Appeals Court Revives Legal Mal. and Conspiracy Claims Against Firm That Represented Looted Start-Up


Daily Report Online reported that the U.S. Court of Appeals for the Eleventh Circuit resurrected legal malpractice and civil conspiracy claims against Miller & Martin, PLLC, a 130+ lawyer firm with offices throughout the southeast.

The trial court had dismissed the claims, which were brought by an investment group to which the claims were assigned, as part of its settlement with a failed startup that Miller & Martin had represented.

Background
According to the court filings, the case began in June, 2010, when Lucky Capital Management, LLC, invested $2.5 million in nValeo, LLC, a Florida-based start-up that its founder, CEO, and Managing Member Jeffrey Ritchie claimed was developing an “on demand virtual video delivery system.”

nValeo retained W. Scott McGinnis and R. Tyler Hand of Miller & Martin’s Chattanooga, TN office to represent it.

Lucky Capital Management invested $500,000 for a 2% share of the company (a membership interest in the LLC). It was represented by its own counsel in the negotiations. 

In July, 2010, Ritchie asked Lucky for ‘accelerated funding’ for nValeo, and Lucky agreed to buy an additional 9% of the start-up for $2,000,000, payable in four installments of $500,000 each, which it made between July and December, 2010. This was memorialized in an amended investment agreement.

The investment agreements limited the compensation of nValeo’s officers, and barred any of them from receiving a performance bonus without the unanimous consent of the board, to which Lucky had the right to appoint one member. The agreements also stated that nValeo had no financial track record, and that Lucky acknowledged that it was assuming “substantial investment risks” in purchasing the membership interests.

Right after Lucky began investing in nValeo, Ritchie began withdrawing those funds, “for his own use”, i.e., $143,843 from 7/30/10 – 8/12/10, and $546,000 from 8/24/10 – 10/4/10.

In September 2010, nValeo’s Chief Operations Officer Buddy Poole, asked the Miller & Martin lawyers to draw up “paper work to record Jeff (Ritchie) taking out loans from the company, which he has needed to do from time to time to get moved to Austin, Tx.”

The law firm then drafted a “Line of Credit Note”, stating that Ritchie promises to pay nValeo the “unpaid principal amount of all advances” it makes to him, up to $2,000,000.

Ritchie signed the note, and continued to withdraw the funds Lucky had invested in nValeo.

In March 2011, Lucky reviewed nValeo’s financial records of nValeo for the first time, and saw Ritchie’s withdrawals, which Buddy Poole had recorded.

Lucky confronted Ritchie about the withdrawals, and Ritchie admitted that he took over $800,000, and used at least part of the money for personal use.

nValeo never brought a product to market, and went out of business.

Lucky lost its entire investment.

Lawsuit

Lucky sued nValeo, Ritchie, Poole, and Miller & Martin and its attorneys in the 72nd District Court of Texas in 2011.

As part of a settlement in that case, nValeo assigned to Lucky “any legal malpractice claim it might have against Miller & Martin.”

Legal Malpractice Claim
In 2014, Lucky
sued Miller & Martin in the U.S. District Court for the Northern District of Georgia, 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.

The primary basis of the claims was the law firm’s drafting of the Line of Credit Note. For example, the Breach of Fiduciary claim alleges that “Miller & Martin…wrongfully concealed from nValeo…and Lucky, that Ritchie was misappropriating…the funds that Lucky was investing in nValeo. Worse, Miller & Martin…encouraged Ritchie to continue to misappropriate the funds…by drafting a Promissory Note…that purported to characterize Ritchie’s misappropriations as “loans.”’ 

Law Firm’s Defense

Miller & Martin filed a Motion to Dismiss all of Lucky’s claims.

In 2015, the district court dismissed Lucky’s legal malpractice claim, holding it “ar[o]se out of an alleged fraud perpetrated on the assignor” and therefore was not assignable under O.C.G.A. § 44-12-24, and fraudulent concealment, civil conspiracy claims, and bad faith litigation claims, for failing to state a claim.

However, the court allowed Lucky’s claims for aiding and abetting or procuring a breach of fiduciary duty to proceed, and discovery was conducted.

Miller & Martin moved for summary judgment on those claims after discovery concluded, which the district court granted in 2016.

Appeal

Lucky appealed the dismissal, and in 3 – 0 ruling, the appeals court upheld the trial court’s dismissal of Lucky’s claims for fraudulent concealment and aiding and abetting a breach of fiduciary duty.

However, it reinstated the other claims.

Regarding Lucky’s claim for malpractice, which the trial court had dismissed, because it wasn’t assignable to Lucky by nValeo under Georgia law, the appeals court cited this portion of the law:

“…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.”

It also added a footnote:

“After Lucky’s assignment, but before the dismissal of (its legal malpractice claim), Georgia amended O.C.G.A. § 44-12-24 to prohibit the assignment of legal malpractice claims. The district court (opinion omitted) the issue of whether O.C.G.A. § 44-12-24 in its current form applies retroactively to disallow the assignment in this case. Neither party has discussed on appeal whether the amended version of O.C.G.A. § 44-12-24 applies retroactively.” 

The appeals court ruled:
“Lucky argues that nValeo’s claim was assignable because it is based not on Ritchie’s fraud on nValeo, 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. The claim alleges that Miller & Martin “failed to exercise the required degree of care, skill, prudence and diligence required in the profession,” and that this failure “constitute[d] legal malpractice, and [was] the proximate cause of financial injury to nValeo.”

Additionally, appeals court ruled that the trial court improperly dismissed the civil conspiracy claim, after concluding that its underlying cause of action, the fraudulent concealment claim, was not supported: “Lucky has sufficiently pleaded that Miller & Martin entered into a conspiracy with Ritchie to defraud Lucky and conceal Ritchie’s fraud.”

The panel also ruled that the trial court correctly dismissed 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.”

The case was presumably remanded to the trial court, for further proceedings on Lucky’s reinstated claims of legal malpractice and civil conspiracy.

Law Firm’s Reaction

Miller & Martin general counsel Billy Eiselstein told Daily Report Online 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.”

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