructing the jury on comparative negligence.
IV [6] The final claim of error relates sole
ly to the plaintiff Raymond Somma. Raymond Somma claims that because the defendants did not allege the existence of an agency relationship between Edward and himself and because he was not involved in the hiring of the defendants, he could not
MISIURKA v. MAPLE fiLLS FAIUIS, INC. Conn. 673 Cite u 544 A.2d 673 (Conn.App. 1988)
have been held to have been comparatively did not constitute notice to employer and, negligent. therefore, employer could intervene beyond
We find, however, that the issue of agen· statutory So-day time limit to seek appor· cy is not pertinent to this case. In their tionment for compensation payments made special defense, the defendants allege that to employee; (2) contention of error in both plaintiffs were negligent in failing to granting apportionment motion was not conduct an adequate investigation of the preserved for review; and (3) interest buyer, and it was on this theory that the should have been ordered to run from date ease was tried to the jury. The court in- of judgment, not from two days after decistructed the jury in accordance with the sion on apportionment motion. defendants' allegations and the jury re- Error in part; judgment set aside in turned a general verdict finding the plain- part and case remanded with directions. tiffs comparatively negligent. According-ly, we fmd that the defendants had no obligation to plead the existence of an agency. See Practice Book § 109.
There is no error.
In this opinion the other Judges concurred.
15 Conn.App. 381
...lJ.slMarian MISIURKA
v.
MAPLE HILL FARMS, INC., et al.
No. 5616.
Appellate Court of Connecticut.
Argued Feb. 3, 1988. Decided Aug. 2, 1988.
In employee's action to recover damages for personal injuries allegedly caused by third parties, the Superior Court, Hart. ford-New Britain at New Britain, Mu..'Tay, J., granted employer's motion to intervene; thereafter, the Court, Allen, J ., denied motion to dismiss intervenor's complaint, rendered stipulated judgment in favor of employee, and subsequently granted employer's motion for apportionment of the judgment. Employee appealed. The Appellate Court, Edward Y. O'Connell, J., held that: (1) notice to employer's insurance carrier
1. Workers' Compensation ¢'::>2225 Failure to notify employer of pending
litigation between injured employee and third party, even though employer's workers' compensation carrier was notified, permitted employer to intervene in suit in order to recover compensation paid employee, even after 80-day period following notice to insurer. C.G.S.A. §§ 31-291 to 31-355a, 31-293.
2. Workers' Compensation ¢'::>2242 Contention of error in apportioning em
ployee's personal injury settlement to allow employer to recover workers' compensation paid employee. was not preserved for appellate review. C.G.S.A. § 31-293.
3. Interest cSi:>39(2.40) Where judgment in employee's person
al injury action was followed by grant of employer's motion to apportion to allow recovery of workers' compensation payments to employee, postjudgment interest should have been computed from date of the judgment, rather than set to begin accruing two days after decision on the apportionment motion. C.G.S.A. § 37-Sb.
_w2Zigniew S. Rozbicki, Torrington, with whom was Albert Vasco, for appellant (plaintiff).
Scott Wilson Williams, Bridgeport, for appellee (intervening plaintiff).
Thomas P. Barrett, Hartford, for appal· lees (defendants). .
Before SPALLONE, EDWARD Y. O'CONNELL and NORCO'IT, JJ.