Scharrer v. Sanders (In re Fundamental Long Term Care., Inc.)
542 B.R. 299
Bankr. M.D. Fla.2015Background
- In March 2006 linked stock-sale transactions, individuals (Forman and Grunstein) used newly formed entities (including a sham Debtor) to acquire THMI (a nursing-home manager) and THI-B (operator of nursing homes), allegedly stripping THMI of assets while leaving its liabilities.
- Troutman Sanders (a law firm) drafted transaction documents, formed entities, performed due diligence, and handled closings; it contends it did not represent THMI or the Debtor.
- A negligence suit against THMI produced a $110 million judgment (Jackson Estate). The Jackson Estate obtained a default judgment against the Debtor in proceedings supplementary, then forced the Debtor into involuntary Chapter 7.
- The Chapter 7 Trustee sued Troutman Sanders and individual lawyers for negligence, fraudulent concealment, fraud, and negligent supervision on behalf of both the Debtor and THMI, alleging the firm’s conduct enabled the asset “bust-out.”
- Troutman Sanders moved to dismiss, arguing (inter alia): the trustee is judicially estopped from attacking the default judgment; the complaint is a shotgun pleading; and the Trustee fails to allege duties/privity necessary for negligence/fraud claims on THMI’s behalf.
- The court dismissed all claims the Trustee asserted on the Debtor’s behalf with prejudice (judicial estoppel) and dismissed the claims on THMI’s behalf without prejudice for failing plausibly to plead a duty owed by Troutman Sanders to THMI; Trustee given leave to amend only as to THMI
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether judicial estoppel bars Trustee from suing on behalf of the Debtor (to challenge the default judgment) | Trustee seeks to recover for the Debtor by proving the Debtor did not receive THMI assets (i.e., that the judgment should not have been entered) | Troutman Sanders argues allowing this contradicts the Jackson Estate’s successful position and would mock the judicial process (citing Grochocinski) | Held: Judicial estoppel applies; all claims on Debtor's behalf dismissed with prejudice |
| Whether Trustee plausibly alleged Troutman Sanders owed a duty to THMI to support negligence/fraud/ concealment claims | Trustee alleges firm had superior knowledge and failed to disclose/advise THMI (or protect interests), asserting duties to explain deal terms and ensure seller performance | Troutman Sanders says it did not represent THMI, no privity, and New York caveat emptor bars imposition of such duties except narrow exceptions | Held: Trustee failed to allege a duty to THMI (exceptions don’t apply); claims on THMI dismissed without prejudice |
| Whether the complaint satisfies Rule 8 / is not a shotgun pleading | Trustee filed extensive factual allegations (259 paras) attempting to plead causation and duties | Troutman Sanders contends the complaint is verbose, includes irrelevant actors, and omits key factual allegations (e.g., that Debtor would have defended proceedings) | Held: Complaint is verbose but not dismissed solely on Rule 8; pleading defects noted and Trustee warned; dismissal on other grounds preferred |
| Whether fraud/ concealment counts adequately plead reliance and distinct elements beyond negligence | Trustee treats fraud/concealment as parallel to negligence to allege nondisclosure/fraud | Troutman Sanders argues fraud counts are duplicative and lack allegations (e.g., justifiable reliance) and requisite duty | Held: Fraud/fraudulent concealment claims fail to the extent they depend on a duty to THMI or contradict the default judgment; those claims dismissed (on Debtor's behalf with prejudice; re THMI without prejudice) |
Key Cases Cited
- New Hampshire v. Maine, 532 U.S. 742 (2001) (articulates factors and purpose of judicial estoppel to protect judicial integrity)
- Grochocinski v. Mayer Brown Rowe & Maw, LLP (In re Grochocinski), 719 F.3d 785 (7th Cir. 2013) (trustee estopped from pursuing malpractice claims that contradict a creditor’s successful position; equitable attribution of creditor’s position to trustee)
- Bell Atl. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleading under Rule 8)
- United States v. Lockheed-Martin Corp., 328 F.3d 374 (7th Cir. 2003) (discusses standards for evaluating verbose or shotgun pleadings)