Magnum Steel & Trading, LLC sued Gerald Mink and others for misappropriation of trade secrets and related claims, after Mink and other former employees of Magnum set up a competing business called FerroTrade Corporation.
The Mink defendants were represented in the litigation by attorneys David S. Nichol and Larry R. Bach of the firm of Roderick Linton Belfance, LLP ("RLB"), but despite their efforts, Magnum won a large verdict award in 2011.
Eventually, Magnum got around to suing all of RLB, Nichol and Bach (collectively I'll refer to them as the "RLB defendants") in Ohio state court for the events that follow, alleging that the RLB defendants conspired and aided and abetted the original Mink defendants in series of fraudulent transfers meant to cheat Magnum out of its judgment.
After losing the jury Verdict, Mink told the RLB defendants that he needed to raise cash to both pay his outstanding legal bills and to finally settle with Magnum.
Mink also later testified that he told the RLB defendants that he wanted to move his assets out of the reach of Magnum, but there was no evidence that the RLB defendants ever acted on that statement (and, I can tell you from long experience, pretty much every losing defendant will tell their attorneys the same thing). To the contrary, the RLB defendants told Mink the truth: Any post-judgment sale, no matter how honest, would be scrutinized as a fraudulent transfer, and thus would need to be made at fair market value.
To raise money, Mink sold his FerroTrade stock to his son for $105,000 which at the higher value of two independent appraisals (if somebody wanted to defraud creditors, they would have taken the lower appraisal). RLB placed the $105,000 into its attorney's trust account for the benefit of all the Mink defendants. Mink used $55,000 to pay its legal fees to RLB and for other expenses of the trial, and the balance was returned to Mink who placed it into a separate bank account (meant to create a settlement fund) on the advice of another of his attorneys who was not a member of the RLB firm. None of this was hidden from Magnum.
Mink also sold his airplane, to both raise money to pay his legal fees and to reduce his expenses in keeping and maintaining it. After being advised by Attorney Nichol that the plane needed to be sold at fair market value, Mink contracted with an aircraft broker to sell it off. These funds were also placed into Mink's separate bank account. The RLB defendants had nothing else to do with the sale of the airplane.
Although Mink had earmarked the separate bank account to settlement funds with Magnum, he was apparently on hard financial times and had to dip into those moneys to pay for his wife's medical bills and for an auto lease for a car after her old clunker finally broke down. No attorney at RLB advised Mink to do this.
FerroTrade, which Mink control (at least until he sold his stock) had been paying Mink $3,000 per month on a $100,000 loan that he had made to the company. At some point, Mink had FerroTrade make two $20,000 payments on the note. No attorney at RLB advised Mink to do this, either.
The RLB defendants moved the Ohio trial court for summary judgment, basically stating tht they did nothing that arguably rose to the level of conspiring or aiding and abetting Mink with fraudulent transfers, and that court agreed. Magnum then appealed to the Ohio Court of Appeals, which ruled as I shall now relate.
The Court first noted that the Uniform Fraudulent Transfer Act (UFTA), as adopted by Ohio, only applies to the debtor and the transferee (recipient) of a fraudulent transfer, and no cause of action for conspiracy or aiding and abetting arises under the UFTA (it might arise as a matter of common law in a state, but not under the UFTA). Thus, at least as far as UFTA claims were concerned, the only issue was whether the legal fees that were paid by Mink to RLB constituted fraudulent transfers.
There can be no fraudulent transfer is the debtor received "reasonably equivalent value" from the transferee. Magnum argued that the fees were incurred on behalf of FerroTrade and that Mink was under no obligation to pay those fees to RLB. The problem with argument was that Mink himself was the primary defendant in the litigation, and RLB's defense benefitted him as well as FerroTrade. Thus, the Court of Appeals ruled, there was "reasonable equivalent value" in RLB's defense of Mink in exchange for the fees that he paid them.
As for the funds held briefly in RLB's attorney's trust account, RLB never received title to those assets, but rather they were held in trust for Mink and technically were always his funds. Thus, Magnum's fraudulent transfer claim flopped there too.
This left Magnum's claims for conspiracy and aiding and abetting against the RLB defendants. The trouble with those claims is that they require that an underlying wrong has been committed to be viable causes of action. Because Magnum lost on its fraudulent transfer claims against the RLB defendants, these claims went away too.
The real bottom line here is that the RLB defendants didn't do anything wrong, as the Court noted:
The record reflects that the advice provided by the RLB attorneys to Mink was within the course and scope of the attorney-client relationship and did not extend beyond the proper bounds of the relationship. Attorney Bach and Attorney Nichol provided advice to Mink as a judgment debtor with regard to his options concerning the underlying judgment of Magnum, including attempting to settle with Magnum. The attorneys advised Mink that any sale or transfer of assets should be for equivalent value and that any debts owed to Mink by FerroTrade should be repaid in the normal course of business and were attachable by Magnum. There is no evidence that appellees advised Mink to hide or conceal any asset from Magnum or to squander his money for purposes of rendering himself uncollectible. Further, there is no evidence that appellees acted with the specific willful purpose to injure Magnum.
With that, the Court of Appeals thus poured Magnum out of court by affirming the trial court's summary judgment ruling.
ANALYSIS
It is actually nice for a change to write about attorneys who did the right thing and declined to assist their financially-distressed clients with fraudulent transfers. Thus, today's ethical hat tip goes to attorneys David S. Nichol and Larry R. Bach of the firm of Roderick Linton Belfance, LLP. Well done, boys, you did your Bar proud.
But beyond that, this case is important because it establishes that attorney services can constitute "reasonably equivalent value" for fraudulent transfer purposes, so long as the fees charged are reasonable and for services actually performed. Contrast this case with the Morris case, which I wrote about here, where a California attorney won a two-year suspension for assisting his client with a fraudulent transfer by attempting to secure attorney's fees for services not yet performed.
Interestingly, Magnum apparently missed a good argument (or at least it was never addressed in the Court of Appeal's opinion). The argument was that "reasonably equivalent value" is always measured from the creditor's perspective -- or in UFTA vernacular the value must have "utility to creditors" -- and RLB's providing a defense to the Mink defendants was of no benefit to Magnum. For those who might think this argument is "pretty out there", you had better read my articles on the Medici and Golf Channel opinions.
But as I wrote in those articles, I'm not sure that those courts got the issue right (and the 5th Circuit seems to have realized that by certifying the question to the Texas Supreme Court in the Golf Channel case). Services can have value to a debtor, even if not valuable to a creditor who shows up later. Between an honest service provider and a creditor, both have equal rights to payment and one must lose -- but the public policy ultimately favors the service provider in the name of protecting reasonable business expectations, since it is unreasonable to require ordinary businesses to investigate whether a customer is in the hole or not.
These same public policy considerations should apply with equal fervor to litigators who are fighting a meritorious case on behalf of a defendant, even if the defendant ultimately loses. Whether they should apply to post-judgment work by attorneys is much more doubtful; in such a case, the attorneys know their client has lost, and that the money the debtor is expending to fend off creditors is of no value to the debtor's estate, i.e., creditors. Thus, it is entirely possible that we may see a future case involving only an attorney's post-judgment defense that has a different outcome.
Stay tuned.
CITE AS
Magnum Steel & Trading, LLC v. Roderick Linton Belfance, LLP, 2015 Ohio 3450, 2015 WL 5042640 (Ohio.App. Distr. 9, Aug. 26, 2015). http://goo.gl/dqPCY7
This article at http://onforb.es/1LpQQ58 and http://goo.gl/pcntTh
