The U.S. Court of Appeals for the Eleventh Circuit has revived legal malpractice and civil conspiracy claims against Miller & Martin, ruling that the trial court erred in tossing out the claims, which were assigned to an investment group as part of its settlement with a failed tech startup.
The appellate panel, however, upheld dismissals by Judge Mark Cohen of the U.S. District Court for the Northern District of Georgia of claims for fraudulent concealment and aiding and abetting a breach of fiduciary duty.
Miller & Martin general counsel Billy Eiselstein said via email that the firm is “pleased that the courts ruled in our favor on most of the plaintiff’s theories. The Court of Appeals reinstated two claims that had been dismissed on questions of law, and we think that when the facts are presented, we will prevail on those claims as well.”
The unpublished July 3 opinion was penned by Senior Judge Paul Huck of the U.S. District Court for the Southern District of Florida, sitting by designation, with the concurrence of Eleventh Circuit Judges Gerald Tjoflat and Adalberto Jordan.
As detailed in the opinion and other filings, the case began in 2010 when Lucky Capital Management made the not-so-lucky decision to invest $2.5 million in nValeo, billed by founder and CEO Jeffrey Ritchie as an “on demand virtual video delivery system.”
The startup retained Miller & Martin to provide legal services on an hourly basis, which were primarily handled by partner W. Scott McGinnis and R. Tyler Hand of the firm’s Chattanooga office. (Hand has since left the firm and is now with Waller Lansden Dortch & Davis in Chattanooga.)
Lucky first invested $500,000 for a 2 percent share of the company, then made four more $500,000 investments for an additional 9 percent share.
The membership purchase agreement limited the compensation of nValeo’s officers and barred any bonuses for them, but it did not prohibit the company from loaning its officers money.
The agreement contained a provision “disclosing the lack of a financial track record and the ‘substantial investment risks’ in purchasing the membership interests,” Huck wrote for the appellate panel.
“Despite this, Lucky did not inspect nValeo’s books before investing.”
“The parties acknowledge that almost immediately after Lucky’s funds were deposited in nValeo’s bank account,” the opinion said. Ritchie, the CEO, “began withdrawing those funds for his own personal use.”
In late 2010, nValeo’s Chief Operations Officer Buddy Poole sent the lawyers an email asking them to draw up a promissory note to record Ritchie’s withdrawals, which “purported to allow nValeo to loan Ritchie up to $2 million.”
In 2011, one of Lucky’s principal partners reviewed nValeo’s financial records “for the first time” and confronted Ritchie about the withdrawals.
“Ritchie admitted that he took over $800,000 and used at least part of the money for personal use,” the opinion said. “nValeo never brought a product to market and went out of business.”
Lucky lost its investment and sued nValeo.
As part of a settlement in that case, nValeo assigned to Lucky “any legal malpractice claim it might have against Miller & Martin.”
In 2014, Lucky sued Miller & Martin, asserting claims for legal malpractice, aiding and abetting a breach of fiduciary duty, procuring a breach of fiduciary duty, fraudulent concealment, civil conspiracy and statutory damages for bad faith.
Regarding the legal malpractice claim, Cohen ruled that Georgia law prohibited the assignment of such claims. The relevant portion of the statute, OCGA 44-12-24, said “a right of action is assignable if it involves, directly or indirectly, a right of property. A right of action … for injuries arising from fraud to the assignor may not be assigned.”
But the appeals panel noted that, subsequent to the suit’s filing but before its dismissal, the General Assembly amended that code section to bar the assignment of legal malpractice claims. Cohen’s ruling did not address whether that revision is retroactive, and the point was not raised on appeal.
Cohen had ruled that the malpractice claim was barred because Lucky’s “alleged injuries arise out of fraud to nValeo,” the opinion said. But Lucky argued that the claim was not for fraud “but upon a claim that Miller & Martin was negligent in failing to report to nValeo Ritchie’s misappropriation of funds and in drafting a promissory note for Ritchie, which allegedly led Ritchie to believe that he could continue to misappropriate nValeo’s assets.”
“A close examination of Lucky’s malpractice claim shows that it is assignable because it is based on Miller & Martin’s alleged professional negligence,” Huck wrote.
Nowhere in that count, wrote Huck, “does Lucky mention, much less specifically allege, the elements of a fraud claim against Miller & Martin.”
The opinion also said Cohen erred in dismissing the civil conspiracy claim after concluding that its underlying cause of action, the fraudulent concealment claim, was not supported.
While Cohen rightly dismissed the fraudulent concealment claim, wrote Huck, he should have allowed the conspiracy claim to go forward.
“Here,” he wrote, “Lucky has sufficiently pleaded that Miller & Martin entered into a conspiracy with Ritchie to defraud Lucky and conceal Ritchie’s fraud.”
In addition to dismissing the fraudulent concealment claim, Huck wrote, Cohen was also correct to dismiss the claims for aiding and abetting a breach of fiduciary duty “because Lucky identified no evidence that Miller & Martin was aware of Ritchie’s misappropriations or acted with malice and intent to injure Lucky.”
Miller & Martin is represented by Shane Keith and Ryan Mock Jr. of Hawkins Parnell Thackston & Young, William Davis of Bovis, Kyle, Burch & Medlin, and Robert Marcovitch of Lewis Brisbois Bisgaard & Smith.
Lucky is represented by solo August Winter of Brentwood, Tennessee, and Jenny Jensen of Duluth’s Jensen Firm.
Jensen said she did not have permission to discuss the case.