586 B.R. 508
E.D.N.Y2018Background
- Brown Media and Roy E. Brown sued K&L Gates (KLG) and partner Edward Fox alleging KLG advised Brown Publishing's managers while covertly favoring creditor/bank clients during a § 363 bankruptcy sale, causing the managers to lose at auction.
- KLG is alleged to have assisted formation of Brown Media, helped craft a stalking-horse APA, solicited financing, and represented Brown Publishing in bankruptcy without disclosing prior work for the Managers or ties to the PNC Bank Group/Huntington.
- Huntington (part of the PNC Bank Group) filed an Ohio foreclosure against CRJ (an affiliate owning key leases); Plaintiffs allege KLG delayed enforcing the automatic stay to diminish the Managers’ bid value and benefit bank clients.
- The auction (July 19, 2010) resulted in the PNC Bank Group acquiring most assets; Plaintiffs claim damages from losing the contemplated asset purchase.
- Procedural posture: case removed from Bankruptcy Court; district court previously dismissed on res judicata grounds, that dismissal was vacated by the Second Circuit; current Rule 12(b)(6) motion resolved: court denies dismissal of Brown Media’s breach of fiduciary duty claim but grants dismissal (without prejudice) of Roy’s claims, and Brown Media’s tortious-interference and fraud claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing (Brown Media) | KLG advised and assisted formation and bidding for Brown Media so Brown Media can sue. | No clear attorney-client relationship; no standing. | Brown Media has standing; allegations suffice to infer attorney-client/fiduciary relationship at pleading stage. |
| Standing (Roy) | Roy claims personal injuries from KLG’s conduct. | Roy’s injuries are corporate losses; shareholders lack standing for corporate injuries. | Roy lacks standing; claims dismissed as to him. |
| Statute of limitations | Claims timely; prior State suit preserved time under CPLR §205. | Claims time-barred. | Claims timely: fiduciary claim may be six years (constructive fraud), CPLR §205 tolls from prior state suit. |
| Breach of fiduciary duty | KLG secretly favored bank clients, used confidential info, delayed stay—breach caused Plaintiffs’ loss. | Allegations insufficient. | Claim survives: fiduciary relationship, breach, causation, and damages adequately pleaded. |
| Tortious interference | KLG’s alleged conduct diverted the sale and interfered with Managers’ relationship with Debtor. | Conduct lawful, aimed at Plaintiffs not the third party; lack of particularity. | Dismissed as to Brown Media (no identified existing third-party business relation) and dismissed as to Roy (standing and directed-conduct defects). |
| Fraud (failure to disclose conflicts) | Non-disclosure of conflicts and relationships induced reliance causing loss. | Fraud not pled with Rule 9(b) particularity; damages not specified for Roy. | Fraud claims dismissed for failure to plead who/when/what omissions with specificity and failure to plead recoverable damages; dismissal without prejudice for Brown Media, Roy’s claims barred by standing. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (courts need not accept legal conclusions; context-specific plausibility)
- Eurycleia Partners, LP v. Seward & Kissel, LLP, 910 N.E.2d 976 (N.Y. 2009) (elements and nature of fiduciary relationships under NY law)
- Carvel Corp. v. Noonan, 818 N.E.2d 1100 (N.Y. 2004) (culpable means required for tortious interference with prospective advantage)
- Birnbaum v. Birnbaum, 539 N.E.2d 574 (N.Y. 1989) (fiduciary duties bar self-dealing and conflicts)
- Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537 (2d Cir. 1994) (breaches of fiduciary duty loosen causation/damages strictness)