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Cohen v. Jaffe, Raitt, Heuer & Weiss, P.C.

United States District Court, E.D. Michigan, Southern Division

June 30, 2017

COBE CAPITAL, LLC, Third-Party Defendant.



         This is a legal malpractice and breach of contract action. Plaintiffs Neal Cohen, Darren Chaffee and one of their businesses, SSL Assets, allege that they hired defendant law firm Jaffe, Raitt, Heuer & Weiss (“Jaffe”), and partners Jeffrey Weiss, Lee Kellert and Deborah Baughman to provide legal advice in connection with the possible purchase of LSI Corporation of America (“LSI”). Plaintiffs allege that Jaffe and its partners provided faulty legal advice which rose to the level of legal malpractice. The matter is before the court on plaintiffs' motion for partial summary judgment, defendants' motion for summary judgment, and third-party defendant's motion for summary judgment. The parties appeared for oral argument on the motions on May 31, 2017. For the reasons stated below, plaintiffs' motion for partial summary judgment is DENIED, defendants' motion for summary judgment is DENIED and third-party defendant's motion for summary judgment is GRANTED.


         Neal Cohen and Darren Chaffee are in the business of buying and turning around distressed businesses. They acquire underperforming businesses from large multinational corporations through CoBe and CoBe Management. Cohen is the owner of CoBe and CoBe Management, and Chaffee is managing director of CoBe Management with no ownership interest in either entity.

         In December 2012, Chaffee began due diligence on the possible purchase of LSI Corp. (“LSI”), which was a wholly owned subsidiary of HNI Corp. In the course of his research, Chaffee learned that LSI sponsored a multi-employer defined benefit pension plan for its union employees, and that the pension fund was underfunded. Chaffee learned that companies who participate in underfunded pension plans could face pension withdrawal liability if the company stops contributing to the plan, such as by ceasing operations and laying off its employees. Chaffee read articles related to pension withdrawal liability, including one from Skadden Arps that discussed a court opinion that decided the investment activities of a private equity fund did not constitute a “trade or business” and therefore did not subject the fund to joint and several liability as a controlled group. Controlled group liability is an ERISA concept whereby other entities can be responsible for the pension withdrawal liability of the sponsor of a pension plan based on common ownership. Cohen and Chaffee learned that the most recent estimate of LSI's pension withdrawal liability was $3.9 million. Their primary concern was to ensure that this liability was confined to LSI and would not spread to themselves or their other companies.

         Chaffee emailed Jeffrey Weiss on April 4, 2013 regarding the pending LSI deal. Weiss had rendered legal advice to Cohen and Chaffee in a prior attempted business acquisition. Chaffee explained that LSI was exposed to pension withdrawal liability of $3.9 million and he wanted advice regarding how to avoid having that liability attach to their other companies.

One of the big issues in this deal is that the facility is union and they sponsor a multi-employer pension plan. The potential clawback on the withdrawal liability is a risk that HNI [the seller] has. We also want to be sure that we aren't personally liable or put our other assets/companies at risk. We'll want to discuss this further. I understand the risk around this pretty well because we've been researching it.

(Plaintiffs' Ex. D) The subject line of the email was “CoBe Capital”.

         Shortly after the April 4, 2013 email, Chaffee believes that he and Weiss had an initial telephone call where they likely discussed the pension withdrawal liability issue. (Chaffee dep. 68-69). Chaffee and Cohen understood that Jaffe was protecting both their personal interests and their other businesses, including SSL Assets. At his deposition, Weiss testified that he understood that Cohen and Chaffee sought Jaffe's legal advice to be sure that they would not face liability associated with the pension withdrawal liability issue, either personally or on behalf of their other assets. (Weiss dep. 49-52). Jaffe did not provide an engagement letter for the services provided in connection with the LSI deal. (Weiss dep. 29).

         Controlled groups are determined by the ownership percentages in the entities involved. In order to render an opinion on whether Cohen and Chaffee's other companies were part of a controlled group, Weiss asked Chaffee if he and Cohen had common ownership in any entities. (Weiss dep. 41). Weiss does not recall explaining to Chaffee what “common ownership” meant for purposes of a controlled group liability analysis. (Weiss dep. 78). According to Weiss, Chaffee said that he and Cohen did not have common ownership in any entities. (Weiss dep. 41). Weiss did not obtain any other information to evaluate the issue of controlled group liability prior to the closing of the LSI purchase. (Weiss dep. 44).

         Jaffe never asked Cohen or Chaffee prior to the close of the LSI purchase for a written organizational chart listing the companies in which Cohen and Chaffee had an ownership interest. No lawyer at Jaffe ever asked Cohen or Chaffee for a list of the other companies they owned.

         Weiss drafted an operating agreement for LSI Holdings of America LLC (“LSI Holdings”), specifying that Cohen was to own 49% of LSI Holdings, Chaffee 49%, and a third investor 2%. The LSI deal was closed on June 18, 2013, at which time Weiss advised Chaffee, “I think we should finalize and execute this agreement . . . the ownership of the holding company avoids any controlled group issues.” (Doc. 1-2 at 5).

         In September of 2014, Chaffee and Cohen formed Cocha Finance, LLC (“Cocha”) to secure a $1.5 million asset-based working capital line of credit that LSI had taken from Bell State Bank & Trust. Despite the investment, by December of 2014, LSI had run out of money. On December 4, 2014, Chaffee emailed Weiss and attorney Kellert to reconfirm the controlled group liability issue: “Travis believe[s], and I think he is wrong, that we ‘CoBe Capital' is also on the hook for part of the pension withdrawal liability. I know we went round and round on this very topic when structuring the deal, but the question is to reconfirm this point again - that we have no liability with the PWL.” (Doc. 1-2 at 36). On December 5, 2014, Kellert replied to Chaffee, confirming “[Y]ou are correct that we do not believe that Cobe has any direct (the plan administrator can always make an alter ego claim) exposure for the pension withdrawal liability . . . .” (Doc. 1-2 at 38).

         At this time, LSI sought advice from the Stinson Leonard Street, LLP (“Stinson”) law firm about the option of filing bankruptcy. From discussions with the Stinson law firm in January 2015, Cohen and Chaffee learned that because they shared ownership interests in SSL Assets through their individual holding companies, SSL Assets was in a controlled group with LSI and LSI Holdings.

         Over the course of the next eight months, Cohen and Chaffee invested an additional $3.25 million in LSI to sustain the company. Nevertheless, in January 2016, LSI was forced to terminate its entire union workforce, thereby constituting a complete withdrawal from the pension fund. This triggered LSI's pension withdrawal liability, and SSL's corresponding controlled group liability. LSI's, and therefore SSL Assets', withdrawal liability is $3, 259, 960. (Ex. 16, Timothy Geddes Decl.) Chaffee testified they would not have purchased LSI if Jaffe had advised them that SSL Assets would be in a controlled group with LSI. (Chaffee dep. 151).

         In his deposition, Weiss admitted that when he was representing Cohen and Chaffee he did not have a “legally accurate” understanding of the meaning of “controlled group liability.” (Weiss dep. 13). Because he did not feel competent to assess controlled group liability, he relied on his partner Baughman to perform the analysis. (Weiss dep. at 14, 59). Weiss testified that Baughman told him what information she would need to conduct the controlled group analysis. (Weiss dep. 59-60). Baughman testified that she relied on Weiss to provide the necessary facts for her to perform a controlled group analysis, but denies that she told Weiss what questions to ask. (Baughman dep. 15-16, 19). Baughman recalled Weiss orally informing her of the ownership structure of LSI Holdings, but not of any other companies. (Baughman dep. 16). Baughman told Weiss there was no LSI controlled group beyond LSI Holdings. (Baughman dep. 18).

         In late 2014, Jaffe represented LSI in conducting negotiations with LSI's labor union. Weiss testified that LSI Holdings was Jaffe's client for services rendered in connection with the union negotiations. On January 23, 2015, Jaffe sent a bill to CoBe for legal services, in the amount of $92, 422.00, provided from September 5, 2014 through December 11, 2014. Jaffe billed the services to the “COBE-LSI” matter/file number to which it had billed all previous services. (Ex. 8 at 34-42). In its third-party complaint, Jaffe seeks to collect its legal fees from CoBe asserting breach of contract and equitable theories.


         Federal Rule of Civil Procedure 56(c) empowers the court to render summary judgment "forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Redding v. St. Eward, 241 F.3d 530, 532 (6th Cir. 2001). The Supreme Court has affirmed the court's use of summary judgment as an integral part of the fair and efficient administration of justice. The procedure is not a disfavored ...

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