Bezanson v . Thomas CV-03-127-JD 06/20/03
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW HAMPSHIRE
Dennis G. Bezanson, Trustee
of the Estate of R & R Associates
of Hampton
v. Civil N o . 03-127-JD
Opinion N o . 2003 DNH 106
Thomas J. Thomas, Jr., et a l .
O R D E R
Dennis G. Bezanson, Trustee of the Estate of R & R
Associates of Hampton, appeals the decision of the bankruptcy
court in an adversary proceeding against the lawyer and law firm
who represented the debtor in possession during a Chapter 11
bankruptcy proceeding. Bezanson contends that the bankruptcy
court improperly excluded his expert witness, erred in finding
that the defendants did not breach their fiduciary duty to the
bankruptcy estate and were not negligent, erred in failing to
impose liability on the defendants for negligent
misrepresentation, and erred in determining that the defendants
had not committed fraud on the court. The defendants oppose the
grounds raised on appeal.
Background1
R & R Associates of Hampton (“RRA”) was a partnership
consisting of two partners, Reginald L . Gaudette and Richard V .
Choate. On April 5 , 1991, RRA filed a Chapter 11 bankruptcy
petition. Thomas J. Thomas, Jr., of Thomas & Utell, represented
RRA and its partners prior to the bankruptcy filing. As part of
the bankruptcy filing, Thomas filed an application to hire Thomas
& Utell to represent RRA, the Chapter 11 Debtor-in-Possession.
The application was supported by Thomas’s affidavit, including
statements that he was familiar with and had “considerable
experience” with bankruptcy laws and procedures and that the firm
had “no connection with the Debtor, the Creditors or any other
party in interest, or their respective attorneys or accountants,
nor does this attorney represent or hold any interest adverse to
the Debtor-in-Possession or the estate herein in the matters upon
which he is to be engaged, and his employment would be in the
best interest of the estate and its creditors.” Bankruptcy Court
Memorandum Opinion, Jan. 3 1 , 2003 (“Mem. Op.”) at 3-4.
Despite the affidavit statements, Thomas and Thomas & Utell
had represented Reginald and Louise Gaudette, at least during the
period of July of 1990 through April 3 1 , 1991. As part of that
1
The background information is taken from the bankruptcy
court’s memorandum opinion issued on January 3 1 , 2003.
2
representation, Thomas and the firm “assisted in the formation of
three family limited partnerships for Reginald and Louise
Gaudette.” Mem. O p . at 6. “[M]ore importantly, they assisted in
the transfer of personal assets, including real estate, cash,
notes and securities into these limited partnerships.” Id. at 7 .
Thomas & Utell represented RRA through the Chapter 11
process. The case was eventually converted to a Chapter 7
proceeding, and Dennis Bezanson was appointed Trustee on August
2 6 , 1992. Bezanson requested and received personal financial
statements from Gaudette and Choate. Gaudette’s statement showed
a negative net worth of more than four million dollars. In April
of 1997, the bankruptcy court allowed Thomas & Utell attorneys’
fees of $18,887.00 and expenses of $221.30.
Bezanson, as Trustee of the Estate of RRA, filed complaints
in the bankruptcy court, initiating adversary proceedings against
Thomas, Thomas & Utell, and others, known collectively as the law
firm defendants, and against Gaudette and Gaudette-related
entities and Choate and Choate-related entities. The bankruptcy
court dismissed the complaints against Choate, the Choate-related
entities, and the Gaudette-related entities. The actions against
Gaudette were stayed due to his Chapter 7 bankruptcy filing.
Because the claims in all three adversary proceedings, N o .
98-1136, N o . 98-1174, and N o . 98-1090, arose from the same
3
factual circumstances and sought money damages, the suits against
the law firm defendants were consolidated for trial. Bezanson
claimed negligent misrepresentation, negligence and breach of
fiduciary duty, and fraud on the court.2 Bezanson sought
disgorgement of the attorneys’ fees and expenses, and
compensatory damages.
Bezanson filed a motion to clarify and supplement his claims
of negligence and breach of fiduciary duty alleged in Count II of
Advocacy Proceeding N o . 98-1136. The defendants opposed the
motion. Although the court’s decision does not appear in the
designated record or the docket, the bankruptcy court apparently
denied that request. See Statement of Issues, N o . 5 , at 3 .
Before trial, the bankruptcy court granted the defendants’ motion
in limine to exclude Bezanson’s expert witness, Steven M .
Notinger, Esquire, from testifying about the duties of counsel to
a Chapter 11 estate. The adversary proceedings were tried over
seven days in September of 2001.
In a decision issued on January 3 1 , 2003, the bankruptcy
court found that Thomas and the law firm had relationships that
2
In Adversary Proceeding N o . 98-1136, Bezanson alleged
negligent misrepresentation in Count I and negligence and breach
of fiduciary duty, pled together, in Count I I . The fraud on the
court claims were alleged in Adversary Proceedings Nos. 98-1174
and 98-1174. Mem. O p . at 2 .
4
may have been adverse to RRA and the creditors and that should
have been disclosed under Bankruptcy Code requirements. In light
of those relationships, the court concluded that the defendants’
representation of RRA constituted a conflict of interest. As a
result, the bankruptcy court ordered the defendants to disgorge
the fees and expenses that had been previously allowed and paid.
The bankruptcy court concluded however, that despite the conflict
of interest, the defendants did not breach a fiduciary duty or
misrepresent facts to the Chapter 7 Trustee, Bezanson. The court
also held that the Trustee had not carried his burden of showing
by clear and convincing evidence that the law firm defendants’
conduct constituted fraud on the court.
Discussion
On appeal, Bezanson contends that the bankruptcy court erred
in excluding the testimony of his expert witness and in denying
the claims for compensatory damages. The defendants oppose the
appeal on procedural and substantive grounds.
The defendants argue that Bezanson has waived the
evidentiary issue, the negligent misrepresentation issue, and the
attorneys’ fees issue. In an appeal from a bankruptcy court
proceeding, the appellant is required to file a statement of
issues for appeal. Fed. R. Bankr. P. 8006. Failure to include
5
an issue in the statement constitutes waiver of the issue.
Zimmermann v . Jenkins (In re GGM, P . C . ) , 165 F.3d 1026, 1031 (5th
Cir. 1999); Interface Group-Nev. v . TWA (In re Trans World
Airlines, I n c . ) ,
145 F.3d 1 2 4 , 132 (3d Cir. 1998). In addition,
an appellant’s failure to brief an issue constitutes waiver of
the issue on appeal. Tower v . Leslie-Brown,
326 F.3d 2 9 0 , 299
(1st Cir. 2003).
As the defendants point out, Bezanson failed to include an
issue pertaining to the negligent misrepresentation claim in the
Rule 8006 statement of issues on appeal. Therefore, that issue
is waived for purposes of appeal. Bezanson did not brief the
issue pertaining to an award of interest and attorneys so that
issue is waived.3 Although the evidentiary issue is presented
somewhat summarily, it is sufficient to permit appellate review.
Therefore, the issues to be addressed on appeal are whether the
bankruptcy court erred in excluding the testimony of Steven
Notinger and in denying the claims for negligence and breach of
fiduciary duty and fraud on the court.
3
Bezanson also did not brief the issue pertaining to the
bankruptcy court’s decision denying the motion to clarify Count
I I , although the issue was included in the Rule 8006 statement of
issues on appeal.
6
A. Exclusion of Expert Witness
The bankruptcy court’s evidentiary rulings are reviewed for
an abuse of discretion. Palmacci v . Umpierrez, 121 F.3d 7 8 1 , 792
(1st Cir. 1997); see also Haarhuis v . Kunnan Enters., Ltd.,
177
F.3d 1007, 1014 (D.C. Cir. 1999). Federal Rule of Evidence 702
governs the admissibility of expert opinion in bankruptcy cases.
Fed. R. Bankr. P. 9017; Tamen v . Alhambra World Inv. (In re
Tamen),
22 F.3d 199, 206 (9th Cir. 1994); Westminster Assocs.,
Ltd. v . Orkin Exterminating C o . (In re Westminster Assocs.),
265
B.R. 329, 331 (Bankr. M.D. Fla. 2001). Under Rule 7 0 2 , a
qualified expert witness may testify if his knowledge will assist
the trier of fact and if his opinion is based on sufficient data
or facts and is the product of reliable principles, methods, and
application.
In this case, Bezanson contends that Steven Notinger was
offered as an expert to provide his opinion on the standard of
care owned by counsel representing a Chapter 11 debtor. The
bankruptcy judge allowed counsel for Bezanson and for the law
firm defendants to inquire into Notinger’s experience and
expertise in the area. Notinger testified that he had graduated
from law school in 1990 and had only once served as debtor’s
counsel in a Chapter 11 partnership case, although he had more
experience in Chapter 7 proceedings. After hearing the testimony
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and the arguments of counsel, the judge concluded that his own
experience far exceeded Notinger’s, so that Notinger’s opinion
was not likely to be of assistance. Bezanson has not shown that
the bankruptcy court abused its decision in excluding the
testimony.
B. Negligence and Breach of Fiduciary Duty
In Count I I , Bezanson alleged that the defendants breached
their fiduciary duties and were negligent in their representation
of RRA during the Chapter 11 proceeding.4 As alleged, the
defendants breached their fiduciary duties and were negligent
because they did not file adversary proceedings against either
Gaudette or Choate to recover assets that had been conveyed to
other entities in anticipation of RRA’s bankruptcy. Bezanson
further alleged that the law firm defendants knew about and
participated in pre-petition and post-petition transfers to the
detriment of the Debtor. Because of the transfers and the law
firm’s failure to pursue claims against the partners, RRA was not
4
The negligence and breach of fiduciary duty claims are pled
together in Count II without distinguishing between the claims as
separate legal theories. In his reply, Bezanson relies on the
clarification of Count II presented to the bankruptcy court in
his motion to clarify and supplement Count I I . Since that motion
was apparently denied, the complaint was not amended or clarified
by those supplemental allegations.
8
able to recover the deficiency in the estate from Gaudette and
Choate.
The bankruptcy court concluded that Thomas and Thomas &
Utell represented RRA under a conflict of interest due to their
representation of the Gaudettes as to interests that were adverse
to RRA. Despite the conflict of interest, the court held that
the law firm defendants did not breach their fiduciary duty to
bring adversary actions against the general partners because 11
U.S.C. § 723 does not apply in Chapter 11 proceedings. The
bankruptcy court also found that Thomas testified credibly that
he believed RRA would be able to confirm a reorganization plan
and that the general partners had considerable wealth.
In addition, the court held that the defendants did not
breach their fiduciary duties by providing Bezanson with the
general partners’ financial statements which did not disclose
transfers to the limited partnerships.5 The court concluded that
the record was insufficient to prove that the statements were
false or misleading. The court also refused to recognize that
counsel has a duty to guarantee the accuracy of a client’s
financial statements that are prepared by a CPA.
5
The Gaudette financial statement showed a negative net
worth of more than $4 million. Based on that information,
Bezanson did not file adversary proceedings as the RRA Chapter 7
trustee to recover from Gaudette.
9
On appeal, Bezanson agrees with the bankruptcy court that
§ 723 does not apply in a Chapter 11 proceeding. Bezanson raises
a new theory, however, not presented to the bankruptcy court,
that 11 U.S.C. § 544(a)(1) provides a legal basis for a
bankruptcy debtor to enforce creditors’ rights of contribution
from partners in a Chapter 11 proceeding. See Official Comm. of
Unsecured Creditors v . Bechtle (In re Labrum & Dak, L L P ) ,
237
B.R. 275, 293 (E.D. Penn. 1999). It is well-settled that new
theories will not be considered for the first time on appeal.
See, e.g., 229 Main S t . P’ship v . Mass. EPA (In re 229 Main S t .
Ltd. P’ship),
262 F.3d 1 , 1 3 , n.7 (1st Cir. 2001); Fleet Mortgage
Group, Inc. v . Kaneb,
196 F.3d 265, 268 (1st Cir. 1999); Sterling
Consulting Corp. v . IRS (In re Indian Motorcycle Mfg. Co., I n c . ) ,
288 B.R. 6 1 7 , 625 (D. Mass. 2003). Therefore, Bezanson’s new
argument, based on § 544(a)(1), will not be considered here.
Although Count II may be inartfully pleaded, the record
indicates that Bezanson intended to plead breach of fiduciary
duty and negligence premised on the law firm defendants’ conflict
of interest. The complaint alleges and the bankruptcy court
found that the defendants represented the Gaudettes both before
and after the bankruptcy petition was filed and performed legal
services “including the formation of family limited partnerships,
the transfer of assets into these partnerships, and the
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participation in various state court litigation issues.” Mem.
O p . at 5 . The court also found that the law firm defendants then
represented the limited partnerships formed to hold the
Gaudettes’ assets.
As Bezanson notes, the bankruptcy court did not expressly
consider whether the law firm defendants breached their fiduciary
duty to RRA, or were negligent in their representation of RRA,
based on other conflict-of-interest issues. The bankruptcy court
did note in connection with the conflict-of-interest ruling under
11 U.S.C. § 327 that it was not considering whether the law firm
defendants performed adequate legal services, “which would
properly be the subject of a subsequent malpractice suit.” Mem.
O p . at 8 . The court also noted that “it is not the Debtor who is
complaining in the instant case, but the Trustee, a functionary
of the Court in a relevant issue before the Court.”
Id.
Therefore, the bankruptcy court’s decision is not clear with
respect to the part of Count II that alleges breach of fiduciary
duty and negligence, as in legal malpractice, based on other
conflict-of-interest issues. Rather than engage in speculation
as to the bankruptcy court’s decision on that part of Count I I ,
it is appropriate to remand the case for clarification or further
proceedings if necessary, on these issues.
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C. Fraud on the Court
Yet another procedural issue bars consideration of
Bezanson’s fraud-on-the-court claim in this appeal. That claim
was alleged in Adversary Proceedings Nos. 98-1174 and 98-1090 but
not in Adversary Proceeding N o . 98-1136. Although the bankruptcy
court consolidated the three proceedings for trial, only
Adversary Proceeding N o . 98-1136 is on appeal here. See Bankr.
Court Docket (doc. n o . 1 ) ; Statement of Issues to Be Presented on
Appeal. The cases are not consolidated for appeal. See Bezanson
v . Thomas, et a l . , Civil N o . 03-124-M, May 9, 2003. Therefore,
the bankruptcy court’s decision denying the fraud-on-the-court
claim in Adversary Proceedings Nos. 98-1174 and 98-1090 is not
properly part of the appeal of Adversary Proceeding N o . 98-1136,
which is before the court in this case.
Conclusion
For the foregoing reasons, the bankruptcy court’s decision
as to Adversary Proceeding N o . 98-1136 is vacated and remanded
for further proceedings as to that part of Count II in which the
plaintiff alleges a breach of fiduciary duty and negligence
(legal malpractice) other than the defendants’ alleged
obligations to proceed under 11 U.S.C. § 723 or to guarantee the
accuracy of the general partners’ financial statements. To that
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limited extent, the case is remanded for clarification or further
proceedings, including a hearing, as the bankruptcy court finds
are necessary. The issues on remand are to be addressed with
specificity. In all other respects, the decision of the
bankruptcy court is affirmed.
The clerk of court shall enter judgment accordingly and
close the case.
SO ORDERED.
Joseph A . DiClerico, J r .
United States District Judge
June 2 0 , 2003
cc: William S . Gannon, Esquire
Robert M . Daniszewski, Esquire
United States Trustee
George Vannah, USBC-NH
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