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Alpha Capital Management, Inc. v. Rentenbach

March 23, 2010

ALPHA CAPITAL MANAGEMENT, INC., PLAINTIFF-APPELLANT,
v.
PAUL ROBERT RENTENBACH AND DYKEMA GOSSETT, P.L.C., DEFENDANTS-APPELLEES, AND MARK E. HAUCK, DEFENDANT.



Wayne Circuit Court LC No. 06-612418-NO.

The opinion of the court was delivered by: Gleicher, P.J.

FOR PUBLICATION

Before: Gleicher, P. J., and Fitzgerald and Wilder, JJ.

This action against a law firm and one of its attorneys arises from events that transpired during a separation of business partners and their joint ownership interests in a company they had owned. Plaintiff Alpha Capital Management, Inc. (ACM) contended that its counsel, defendants Dykema Gossett, P.L.L.C., and Dykema attorney Paul Rentenbach, breached fiduciary duties and committed other actionable wrongs by representing a former ACM shareholder in a dispute concerning his buyout agreement. A jury found in favor of defendants on all counts alleged in ACM's complaint. ACM appeals as of right from the trial court's entry of a no cause judgment effectuating the jury verdict. We affirm.

I. Underlying Facts and Proceedings

In 1991, Ralph Burrell founded ACM to provide financial consulting services to businesses, pension funds and nonprofit institutions. Initially, Burrell owned 55% of ACM's shares and Robert Warfield owned 45%. Within a year, Burrell and Warfield each owned 50% of ACM's shares. Soon after ACM's formation, the company hired Dawna Edwards as its portfolio manager. In 1996, ACM hired Napolean Rodgers as managing director of its fixed income portfolio.

Before starting ACM, Burrell had established a successful information systems and management consulting business called SymCon. Dykema served as SymCon's general counsel. Burrell and Warfield retained Dykema in 1991 to supply the legal services necessary to form ACM. After other Dykema lawyers completed ACM's corporate formation, Rentenbach provided ACM ongoing legal services.*fn1

Problems developed over time between Burrell and Warfield. They disagreed about Warfield's compensation, Edwards's equity in the firm, and fees received by Munder Capital Management*fn2 (35% of ACM's client revenues). Because ACM "didn't grow as quickly" as Burrell thought it would, it accrued long-term debt payable to Munder Capital.*fn3 Warfield's compensation also created a debt. In 1998, Burrell entered into negotiations with Munder Capital seeking adjustments to the ACM-Munder Capital subadvisory agreement, and eventually achieved a lower cost structure. Warfield and Edwards wanted ACM "to move away from Munder" Capital, while Burrell hoped to expand ACM's relationship with Munder Capital.

In 1999, Burrell and Warfield began negotiating a buyout agreement contemplating that Burrell would buy Warfield's shares or vice versa. Rentenbach served as a "facilitator" during the negotiation sessions. Burrell recalled that at a meeting in mid-April 1999, Rentenbach turned to Warfield to "get approval" to answer one of Burrell's questions. Burrell felt "shocked" because "Rentenbach is the corporate attorney representing Alpha." After the meeting, Rentenbach informed Burrell that Warfield and Edwards had asked him to represent them. On April 15, 1999, Rentenbach wrote a letter to Burrell's personal counsel, former Michigan Supreme Court Justice Conrad Mallett, Jr., advising that Rentenbach and Dykema sought to represent Warfield and Edwards "with respect to the negotiations that will take place regarding [Burrell's] proposed disengagement." Rentenbach requested that Burrell waive any conflict of interest that might arise from "our firm's representation of [Burrell] and his other business interest (Symcon, Inc.)." Burrell declined to waive the conflict, but Rentenbach continued to represent Warfield and Edwards. Rentenbach's billing records reveal that he proceeded to prepare draft agreements in contemplation of a buyout by one shareholder or the other, while Dykema sent ACM invoices for Rentenbach's time.

In July 2000, Burrell and Warfield signed an "Alpha Capital Management, Inc. Process for Separation/Buy-Out," which contemplated a three-phase stock purchase process. In Phase I, Burrell would present an offer to Warfield, which Warfield could accept or counter. If Warfield did neither, Phase II would commence, during which a facilitator would assist the parties in crafting a transaction. If that failed, in Phase III Burrell would "make[] a final written offer to sell his shares to Mr. Warfield or to purchase Mr. Warfield's shares," and Warfield would "decide[] whether to buy Mr. Burrell's shares or to sell his shares to Mr. Burrell."

Phases I and II did not result in ACM's sale. On April 20, 2001, the parties embarked on Phase III. In a document drafted by Burrell's counsel, entitled "Offer to Purchase and Stock Purchase Agreement," Burrell offered either to sell his ACM shares to Warfield or to purchase Warfield's shares.*fn4 In May 2001, Warfield elected to sell his shares to Burrell, and in June 2001 Burrell assigned to ACM his right to purchase Warfield's shares. The deal closed on October 24, 2001, and Burrell then terminated Dykema's services on behalf of ACM. Warfield, Edwards and Rodgers continued to work for ACM.

Section 2 of the stock purchase agreement governed the "purchase price and payment" applicable to the seller's shares. Section 2.1 required an initial payment of $75,000 at the closing and § 2.2 mandated execution of a promissory note in the amount of $1,425,000, to be paid in 20 equal quarterly installments. Section 2.8 addressed what would happen if the buyer became "unwilling or unable to pay any remaining amounts owing to Seller[.]" In that event, the seller had 30 days in which to exercise an option "to obtain all ownership interests in" ACM for $1.00 "in full satisfaction of the Unpaid Amounts[.]" If the seller failed to exercise that option, "any claims of Seller to the Unpaid Amounts will be deemed to be waived and released as of the end of such 30 day period." The stock purchase agreement also contained mutual covenants not to compete effective for three years after the closing date.

In July 2003, Burrell notified Warfield that he could not make the quarterly payment required under the buyout agreement unless Warfield approved a secured loan "of up to $150,000 from SymCon to Alpha." Warfield did not respond to this letter, and Burrell did not make the July payment. On August 1, 2003, Burrell wrote to Warfield and again sought approval for a loan. Warfield replied on August 4, 2003, declining to approve the loan on the basis that "I am not required to consent to this type of a transaction under the stock buy-out agreement . and this arrangement is unfair to the other creditors of Alpha Capital (principally me and Munder Capital) because no other creditor has a lien on Alpha's assets." Warfield's letter continued, "Since I have not received the payment due on July 31, I hereby declare Alpha Capital in default under the Note." On August 29, 2003, Warfield sent Burrell another letter stating in part, "Further, I am notifying Alpha and you that due to Alpha's non-payment of its obligations, my covenant not to compete with Alpha is no longer applicable, pursuant to the provisions of Section 6.1(i) of the Offer to Purchase and Stock Purchase Agreement dated April 20, 2001."

Burrell responded on September 24, 2003, informing Warfield that "by receipt of this letter . I am issuing a Refusal Notice pursuant to Paragraph 2.8 of our agreement." The pertinent portion of § 2.8 sets forth:

If, at any point prior to or on the date which is 45 days following the end of the 20th full fiscal quarter of the Company following the Closing Date (the "Last Payment Date"), Buyer notifies Seller, in writing (the "Refusal Notice"), that Buyer is unwilling or unable to pay any remaining amounts owing to Seller pursuant to the Promissory Note or Sections 2.4, 2.5 or 2.6 of the Offer (the "Unpaid Amounts"), Seller will have the right, upon giving written notice to Buyer within 30 days of either Seller's receipt of the Refusal, to obtain all ownership interests in the Company then owned by the Buyer (and the Guarantor, if applicable) for $1.00 paid to Buyer or Guarantor, as applicable, in full satisfaction of the Unpaid Amounts, and the parties will cooperate to effectuate a transfer of such ownership interests to Seller. . . .

On October 10, 2003, Warfield declined to exercise his right to purchase ownership of ACM.

Rentenbach supplied legal services to Warfield, Rodgers and Edwards both before and after Burrell notified Warfield of his inability to make the July 31, 2003 payment. Rentenbach's billing records reflect that on August 4, 2003 Rentenbach spent time drafting a default letter to Burrell. In August 2003, Rentenbach received a call from Warfield inquiring whether Burrell's missed quarterly payment rendered unenforceable the stock purchase agreement's non-compete clause. Rentenbach read the stock purchase agreement and advised Warfield that Burrell's breach negated the non-compete clause. On August 25, 2003, Rentenbach met with Warfield, Rodgers and Edwards and reviewed Warfield's letter of that date to Burrell. Two days later, Rentenbach drafted an operating agreement for Alpha Partners, L.L.C. On October 9, 2003, the day before Warfield declined to purchase ACM, Rentenbach faxed to Rodgers a schedule describing the backgrounds of Alpha Partners's three founding partners: Warfield, Edwards and Rodgers. Rodgers and Edwards resigned from ACM on October 15, 2003. By the end of October 2003, most of ACM's clients had withdrawn their funds from ACM and invested them with Alpha Partners.

On November 4, 2003, ACM and Burrell sued Alpha Partners, Warfield, Edwards and Rodgers in the Oakland Circuit Court seeking injunctive relief and damages. Honigman Miller Schwartz and Cohn represented the plaintiffs in the Oakland County action and Dykema represented the defendants. The plaintiffs alleged that the defendants had violated the non-compete clauses in their contracts and the stock purchase agreement, misappropriated confidential information, breached their fiduciary duties to ACM, and tortiously interfered with ACM business relationships. The Oakland Circuit Court denied injunctive relief, and the parties ultimately settled the damage claims for a relatively small amount-a $60,000 payment to ACM and Burrell.*fn5

On April 28, 2006, ACM filed the instant case in the Wayne Circuit Court against Dykema and Rentenbach, alleging breach of fiduciary duty (Count I), tortious interference with contractual relations and with prospective economic and business advantage (Count II), and aiding and abetting Warfield in violating his covenant not to compete (Count III). In June 2006, defendants moved for summary disposition pursuant to MCR 2.116(C)(7) and (8). They contended that the allegations in ACM's complaint arose solely from their prior attorney-client relationship with ACM, and that the statute of limitations barred this malpractice claim. In the alternative, defendants argued that the plaintiffs' release of the Oakland defendants in the prior litigation, Alpha Partners, Warfield, Edwards and Rodgers, barred an "aiding and abetting" theory against defendants as a matter of law. They also averred that the covenant not to compete had dissolved before the formation of Alpha Partners.

ACM answered that the breach of fiduciary duty claim did not sound in legal malpractice, but rather was properly pleaded as a separate cause of action subject to a three-year statute of limitations. ACM denied that the release barred its claims for aiding and abetting, and contended that the covenant not to compete remained in effect when defendants formed Alpha Partners. The trial court denied defendants' motion, and this Court denied their application for leave to appeal. Alpha Capital Mgt, Inc v Rentenbach, unpublished order of the Court of Appeals, entered October 27, 2006 (Docket No. 272819). The Supreme Court also denied leave to appeal. 477 Mich 1059 (2007).

On May 19, 2008, a jury trial commenced. The trial concluded on June 3, 2008, when the jury returned a special verdict finding that (1) defendants had not breached a fiduciary duty to ACM; (2) former employees of ACM tortiously interfered with contracts or business relationships of ACM; (3) defendants did not aid or abet the tortious interference; and (4) Warfield did not breach the covenant not to compete.

II. Summary Disposition Rulings

A. Standard of Review

ACM initially contests the propriety of the trial court's denial of ACM's motion for partial summary disposition concerning its breach of fiduciary claim. Because the trial court considered documentation beyond the pleadings in reaching its ruling and denied the motion based on the existence of conflicting questions of fact, we review the court's ruling under MCR 2.116(C)(10). Walsh v Taylor, 263 Mich App 618, 621; 689 NW2d 506 (2004). This Court reviews de novo a trial court's summary disposition ruling. Id. "Summary disposition is appropriate under MCR 2.116(C)(10) if there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law." West v General Motors Corp, 469 Mich 177, 183; 665 NW2d 468 (2003).

ACM additionally asserts that the trial court should have granted a directed verdict or judgment notwithstanding the verdict (JNOV) regarding its breach of fiduciary duty count. We also review de novo a trial court's rulings on motions for directed verdict and JNOV. Sniecinski v Blue Cross & Blue Shield of Michigan, 469 Mich 124, 131; 666 NW2d 186 (2003). "A motion for directed verdict or JNOV should be granted only if the evidence viewed in th[e] light [most favorable to the nonmoving party] fails to establish a claim as a matter of law." Id.

B. Breach of Fiduciary Duty Claim

Defendants do not dispute that they owed ACM a fiduciary duty premised on ACM's status as their former client. See Rippey v Wilson, 280 Mich 233, 243; 273 NW 552 (1937) (observing that "[t]he relationship between client and attorney is a fiduciary one, not measured by the rule of dealing at arm's length"); Meyer & Anna Prentis Family Foundation, Inc v Barbara Ann Karmanos Cancer Institute, 266 Mich App 39, 47; 698 NW2d 900 (2005) ("Damages may be obtained for a breach of fiduciary duty when a position of influence has been acquired and abused, or when confidence has been reposed and betrayed.") (internal quotation omitted). Defendants insist that material questions of fact precluded a grant of summary disposition, directed verdict or JNOV with respect to whether they breached their fiduciary duty by working on behalf of Alpha Partners, Warfield, Edwards and Rodgers in 2003.

Few Michigan cases elaborate concerning the substantive elements of a former client's breach of fiduciary duty claim against an attorney. ACM relies on the seminal Michigan case addressing an attorney's liability for breach of fiduciary duty, Fassihi v Sommers, Schwartz, Silver, Schwartz & Tyler, PC, 107 Mich App 509; 309 NW2d 645 (1981).*fn6 However, Fassihi does not resolve the question whether, as a matter of law, defendants' conduct violated their fiduciary duties.

The plaintiff in Fassihi, a radiologist, owned 50% of Livonia Physicians X-Ray, P.C., a closely held corporation. The defendant law firm represented Livonia Physicians and had drafted "all the agreements pertaining to membership in the professional corporation." Id. at 513. Dr. Rudolfo Lopez owned the other half of the corporation's shares. Id. at 511-512. Lopez had a prior agreement with St. Mary's Hospital that invested him with "personal and sole responsibility for staffing [its] radiology department." Id. at 513. Lopez and Fassihi practiced together for about 18 months before Lopez reached the decision that he no longer wished to associate with Fassihi. Id. at 512. Lopez asked the defendant, Livonia Physicians's lawyer, to ascertain how Fassihi "could be ousted from Livonia Physicians . . . ." Id. In June 1975, an employee of the defendant delivered Fassihi a letter advising that Livonia Physicians's board of directors had met in Fassihi's absence and voted to terminate his employment. Id. at 513. Fassihi then learned that due to his "termination" from Livonia Physicians, he could no longer practice at St. Mary's Hospital. Id. Fassihi filed a complaint asserting that the defendant had "represented both Lopez individually and the professional corporation without disclosing to him this dual representation." Id.

This Court identified the "difficult question" of first impression presented in the case as "what duties, if any an attorney representing a closely held corporation has to a 50% owner of the entity, individually." Id. at 514. The Court began its analysis by adopting the proposition that "the attorney's client is the corporation and not the shareholders." Id. Notwithstanding that no attorney-client relationship existed between Fassihi and the defendant law firm, the Court cautioned that this fact did not categorically preclude a fiduciary duty from arising between the law firm and Fassihi. Id. The Court explained,

A fiduciary relationship arises when one reposes faith, confidence, and trust in another's judgment and advice. Where a confidence has been betrayed by the party in the position of influence, this betrayal is actionable, and the origin of the confidence is immaterial. Furthermore, whether there exists a confidential relationship apart from a well defined fiduciary category is a question of fact. [Id. at 515.]

The Court further noted the "difficulties" inherent in "treating a closely held corporation with few shareholders as an entity distinct from the shareholders." Id. at 516. "Instances in which the corporation attorneys stand in a fiduciary relationship to individual shareholders are obviously more likely to arise where the number of shareholders is small." Id. at 516. In these situations, "the corporate attorneys, because of their close interaction with a shareholder or shareholders, simply stand in confidential relationships in respect to both the corporation and individual shareholders." Id.

This Court in Fassihi examined whether, by virtue of "close" attorney-shareholder interaction giving rise to "confidential relationships," a distinct fiduciary relationship existed between an attorney for a closely held corporation and a shareholder. Id. at 516. Because Fassihi and the defendant law firm lacked an attorney-client relationship, any liability on the part of the law firm arose on the basis of a cause of action-breach of fiduciary duty-separate and apart from the defendant's breach of a traditional duty of care. Here, the parties do not dispute that defendants and ACM had a fiduciary relationship through October 2001. Consequently, Fassihi does not resolve the issue at the core of the parties' dispute, whether defendants violated the fiduciary duty they owed to ACM by providing legal services to Warfield, Rodgers and Edwards in 2003.

The common law has long recognized that an attorney's fiduciary duties extend to both current and former clients. For example, in T C Theatre Corp v Warner Bros Pictures, Inc, 113 F Supp 265, 268 (SD NY, 1953), the district court explained,

A lawyer's duty of absolute loyalty to his client's interests does not end with his retainer. He is enjoined for all time, except as he may be released by law, from disclosing matters revealed to him by reason of the confidential relationship. Related to this principle is the rule that where any substantial relationship can be shown between the subject matter of a former representation and that of a subsequent adverse representation, the latter will be prohibited.

The Sixth Circuit has declared it "well settled that an attorney who has acted for one party cannot render professional services in the same matters to the other party, and it makes no difference in this respect whether the relation itself has terminated, for the obligation of fidelity still continues." United States v Bishop, 90 F2d 65, 66 (CA 6, 1937). In Consolidated Theatres, Inc v Warner Bros Circuit Mgt Corp, 216 F2d 920, 927 (CA 2, 1954), the Second Circuit held that Canon 6 of the American Bar Association Canons of Professional Ethics "is devised to protect the secrets and confidences reposed in the attorney by his clients," and required the disqualification of an attorney representing the plaintiff in an antitrust action "substantially similar" to matters on which the attorney had worked on behalf of the defendants.*fn7 Id. at 927.

These descriptions of an attorney's obligation to a former client derive from the principle that the attorney's duties of loyalty and confidentiality continue even after an attorney-client relationship concludes. But under the common law and pursuant to the rules of professional responsibility, the continuing duties of loyalty and confidentiality apply only to matters in which the new client's interests qualify as both adverse to those of the former client and substantially related to the subjects of the attorney's former representation. Michigan Rule of Professional Conduct 1.9(a) embodies these concepts as follows: "A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation." An attorney does not necessarily breach his or her duty of loyalty and confidentiality to a former client by representing a new client whose interests are merely adverse to those of the former client. The attorney breaches his or her fiduciary duty to a former client only by undertaking representation of a client who has interests both adverse and substantially related to work the attorney performed for the former client.*fn8

A number of courts around the country have examined the circumstances under which an adverse subsequent representation may be deemed substantially related to legal services done for a former client. Most commonly, courts have adopted a three-part test set forth in INA Underwriters Ins Co v Nalibotsky, 594 F Supp 1199, 1206 (ED Pa, 1984):

1. What is the nature and scope of the prior representation at issue?

2. What is the nature of the present lawsuit against the former client?

3. In the course of the prior representation, might the client have disclosed to his attorney confidences which could be relevant to the present action? In particular, could any such confidences be detrimental to the former client in the current litigation?

The district court in INA Underwriters further elaborated,

In answering the first question, the court should consider both the purposes for which the attorney was employed and the facts underlying the matter for which the attorney was responsible. However, the focus should be upon the reasons for the retention of counsel and the tasks which the attorney was employed to perform. Once the purposes for which the attorney was employed are clear, it is then possible to consider the type of information which a client would impart to an attorney performing such services for him.

The second question is relatively simple to answer. All that is necessary is an evaluation of the issues raised in the present litigation and the general facts upon which the legal claims asserted in the present action are based.

In resolving the third question-whether confidential information "might" have been received in the course of the prior representation which would be substantially related to the present representation-the court should not allow its imagination to run free with a view to hypothesizing conceivable but unlikely situations in which confidential information "might" have been disclosed which would be relevant to the present suit. "The lawyer 'might have acquired' the (substantially related) information in issue if (a) the lawyer and the client ought to have talked about particular facts during the course of the representation, or (b) the information is of such a character that it would not have been unusual for it to have been discussed between lawyer and client during their relationship." [Id., quoting Realco Services, Inc v Holt, 479 F Supp 867, 871-872 (ED Pa, 1979).]

Application of the INA Underwriters analysis to the instant facts yields a conclusion that material questions of fact precluded summary determination whether defendants breached their fiduciary duties to ACM. At trial, three witnesses testified about whether Rentenbach breached his fiduciary duties to ACM: Mallet, John Beckerman, and Charles Borgsdorf. These witnesses offered differing views regarding whether Rentenbach's work on behalf of Alpha Partners qualified as "substantially related" to the work he had done for ACM.

Mallett described the "continuing ethical responsibility" to a former client as follows:

You have an ongoing relationship with this client. It isn't that you simply get to pick a new side at the end of the day just because you say I no longer represent you; therefore, I can represent someone whose interests are adverse to yours. It doesn't work that way.

You can end your relationship with a client and many times lawyers do because the relationship is broken down. That doesn't mean that you can then switch sides, it just means that you can leave the field.

He opined that "the establishment of a competing firm against [ACM] would have been directly adverse to Alpha Capital," and "I don't think the conflict gets any more direct than that." Mallett added that "if . two corporations are competing in the same field, competing for the same client base and delivering the same product," a corporate counsel for one company could not ethically represent the other without a waiver. During his direct examination, Mallett did not specifically address whether Rentenbach's representation of Alpha Partners and its principals had a substantial relationship to defendants' representation of ACM. On recross-examination, Mallett acknowledged his awareness of MRPC 1.7 regarding conflicts of interest and a relevant comment to the rule:

[A] lawyer ordinarily may not act as advocate against a person the lawyer represents in some other matter, even if it is wholly unrelated. On the other hand, simultaneous representation in unrelated matters of clients whose interests are only generally adverse, such as competing economic ...


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