H3GM JONATHAN HARWELL* JOHN M. BRITTINGHAM ALIX COULTER CROSS JONATHAN STANLEY

LiN S. HOWARD* SUSAN V. SIDWELL KRISKEMP J. DAVID MCDOWELL

ERNEST E. HYNE II JOHN F. BLACKWOOD J. GREG GiFFEN D. MATTHEW FOSTER

CRAIG V. GABBERT, JR. D. ALEXANDER FARDON LESLIE B. WILKINSON, JR.* JACOBA. FELDMAN

MARK MANNER MICHAEL R. HILL DAVID P. CANAS MICHAEL J. MILLS

HARWELL HOWARD HYNE GLEN ALLEN CiVJTTS DAVID Cox TRACY M. LUJAN LARA A. FLATAU

GABBERT & MANNER, P. C. GLENN B. ROSE CURTIS CAPELING JEFFREY J. MILLER ELIN M. HENNINGSSON

JOHN N. POPHAM IV BARBARA D. HOLMES WM. JAY HARRELSON*

* OfCounsel

Robert M. Garfinkle

July 14, 2011 ~~c )'"' J<1 ~~;~

Garfinkle, McLemore & Young, PLLC 2000 Richard Jones Road, Suite 250 Nashville, TN 37215

Sarah H. Hiestand 0;}1>-o ./ & . '~ Lyndsay F. Sanders ~t110,(1'~y. <'<?tl ' Office of the Attorney General ~< 0~ <>'<&-.t P.O. B.ox 20207 0si, <$';)1-1: Nashville, TN 37202-0207 01' ~

Re: Julie Mix McPeak, Commissioner ofthe Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner) v. Smart Data Solutions, LLC, and others

Dear Counsel:

Chancery Court- 20th Judicial District- Part III Case No. 10-507-III

Please find enclosed your service copy of a Motion to Dismiss the Petition for Failure to state a Claim which has been filed this same date in the above-referenced matter.

Should you have any questions, please do not hesitate to contact this office.

Enclosure

Sincerely,

HARWELL HOWARD HYNE GABBERT & MANNER, P.C.

~'--In~~

Linda Montalbano Legal Assistant to Alex Fardon

315 DEADERICK STREET, SUITE 1800 NASHVILLE, TENNESSEE 3 7238-1800 · - - · · -~----- - - -plion:e··-6-15:.-25Q;05DO- faxor5;L:S1:1o5-9- -w-ww--:h3 gm.com - -- -- -

IN THE CHANCERY COURT FOR THE STATE OF TENNESSEE 20th JUDICIAL DISTRICT, PART III

JULIE MIX McPEAK, Commissioner of the Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner),

) ) ) ) ) ) ) ) )

Petitioner, No. 10-507-111

v.

SMART DATA SOLUTIONS, LLC, and others,)

"Damages Petition Against Evans Petree PC and William L. Hendricks, Jr."

Respondents. ) )

MOTION TO DISMISS THE PETITION FOR FAILURE TO STATE A CLAIM

The Commissioner has filed a "Damages Petition" against Evans Petree PC and William

Hendricks. The Commissioner filed the Petition on behalf of Smart Data Solutions, LLC

("SDS"), a former client of Evans Petree and Mr. Hendricks that has been seized by the

Commissioner. The Petition accuses Evans Petree and Mr. Hendricks of breaching a duty to

SDS by (1) advocating SDS's position that it was not an insurance company instead of accepting

the contrary position asserted by various state agencies; (2) not stopping SDS from continuing to

make premium payments even after they and SDS knew that at least one state agency was

claiming that the insurance pr0duct SDS was buying was "bogus"; and (3) not preventing SDS, a

for-profit company, from making distributions to, or for the benefit of, its owner.

The Commissioner's position radically departs from long-standing Tennessee law. If

adopted, that position would expose Tennessee lawyers to liability for fulfilling their ethical duty

to advocate their clients' positions rather than adopt the positions of their clients' adversaries and

would make Tennessee lawyers guarantors of their clients' informed business decisions, as well

as financially responsible for their business clients' distributions to their owners.

The Petition against SDS's former lawyers not only fails to state a claim under existing

law, but it also contradicts the position that the Commissioner had SDS take in successfully

obtaining relief against other parties in two other lawsuits filed as part of this same liquidation.

Evans Petree and Mr. Hendricks move for dismissal pursuant to Tennessee Rule of Civil

Procedure 12.02(6). The movants have filed a memorandum in support of their motion.

Respectfully submitted,

HARWELL HOWARD HYNE

GABB~P.C. -

By: __ +~------------------------­Craig V. Gabbert, Jr. (Tenn. 4702) D. Alexander Pardon (Tenn. 13787) 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Telephone: 615-256-0500 cvg@h3 gm.com; daf@h3 gm.com

Counsel for Evans Petree PC and William L. Hendricks, Jr.

NOTICE OF HEARING: This motion will be heard during the Court's motion docket that starts at 9 a.m. on August 26, 2011. If you fail to timely file and serve a written response to this motion, the Court may grant the motion without further hearing.

Certificate of Service

On July 14, 2011, I caused this document to be sent by first-class mail to:

Robert M. Garfinkle Garfinkle, McLemore & Young, PLLC 2000 Richard Jones Road, Suite 250

. Nashville, TennessGe 37215

D. Alexander Fardon

Sarah H. Hiestand Lyndsay F .. Sanders

· Office of the Attorney General ·P.O. Box 20201 Nashville, Tennessee 37202-0207

2

IN THE CHANCERY COURT FOR THE STATE OF TENNESSEE 20th JUDICIAL DISTRICT, PART III

JULIE MIX McPEAK,. Commissioner of the Tennessee Department of Commerce and Insurance (Marie Murphy, Special Deputy Commissioner),

Petitioner,

v.

) ) ) ) ) ) ) ) )

No. 10-507-111

SMART DATA SOLUTIONS, LLC, and others, )

"Damages Petition Against Evans Petree PC and William L. Hendricks, Jr."

Respondents. ) )

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS THE PETITION FOR FAILURE TO STATE A CLAIM

The Commissioner has filed a "Damages Petition" against Evans Petree PC and William

Hendricks. The Commissioner filed the Petition on behalf of Smart Data Solutions, LLC

("SDS"), a former client of Evans Petree and Mr. Hendricks that has been seized by the

Commissioner. The Petition accuses Evans Petree and Mr. Hendricks of breaching a duty to

SDS by (1) advocating SDS's position that it was not an insurance company instead of accepting

the contrary position asserted by various state agencies; (2) not stopping SDS from continuing to

make premium payments even after they and SDS knew that at least one state agency was

claiming that the insurance product SDS was buying was "bogus"; and (3) not preventing SDS, a

for-profit company, from making distributions to, or for the benefit of, its owner.

The Commissioner's position radically departs from long-standing Tennessee law. If

adopted, that position would expose Tennessee lawyers to liability for fulfilling their ethical duty

·. to advocate their clients' positions rather than adopt the positions of their clients' adversaries and

would make Temiessee lawyers guarantors of their clients' informed business decisions, as well

as financially responsible ·for their business clients' distributions to their owners.

The Petition against SDS's former lawyers not only fails to state a claim under existing

law, but it also, as shown below, contradicts the position that the Commissioner had SDS take in

obtaining relief against other parties in two other lawsuits filed as part of this same liquidation.

Evans Petree and Mr. Hendricks move for dismissal pursuant to Tennessee Rule of Civil

Procedure 12.02(6).

THE LEGAL STANDARD FOR THIS MOTION

A Rule 12.02(6) motion tests the legal sufficiency of the well-pled factual allegations in a

complaint. "The· basis for the motion is that the allegations contained in the complaint,

considered alone and taken as true, are insufficient to state a claim as a matter of law." Daniel v.

Hardin Co. Gen. Hospital, 971 S.W. 2d 21, 23 (Tenn. Ct. App. 1997). Allegations of fact- not

mere conclusions--' are needed to state a claim. See Jasper Engine and Transmission Exchange

wMills, 911 S.W. 2d. 719, 720 (Tenn. Ct. App. 1995) ("While we recognize that the adoption of

the Tennessee Rules of Civil Procedure greatly relaxed the requirements as to pleadings,

pleading of some facts giving rise to a claim for relief is still a necessary requirement.").

THE COMMISSIONER'S PETITION1

"ATA" is an association people could join to obtain certain benefits, including health

insurance benefits (Petition~ 12). Until late 2009, ATA purported to have a master health and

accident insurance policy that covered its members and that was underwritten by Serve America

Assurance, a South Carolina company("SAA") (id. ~~ 10, 12-13, 23)? SAA "may be and has

sometimes been described as a wholly-owned alien captive insurance company subsidiary of

1 Evans Petree and 11r. Hendricks accept the Petition's allegations of fact as true for purposes of this motion only.

2 The Petition inconsistently alleges both that "[t]he Liquidator has not been able to verify whether that SAA master policy or any SAA master policy was ever issued to ATA" (id. ~ 14) and that "[t]here never was any insurance covt<rage issued to ATA by SAA" (id. ~ 18).

2

Beema-Pakistan Conipany, Limited" ("Beema") (id. 'j[10). William Worthy, II, a resident of

South Carolina, represented himself to be an authorized agent ofBeema/SAA (id. 'i[74).

SDS acted as ATA's administrator, collecting premiums from ATA members and

processing and paying claims submitted by those members (id. 'j[12 & Ex. 1 p. 18 at 'if 48 ("SDS

acts as the third party administrator for the ATA.")). SDS is a Tennessee limited liability

company (an "LLC") (id. 'i[2). Bart Posey was SDS's president and/or managing member (id.).

The Petition 'sAllegations I Assertions Regarding SDS 's Premium Payments

In early 2008, the North Carolina Department of Insurance ("NCDI") began to

investigate SDS, Posey; ATA and others regarding the marketing and administration of certain

insurance policies (id., 33). SDS and Posey hired Mr. Hendricks, a Memphis lawyer, to assist

them with responding to that investigation (id. 'j['j[3, 18, 32-33, 66-67).3

Posey had concerns about Worthy when the NCDI investigation began (id. 'if 75).

(Indeed, in a brief filed with the Court of Appeals in this proceeding, the Commissioner cites a

March 2008 email in which Posey implies to Worthy that the Beema/SAA insurance Worthy was

providing was not "with a rated, licensed· carrier" and an April2008 email to Worthy in which

Posey expresses doubt as to whether "this plan through Beema is even legal" (see Tab A p. 27).)

SDS nevertheless chose to continue doing business with Worthy and making premium payments

· for the Beema/SAA co~;erage (id. 'j['j[35, 75-77).

3 The Petition creates unnecessary confusion by, among other things, defming "the receivership entities" to include SDS, ATA, and SAA (id. , 9) and then alleging that Evans Petree and Mr. Hendricks represented the "the receivership entities" in the North Carolina proceedings (id. ~ 35). As the Petition makes clear els~where (~, id. ~ 32 & p. 10 (section entitled "EVANS PETREE AND HENDRICKS' LEGAL REPRESENATION OF SDS AND POSEY")), however, and as is the case, Evans Petree and Mr. Hendricks haye never represented SAA, which is a Worthy-affiliated entity that, as the Commissioner herself has stated in the lawsuit against Worthy described below, helped Worthy defraud SDS of most of the premium payments at issue.

3

In August 2008, the NCDI issued an Emergency Cease and Desist Order in an

administrative case filed against SDS, Posey, ATA and others (id. ~~ 18, 68 & Ex. 1). That

August 2008 Order stated that Beema was "an unauthorized, alien insurer" and described the

Beema insurance .productsold by Worthy as "bogus" (id. ~~ 18, 68-69 & Ex. 1 p. 6 at~ 19).4

SDS nevertheless continued doing business with Worthy and making premium payments for the

Beema/SAA insurance coverage (id. ~~ 35, 75-77).

In February 2009, after an October 2008 hearing, the NCDI issued a Final Decision and

Order (id. ~~ 34, 71 & Ex. 2). That Order stated in part that SDS had marketed and sold "bogus

health insurance coverage," ihcluding under the plan purportedly issued by Beema/SAA (id. Ex.

2 pp. 16-17 at~~ 71-79, p. 27 at~ 132, p. 34 at~ 176, p. 35 at~~ 180-81). This Court has held

that SDS and Posey knew: or should have known by no later than the issuance of the NCDI Final

Decision and Order that the Beema/SAA insurance product was "a sham" (id. ~~ 34, 71, 73).

SDS nevertheless chose to continue doing business with Worthy arid paying premiums for the

Beema/SAA insurance after the February 2009 NCDI Order (id. ~~ 35, 75-77).

Mr. Hendricks joined Evans Petree in early 2009 (id. ~~ 32, 78). At the same time, SDS

asked Mr. Hendricks to respond to a new investigation of SDS, ATA, and Posey by the

Tennessee Department of Commerce and Insurance ("TNCf') (id. ~ 78).5 Mr. Hendricks told the

TNCI that SDS 'planned to appeal the~NCDIFinal Decision and Order (id.).

Several more state aget1.cies began investigating SDS and Posey during 2009 {id. ~~ 31,

79). Many of these agencies took the position that, despite paying millions of dollars in

., . -4 The August 2008 NC.DI Order concerned niany more issues and parties than just Worthy and

Beema/SAA and suggested t,ttat SDS had served as administrator for another "bogus" insurance plan, called NAA, since 2006, which is long before SDS retained Mr. Hendricks (see, M., id. Ex. 1 p. 13 at~ 7) ..

5 The Commissioner and her former law firm actually represented "bogus" insurer Beema in connection with the TNCI proceedings (See Tab B).

4

premiums for Beema/SAA to insure AT A members, SDS was itself engaged in an unauthorized

insurance business (id. ~~ 14, 31). SDS hired Evans Petree and Mr. Hendricks to advocate

SDS's position that it was a third-party administrator, not an insurer (id. ~ 37).

In October 2009, SDS and Posey stopped doing business with Worthy and Beema/SAA

(id. ~ 20). From the time Mr. Hendricks joined Evans Petree in early 2009 through late 2009,

SDS paid Worthy $2,106,944 in premiums for the "unauthorized, bogus" Beema/SAA insurance

(id. ~ 84). In March 2010, Evans Petree filed suit for ATA against Worthy and companies he

controlled, alleging that they had obtained these premiums through fraud (id. ~ 19).

SDS ·and Posey began searching for a new insurance provider for AT A after SDS stopped

paying premiums to Beenia/SAA (id. ~ 88). In December 2009, SDS wired $582,967 to First

Risk - Andone ("Andone") "at the instructions of an individual named Gary Ketchum to obtain

·insurance that did not exist" (id. ~ 90). The Petition does not allege that Evans Petree or Mr .

. ·Hendricks even knew about SDS 's payment to Andone (see id. ~~ 87-91 ).

SDS then turned to Atlantic Surety Holdings, S.A. ("Atlantic Surety") (id. ~ 93). Atlantic

Surety had confirmed·by email·that PT Prudential Life "would bind coverage and provide an

admitted carrier so thatbusiness could be conducted legally in Tennessee" (id. ~ 95). Mr.

Hendricks was told 6fthistrimsaction before it occurred (id. ~ 94). In March 2010, SDS wired

Atlantic Surety $125,000 rot this coverage (id. ~ 93). SDS's payment to Atlantic Surety also

proved to be for "bogus cover:agethat did not exist" (id. ~ 96).

The Petition asserts that "the negligence of Hendricks" was the cause of SDS' s premium

payments to Beema/SAA ($2,106,944), Andone ($582,967), and Atlantic Surety ($125,000)

. between early 2009 and March 2010 (id. ~~ 19, 85, 90, 96). The Petition does not allege that

Evans Petree or Mr. Hendricks advised SDS to make these payments. Nor does the Petition

5

allege that SDS asked. Evans Pet~ee or Mr. Hendricks to give such advice, or to even investigate

any insurer or pot~ntial: insurer. Nor does the Petition allege that Evans Petree or Mr. Hendricks

failed to tell SDSanything that SDS and its owner Bart Posey did not already know. Instead, the

Petition asserts that Evans Petree and Mr. Hendricks should have known that SDS was paying

premiums for insurance that was "bogus" and, somehow, should have prevented SDS from

paying those premiums (id. ~~ 34-36, 44, 80-82, 89-90, 96).

The Petition's Allegations I Assertions Regarding Advocating SDS's Position

. The Commissioner contends, as she has since the March 2010 ex parte seizure, that SDS

and ATA "constituted ah unlicensed, unregulated insurance entity" (id. ~~ 11, 13-16).6 The

Commissioner 'faults .Evans Petree and Mr. Hendricks for previously having advocated SDS's

position to the contrary· (id. ~~ 31-:32, 42-43, 101).7 The Commissioner claims SDS's former

· lawyers breached their duty to their client when "[t]hey took the position that [SDS and ATA]

-did nothing wrong and were not engaged in an insurance business that subjected them to

regulation" (id. ~ 101). According to the Commissioner, by advocating their client's position

rather than agreeing with their client's adversaries, Evans Petree and Mr. Hendricks "facilitated

the operation of art unliCensed, unauthorized, illegal busi:hess" and should themselves have to

pay "ail valid claimsiri the Liquidation" (id. ~~50, 99, 105).

6 Before taking the position that SDS is an unlicensed insur~r to justify seizing SDS, the Commissioner had filed an administrative action against SDS in which the Commissioner accurately claimed that SDS

. was not an insurer hut a third:.party administrator processing insurance claims (TNDCI No. 10-004 12.04-106294J). The <Petition against Evans Petree and Mr. Hendricks reflects this on-going contradiction between thy reality that SDS paid millions of dollars in premiums to third parties to buy insurance coverage for A TA members (even if that coverage proved to be "unauthorized" or "bogus") and the Commissioner's position before this Court (which, admittedly, has been successful) that SDS itself was providing insurance coverage. In short, the Commissioner was able to reach this point only by successfully asserting that SDS was the insurer and, having reached this point, is now bringing claims that focus on the reality that SDS was a purchaser of insuran.ce.

7 As the Court knows and as the record already reflects, SDS and A TA eventually had other counsel argue their position on this issue to both this Court and to the Court of Appeals.

The Petition's Allegations I Assertions Regarding Posey's Control o(SDS Funds

From August 2009 through March 2010, Bart Posey transferred over $1.2 million of SDS

money to himself or to his family "for his personal benefit" (id. ~~ 30, 61). These transfers

included $144,000 Posey wired from an SDS account to an Evans Petree trust account in August

2009 to be used to buy a home (id. ~~ 30, 53-54). The Petition labels these transfers from SDS to

its owner as "fraudulent," "conversion," and "embezzlement," but the Petition contains no

factual allegations to support these labels (id. ~~ 30, 47, 54, 56-57, 60-63, 101). The Petition

nevertheless asserts that Evans Petree and Mr. Hendricks are liable to SDS for not "recognizing"

and, presumably, notstoppi1ig SDS from making, the transfers (id. ~~56-57, 62-63).8

THE WORTHYIBEEMA LAWSIDT AND JUDGMENT

The Court's record shows that this malpractice action is not the first lawsuit the

. Commissioner has pursued concerning the premiums SDS paid to obtain insurance coverage

from Beema/SAA. In fa.ct, the Colilmissioner has already obtained a judgment to recover those

premiums based on the Commissioner's assertion that SDS paid the premiums in reasonable

reliance on William Worthy's false representations.

The Con:imiss1ciner filed Newman v. William Worthy, U and others (the "Worthy/Beenia

Lawstiit") as part of this ·liquidation (9/30/10 Liquidator's Petition to Recover Damages from

William M. Worthy, II, Caroline H. Worthy, Southeast Insurance Advisors, LLC, and

Nationwide Administrators, LLC (No. 10-507-III)(the "Worthy Petition")). The Commissioner

alleged in the Worthy Petition: (1) Worthy represented to SDS and Posey that he was an agent of

8 The movants have not tried to repeat here every allegation in the 25-page Petition, as many of those allegations do not even .relate to any claim asserted against Evans Petree and Mr. Hendricks, but rather just seek to criticize the businessofthese lawyers' former clients (see,~ Petition~ 24 ("Further, the benefits purportedly being prpv~de,d by the receivership entities were not reasonable in relation to the premium charge~.") The Commissioner's opinion of a business, whether right or wrong, is not a basis for suing the business's l~:twyers. See, M, Tenn. Rule of Prof. Conduct 1.2 at Comment 6 ("[R]epres(mting a Client does not constitute approval of the client's views or activities.").

7 ~

Beema and Beema' s off-shore captive SAA and that Beema/SAA would provide insurance

coverage for ATA members effective January 1, 2008 (Worthy Petition~~ 9-10, 27 & Exs. 1, 2);

(2) these representations were false (id. ~ 28); (3) even though SDS and Worthy were "at odds

about ... [the] existence of coverage" by April 2008, SDS reasonably relied on Worthy's false

representations iil paying over $2.8 million in premiums between early 2008 and late 2009 for

insurance for ATA members (id. ~~ 12, 14, 20, 29); (4) rather than use the premiums SDS had

paid to provide the insurance coverage promised, Worthy and the other defendants named in the

Worthy Lawsuit stole the money (id. ~~ 16-17). The Commissioner asserted claims in the

Worthy/Beema Lawsuit for, among other things, fraud and conversion (id. ~~ 26-32).

The Court's record shows that, at the Commissioner's request, the Court entered

judgment against three of the defendants in the Worthy/Beema Lawsuit on all claims and for all

, relief sought (5/5/11 Order of Judgment by Default).

THE KETCHUM/ANDONE LAWSUIT AND JUDGMENT

This malpractice action also is not the first lawsuit the Commissioner has pursued

concerning the pteniium· SDS paid to obtain insurance coverage from: Andone. In fact, the

Commissioner ·has already obtained a judgment to recover that payment based on the

Commissioner's assertion that SDS paid the premium in reasonable reliance on others' false

representations.

The Corhhlissioner. filed Newman v. William Gary Ketchum and others (the

. ! .

"Ketchum/Andon~Lawsuit") as part of this liquidation (8/13/10 Liquidator's Petition to Recover

Damages from Gary L Ketchum, Donald Choi, and First Risk Holdings, LLC (No. 10-507-III)

(the "Ketchum Petition")). The Commissioner alleged in the Ketchum Petition: (1) Ketchum and

Choi represented to SDS and Posey that Ketchum was a principal in Andone, which is a licensed

8

insurance company, and that Andone would provide insurance coverage for AT A members

(Ketchum Petition~~ 8, 24); (2) these representations were false (id. ~~ 9-10, 25); (3) Ketchum

sent Posey a coverage binder and wiring instructions (id. ~ 11); (4) relying on Ketchum's and

Choi's representations, and pursuant to Ketchum's instructions, Posey had SDS wire

$582,966.85 to an account in the name of First Risk- Andone (id. ~~ 12, 26); (5) rather than use

SDS's premium payment to pay Andone for insurance coverage for ATA members, Ketchum,

Choi, and First Risk stole the money (id. ~~ 15-16). The Commissioner asserted claims in the

Ketchum/Andone Lawsuit for fraud and conversion (id. ~~ 23-30).

The Court's record shows that, at the Commissioner's request, this Court entered

judgment against all defendants in the Ketchum/ Andone Lawsuit on all claims and for the full

amount sought (1/7/11 Agreed Order ofJudgment).

ARGUMENT

A client accusing a lawyer of malpractice must prove: (1) that the lawyer breached a duty

to the client; and (2) that the breach proximately caused the client damage. Lazy Seven Coal

Sales, Inc. v. Stone & Hinds, P.C., 813 S.W.2d 400, 403 (Tenn. 1991). Given these elements,

the Petition fails to state a viable malpractice claim against Evans Petree and Mr. Hendricks.

I. . THE PETITION FAILS TO IDENTIFY ANY DUTY TO SDS THAT EVANS PETREE AND MR. HENDRICKS BREACHED.

The Commissioner asserts_that Evans Petree and Mr. Hendricks are liable to SDS for (1)

advocating SDS 's position that it was not an insurance company instead of accepting the

contrary position asserted by various state agencies; (2) not stopping SDS from continuing to

make premium payments even after SDS knew that at least one state agency was claiming that

·the insurance for which SDS was.paying was "bogus"; and (3) not preventing SDS, a for-profit

9

company, from making distributions to, or for the benefit of, its owner. As a matter of law, none

of these alleged "failures" by SDS's former lawyers constitutes a breach of duty to SDS.

A. A LAWYER DOES NOT COMMIT MALPRACTICE BY ADVOCATING HIS CLIENT'S POSITION TO IDS CLIENT'S ADVERSARIES.

Various state agencies have a dispute with a business. The business hires lawyers to

advocate its position in that dispute. One of the agencies then seizes the business and sues the

business's lawyers for not having adopted the state agencies' position rather than advocating

their client's position. Are the lawyers liable to their former client for having advocated for the

client's position? The answer is obvious. Yet this is the very scenario and claim the

Commissioner presents in this .case (see,~' Petition~ 101 (Evans Petree and Mr. Hendricks

liable for having taken "the position that the receivership entities.did nothing wrong and were not

engaged in an insurance busmess that subjected them to regulation")).

Evans Petree and Mr. Hendricks did not breach a duty to SDS by advocating SDS's

position that it was not an insurance company to the state agencies investigating SDS. In fact,

Evans Petree and Mr. Hendricks would have violated their ethical duty to SDS if they had done

otherwise. See, ~' Tenn. Rules of Prof. Conduct at Preamble ~ 3 ("As an advocate, a lawyer

zealously asserts the client's position under the rules of the adversary system.").

B. A LA,VYER IS NOT A GUARANTOR OF A CLIENT'S BUSINESS DECISIONS.

Lawyers <rre not guarantors of the matters their clients ask them to handle, let alone of

their client's businesses generally. See, ~' Strauss v. Wyatt, Tarrant, Combs, Gilbert &

Mi1om, 911 S.W.2d 727, 729 (Tenn. Ct. App. 1995) (rejecting malpractice claim that "would

impose ... a guarantor's duty"); 3 Tenn. Jur. "Attorney and Client" § 12 (2011). "It is

axiomatic ... that the duty .of the attorney to act does not extend to the business of the client in

10 ~-~-

general.. .. The obligation of the attorney is to provide the service for which he was hired."

Somma v. Gracey, 544 A.2d 668, 672 (Conn. Ct. App. 1988) (citations omitted) (Tab C). Yet, in

suing Evans Petree and Mr. Hendricks for the premiums SDS chose to pay for coverage from

Beema/SAA, Andone, and Atlantic Surety in 2009 and early 2010, the Commissioner is seeking

to make SDS's lawyers guarantors ofSDS's business decisions.

The Beema/SAA Premium Payments

SDS did not hire Mr. Hendricks to advise SDS on whether to enter into a business

relationship with Worthy and Beema/SAA. SDS hired Mr. Hendricks in early 2008 because the

NCDI was already investigating that relationship (see Petition~~ 3, 18, 32.;33, 66-67). Indeed,

according to the Commissioner's own filings, by early 2008 SDS and its principal, Bart Posey,

were themselves suggesting that Beema/SAA was not a licensed carrier and challenging Worthy

as to whether "this plan through Beema is even legal" (id. ~ 75;-Tab A p. 27; Worthy Petition~

20 ("As early as April; 2008, Worthy and the ATA entities/SDS were at odds about payment of

premiums and existence of coverage, as shown in [the attached e-mails].")).

The Commissioner suggests that the NCDI administrative orders put Evans Petree and

Mr. Hendricks on notice "that the Beema!SAA insurance product was a sham" and that SDS was

therefore paying for "bogus" instirance (Petition ~~ 34, 80). But the Commissioner ignores the

critical legal significance oftlie fact that SDS and Posey (as well as ATA) were named parties in

the NCDI investigation and the NCDI's orders resulting from that investigation (see id. Ex. 1 p.

6 at~ 19, pp. 21-22 at ,168 (8/15/08 NCDI Order stating that SDS has been enrolling individuals

in a group health insurance policy issued by Beema, that Beema is an unauthorized alien insurer,

and that SDS is selling "bogus insurance") & Ex. 2 p. 2, p. 5 at~ 14, pp. 16-17 at~~ 71-79, p. 27

at~ 132, p. 34 at~ 176,-p. 35 at~~ 180-81 (2/26/09 NCDI Order noting thatPosey appeared for

~-- 11

first day of hearing without counsel and finding that SDS had marketed and sold "bogus health

insurance coverage," including under the policy Worthy purportedly had Beema/SAA issue)) .

. The NCDI administrative orders thus did not convey to Evans Petree and Mr. Hendricks

anything that SDS and its principal, Posey, did not also know (see,~; id. ~ 73 (quoting from

this Court's 4/14/10 Memo. and Order to effect that NCDI order had put SDS on notice that

Beema!SAA product was a sham that posed significant risk of nonpayment of ATA member

claims). Yet, even though the information known to SDS had put SDS and Worthy "at odds

about payment of premiums and existence of coverage" by April 2008, SDS chose to continue

making premium payments to Worthy for the purported Beema!SAA insurance until late 2009

(id. ~~ 20, 35, 75-77; Tab A p. 27; Worthy Petition~ 20 & Ex. 7).

Given these allegations, SDS has not stated a viable claim against its former lawyers for

SDS's decision to continue to pay premiums for the Beema!SAA insurance. See, M.,., Strauss v.

Wyatt, Tarrant, 911 S.W.2d at 728-29 (clients' lawyers not liable for malpractice where clients

knew and understood investment transaction and its risks, were not misled by lawyers, and

decided to proceed With transaction without asking lawyers for advice on whether to engage in

transaction).9

· The Andone· and Atlantic Surety Premium Payments

The ColJllllissioiler also wants SDS to blame its former lawyers for the $582,967 SDS

wired to First Risk- Andone in December2009 "at the instructions of an individual named Gary

9 Note that SDS's daim relate.dto the. premiums it paid for the Beema/SAA insurance is also time-barred given that, if the Commissioner's allegations are accurate, SDS knew no later than by the February 2009 NCDI Order that it was paying for, and marketing, a "bogus" insurance product. See Woods & Wodds v. Lewis, 9()2 S.W.:id 914, 917-18 (Tenn. Ct. App. 1994) (client had one year from discovery of negligence to sue lawyer, and initiation of action by third party put client on notice of lawyer's allegedly deficient advice to client); Tenn. Code Ann. §§ 56-9-304; 56-9-313(b)(1) (indicating that rehabilitation and liquidation orders do not revive claims on which the limitations period has already expired by the time the rehabilitation and/or liquidation petition is filed).

·-·--------. ·---------- --------------------~~

Ketchum" (Petition fl~ 87-91), as well as for the $125,000 SDS wired Atlantic Surety in March

2010 for coverage through PT Prudential Life (id. ~~ 92-97).

Here, again, the Petition does not allege that SDS asked its lawyers to investigate Mr.

Ketchum, Andone; or Atlantic Surety; that SDS asked its lawyers to advise SDS on whether to

make these payments; or that SDS 's lawyers in fact gave SDS advice (let alone deficient advice)

on whether to make these payments (see id. 'j['j[87-97). The Petition does not even allege that

Evans Petree and Mr. Hendricks evenknew about the Andone premium payment (see id. ~~ 87-

91). The Commissioner's Petition instead merely relies on the implied proposition that, once a

client hires a lawyer for ariy purpose, that lawyer is liable for anything bad (including a third

. party's fraud) that happens to the client. That is not the law. See,~' Jamison v. Norman, 771

S.W.2d 408, 409-10 (Tenn. 1989) (lawyer hired to handle- client's personal injury claim not

.liable for client's own failure to file worker's compensation claim in Georgia where client chose

not to consult lawyer on the latter claim); Strauss v. Wyatt, Tarrant, 911 S.W.2d at 728-29

(lawyers not liable for client's decision to enter into transaction where lawyers were asked only

for advice on how to structure transaction).

· C. A LAWYER DOES NOT HAVE A DUTY TO PREVENT A FOR-PROFIT ENTITY FROM MAKING DISTRIBUTIONS TO ITS OWNER. . . .

The Commissioner also seeks to have SDS sue its former lawyers for over $1.2 million of

SDS funds that SDS' s ovmer, Posey, allegedly transferred to himself or his family members in

2009 and e<;~.rly 2010 (Petition~~ 30, 61). These allegations also fail to state a claim for legal

malpractice .

.. SDS is a Tennessee LLC (id. 'if 2). A Tennessee LLC, like other for-profit business

entities, is permitted to tr~sfer money, whether directly or indirectly, to or for the benefit of its

owner-members. See Tenn. Code Ann. § 48-249-102(7) ("distribution" definition) & § 48-249-

305 (rights to distributions). 10 This is true unless, upon making the distribution, the LLC would

be insolvent urider the statutory definition, in which case those who vote for and those who

receive the excess distribution are personally liable. See Tenn. Code Ann. §§ 48-249-306 to -

307.

The Commissioner's Petition labels the alleged SDS transfers to Posey as "fraudulent,"

"conversion," and "embezzlement" (id. ~~ 30, 47, 54, 56-57, 60-63, 101). But the Petition

contains no factual allegations to support any of those labels. The Petition, in short, fails to make

allegations that would support a claim under Section 48-249-307 to recover SDS funds from

SDS's owner, let alone from SDS's former lawyers. In addition, Evans Petree and Mr.

Hendricks have not been able to find any precedent for a claim that a business entity's lawyers

commit malpractice by not preventing the entity's owner from causing the entity to make

transfers to or for the benefit of that owner. This part of the Petition thus appears to be yet

another application of the legally-defective "lawyer as guarantor" proposition that generally

underlies the Commissioner's theories against SDS's former counsel.

II. THE COMMISSIONER AND SDS ARE ESTOPPED FROM CLAIMING THAT EVANS PETREE AND MR. HENDRICKS PROXIMATELY CAUSED SDS TO INCUR THE BEEMA/SAA AND ANDONE PREMIUM LOSSES.

Evans Petree a:lld Mr. Hendricks have already shown that the Commissioner's Petition

fails to state a claim against them as to the premium payments SDS made seeking insurance

coverage for ATA members (see Section I(B) above). The Petition, however, suffers from a

second fatal defect \vith respect to the premium payments SDS made for the Beema/SAA and

Andone coverage: it contraqicts the position the Commissioner took in previously obtaining

judgments in two other actions.

10 A single-owner LLC is even presumptively treated as if the LLC and its owner are one entity for federal taxation purposes (that is, the LLC's revenue "passes through" to its owner). See IRS Treasury Regulation§ 301.7701-3.

As described above, the Commissioner has already obtained judgments against several

parties who induced SDS to pay premiums for coverage from Beema/SAA and Andone (see

description ofWorthy/Beema Lawsuit and Ketchum/Andone Lawsuit at pp. 7-9 above). In both

of those cases, the Commissioner, acting on behalf of SDS, took the position that SDS had made

the premium payments at issue in justifiable reliance upon the defendants' false representations

to SDS (see Worthy Petition~~ 9-10, 12, 14, 20, 27-29; Ketchum Petition~~ 8-12, 23-28)Y

A plaintiff may not obtain a judgment (including a default judgment) on one theory and

then separately pursue a claim for the same loss using an inconsistent theory. See, M, Morris v.

Esmark Apparel, Inc., 832 S.W.2d 563, 565 (Tenn. Ct. App. 1991) (under rule of collateral

estoppel, party may notre-litigate a particular dispositive issue that was necessarily decided in a

.previous lawsuit involving that party); Phillips v. General Motors Corp., 669 S.W.2d 665, 668-

69 (Tenn. Ct. App. 1984) (same). See also Beare v. Burnett, 39 S.W.2d 737 (Tenn. 1931) ("A

judgment by default is as conclusive as one rendered in a case where defendant appears as to all

. matters properly in issue."); State v. Chapman, 922 S.W.2d 516, 518 (Tenn. Ct. App. 1996)

(same). Having successfully taken the position that SDS was justified in paying the premiums at

issue to parties who deceived SDS andthen stole the money rather than providing the promised

insurance, the Commissioner and SDS are estopped from now claiming that any alleged failure

of SDS 's lawyers caused the same loss.

11 .The Commissioner may object that, in bringing fraud claims against the defendants in those cases, the Worthy and Ketchum Petitions allege only "reliance," and not ''justifiable" or "reasonable" reliance (see Worthy Petition~. 29; Ketchum Petition~ 26). Such an objection would not overcome the reality that a judgment cannot be obtained on a fraud claim absent the victim's "justifiable reliance" on the defendant's misrepresentations. See, £:.&, McNeil v. Nofal, 185 S.W.3d 402, 409 (Tenn. Ct. App, 2005) Gustifiable reliance necessary element in any cause of action based on negligent or fraudulent misrepresentation); Allied Sound v. Neely, 58 S.W.3d 119, 122-23 (Tenn. Ct. App. 2001) (plaintiff cannot prove reasonable reliance element of fraud claim where plaintiff had opportunity to discover the fraud); Security Fed. Sav. & Loan Ass'n v. Riviera, Ltd., 856 S.W.2d 709, 712 (Tenn. Ct. App. 1992) (the claimant's reliance must be reasonable under the circumstances).

CONCLUSION

The Commissioner has made convoluted and contradictory assertions but has not stated a

viable claim for malpractice under Tennessee law. Evans Petree and Mr. Hendricks respectfully

move for dismissal of the Petition pursuant to Tennessee Rule of Civil Procedure 12.02(6).

Respectfully submitted,

HARWELLHOWARDHYNE GABBERT MANNER, P.C.

-By: I ~,---------------------------

Craig V. Gabbert, Jr. (Tenn. 4702) D. Alexander Fardon (Tenn. 13787) 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Telephone: 615-256-0500 cvg@h3gm.com; daf@h3gm.com

Counsel for Evans Petree PC and William L. Hendricks, Jr.

Certificate of Service

On July 14, 2011, I caused this document to be sent by first-class mail to:

Robert M. Garfinkle Garfinkle, McLemore & Young, PLLC 2000 Richard .Tones Road, Suite 250 Nashville, Tennessee 37215

D.bGk::

449595-1

Sarah H. Hiestand Lyndsay F. Sanders Office oftheAttomey General P.O. Box 20207 Nashville, Tennessee 37202-0207

-16 --- -----

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.1

IN THE COURT OF APPEALS OF TENNESSEE MIDDLE SECTION

COMMISSIONER OF COMMERCE AND ) INSURANCE FOR THE STATE OF TENNESSEE, )

) No. :M2010-01938-COA-R3-CV Petitioner/ Appellee, )

) Davidson County Chanceiy Court v. ) No. 10-507-lll

) SMART DATA SOLUTIONS, LLC, a Tennessee limited ) liability company, AMERICAN TRADE ASSOCIATION, ) INC, an Indiana nonprofit corporation with its principal ) place ofbusiness in Tennessee, AMERICAN TRADE ) ASSOCIATION, LtC, an Arkansas limited liability ) company, SERVE AMERICA ASSURANCE, a ) corporation with an unknown location, BART S. POSEY, ) Sr. ap. individual, ANGIE POSEY, an individual, OJ?ED ) W. KIRKPATRICK, Sr., an individual, LINDA . )' KIRKPATRICK, an individual, RICHARD H. ) BACHMAN, an individual, WILLIAM M. WORTHY, ) II, an individual, COLIN YOUELL, an individual, )

) Respondents/ Appellants. . )

ON APPEAL FROM THE JUDGMENT OF THEDA VIDSON COUNTY CHANCERY COURT

BRIEF OF APPELLEE COMMISSIONER OF. COMJ.\1ERCE AND INSURANCE FOR THE

STATE OF TENNESSEE

ROBERT E. COOPER, JR (BPR 10934) Attoniey General and Reporter

SARAH A. IDESTAND (BPR 14217) Senior Counsel, Financial Division L YNDSAY F. SANDERS (BPR 22849) Assistant A,ttomey General Law Enf. & Special Prosecutions Division LAURA T. KIDWELL (BPR 14632) Senior Counsel, Financial Division 425 5th Ave. N., 2nd Floor Nashville, 1N 37243-3200 (615) 741-6035

ORAL ARGUMENT REQUESTED

l

t --,..l

B. Posey's knowledge that Beema and Serve America are unauthorized insurers

Even before the North Carolina final agency order was issued on February 19, 2009,

correspondence between Bart Posey and William Worthy reveals that Posey had doubts that

Beema and Serve America were authorized insurers. On March 7, 2008, Worthy forwards Posey

the following emails that he exchanged with Dave Clark, RBA Chairman:

Dave,

I want you to understand that Bart and Rick are two outstanding guys and very determined to grow this block of business to 25,000 lives quickly. With Beema's input with systems and products, the poteD:ti.al is unlimited.

As far as the captive, we decide~ to use the name Serve America Limited. This be [sic] an Offshore Captive. It will not be admitted in any states, which will allow it to write business in all 50 st;ates. Beema will obtain from an outside legal

· firm to give us an opinion that agents can legally market the captive in the US.

William

Clark responds to each of the septences in Worthy, s emaiL (The bolded language was contained

in Worthy's original email to Clark.)

William,

I want you to understand that Bart and Rick are two outstanding gU.ys and very determined to grow this block_of business to 25;000 lives quicldy. I certainly applaud that effort and will diligently work to assist in any way I can. With Beema's input with systems and products, the potential is unlimited. Not knowing what that contribution will be from Beema, it is difficult for me to comment.

As far as the captive, we decided to use the name Serve America Limited. Nice name.

This be [sic] an Offshore Captive. It will not be admitted in any states, which will allow it to write business in all 50 states. As you learned in our brief conversation, that is precisely what we accomplished with the formation of

26

RBA. 13 Beema will.obtain from an outside legal finn to give us an opinion that agents can legally market the captive in the US. I will be very curious to learn of this "opinion letter" and its content. This is a vital issue in the long term development of our mutual business interest ....

Dave

(Jaquish Aff. R XVIII, p. 2549, 'i[4, e~. A, R. XVIII, p. 2550-2551).

On March 12, 2008, Posey emails Worthy, "William, I think at this time I just need to

' refund all collected premium back to the accounts we have hit until we get all things in place. Or . .

I need to place it with a rated, licensed carrier." (Posey Supp. Aff. R. XIV, p. 1874, ~13, exh. 12,

R XIV, p. 1935a). Nevertheless;Po1?eY writes Clark on March 19,2008, and states, "we would

like to become part of the RBA .... [I]t is our understanding that all m~r contracts [for p1ans]

will be issued directly to the RB.t?- from Beema/ Serve America Assurance." (King Af;f. R. VIII,

p. 1058, ~6, exh. B, R. VIII, p. 1 083).

OnA.pril. 22, 200$, Posey emails Worthy, "To date I still do not have sufficient paper

work and or evidence that 1h.is plan throughBeema is even leg;ll .... " (Posey Supp. Aff. R. XIV,

p. 1874, ~1i, exh. 13, R XIV, p. 1934a).

On February 19, 2009, North Carolina !ssued the final agency order described earlier. It

puts Posey on direct notice that "Beema . . . is not licensed as an insuraJ;t'Ce company in North

) J Carolina or any other state" and that "Serve America ... is not li~ed in any state." (Rill,

p. 449, ~132). After the issuance of this order, Posey emailed Worthy about the legitimacy of

Beema and Serve America. The only assurances Posey received were from Worthy. (Posey

Supp. Aff. R. XIV, p. 1874, 1[13, exh. 12, R. XIV, p.l914-1914a; R. XIV, p. 1874-1875, ~14,

13 The RBA asserted that it was a Taft--Hartley Union Association. The United States Department of Labor investigated this assertion and informed Clark that it was not a "labor organization." (R. III, p. 446-447, ffll9-l22; R. :rrr, p. 447-448, Wl25-26).

27

l [

j

l I

exh. B; R. XIV, p. 1937-1937a; KingMf. R. VIII~ p. 1058, 15, exh. A, R. VIII, p. 1062-1063

and 1066-1067, R. VII; p. 1068-1071). According to a lawsuit eventually filed by ATA against

Worthy, "[t]he one letter that W9S allegedly produced,by Beema and sent to SDS in fact stated

that Beema has never issued a policy to an entity in the Unites States and that Beema does not

own any subsidiary, company or other leg~ entity outside of Pakistan." (Heisse Aff. R. I, p. 89,

122, R. IV, p. 479 ~22, exh. 9, R. N, p. 535-536; Posey Supp. Mf. R. XIV, p. 1875, 11~,

exh.·15, R. XIV, p. 1946-1947) (emphasis added). While the SDS/ATABrieftriesto back off its

earlier assertion by ~guing that Beema made "conflic~g statements" about its CO?fiections with

Serve America and William Worthy, most of the statements set forth in their brief occurred after

the instant action had been brought. (SDS/ATA Brief, p. 8-9).. More bnportantly;none of these

statements addresses, much less disproves, the statements in the North Carolina February 19,

2009 final agency order that neither Beema nor Serve America is licensed as an insurance

company in any state. (HeisseA:ff. R. I,p. 89, ~22, Rill, p.449, ~132).

On October 21, 2009, Posey notified Worthy of SDS' s intent to cancel its agreement with ·

Beemal Serve America, and he informed Worthy that .SDS would not be forwarding any more

premiums to Beemal Serve America. (Heisse Aff. R. I, p. 89, 122, R. IV, p. 479 ~23, exh. 10,

R. IV, p. 529-531; Posey Supp. Aff. R. XIV, p. 1875, ,16, exh. 15, R. XIV, p. 1946-1947). Not

only had Worthy failed to adequately respond to Posey's inquiries about Beema and ·Serve

. America, he had also failed to wire monies to pay delinquent claims of ATA members, many of

which were months old. (Posey Supp. Aff. R XIV, p. 1874, ~13, exh. 12> R. XIV,

p. 1908-1936).

28

Jeff Jacobs - RE: Beema-Pakistan Co. Ltd.

From: To; Date: Subject: CC: Attachments:

Mr. Jacobs,

"Doherty, Kevin M." <kdoherty@burr.com>

jmcpeak@burr.com; JJacobs@dol.sc.gov

06/22/2010 6:26 PM

RE: Beema-Pakistan Co. ltd.

dbroemet@burr.com; GMcGriff@dol.sc.gov

emailsig.jpg

Page: I

We will be in touch as soon as we can on this. Please understand that we represent only 6eema-P<;lkisti!'ln Company Limited, and only in connection with Lesffe A. Newman v. Smart Data Solutions, LLC, eta!., No. 10-507-III, currently pending iii Davidson County, Tennessee.

Please note I have also learned that you received a letter, dated June 17, 2010, from attorney Glennon J. Karr in Ohio claiming that we represent Beema-Bahamas in connection with a purported lawsuit against U.S. Contractors Trust and Phoenix Insurance Company. We have no knowledge of any such lawsuit and do not in fact represent Beema-Bahamas.

Sincerely,

Kevin M. Doherty

Kevin M. Doherty Attorney at Law

Direct: (615) 724-3211 Cell: (615) 974-2587 Main: (615) 724-3200 Fax: (615) 724-3311 kdoherty@burr.com

700 Two American Center 3102 West End Avenue Nashville, Tennessee 37203 v'vv,Nv .burr. com

r·~----~----·-···-·-···---·-···-·----~----------···------------··--· .. ····1

! x Burr & Forman .. results matter

L~-··· -····~- ·------~-- .... ·-· ·-·-· ..... -. ___ ., __ .. - ---·--···- ---- -·

CONFIDENTIAL: ATIORNEY/CLIENT PRIVILEGED; ATIORNEY WORK PRODUCT The information contained in this emarl is intended for the individual or entity above. This emaH is protected by the Electronic Communications Privacy Act, 18 U.S.C. Sections 2510-2521 and is legally protected by the attorrieyfclient privilege andlor work product doctrine. !f you are not the intended recipient, please do not read. copy, use, forvvard or disclose this communication to others; also, please notify the sender by repiying to this message. and then delete this message from your system. Thank you.

Circular 230 Notice - Regulations adopted by the Internal Revenue Service require us to inform you that any federal tax advice contained in this communication (including attachments)(!) is not intended or written by Burr & Forman LLP to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. and (It) is not written to support the promotion or marketing of any transaction(s) or matter(s) addressed in this communication.

--~~~--~~~-~----~~~---A-1-1~-ct,~~~~-~~--file://C:\Documents and Settings\user\Local Settings\Temp\XPgrpwise\4CA0739BSCDL.. 03/10/2011

From: Jeff Jacobs [mailto:JJacobs@doi.sc.gov] Sent: Thursday, June 17, 2010 9:31AM To: f\1cPeak, Ju{ie; Doherty, Kevin M. Cc: Gwen McGriff Subject: Beema-Pakistan Co. Ltd.

Mr. Doherty and Ms. McPeak,

Gwen McGriff inform&d me of your telephone conversation yesterday afternoon, in which you offered, on behalf of your client Beema-Pakistan Co. Ltd., you cooperation to us.

We would very much like to interview Shanawaz Agha, Mirza "Zeke'' Agha, and Co!fn Youell, preferably under oath pursuant to South carolina statute, regarding their knowledge of and involvement in the events outlined in the cease and desist order we issued on May 11. We are particularly interested in Beema's and the Aghas' relationship to and dealings with William Worthy, Kathleen cauthen, and David Clark; the role of CoHn Youell; the circumstances behind the issuance of fraudulent insurance policies issued in the name of Phoenix Insurance Company and US Contractors Trust; and the details surrounding the formation of Beema Oceanic Re, to include the deposit of $500,000 in escrow in a california account and the issuance of a fraudulent letter of credit to Oceanic Indemnity. We would also be interested in obtaining any documents your client may have relating to the issues in our C&D order, especially documents evidencing financial transactions related to the events described in our C&D.

I look forward to hearing from you.

Jeffrey A. Jacobs Chief Legal Counsel So\.lth Carolina Department of Insurance P.O. Box 100105 Columbia, SC 29202-3105 (803) 737-5913

file://C:\Documents and Settings\user\Local Settings\Temp\XPgrpwise\4CA0739BSCDI... 03il0/2011

668 Conn. 544 ATLANTIC REPORTER, 2d SERIES

spondents were not aware that the hear­ings could result in the total loss of their parental rights.

[1, 2] The parties have not addressed in their briefs the fact that the purported petition for a new trial was not instituted as a separate civil action. The trial ended on May 6, 1987, and the purported petition for a new trial was filed on July 16, 1987, within the confines of the original proceed­ing for termination of parental rights, and not as a separate action. A petition for a new trial is properly instituted by a writ and complaint served on the adverse party; although it is collateral to the action in which the new trial is sought, it is by its nature a distinct and separate proceeding. State v. Asherman, 180 Conn. 141, 144, 429 A.2d 810 (1980). The respondents thus de­prived the trial court of subject matter jurisdiction, and the court should have dis­missed the petition. See State v. Servello, 14 Conn.App. 88, 101~102, 540 A.2d 378 (1988).

There is error in the form of the judg­ment, the order denying the petition for a new trial is set aside and the case remand­ed with direction to dismiss that petition.

In this opinion the other Judges concurred.

15 Conn.App. 371

...U.nEdward SOMMA, et al.

v. Jerome B. GRACEY, et al.

No. 5120.

Appellate Court of Connecticut.

Argued Nov. 17, 1987. Decided Aug. 2, 1988.

Clients brought legal malpractice ac­tion against attorneys who represented

them in the sale of their business. The Superior Court in the Judicial District of Waterbury, O'Brien, J., found for clients and attorneys appealed, clients cross-ap­pealed damage award. The Appellate Court, Norcott, J., held that: (1) attorney's alleged malpractice was question for jury; (2) whether actions of buyers constituted superseding cause was for jury; and (3) comparative negligence defense presented issue for jury.

Affirmed.

1. Attorney and Client ¢:::>129(2) In a legal malpractice action, the plain­

tiff must produce expert testimony that a breach of a professional standard of care has occurred and that the breach was a proximate cause of the injury suffered by the plaintiff.

2. Attorney and Client ¢:::>129(3) Whether attorneys were negligent in

failing to conduct or advise client/sellers to conduct an adequate investigation of the buyers, failing to conduct an audit or to request sufficient financial information about the buyers and their guarantees and to advise clients not to accept nonnegotia­ble promissory notes was for jury.

3. Attorney and Client ¢:::>129(3) Whether actions of buyers of business,

in misappropriating company assets, consti­tuted superseding cause insulating attor­neys for secured sellers from malpractice liability, was for jury, where attorneys were aware that sellers; by entering into the contract, might be subject to the type of thievery that occurred.

4. Negligence ¢:::>97 In situations where the claim of legal

malpractice sounds in negligence, defense of comparative negligence should be made available. C.G.S.A. § 52-572h(b).

5. Attorney and Client ¢:::>129(3) In legal malpractice action, whether

obligation of attorneys for sellers of busi­ness, extended to investigation of buyers and, if not, whether sellers were negligent

SOMMA v. GRACEY Conn. 669 Cite as 544 A.2d 668 (Conn.App. 1988)

in conducting the investigation, was for ness by his brother, the plaintiff Raymond jury. Somma.

6. Negligence <S=97 Pleading existence of agency relation­

ship between two clients was not a prereq­uisite to attorneys' special defense of com­parative negligence, because attorneys al· leged that both clients were negligent.

The two brothers continued to work at the tool shop as employees untH 1960 when their father died. Upon the father's death, Edward Somma became president of the company and Raymond Somma became vice-president. At this time, the company employed approximately twenty people. In 1963, the brothers sold the company. The brothers were represented in the sale by

Paul E. Pollock, Bridgeport, for appel- the law firm of Reid and Riege. The Som-lants-appellees (defendants). mas first became acquainted with the firm

Richard A. Fuchs, Bridgeport, for appel- in 1952, when they had consulted it about lees-appellants (plaintiffs). some estate matters .

Before DUPONT, C.J., and DALY and NORCOTI', JJ.

.J.§.7~0RCOTI', Judge.

The defendants appeal from the judg­ment rendered on a jury verdict in favor of the plaintiffs in an action for legal malprac­tice. The defendants claim that the trial court erred (1) in submitting certain of the claims of negligence to the jury, and (2) in denying the defendants' motion for judg­ment notwithstanding the verdict. In their cross appeal, the plaintiffs claim that the trial court erred (1) in instructing the jury that they could reduce the amount of the damage award to the plaintiffs if they found the plaintiffs to be comparatively negligent, and (2) in allowing the jury to reduce the amount of the damage award to Raymond Somma in the absence of any evidence of an agency relationship between Raymond Somma and Edward Somma. We find no error in either the appeal or the cross appeal.

This case involves the sale of a family business. In 1941, the plaintiffs' father opened a small tool shop in Waterbury. The plaintiff Edward Somma began work­ing at the tool shop when it opened. At the time, he was fourteen years of age. Ed­ward Somma continued to work at the shop until 1944 when he went away to college. After spending some time in the Navy and fmishing college, Edward went back to work at the family business in 1950. In 1952, Edward was joined in the family busi-

.J!!sln the years that followed the sale of the business, Edward Somma worked as an estate planner for an insurance compan,y. In 1967, the plaintiffs .opened a sign mak­ing company. When the company proved to be unprofitable, the plaintiffs dissolved the company. The plaintiffs were repre­sented in the dissolution action by the law firm of Reid and Riege.

The plaintiffs then purchased another small company located in Waterbury. The plaintiffs were represented in this action by the law firm of Reid and Riege, particular­ly, Jerome Gracey. Thereafter, Edward Somma, acting without representation, sold his interest in this company, and he, along with his brother Raymond, repurchased the family business. The company's name had been changed to Gradel, Inc.

In 1978, the plaintiffs were approached about the sale of Gradel, Inc. At that time, the plaintiffs owned 90 percent of the shares in the company, the other 10 percent having been purchased by other people. Following some preliminary talks with the prospective purchasers, the plaintiffs agreed to the sale. After receiving a letter of intent from the prospective purchasers, Edward Somma engaged the services of the defendants, Reid and Riege, P.C., and particularly Jerome Gracey, to represent the plaintiffs in the sale of the company.

After Edward Somma had consulted with Gracey on several occasions and after Gra· cey had taken some action on the matter, the sale was consummated on October 4, 1978. The terms of the sale were that

670 Conn. 544 ATLANTIC REPORTER, 2d SERIES

Grodel, Inc., would be sold for a price of $2,182,000. This amount was to be paid over a period of years, with $109,022.72 to be paid at closing, $1,491,008.88 to be paid by a series of promissory notes, and $582,· 000 to be paid to Edward Somma pursuant to a consulting contract. As security for this sale, the purchasers pledged ...1§.74the stock they received in Grode], Inc. Fur­ther, the promissory notes were guaran­teed by an entity known as THFIT, Inc., a trust of the purchaser.

After the closing, the plaintiffs received the first payment due on the promissory notes, but the buyers thereafter defaulted. The plaintiffs, however, did not get their stock back as they believed they would, the company went into bankruptcy, and the plaintiffs suffered a financial loss. Within one year, the buyers of the company had misappropriated over $1,000,000 from the assets of the company. The plaintiffs thereafter instituted the underlying action for malpractice against the defendants.

I The defendants' first claim is that the

trial court erred in submitting the follow­ing issues to the jury: (1) whether the defendants were negligent in failing to con­duct, or advising the plaintiffs to conduct an adequate investigation of the buyers; (2} whether the defendants were negligent in failing to conduct an audit or to request sufficient financial information about the buyers and their guarantees; · and (3) whether the defendants were negligent in failing to advise the plaintiffs not to accept nonnegotiable promissory notes. We dis­agree.

[1, 2] The defendants' claim is one of evidentiary sufficiency. "It is established law that it is error for a court to submit to the jury an issue which is wholly unsup­ported by the evidence. State v. Rose, 169 Conn. 683, 687, 363 A.2d 1077 [ (1975) ]." Novak v. Anderson, 178 Conn. 506, 508, 423' A.2d 141 (1979). In determining whether the evidence is sufficient to sup­port the submission of an issue to the jury, we must review the evidence produced by the plaintiff in the light most favorable to

him. Hoyt v. Connecticut Company, 107 Conn. 160, 161, 139 A. 647 (1927). In a legal malpractice action, the plaintiff must produce expert te.!£mony876 (1) that a breach of the professional standard of care has occurred, and (2) that the breach was the proximate cause of the injuries suf­fered by the plaintiff. Pearl v. Nelson, 13 Conn.App. 170, 173, 534 A.2d 1257 (1988); Campbell v. Pommier, 5 Conn.App. 29, 32, 496 A.2d 975 (1985). We find that the plaintiffs produced sufficient expert testi­mony to have these issues submitted to the jury.

The plaintiffs produced two witnesses who were qualified as experts in the field of business· and corporate law. Each of the expert witnesses testified as to a lawyer's standard of care in a business purchase situation. Each of the witnesses also testi­fied that the defendants had breached that standard of care, and that the defendants' breach was the proximate cause of the losses incurred by the plaintiffs. One of the expert witnesses specifically testified that the defendants had been negligent in allowing the security note to be nonnego­tiable and in failing to conduct or failing to instruct the plaintiffs to conduct an investi­gation of the prospective purchasers. While this evidence was far from over­whelming on the issues of negligence in question, it was sufficient to support the submission of those issues to the jury. As we have noted before, "[a] party has the same right to submit a weak case as he has to submit a strong one .... " Strickland v. Vescovi, 3 Conn.App. 10, 16, 484 A.2d 460 (1984); see also Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 548, 447 A.2d 406 (1982).

II The defendants' second claim is that the

trial court erred in failing to grant their motion for judgment notwithstanding the verdict. Specifically, the defendants con­tend that their motions should have been granted because the actions of the purchas­ers constitut~d a superseding, intervening cause which insulated them from liability. We disagree.

SOMMA v. GRACEY Conn. 671 Cite u 544 A.2d 668 (Conn.A.pp. 1988)

[3] ...J.w60ur review of the trial court's felt that the security offered by the buyers denial of the defendants' motion for judg- was insufficient to protect the plaintiffs' ment notwithstanding the verdict is limited. interests. He further testified that one of "'We must consider the evidence, including the dangers of having insufficient security reasonable inferences which may be drawn was that the plaintiffs would lose a great therefrom, in the light most favorable to deal of money if the buyers were thieves. the parties who were successful at trial; Accordingly, we find that the actions of the Bleich v. Ortiz, 196 Conn. 498, 501, 493 buyers did not constitute a superseding A.2d 236 (1985); giving particular weight cause as a matter of law and that the trial to tl_le "concurrenc~ of the judgments ?f court did not err in denying the defendants' the Judge and the JUry, who ~aw the ~t: motion for judgment notwithstanding the nesses and heard the testimony. . . . verdict. Bound Brook Assn. v. Norwalk, 198 Conn. 660, 667, 504 A.2d 1047, cert. denied, 479 U.S. 819, 107 S.Ct. 81, 93 L.Ed.2d 36 (1986), quoting Chanosky v. City Building Supply Co., 152 Conn. 642, 643, 211 A.2d 141 (1965). The defendant{s] can prevail on this claim only if we find that the jury could not reasonably and legally have reached its conclusion. Bound Brook Assn. v. Norwalk, supra." Aksomitas v. Aksomitas, 205 Conn. 93, 100, 529 A.2d 1314 (1987). In this case, the defendants claim that the actions of the buyers were a superseding cause as a matter of law and that the jury could not reasonably have concluded as it did.

. The Restatement of Torts provides that ''[t]he act of a third person in committing an intentional tort or crime is a supersed­ing cause of harm to another resulting therefrom, although the actor's negligent conduct created a situation which afforded an opportunity to the third person to com­mit such a tort or crime .... " 2 Restate­ment (Second) Torts, § 448. The Restate­ment further provides, however, that the criminal acts of a third party will not con­stitute a superseding cause if "the actor at the time of his negligent conduct realized or should have realized the likelihood that such a situation might be created, and that a third person might avail himself of the opportunity to commit such a tort or crime." Id.

.,.W7In this ease, it is clear that the actions of the buyers were criminal in nature. It is also clear, however, that the defendants were aware that the plaintiffs, by entering into this contract for sale, might be subject to exactly the type of thievery that oc­curred. Attorney Gracey testified that he

III

The plaintiffs' first claim on cross appeal is that the trial court erred in instructing the jury on the defense of comparative negligence. Specifically, the plaintiffs claim that there was insufficient evidence to support the submission of this defense to the jury. Before we can rule on wheth­er the evidence was sufficient, we must first resolve what appears to be an issue of first impression in this state; whether the defense of comparative negligence may be properly pleaded in an action for legal mal­practice .

Other jurisdictions which have con­sidered this issue have either directly or implicitly held that the defense of compara­tive or contnbutory negligence is available in an action for legal malpractice. Cicorel­li v. Capobianco, 89 App.Div.2d 842, 453 N.Y.S.2d 21 (1982), aff'd, 59 N.Y.2d 626, 449 N.E.2d 1278, 463 N.Y.S.2d 195 (1983); see Theobald v. Byers, 193 Cal.App.2d 147, 13 Cal.Rptr. 864 (1961); R. Mallen & V. Levit, Legal Malpractice (2d Ed.) § 351. In so holding, the courts have recognized that the use of this defense has long been sanc­tioned .,.Wain medical malpractice actions. See Cicorelli v. Capobianco, supra, 22, citing Dunn v. Catholic Med. Center of Brooklyn & Queens, 55 App.Div.2d 597, 889 N.Y.S.2d 123 (1976). The courts have noted that there is nothing in the nature of a legal malpractice action which would pre­clude the use of this defense. Hansen v. Wightman, 14 Wash.App. 78, 538 P.2d 1238 (1975); see also annot., 45 A.L.R.2d 5, 17, 18.

672 Conn. 544 ATLANTIC REPORTER, 2d SERIES

[4] We agree with the analysis of the other jurisdictions. In situations where the claim of malpractice sounds in negligence; see Shuster v. Buckley, 5 Conn.App. 473, 478, 500 A.2d 240 (1985); the defense of comparative negligence should be made available. Our own statute dealing with comparative negligence, General Statutes § 52-572h(b), provides that in causes of action based on negligence "[a]ny economic or noneconomic damages allowed shall be diminished in proportion of the percentage of negligence attributable to the person recovering .... " We see no basis for dis­tinguishing between actions for legal mal­practice and other claims sounding in negli-· gence.

[5] We must now determine whether there was sufficient evidence in this partic­ular case to support the submission of the defense of comparative negligence to the jury. We find that there was.

In their complaint, the plaintiffs alleged that the defendants were negligent in sev· era! respects. Specifically, the plaintiffs alleged (1) that the defendants failed to conduct an adequate investigation of the buyers, and (2) that the defendants failed to inform the plaintiffs that they should not have gone through with the deal be­cause there was inadequate security. At trial, the plaintiffs produced expert testi­mony th~;~.t, indeed, the defendants had been negligent in those respects.

The defendants produced evidence, how­ever, that they had not agreed to conduct an investigation of thti§:r9buyers. Gracey testified that it was the plain.tiffs' responsi­bility to conduct the investigation of the buyers. Gracey further testified that any obligationS he might have had in this area were satisfied when he informed the plain­tiffs that if he were in their position he would do a more thorough check on the buyers.

The evidence produced by the defendants raised questions about the scope of the attorney-client relationship. An attorney­client relationship is established when the advice and assistance of the attorney is sought and received in matters pertinent to his profession. 7 Am.Jur.2d, Attorneys at

Law § 118. Once the relationship is estab· lished, the attorney "is bound to discharge his duties to his client with the strictest fidelity, to observe the highest and utmost good faith towards him, and to inform his client promptly of any known information important to him." Id., § 120; Gay v. Hel­ler, 252 F.2d 313 (5th Cir.l958). It is axio­matic, however, that the duty of the attor­ney to act does not extend to the business of the client in general. Erickson v. Civic Plaza Nat. Bank, 422 S.W.2d 373 (1967). The obligation of the attorney is to provide the service for which he was hired. 7 Am.Jur.2d, Attorneys at Law § 129.

In this case, the defendants testified that they were not engaged to conduct an inves· tigation of the buyers. Although the plain­tiffs disputed the extent of the representa­tion, there was sufficient evidence to present to the jury the question of what the attorneys' obligations were. R. Mallen & V. Levit, supra, § 659 (the scope of the attorney's duty is a question of fact for the jury to determine). If the attorneys' obli­gations did not include conducting an inves­tigation of the buyers, then the attorneys could not have been negligent in that re­spect. The plaintiffs, then, would have been responsible for conducting the investi­gation, and it would have been their negli­gence in conducting that investigation which would have been partly responsible for the losses JJ.80they incurred. At the same time, the jury could reasonably have found that the defendants were negligent in not telling the plaintiffs . not to go through with the deal without more securi­ty. Accordingly, this is a situation in which both parties could have been found negligent in· some respect and, therefore, the court did not err in instructing the jury on comparative negligence.

IV [6] The final claim of error relates sole­

ly to the plaintiff Raymond Somma. Ray­mond Somma claims that because the de­fendants did not allege the existence of an agency relationship between Edward and himself and because he was not involved in the hiring of the defendants, he could not

MISIURKA v. MAPLE fiLLS FAIUIS, INC. Conn. 673 Cite u 544 A.2d 673 (Conn.App. 1988)

have been held to have been comparatively did not constitute notice to employer and, negligent. therefore, employer could intervene beyond

We find, however, that the issue of agen· statutory So-day time limit to seek appor· cy is not pertinent to this case. In their tionment for compensation payments made special defense, the defendants allege that to employee; (2) contention of error in both plaintiffs were negligent in failing to granting apportionment motion was not conduct an adequate investigation of the preserved for review; and (3) interest buyer, and it was on this theory that the should have been ordered to run from date ease was tried to the jury. The court in- of judgment, not from two days after deci­structed the jury in accordance with the sion on apportionment motion. defendants' allegations and the jury re- Error in part; judgment set aside in turned a general verdict finding the plain- part and case remanded with directions. tiffs comparatively negligent. According-ly, we fmd that the defendants had no obligation to plead the existence of an agency. See Practice Book § 109.

There is no error.

In this opinion the other Judges concurred.

15 Conn.App. 381

...lJ.slMarian MISIURKA

v.

MAPLE HILL FARMS, INC., et al.

No. 5616.

Appellate Court of Connecticut.

Argued Feb. 3, 1988. Decided Aug. 2, 1988.

In employee's action to recover dam­ages for personal injuries allegedly caused by third parties, the Superior Court, Hart. ford-New Britain at New Britain, Mu..'Tay, J., granted employer's motion to intervene; thereafter, the Court, Allen, J ., denied mo­tion to dismiss intervenor's complaint, ren­dered stipulated judgment in favor of em­ployee, and subsequently granted employ­er's motion for apportionment of the judg­ment. Employee appealed. The Appellate Court, Edward Y. O'Connell, J., held that: (1) notice to employer's insurance carrier

1. Workers' Compensation ¢'::>2225 Failure to notify employer of pending

litigation between injured employee and third party, even though employer's work­ers' compensation carrier was notified, per­mitted employer to intervene in suit in or­der to recover compensation paid employee, even after 80-day period following notice to insurer. C.G.S.A. §§ 31-291 to 31-355a, 31-293.

2. Workers' Compensation ¢'::>2242 Contention of error in apportioning em­

ployee's personal injury settlement to allow employer to recover workers' compensation paid employee. was not preserved for appel­late review. C.G.S.A. § 31-293.

3. Interest cSi:>39(2.40) Where judgment in employee's person­

al injury action was followed by grant of employer's motion to apportion to allow recovery of workers' compensation pay­ments to employee, postjudgment interest should have been computed from date of the judgment, rather than set to begin ac­cruing two days after decision on the ap­portionment motion. C.G.S.A. § 37-Sb.

_w2Zigniew S. Rozbicki, Torrington, with whom was Albert Vasco, for appellant (plaintiff).

Scott Wilson Williams, Bridgeport, for appellee (intervening plaintiff).

Thomas P. Barrett, Hartford, for appal· lees (defendants). .

Before SPALLONE, EDWARD Y. O'CONNELL and NORCO'IT, JJ.