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Lfg National Capital, LLC v. Gary

July 12, 2012


The opinion of the court was delivered by: David N. Hurd United States District Judge



Plaintiff LFG National Capital, LLC ("plaintiff" or "LFG National") brought suit*fn2 against Gary, Williams, Finney, Lewis, Watson, and Sperando P.L. (the "Firm" or "counter-claimant"); and individuals Willie Gary ("Gary") and Lorenzo Williams ("Williams") (collectively "defendants") alleging: (1) Breach of Contract against the Firm; and (2) Breach of Guarantees against Gary and Williams. Defendants answered and the Firm counterclaimed against LFG National; LawFinance Group, Inc. ("LawFinance"); and LFG Servicing, LLC ("LFG Servicing") (collectively "counter-defendants") alleging: (1) Breach of the Implied Covenant of Good Faith and Fair Dealing; (2) Interference with Contractual Relations; (3) Violation of Florida Usury Law; (4) Violation of California Usury Law; and (5) Unfair Business Practices under the California Code.

Individual defendants Gary and Williams moved to dismiss plaintiff's second cause of action for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposed and the individual defendants replied.

Counter-defendants moved to dismiss all five counterclaims for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The counter-claimant Firm opposed and counter-defendants replied.

Oral argument was heard on both motions in Utica, New York on May 23, 2012. Decision was reserved.


The following facts, taken from the complaint and counterclaims, are undisputed unless otherwise noted.

The defendant Firm is a law practice registered as a Florida professional limited liability company. The Firm has a national reputation for large scale personal injury and civil rights litigation, and its business is typically contingent fee work. Gary and Williams are trial attorneys and partners of the Firm.

On March 19, 2007, the Firm borrowed approximately $10 million from LawFinance, a California corporation. Zimmerman Decl., June 7, 2011, Ex. A, Dkt. No. 23-1 ("Loan Agreement"). The Loan Agreement replaced, and provided funds to refinance amounts due under an earlier, similar loan between the Firm and LawFinance. Gary and Williams each executed personal guarantees in connection with the Loan Agreement. Zimmerman Decl., June 7, 2011, Exs. E, F, Dkt. Nos. 23-1, 23-2 ("Guarantees").

On March 22, 2007, three days after executing the Loan Agreement, LawFinance assigned all of its interests in the loan to its affiliate LFG National, a Delaware limited liability company with its principal place of business in Nevada.

The purpose of the loan was to enable the Firm to finance the payment of litigation costs in its pending cases. The interest rate under the Loan Agreement was "[t]he Index plus 13.0% per annum"*fn3 and the default interest rate was "[t]he Interest Rate plus 5% per annum"; rendering the default interest rate to be at least 18%. Loan Agreement §§ 1.2.24, 1.2.16. In addition to mandated principal and interest payments, the Loan Agreement required the Firm to remit "Case Costs" to LFG National within ten days of the end of the calendar month in which the Firm received the funds. Id. § "Case Costs" are defined as "costs advanced by Borrower on Eligible Cases for which Borrower is legally entitled under a fee agreement to be reimbursed out of the first Proceeds of a Case and any interest payable to Borrower thereon." Id. § 1.2.9.

Further, under the terms of the Guarantees, any Firm indebtedness to Gary or Williams is subordinated to the payment of the Firm's obligations to LFG National. See Guarantees § 7.2. Thus, no payment of any kind with respect to monies owed to Gary or Williams could be made until all of the Firm's obligations to LFG National were satisfied. If payments were made to Gary or Williams, they were to be held in trust for LFG National. Id.

Pursuant to the Loan Agreement, the Firm granted to LFG National a first-priority security interest in the Firm's collateral. Loan Agreement § 5. The term "Collateral" encompasses essentially all of the Firm's property and assets, including its cash, general intangibles, rights to attorneys' fees and costs, and equipment. Id. § 1.2.15. LFG National perfected its liens as of June 8, 2005, through the filing of a Florida Uniform Commercial Code Financing Statement (with a subsequent continuation filed on June 8, 2010).

LFG National and the Firm amended the Loan Agreement for the third time on May 29, 2009. Loan Agreement Amendment No. 3 ("Amendment"). LFG National alleges that by this date, the Firm defaulted under the terms of the Loan Agreement. The Amendment provides that an "Event of Default" occurred and was continuing under section 11 of the Loan Agreement because the Firm failed to make mandatory payments upon receipt of Case Costs, and made other payments late in breach of the Loan Agreement. Id. ¶ 1. According to the Amendment, LFG National agreed to waive the Firm's defaults, subject to its compliance with the terms and conditions in the Amendment. Id. ¶ 2.

As consideration for LFG National's waiver of the Firm's defaults, the parties agreed to alter the interest rate to a fixed rate of 16%, with an option to reduce the rate to the original Index plus 13% per annum if the Firm paid the loan in full before the end of 2009. Id. ¶ 3 (replacing section 1.2.24 of Loan Agreement with "[t]he Index plus 13.0% percent annum; provided, however, the Interest Rate for the period from January 1, 2009 through full repayment of the Obligations shall not be less than 16.0%."). The modified 16% interest rate, plus the original 5% default interest rate, resulted in a default interest rate as high as 21%.

The loan matured on June 30, 2010, and the Firm was notified on July 1, 2010, that the maturity date would not be extended and that all sums were due and payable in full immediately. As of October 5, 2011, the date the proposed amended complaint was filed, the total amount due under the Loan Agreement, excluding costs and attorneys' fees for this litigation (which the Loan Agreement dictates the Firm must pay), was $11,137,630.03. Proposed Am. Compl. ¶ 36.

Plaintiff contends defendants have been in continuous default of their obligations since at least July 16, 2009, when the Firm failed to remit a required interest payment. Id. ¶ 24. It is also alleged the Firm missed interest payments since that date. Id. Defendants deny they breached the Loan Agreement and contend the Firm has made substantial payments of both interest and principal since 2005. Countercl. ¶ 23. Defendants allege that since May 29, 2009, the Firm has paid back $2,477,827.32 in interest; $801,575.08 in principal; and $6,000.00 in fees. Id.

Plaintiff also contends the Firm breached the Loan Agreement when it failed to remit Case Costs on numerous occasions including most recently on September 7, 2011, when the Firm received a settlement payment as the plaintiff's counsel in the case of Pericles v. Buyak, Middle District of Florida case number 6:11-cv-1269. Further, the Firm acted as co-counsel with Sussman & Watkins, LLP, representing the plaintiff in Simpson before the undersigned. A stipulation of settlement in Simpson was approved on April 25, 2011, and New York State was ordered to pay attorneys' fees to the Firm and Sussman & Watkins, LLP. After LFG National and another creditor of the Firm asserted they held valid liens over those attorneys' fees payments, a June 9, 2011, order was issued modifying the April 25, 2011, order and directing the payment of attorneys' fees to Sussman & Watkins, LLP in a separate escrow account pending further order.

In attempting to collect amounts due under the Loan Agreement, LFG National and LFG Servicing contacted several third parties with whom the Firm had business relationships. LFG National and LFG Servicing informed those parties of LFG National's status as a secured creditor of the Firm and advised that the Firm defaulted under the Loan Agreement. On April 26, 2011, plaintiff's attorneys wrote Sussman & Watkins, LLP, the Firm's local counsel in Simpson, whom it was ordered should collect the Firm's fee from New York State. Countercl. Ex. B ("Sussman letter"). The Sussman letter and its enclosed correspondence from LFG Servicing demanded Sussman & Watkins, LLP forward those attorneys' fees due to the Firm, directly to LFG Servicing for amounts owed under the Loan Agreement. Id.

On May 20, 2011, plaintiff's attorneys wrote Boies, Schiller, & Flexner LLP, the Firm's co-counsel in Pokorny v. Quixtar Inc., Northern District of California case number 3:07-cv-201-SC ("Pokorny") in which settlement was pending. Countercl. Ex. C ("Boies letter"). According to the Boies letter, Boies, Schiller, & Flexner LLP was in a position to receive fees from the defendants in Pokorny and pay the Firm its share of such fees. Id. The Boies letter also stated: "Be advised that LFG intends to advise Judge Conti [the presiding United States District Judge in Pokorny] on Monday that LFG possesses a first lien security interest over all sums due to the Firm." Id.

Also on May 20, 2011, plaintiff's attorneys wrote the New York State Attorney General's Office, counsel for defendant New York State in Simpson, who owed the Firm and Sussman & Watkins, LLP attorneys' fees. Countercl. Ex. D ("Attorney General letter").

The Attorney General letter and its enclosed correspondence from LFG Servicing demanded New York State forward those attorneys' fees due to the Firm, directly to LFG Servicing for amounts owed under the Loan Agreement. Id.

The Firm alleges these letters "seriously affected" and "possibly damaged" the Firm's relationships with its clients and co-counsel. Countercl. ¶ 28. Further, the Firm accuses LFG National of acting in bad faith and alleges its motive in demanding payment of funds pursuant to the Loan Agreement was "to prevent to prompt repayment of amounts owed by the Firm" and to collect exorbitant amounts of default interest. Id. ¶ 29.

In addition to the Sussman, Boies, and Attorney General letters, the Firm alleges counter-defendants sent letters to "the Court in the Pokorny case and the Simpson case." Id. ¶¶ 33, 41, 63. Finally, although not alleged in the counterclaim,*fn4 the Firm contends "LFG has increased its aggressive and harassing collection efforts by threatening to send similar [collection] letters to the Firm's clients." Counter-claimant's Opp'n to Mot. to Dismiss, Dkt. No. 51 at 2. The Firm submitted a letter by LFG Servicing Chief Executive Officer Alan Zimmerman ("CEO Zimmerman") to Gary and Williams. Robertson Decl., Oct. 3, 2011, Ex. D ("Zimmerman letter"). The Zimmerman letter advised Gary and Williams that LFG National learned that certain of the Firm's cases had recently settled. Accordingly, CEO Zimmerman enclosed "letters of instruction under Section 9-406 of the UCC to your firm's clients, Eddie Persons, Loveding Pericles, and Esther Pericles ("Plaintiffs"), directing that they pay to [LFG] National Capital all sums representing fees and costs owed to your firm." Id. The Zimmerman letter concluded by stating "I trust that you will forward the attached correspondence to Plaintiffs . . . ." Id. Pre-drafted letters from CEO Zimmerman and LFG Servicing to the above-named plaintiffs were enclosed.


The parties agree that California law applies pursuant to the terms of the Loan Agreement. Loan Agreement §§ 1.2.12, 22.

A. Motion to Dismiss-Legal Standard

When deciding a motion to dismiss pursuant to Rule 12(b)(6), a plaintiff's-as well as here, a counter-claimant's-factual allegations must be accepted as true and all reasonable inferences must be drawn in their favor to assess whether a plausible claim for relief has been stated. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555--61, 127 S. Ct. 1955, 1964--67 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 684, 129 S. Ct. 1937, 1953 (2009) (holding that the pleading rule set forth in Twombly applies in all civil actions). The factual allegations must be sufficient "to raise a right to relief above the speculative level," crossing the line from conceivable to plausible. Twombly, 550 U.S. at 555, 127 S. Ct. at 1965. Additionally, "a formulaic recitation of the elements of a cause of action will not do." Id. at 555, 127 S. Ct. at 1965. "A claim has facial plausibility when the plaintiff [or counter-claimant] pleads factual content that allows the court to draw the reasonable inference that the defendant [or counter-defendant] is liable for the misconduct alleged." Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949 (citing Twombly, 550 U.S. at 556, 127 S. Ct. at 1965).

Thus, in reviewing the sufficiency of the pleading, a court first may identify legal conclusions that are not entitled to the assumption of truth. Id. at 679, 129 S. Ct. at 1950. The court should then "assume [the] veracity" of well-pleaded factual allegations "and then determine whether they plausibly give rise to an entitlement to relief." Id.

When deciding a motion to dismiss, a district court may consider documents attached to the complaint (and counterclaim) as exhibits or incorporated by reference therein. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). Even if a document is not incorporated by reference, a court may nevertheless consider it "where the complaint [or counterclaim] relies heavily upon its terms and effect, thereby rendering the document integral to the complaint [or counterclaim]." Id. (internal quotations omitted). However, even if the document is integral, "it must be clear on the record that no dispute exists regarding the authenticity or accuracy of the document." Id. (internal quotations omitted).

Surprisingly, the essential documents at issue here-the Loan Agreement, Guarantees, and Amendment-are attached to neither the complaint nor counterclaim. However, both the complaint and counterclaim rely heavily on these documents, rendering them integral to the pleadings. Further, no dispute exists regarding the authenticity or accuracy of the documents. All three documents were attached to the June 7, 2011, Zimmerman declaration submitted in support of plaintiff's ex parte application for a temporary restraining order and preliminary injunction.

B. Gary and Williams' Motion to Dismiss

Plaintiff's second claim alleges Gary and Williams breached the terms of their respective Guarantees by failing, after receiving written demand from LFG, to make payments to LFG National. LFG National contends Gary and Williams each received payments from the Firm while the Firm owed sums to LFG. Gary and Williams argue this claim should be dismissed as premature because LFG has not first exhausted its remedies against the Firm as required.

At the outset it should be noted that California abolished the distinction between sureties and guarantors.*fn5 Cal. Civ. Code § 2787 (West 2012). In California, "[a] surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor." Id. Thus, both the terms "surety" and "guarantor" are appropriate to describe Gary and Williams' obligations to LFG National under the Loan Agreement and Guarantees.

California law permits a surety or guarantor to insist that a creditor proceed against the debtor, including exhausting any security, before bringing suit to enforce a guarantee. See e.g., Pearl v. Gen. Motors Acceptance Corp., 13 Cal. App. 4th 1023, 1029 (Cal. Ct. App. 4th Dist. 1993). California Civil Code section 2845 provides in part: "A surety may require the creditor . . . to proceed against the principal, or to pursue any other remedy in the creditor's power which the surety cannot pursue, and which would lighten the surety's burden." Cal. Civ. Code § 2845. Further, section 2849 requires a creditor to exhaust the security given by the principal debtor. Id. § 2849. That provision states: "A surety is entitled to the benefit of every security for the performance of the principal obligation held by the creditor, or by a co-surety at the time of entering into the contract of suretyship, or acquired by him afterwards, whether the surety was aware of the security or not." Id.

However, section 2856(a) of the California Civil Code provides that the statutory protections in sections 2845 and 2849 may be waived. Id. § 2856(a) ("Any guarantor . . . may waive . . . any other rights and defenses that are or may become available to the guarantor or other surety by reason of Sections 2787 to 2855, inclusive."); see also Pearl, 13 Cal. App. 4th at 1029 ("Sections 2845 and 2849 have often been found to have been waived by language contained in documents."). Section 2856(b) further states:

A contractual provision that expresses an intent to waive any or all of the rights and defenses described in subdivision (a) shall be effective to waive these rights and defenses without regard to the inclusion of any particular language ...

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