United States District Court, E.D. New York
BROWN MEDIA CORPORATION and ROY E. BROWN, Plaintiffs,
K&L GATES, LLP and EDWARD M. FOX Defendants.
Office of Daniel L. Abrams, PLLC Attorney for the Plaintiffs
Silverman Acampora LLP Attorneys for the Defendants Anthony
A. Acampora, Esq., Of Counsel
MEMORANDUM OF DECISION & ORDER
D. SPATT, UNITED STATES DISTRICT JUDGE
about November 27, 2013, Brown Media Corporation
(“Brown Media”) and Roy E. Brown
(“Roy”) (together, the “Plaintiffs”)
commenced this action against K&L Gates, LLP
(“KLG”), Edward M. Fox (“Fox”,
together with KLG the “Defendants”) as well as a
recently dismissed individual defendant, Eric T. Moser.
claims in this action arise from a related bankruptcy
proceeding. Therefore, the case was automatically referred to
the United States Bankruptcy Court for the Eastern District
of New York (the “Bankruptcy Court”).
December 1, 2014, the Defendants filed a motion, pursuant to
28 U.S.C. § 157(d); Federal Rule of Bankruptcy Procedure
(“Fed. R. Bankr. P.”) 5011; and Local Bankruptcy
Rule 5011-1, to withdraw the automatic reference and have the
case proceed before this Court. On or about January 14, 2015,
while that motion was pending, the Defendants filed a second
motion, pursuant to Fed.R.Bankr.P. 7012 and Federal Rule of
Civil Procedure (“Fed. R. Civ. P.” or
“Rule”) 12(b)(6), to dismiss the complaint.
January 28, 2015, this Court withdrew the reference from the
November 21, 2015, the Court granted the Defendants'
motion to dismiss the complaint pursuant to Rule 12(b)(6) on
the grounds that res judicata bars the Plaintiffs' claims
for breach of fiduciary duty, tortious interference and
common law fraud (“2015 MTD Decision”).
April 14, 2017, the U.S. Court of Appeals for the Second
Circuit vacated the Court's judgment issued pursuant to
the 2015 MTD Decision, ruling “[b]ecause the
plaintiffs' claims are not of the sort that should have
been raised in the underlying bankruptcy proceedings nor do
they implicate the validity of the asset sale confirmed in
the bankruptcy proceedings, res judicata does not bar
them.” Docket Entry (“DE”) 18 at 2.
February 8, 2018, Eric T. Moser was voluntarily dismissed
from this case.
before the Court is the motion by the Defendants, pursuant to
Rule 12(b)(6) to dismiss the Plaintiffs' entire complaint
for failure to state a claim upon which relief can be
granted. As stated above, the previous decision that
dismissed the complaint was vacated and remanded by the
Second Circuit for further proceedings consistent with its
opinion. For the following reasons, the Defendants'
motion to dismiss pursuant to Rule 12(b)(6) is granted in
part and denied in part.
otherwise noted, the following salient facts are drawn from
the complaint and are construed in favor of the Plaintiffs.
Media is a Delaware Corporation, which was established in
March 2010 for the express purpose of acquiring the assets of
an entity known as Brown Publishing Company and its
affiliated entities (collectively “Brown
an individual residing in Cincinnati, Ohio. He presently owns
the substantial majority of the stock of Brown Media, and is
the former CEO, shareholder, and director of Brown
Publishing. Roy is also a part of Brown Publishing's
defendant, KLG, is an international law firm with
approximately forty-five offices located throughout the
United States and abroad. The individual defendant Fox and
former defendant Moser are attorneys and former partners at
KLG, both of whom currently reside in New York.
Publishing was a closely-held corporation, which was
controlled by Roy; his brother Clancy; his parents, Bud and
Joyce; the company's former General Counsel, Joel Dempsey
(“Dempsey”); and one Joel Ellingham
(“Ellingham”) (collectively, the
“Managers”). Brown Publishing was a family
business, having been founded in 1920 by Roy's
unspecified time, Brown Publishing received financing from a
company known as Windjammer Capital
(“Windjammer”). In connection with their
financing arrangement, Windjammer allegedly retained an
equity option, so that, in the event the loan was not repaid,
Windjammer could exercise its option and force the sale of
Brown Publishing's assets to recoup its investment.
reasons not set forth in the complaint, it is alleged that in
late 2008, although not yet in default, the Managers feared
that Windjammer might soon exercise its option, which would
result in their losing control of Brown Publishing. As a
result, the Managers sought legal advice as to how best to
maintain control of the enterprise.
regard, on or about December 12, 2008, allegedly on behalf of
himself and the other Managers, Dempsey contacted Fox and
KLG. On that date, Dempsey allegedly supplied Fox and KLG
with a document entitled the “Warrant Put Memo”
(the “Memo”), which sets forth the issues about
which the Managers required legal advice. It is unclear who
prepared the Memo, but, as to its contents, the complaint
alleges as follows:
The [ ] Memo ask[ed] KLG for advice related to, inter alia,
the legal ramifications of a proposed transaction whereby the
Managers create a new LLC and Managers Roy, Dempsey, and
Ellingham acquire the assets of Brown Publishing through the
new LLC. This proposed transaction was to take place outside
of bankruptcy. Legal issues specifically identified in the [
] Memo included what actions to take, if any, with regards
[sic] to Windjammer Capital, possible successor liability
related to the proposed transaction, what state would be an
advantageous one for incorporation of the new LLC, the tax
consequences to the Managers, shareholder disclosure
requirements, if any, and other issues pertaining to Brown
See Compl. ¶ 20.
alleged that the Memo did not contemplate a bankruptcy. In
fact, as noted above, Brown Publishing allegedly was not in
default of any loans at this time and the Managers were
specifically seeking advice about how to retain equity
control through a non-bankruptcy transaction.
in response to the Memo, KLG and the individual Defendants
provided advice directly to Roy and Dempsey, and billed the
Managers for the time spent providing these legal services.
In particular, KLG allegedly advised the Managers on ways to
reduce the possibility of so-called successor liability -
i.e., the possibility that the new LLC would succeed to the
debts and liabilities of Brown Publishing after acquiring its
assets. In order to minimize this possibility, KLG allegedly
advised Roy not to participate in any eventual transaction,
and advised Dempsey to relinquish his shares in an entity
known as Brown Media Holdings Company (“Media
Holdings”), so that he could become the majority owner
of the new LLC.
March 2009, Brown Publishing was in imminent danger of
defaulting on its loan agreement with Windjammer.
See Compl. ¶ 26. Accordingly, the Managers
allegedly took a series of actions to protect Brown
about March 2009, the Managers allegedly decided to enter
into a non-bankruptcy transaction that was structured
similarly to the one contemplated by the Defendants in the
Memo. The complaint does not provide many supporting details
concerning this transaction. From the complaint, the Court
cannot determine the parties to the transaction or any of the
relevant terms or conditions. However, it is alleged that, in
proceeding with this transaction, the Managers followed
advice provided by KLG, namely, Roy did not participate and
Dempsey relinquished his shares in Media Holdings.
about the same time, in March 2009, Windjammer allegedly
commenced a lawsuit in Ohio, seeking to invalidate this
transaction. Again, the complaint does not provide many
supporting details, including the identities of the parties
to that action. Nor does it specify whether the action was
commenced in state or federal court; or what legal theory
Windjammer asserted. Nevertheless, an unidentified Ohio court
allegedly approved the transaction and authorized it to move
again for reasons not explained in the complaint, at some
unspecified time, the Managers allegedly rescinded the March
2009 transaction and, on the advice of KLG, proceeded to
regard, it is alleged that when “[t]he March 2009
transaction did not solve the problems associated with Brown
Publishing's debt, ” Dempsey contacted Fox in early
May 2009 for advice. See Compl. ¶ 26. From May
2009 to June 2009, KLG allegedly advised the Managers that a
sale of Brown Publishing's assets in bankruptcy was their
best strategy in order to retain control of the company.
KLG apparently advised Roy and Dempsey, in their individual
capacities, to attempt to purchase Brown Publishing's
assets through a sale pursuant to Section 363 of the United
States Bankruptcy Code, 11 U.S.C. § 363 (“§
363”), which authorizes the bankruptcy court to conduct
a sale of a bankruptcy debtor's assets outside of the
ordinary course of business. The complaint alleges that KLG
suggested that, if the Managers, acting through the new LLC,
purchased Brown Publishing's assets in a sale pursuant to
§ 363, they “could eliminate successor liability
and related tax concerns, and that Roy's family members
could potentially join the purchase.” In June 2009, KLG
allegedly notified Roy and Dempsey that the firm was
interested in representing Brown Publishing in its bankruptcy
proceeding. According to the complaint, KLG did not disclose
any conflict of interest created by simultaneously (a)
representing Brown Publishing in connection with its
bankruptcy filing; and (b) advising the Managers in
connection with their efforts to retain control of Brown
Publishing and acquire its assets. In particular, KLG
allegedly did not seek or obtain a waiver from the Managers.
Nor did the firm seek consent to represent both the Managers
and Brown Publishing.
2009, Brown Publishing allegedly retained KLG as counsel.
After being so retained, KLG allegedly continued to advocate
for a sale of Brown Publishing's assets to the Managers
by way of a sale in bankruptcy pursuant to § 363,
despite the Managers' expressed preference for an
out-of-court restructuring. In this regard, KLG allegedly
began preparing a strategy by which the Managers would
maximize their odds of prevailing in a public auction for the
company's assets. In particular, in August 2009, KLG and
Dempsey began preparing a “stalking horse asset
purchase agreement.” (the “APA”)
not described in the complaint, the Court will take judicial
notice of the basic concept of a stalking horse bid in
bankruptcy. As one court has noted:
A stalking horse bidder in a bankruptcy proceeding makes an
initial bid to purchase the assets of a debtor on the theory
that the initial bidder's “initial research, due
diligence, and subsequent bid may encourage later
bidders.” In re 310 Associates, 346 F.3d 31,
34 (2d Cir. 2003). Stalking horse bidders often contract to
receive a “break-up fee” compensating it for its
bidding activities should a higher bid ultimately emerge and
win an eventual asset auction. See In re Integrated Res.,
Inc., 147 B.R. 650, 659 (S.D.N.Y. 1992).
In re MSR Resort Golf Course LLC, 13-cv-2448, 2014
WL 67364, at *2 n.3 (S.D.N.Y. Jan. 7, 2014). As the Second
Circuit has succinctly stated: “A ‘stalking
horse' contract is a first, favorable bid strategically
solicited by the bankrupt company to prevent low-ball
offers.” In re WestPoint Stevens, Inc., 600
F.3d 231, 239 n.3 (2d Cir. 2010).
addition to preparing the APA, KLG also allegedly provided
the managers with specific advice concerning, inter
alia, how much to bid and how to frame their bid so as
to maximize the chances that a bankruptcy court would approve
an eventual sale. Further, KLG allegedly provided advice
regarding the formation of Brown Media, the entity into which
the purchased assets of Brown Publishing would be
transferred, namely, the “stalking horse.” KLG
also allegedly provided advice as to the benefits of filing
the bankruptcy petition in New York.
complaint alleges that KLG was also active in seeking funding
for the Managers' planned purchase of Brown
Publishing's assets. In this regard, allegedly,
“KLG provided advice to the Managers on the price they
should offer, and revised documents drafted by the Managers
and sent to potential capital [investors].” Compl.
¶ 35. In addition, Fox allegedly referred the Managers
to a friend of his at W&L Ross, a company that acquires
other distressed companies, and participated in a conference
call with the Managers and individuals at Goldman Sachs.
KLG provided advice to Roy and Dempsey regarding the
Managers' efforts to convince Brown Publishing's
lenders to finance the Managers' purchase. Among other
things, KLG allegedly made extensive edits to a memo prepared
by Roy on behalf of himself and the other Managers for this
further alleged that the Managers eventually obtained a
funding commitment from Guggenheim Partners
(“Guggenheim”) to support their purchase offer.
The complaint alleges that KLG worked directly with
Guggenheim and the Managers to prepare the APA and encouraged
Guggenheim to provide a debtor-in-possession loan to infuse
capital into Brown Publishing during the Chapter 11
proceeding and preserve the value of its assets.
shortly before Brown Publishing's bankruptcy filing, KLG
allegedly urged the Managers, and Brown Media, to obtain
separate counsel. In particular, Fox allegedly recommended
that the Managers retain his friend and former partner,
Richard Levy, Esq. The Managers agreed to retain Levy.
However, by the time they did so, Brown Media had already
been formed for the purpose of placing a stalking horse bid
and ultimately acquiring Brown Publishing's assets; and
substantive portions of the APA were already negotiated and
in place. Around the same time, at KLG's suggestion,
Brown Publishing hired Tom Carlson (“Carlson”) as
an independent director with a mandate to manage the sales
The Bankruptcy Filing
April 30, 2010, Brown Publishing filed for Chapter 11
bankruptcy in the Eastern District of New York. The complaint
alleges that, “[a]s part of the filing, KLG sought to
be and was eventually retained as [Brown Publishing's]
Counsel.” Compl. ¶ 45. Apparently, KLG submitted a
disclosure statement (the “Disclosure Statement”)
in furtherance of the Bankruptcy Court's approval of its
retention as counsel for Brown Publishing. Allegedly, this
Disclosure Statement failed to disclose KLG's prior
representation of the Managers. The complaint also alleges
that the Disclosure Statement did not disclose “the
extent of Defendants' relationships with all of the
members of the Bank Group and many other major
creditors.” Compl. ¶ 47. However, the complaint
does not define the term “the Bank ...