Miller v. Kirkland & Ellis LLP, Adv. No. 12-50713 (PJW) (Bankr. D. Del. Oct. 2, 2012).
Tara Lattomus of Eckert Seamans prepared this case summary.
Whether the two year statute of limitations or the equitable doctrine of laches applied to claims against attorneys who allegedly conspired with corporate fiduciaries to defraud their client?
Short Answer: The Bankruptcy Court held that the attorneys, as alleged co-conspirators, were subject to the same principles with respect to the merits of the complaint so they should also be subject to the same principles governing the application of the statute of limitations. Accordingly, as the claims against the fiduciaries would be subject to the doctrine of laches, so were the claims against the attorneys.
On February 2, 2006, Kirkland & Ellis LLP (“K&E”), a law firm, issued a retention letter to Indalex Holdings Finance, Inc. (“Indalex”) for legal services. At the time, a number of partners at K&E were invested in certain investment funds owned by Sun Capital Partners, Inc. (“Sun”), an existing K&E client. The investment funds were in turn invested in Sun Indalex, Inc. which was a controlling insider of Indalex. The Trustee alleged that K&E’s interest in Indalex was deliberately concealed from Indalex until April 12, 2012.
Prior to the disclosure of interest, Indalex paid K&E for legal advice relating to the issuance of a dividend on June 1, 2007. The Trustee alleged that the advice provided by K&E was negligent and that K&E prepared false documents to ensure that the dividend was paid, resulting in a financial benefit to the K&E partners, Sun and certain other insiders. The Trustee further alleged that the false documents were also drafted to protect Sun and other insiders from liability under Delaware corporate law. In addition, Indalex retained FTI Capital Services to render an opinion on Indalex’s ability to issue the dividend. The Trustee alleged that K&E failed to ensure that FTI was competent, insisted that FTI’s opinion include language to protect Sun, but not Indalex from liability and failed to advise Indalex that a K&E partner was on FTI’s board of directors and held a financial interest in FTI. Finally, the Trustee alleged that K&E conspired with Indalex’s controlling insiders and received proceeds from the dividend. Due to the close relationship between K&E and Sun, and K&E’s financial interest in Indalex, the Trustee asserted that K&E was an insider of Indalex.
The Trustee commenced the action against K&E for aiding and abetting breach of fiduciary duty and professional negligence. Pending before the Court was K&E’s motion to dismiss for failure to state a claim due to the expiration of the relevant statute of limitations.
Summary of Court’s Reasoning
The Bankruptcy Court began by stating that the facts of this case were “squarely within the Delaware Supreme Court’s ruling in Laventhol, Krekstein, Horwath & Horwath v. Tuckman, 372 A.2d 168 (Del.Supr. 1976).” For purposes of drawing the comparison, the Court listed a number of factual statements from the Trustee’s complaint and then quoted the relevant sections of the Laventhol decision.
In Laventhol, two public accounting firms were accused of conspiring with the directors of a corporation to defraud its shareholders. The accounting firms moved to dismiss the complaint due to the expiration of the statute of limitations. The Court of Chancery denied the motion and applied the equitable doctrine of laches.
In Laventhol, the Supreme Court stated that actions in Chancery Court for damages are usually subject to the statute of limitations rather than the doctrine of laches, but noted that an exception exists when corporate fiduciaries engage in fraudulent self dealing. Accordingly, the question before the Laventhol court was whether the Chancery Court had correctly extended the exception to professionals who conspire with corporate fiduciaries. Agreeing with the Chancellor in that case, the Supreme Court recognized that the accountants, as alleged co-conspirators, were jointly and severally liable with the fiduciaries and were therefore, in the same position under applicable law. Accordingly, the extension of the exception to the accountants was both logical and proper. Although the court acknowledged the difficulty of making the decision in the context of a motion to dismiss, the reliance on such professionals, such as lawyers in this case, by people with no other choice, led the court to affirm the reasoning of the Chancery Court.
As the K&E disclosure occurred on April 12, 2012 and the Trustee filed the complaint twenty seven days later, the Bankruptcy Court held that the complaint with filed within a reasonable time under the equitable doctrine of laches and denied the motion to dismiss.