Summary Block 31-60

Roger Corman Lawsuit Blames Citco for Losing $60 Million of Family's Money

By Eriq Gardner
(The Hollywood Reporter)

Larry Busacca/Getty Images

Larry Busacca/Getty Images

The famed filmmaker says he wasn't told that his money was being managed by troubled hedge fund manager Buddy Fletcher.

Roger Corman and his wife Julie Corman, together responsible for hundreds of films and the mentoring of some of Hollywood's biggest directors and actors, have filed a lawsuit that says they put money in an investment fund managed by George Soros before the money was moved and they ended up losing up to $60 million.

According to the complaint filed in Los Angeles Superior Court on Monday, the administrator of the Soros fund was the Citco Group. The Cormans' primary contact there was Ermanno Unternaehrer.

In 1996, Unternaehrer convinced the Cormans to put money in a fund managed by Citco, instead of with Soros, alleges the complaint. The Cormans say they were told that "the Citco fund was a safe, secure place to invest their moneys, and that Citco would administer and manage the fund to ensure continued high performance."

For the next six years, things seemed fine. In 2002, Unternaehrer is said to have recommended that a vehicle named "Pasig, Ltd" be set up in the British Virgin Islands for tax reasons. Corman says he initially was a director of the newly incorporated company, but a few months later, upon advice, Corman says he resigned, becoming only a signatory on the account. By 2008, the lawsuit says that there was $73 million under Citco's "complete control" and management fell to Alphonse "Buddy" Fletcher.

If the name rings a bell, it's because Fletcher's financial troubles have been well detailed by the financial press. A court-appointed bankruptcy trustee once said that Fletcher's failed hedge fund "had many of the characteristics of a Ponzi scheme." Fletcher is also married to Ellen Pao, the former junior partner at venture capital firm Kleiner Perkins who is currently suing the firm for gender discrimination. Pao is now the chief executive at Reddit. The judge in Pao's headline-making lawsuit wouldn't let Kleiner Perkins bring up Fletcher's financial troubles at trial.

The Cormans say they were not informed that the Pasig moneys were being transferred to Fletcher's management.

"Citco did not make this transfer of management to Fletcher in good faith based on the business or financial interests of the Cormans, but rather to further its own interests," they say in the complaint. "Citco was facing criticism from other clients for its conflicting role as both a bank and the manager of investment funds, and the transfer to Fletcher allowed Citco to mitigate this criticism. In addition, Citco obtained a payout to itself of at least $28 million for the transfer of management, along with other benefits for Citco and its representatives."

The lawsuit further alleges that Citco was familiar with Fletcher's operations, that Unternaehrer obtained $6.6 million in cash from Fletcher in a side deal, and that "Citco knew or should have known at the time of the transfer that Fletcher would be a poor manager of the fund, and that he was already engaged in fraud and mismanagement of other funds under his control."

The Cormans say their money got invested in the same Fletcher entity as the Louisiana Firefighters pension fund, which is currently subject to ongoing litigation over asset management. However, the Cormans imply they were even in a worse position. "Fletcher promised the Louisiana Firefighters pension fund that it would always obtain at least a 12% return on its investment," states the lawsuit. "Citco agreed to subordinate the rights of the Cormans' fund in the Fletcher entity to those of the Louisiana Firefighters Pension fund, even allowing Fletcher to reduce the value of the Cormans' funds in the entity in order to ensure that 12% return to the Firefighters."

The Cormans say that just four months after the money landed in Fletcher's hands, Citco removed the Cormans as signatories to the Pasig count, thus taking away their last remaining control over the money. By 2009, the Cormans say they were no longer receiving account statements. And when the "red flags" came, the Cormans say that Citco "intentionally concealed" material information.

Only $13 million of the $73 million was recovered, say the Cormans in a lawsuit that alleges 12 causes of action including breach of fiduciary duty, fraud, misrepresentation and unjust enrichment. The Cormans are represented by Don Howarth and Suzelle Smith at Howarth Smith. A rep for Citco wasn't immeidately available for comment.

B-Movie King Sues Citco Over $60M Ponzi Scheme Loss

By Brandon Lowrey
(Law360, Los Angeles)

Legendary B-movie director Roger Corman on Monday sued Citco Group Ltd. alleging it tricked him and his wife into withdrawing millions from a successful fund managed by George Soros and investing it in what turned out to be a Ponzi scheme, resulting in a $60 million loss.

In a complaint filed in Los Angeles Superior Court, Corman and his wife, film producer Julie Corman, allege Citco and related companies convinced them to invest millions with the financial services company, which later secretly put the funds under the control of a Ponzi schemer. Citco discovered the Ponzi scheme and removed its own funds but left the Cormans' money there to "go down with the ship," Corman's attorney Don Howarth of Howarth & Smith told Law360 on Tuesday.

"This gives new meaning to breach of fiduciary duties," Howarth said. "This is as extreme as I've seen. ... The whole point of [being] a fiduciary is putting your interests not ahead of your clients' interest but behind it. They reversed that."

According to the complaint, a Citco representative convinced the Cormans to invest with the company in late 1996. In 2002, Citco recommended setting up a corporation in the British Virgin Islands for tax purposes, and created Pasig Ltd. to manage the Corman's funds.

Roger Corman was initially a director of Pasig, but Citco employee and defendant Ermanno Unternaehrer told Corman that he should resign for tax purposes. In June 2008, Citco transferred control of the Cormans' funds to Alphonse "Buddy" Fletcher without telling the Cormans.

Citco obtained a payout of $28 million from the transfer. Unternaehrer allegedly arranged a side deal with Fletcher that netted him $6.6 million, the complaint says.

Meanwhile, Citco was an administrator for Fletcher's funds and knew he was struggling — he had not made a single profitable investment in the 10 months preceding the transfer and was having trouble paying back loans, the complaint said.

In addition, the $28 million that Fletcher paid Citco for the transfer of the Pasig funds came from money invested by the Louisiana Firefighters Pension Fund, which is also suing Citco over the Ponzi scheme, according to the complaint.

Citco had withdrawn its own funds from Fletcher's management without telling the Cormans, the suit says.

"Had Citco told the Cormans that it was pulling its money out of the Fletcher funds, the Cormans would not have left their own funds invested with Fletcher at the time," the suit says.

Citco later tried to withdraw the Cormans' funds in May 2010, but was unable to do so. In the summer of 2013, the Cormans were able to recover just $13 million of the $73 million that had been invested in Pasig, the complaint said.

Corman's suit alleges Citco breached its contract and fiduciary duties, committed fraud, negligence and other claims.

Representatives for Citco did not immediately respond to a request for comment Tuesday.

Corman is represented by Don Howarth, Suzelle M. Smith, Padraic Glaspy, and Jessica L. Rankin of Howarth & Smith.

Counsel information for the defendants was unavailable.

The case is Roger W. Corman et al. v. Citco Group Ltd. et al., case number BC576379, in the Superior Court of the State of California, County of Los Angeles.

--Editing by Emily Kokoll.

Filmmaker Roger Corman Sues Over Losses From Buddy Fletcher

by Edvard Pettersson
(Bloomberg)

Filmmaker Roger Corman sued a hedge-fund administrator that he blames for losses of as much as $60 million when money manager Alphonse “Buddy” Fletcher’s master fund went bankrupt.

Corman, whose movies include Edgar Allan Poe adaptations “House of Usher” and “The Raven,” and his wife claim that Citco Group Ltd. in 2008 transferred its management of $73 million in a Virgin Island entity to

Fletcher without telling them, and should have known better. “Citco did not inform the Cormans that Fletcher would be a poor manager or that he was already engaged in fraud and mismanagement of other funds under his control,” the Cormans said in a complaint filed Monday in state court in Los Angeles.

Fletcher is the husband of Ellen Pao, the former junior partner at Kleiner Perkins Caufield & Byers whose gender discrimination lawsuit against the Silicon Valley venture capital firm is on trial in San Francisco state court.

The U.S. trustee in charge of liquidating Fletcher International Ltd. said in 2013 that Fletcher’s company was a fraud that didn’t make a single profitable investment after Aug. 31, 2007. According to the trustee, Fletcher funnelled money out of the fund before it went bankrupt with the intent to defraud investors.

Corman accuses Amsterdam-based Citco Group of breach of fiduciary duty, constructive fraud and negligence, among other claims. He seeks unspecified damages.

Andrew G. Gordon, a lawyer who represents Citco Group in a lawsuit brought by three Louisiana pension funds over losses from their investments in Fletcher’s fund, declined to comment on Corman’s lawsuit.

Fletcher didn’t immediately respond after regular business hours to a phone message left for him at a number listed in court records.

Gov’t, Court Slap Down Claimant Hopefuls in NYC Tower Suit

By Natalie Rodriguez
(Law360, New York)

The U.S. government on Wednesday blasted a family looking to intervene in a suit over the sale of Iran's interest in a Manhattan tower as being too late to the table, on the heels of a New York federal judge denying another party looking to become a claimant to the assets.

In a letter to U.S. District Judge Katherine B. Forrest, U.S. Department of Justice attorneys argued that a motion to intervene by Jeremy Levin, who was kidnapped in 1984 by terrorists allegedly funded by Iran, and Lucille Levin should be denied for untimeliness, the potential prejudice to current plaintiffs and failure to show a legally protectable interest.

The objection was filed after Judge Forrest denied on Wednesday another would-be claimant’s motion to consolidate his case with the suit over 650 Fifth Ave.

In the letter, the government blasted the Levins’ argument that it had failed to properly notify them that they were potential claimants to the suit. The family holds a $28.8 million judgment against Iran from a 2009 Washington, D.C., case.

“The government provided notice to such reasonably ascertainable potential claimants … But the law contains no support for the proposition that the government must provide direct notice to any entity that may have a potential judgment against Iran, which itself was not even a potential claimant with a clear stake in the action at the time of its inception,” the U.S. government said.

It argued under the Levins’ interpretation, the government would have had to assume the outcome of a Terrorism Risk Insurance Act litigation question that did not exist when the government filed its action in the 650 Fifth Ave. case. Further, it noted that the published notice allowed vigilant parties with an interest to intervene and that more than a dozen judgment creditor claimants were able to do so.

“The government takes seriously the tragic circumstances that led to the Levins’ judgment against the government of Iran, and the frustration that holders of such judgments often encounter in getting those judgments enforced. The recognition of such sympathetic factors does not, however, excuse an untimely bid for an easy judgment, at the expense of other litigants — including other victims of terrorism — who actually acted timely in vindicating their interests,” the government said in its letter.

The Levins have argued, though, that it would be a “miscarriage of justice” to allow other judgment creditors in a similar position to be paid out from the asset sale, while their judgment is left unfulfilled.

On Wednesday, however, the court also leaned on similar arguments in blocking Amir Reza Oveissi, whose grandfather was an Iranian general killed during the 1979 Iranian revolution, from consolidating his Washington, DC., case — which has a $307.5 million claim against Iran — with the New York case.

Judge Forrest contended that the consolidation would be unfair to the current plaintiff-claimants who have a settlement agreement to distribute funds from the property’s sale on a pro rata basis.

“Consolidation would complicate the current settlement agreement between the judgment-creditor plaintiffs and the government … Consolidation at this stage would also undermine plaintiffs’ extensive efforts over several years, including significant discovery, preparation for trial, and ultimately winning summary judgment in their favor,” the order said.

Oveissi had offered to agree to be bound by certain stipulations if he was let in on the case, including not seeking to reopen discovery in the long-running New York suit and being bound by a decision from the U.S. Court of Appeals for the Second Circuit, as well as any further appeal.

"Allowing Mr. Oveissi to participate in the distribution of the forfeited assets would have only had a negligible impact on the amounts received by the other terrorist victims, and it was very disappointing that the court did not allow Mr. Oveissi to participate in that distribution. The outcome of this case will favor some terrorist victims over others, and that is disappointing," James W. Spertus of Spertus Landes & Umhofer LLP, an attorney for Oveissi, told Law360.

He added that the outcome would have made sense if the property was privately located by the plaintiffs, but since the government located and forfeited it, more should have been done to more equally protect citizens' rights.

Oveissi is represented by James W. Spertus of Spertus Landes & Umhofer LLP.

The Levins are represented by Suzelle M. Smith and Don Howarth of Howarth & Smith.

The U.S. Government is represented by United States Attorney for the Southern District of New York Preet Bharara and Assistant United States Attorneys Michael D. Lockard, Martin S. Bell and Carolina A. Fornos.

The case is In re: 650 Fifth Avenue and Related Properties, case number 1:08-cv-10934-KBF, in the U.S. District Court for the Southern District of New York.

Family Asks For Spot In Iran-Held NYC Tower Dispute

By Natalie Rodriguez
(Law360, New York)

The family of a terrorist hostage victim who holds a $28.8 million judgment against Iran asked a New York federal court on Wednesday to be let in on a lien priority dispute related to the sale of Iran's interests in a Manhattan tower.

Jeremy Levin, who was kidnapped in 1984 by terrorists allegedly funded by Iran, and Lucille Levin motioned to intervene in the case, arguing that a 2009 Washington, D.C., district court judgment that was registered in New York late last year allows them a spot at the table with other creditors looking to score a piece of the stake sale proceeds.

“It would be a miscarriage of justice to allow the other judgment creditors in the same position as the Levins to recover all of the assets from this action, while the Levins’ judgment is left unsatisfied,” the family argued in a memorandum supporting their motion.

The Levins contend they were informed about the seizure of 650 Fifth Ave. through media reports and were wrongfully not put on notice as potential claimants by the U.S. government. They blasted a 2014 settlement agreement with certain judgment creditors in the New York case that would essentially distribute all the net proceeds of the sale of the building after litigation expenses and sales costs are taken out.

“Thus, the Levins are in the position of having relied upon the rules and upon the representations of the U.S. government in claiming their rights as victims, but having been cut out of any recovery with no due process at all. The court should therefore grant the Levins’ motion to intervene and allow the Levins to pursue their claim to some of the funds in the civil forfeiture action,” the family said in its memorandum.

The Levins are not the only family looking to carve out a spot in the case. The Hegnas, the family of a U.S. diplomat killed by Iranian terrorists, have been fighting for a piece of the proceeds for several years and recently urged the court to consider new evidence that the family contends is sufficient to warrant the renewal of a real property docketing lien, according to court documents. The Hegnas currently have an outstanding motion for partial summary judgment as to the enforcement priority in the long-running case.

With that motion pending, the Levins contend their motion to intervene causes no prejudice to the current litigation parties by delaying the case further and argue that their motion should take less than a month to resolve.

Other plaintiff-claimants, however, have been pushing a motion for summary judgment against the Hegnas’ claimed lien on 650 Fifth Ave.

The Levins are represented by Suzelle M. Smith and Don Howarth of Howarth & Smith.

The case is In re: 650 Fifth Avenue and Related Properties, case number 1:08-cv-10934-KBF, in the U.S. District Court for the Southern District of New York.

“The Butler Did It!”: The Legal Battle over the Estate of Doris Duke

“The Butler Did It!”: The Legal Battle over the Estate of Doris Duke

This was Doris Duke's predicament. She was worth $1.2 billion, but had no relatives or friends she particularly cared to enrich so massively when she died. Instead, she decided with immodesty befitting one of the world's richest women that her estate would go toward "the improvement of humanity," as her will said. Her money would allow dancers to dance, artists to paint, doctors to cure diseases, animals to escape the cruelty of people.

The Sheer Force of an Idea

by Cullen Couch
(UVA Lawyer, Fall 2014)

Salisbury Cathedral's Magna Carta

Salisbury Cathedral's Magna Carta

They say that to do injustice is, by nature, good; to suffer injustice, evil; but that the evil is greater than the good. And so when men have both done and suffered injustice and have had experience of both, not being able to avoid the one and obtain the other, they think that they had better agree among themselves to have neither. —THE REPUBLIC, Plato (360 BC)

39– No freeman shall be taken, imprisoned, disseized, outlawed, banished, or any way destroyed, nor will We proceed against or prosecute him, except by the lawful judgment of his Peers or by the Law of the land.

40– To no one will We sell, to none will We deny or delay, right or justice. —MAGNA CARTA (AD 1215)

In June 2015 Magna Carta will turn 800. Its age alone is a wonder. Only by a lucky accident of history did it survive the bloody tumult of its birth, and then centuries of war, revolution, and political upheaval. Magna Carta’s animating principles, derived from ancient concepts of justice, evolved to become the totem for the rule of law in an empire that spanned the globe.

In the 17th century, America’s colonists found in Magna Carta a guarantee. They built legal arguments to redeem it. In the 18th century they fought a war to implement it and wrote a constitution to embed its ideals in a uniquely American form of government. In the 20th century, they stored an early copy of Magna Carta for safekeeping at Fort Knox during World War II. The surviving written copies of the original Charter now reside in damage-proof viewing boxes in Lincoln Cathedral, Salisbury Cathedral, and the British Library, where viewers find inspiration, just as our Bill of Rights to the U.S. Constitution found its inspiration centuries ago.

Magna Carta continues to inspire. Researchers at King’s College London are re-examining rival versions of clauses proposed but ultimately rejected during the negotiations at Runnymede, casting new light on Magna Carta’s meaning. Just this past July a committee of the House of Commons published a report, “A New Magna Carta,” in response to a parliamentary inquiry into the question of a written constitution. And Carlyle Group CEO David Rubenstein paid $21.8 million to own one of the four existing copies.

A. E. Dick Howard ’61, White Burkett Miller Professor of Law and Public Affairs and a noted authority on Magna Carta, is advising the Library of Congress on its forthcoming exhibit, “Magna Carta: Muse and Mentor.” In 2015 Howard will give lectures in London under the auspices of the American Embassy, and will lecture at Oxford’s Bodleian Library, at Salisbury Cathedral (which has one of the four extant copies of the 1215 Charter) and elsewhere in England.

“The 800th anniversary is not so much about celebrating Magna Carta’s origins as it is about explaining how and why the Charter survived and what its legacy is for our time,” he says. “Magna Carta could have died entirely, and yet it didn’t. Instead, it has become a universal symbol of the rule of law, of due process of law, and of limits on government power.”

“Given by Our hand in the meadow which is called Runnymede …”

Magna Carta arose out of the chaotic reign of King John whose profligacy, inept statecraft, and military incompetence had infuriated his barons. Forced by the barons’ might and lacking any popular support, John agreed in 1215 at Runnymede to 63 “chapters” that granted “to all the free men of our realm for ourselves and our heirs for ever, all the liberties written below.”

Almost immediately, John sought to have Magna Carta annulled, and Pope Innocent III issued a papal bull declaring it “null and void of all validity for ever.” The deceit of John and an irate Pope came close to smothering Magna Carta in its crib, but the king died in 1216 of dysentery and a young Henry III succeeded him. Henry’s regents, needing the barons’ support, reissued Magna Carta in 1216 (and again in 1217 and 1225). In 1297 Edward I entered Magna Carta into the statutes of the realm.

An engraved 19th century illustration of King John signing the Magna Carta

An engraved 19th century illustration of King John signing the Magna Carta

It continued to evolve over the centuries through statutory amendments and royal proclamations, some repealing its feudal anachronisms, others restating its fundamental principles (just four of the original chapters remain today—the last few were repealed in 1971).

Magna Carta lay largely dormant during the Tudor period. It was in the seventeenth century that the Stuart kings’ notions of “divine right” brought renewed reliance on the Charter. Sir Edward Coke, the greatest jurist of his time, brought forth Magna Carta as authority for his opposition to the Stuart claims of royal prerogative.

Meanwhile, colonial charter companies were assuring prospective settlers that they would enjoy in America the same rights and privileges of their homeland, understood by them to mean the principles contained in Magna Carta for justice according to “the law of the land.”

Originalism and Historical Meaning

Were the barons who forced a tyrannical king to sign the document thinking of timeless values? No. Were they trying to establish fundamental rights for all? Certainly not. Were their words open to interpretation? Absolutely, and therein hangs a tale.

“It was a bargain struck between King John and the barons who had their own interest at heart,” says Howard. “They were not concerned about posterity, and they certainly weren’t concerned about the common good. A very reluctant King John sealed the document. He would have surely broken his promises. He never intended to keep them.”

Ted White, David and Mary Harrison Distinguished Professor of Law, agrees: “It is less a charter of individual liberties than a rebellion against absolute powers of the monarch by a group of persons interested in preserving their own economic and political and social autonomy against the Crown.”

“Magna Carta was intended to give relief to a handful of angry male barons, but the word ‘barons’ was changed to ‘any freeman,’ and that made all the difference in law,” says Suzelle Smith ’83, co-founder of litigation boutique Howarth & Smith, a visiting fellow at Lady Margaret Hall at Oxford, and an elected fellow and member of the board of directors of the International Academy of Trial Lawyers. “In 1215, there were very few ‘freemen.’ But as time passed, the clause was applied in England to guarantee ‘due process of law’ universally, including to women.”

What Magna Carta’s provisions mean, taking into account their context, is not the same as what Coke understood them to mean when he fashioned his arguments against the Stuart claims. “But the language is broad and a potential source of authority to be interpreted in purposive ways by subsequent interpreters,” says White. “That dimension of Magna Carta can’t be underestimated. It is out there as a legacy of a kind, even though its meaning may not be obvious.”

Magna Carta is interesting for what it meant at the time it was adopted and how it summed up important principles, but its modern legacy flows in part from the uses made of it by later generations. “Magna Carta has been glossed in a way that John or the barons in the 13th century might not recognize,” says Howard, who sees “due process of law” as the actual textual connection between Magna Carta and the U.S. Constitution. The phrase “law of the land” in English history very quickly became interchangeable with due process.

“They’re the same concept,” he says. “Due process has been perhaps the most powerful single organic concept in constitutional law. Throughout the centuries people have poured their contemporary understandings into what due process is all about.

“If I wanted to respect the so-called ‘original meaning’ interpretation of the Constitution, I could argue that, when the framers used the phrase ‘due process of law,’ they understood it to be a constantly evolving concept.” Unfortunately, the framers of the Constitution never made explicit how they wanted future generations to interpret their document; or put another way, their original intent about original intent. But we know they had a perspective framed by deep study of the rise and fall of governments and civilizations.

The American Bar Association’s Magna Carta Memorial at Runnymede.

The American Bar Association’s Magna Carta Memorial at Runnymede.

“We tend to think of historical change as a qualitative development over time so that the meaning of a provision one day might not be the same at a later date in a different context,” says White. “But the framers’ perception was different. They saw history as a cyclical process that approximates the human condition going from early life to maturity to decay and ultimately disintegration. It’s not progressive change. It’s not qualitative change. Instead, it is the recurrence of fundamental principles as the course of a nation’s history evolves.”

When Chief Justice Marshall wrote in McCulloch v. Maryland that the Constitution is designed to be adapted to the various crises of human affairs, he wasn’t saying that the meaning of the Constitution would change over time. “Instead,” says White, “he meant that the foundational principles of the Constitution will need to be restated in different contexts as the context emerges. The crises that require constitutional interpretation are products of changed circumstances, and the interpreter is supposed to solve those problems by restating the original foundational principles. The problem is that that view of history has been abandoned for over a century.”

The Law of the Land in England

While the bones and sinew of Magna Carta dealt with the immediate and specific grievances of the barons in their feudal role, the heart and soul of the document is its Chapters 39 and 40. Those fifty words became the cornerstone of English common law, a nascent form of what would later inform part of the U.S. Constitution. But it took a long time and many turns to get there.

What does Magna Carta mean by “the Law of the land”? It doesn’t say, but over time it became consistent with the idea of the right to trial by jury of one’s peers, to confront accusers, and to appeal. “That’s important because you could imagine in a monarchy that there is no appeal, that everything is done at the pleasure of the monarch,” says White.

Later, in 1368, a statute of Edward III said if a law was in conflict with Magna Carta, it should be “holding for none,” or null and void, essentially treating Magna Carta as a “superstatute, in other words, as a constitution,” says Howard. “It didn’t turn out to be Marbury v. Madison. England still has Parliamentary supremacy, and they don’t have what we call judicial review, but the idea gets planted.”

But it was the ascent of the Stuart dynasty with James I in 1603 that became a “pivot point” in England and America that refined the meaning of “Law of the land.” The new king’s claim of divine right was clearly not a Parliamentary principle and was not consistent with English constitutional traditions.

Penumbras and emanations, brawlers and vagabonds : In researching her book on vagrancy law Professor Risa Goluboff came across a revealing artifact in the substantive due process debate in the mid-20th century U.S. Supreme Court.

Penumbras and emanations, brawlers and vagabonds: In researching her book on vagrancy law Professor Risa Goluboff came across a revealing artifact in the substantive due process debate in the mid-20th century U.S. Supreme Court.

In response, Parliament passed a series of acts, particularly the English Bill of Rights, which introduced principles beyond those found in Magna Carta. “Coke and his friends argued that Magna Carta laid down certain precepts which they built upon and enlarged in the quarrels between Parliament and the Crown,” says Howard.

“So, yes, you do have some open-ended language in Magna Carta,” says White, “but it is plain that at the time the United States declared independence from Great Britain, the British citizens did not have a full panoply of individual rights against the Crown. In fact, the Crown and Parliament are still dominant. The lawmaking authority in England is statutory. The British don’t have separation of powers in the full sense that the Americans do, so I think Magna Carta is susceptible of over-generalization.”

Smith notes another glaring difference. “The bedrock of American judicial process, the Constitutional right to a jury of one’s Peers, is straight from Magna Carta. Yet, the English, with no formal written Constitution, have virtually eliminated the right to a jury in civil cases.”

The Law of the Land in America

While Coke was leading the opposition to the Stuarts in England, the first English-speaking colonies were being planted in America, beginning with Virginia in 1607. The colonial charters introduced principles of Magna Carta by promising that those settlers who immigrated to Virginia would enjoy all the rights they would have had in England.

The promises helped soothe fears that the charter company would become a monarchical fiefdom with absolute power over them if they chose to settle in the new world. Still, “the theory was that these colonies ultimately would be governed by England,” says White, “so these provisions referencing Magna Carta were likely intended to be rhetorical.”

However, the Crown barely governed at all during the time between the original settlements in the early 17th century and the movement for independence that began in the 1750s. The colonies essentially governed themselves during this long period of “benign neglect” by Great Britain. “By the time that Great Britain attempted to tighten the administrative screws and raise some money [the stamp tax] after the end of the Seven Years War [in 1765], the barn door had been left open too long,” says White. “The colonists had grown used to the freedom to conduct their affairs economically, and to some extent politically, so this was deeply resented,” all of which ultimately led to war and separation.

Magna Carta Moves Temporarily to the Sidelines

After the Revolution, the new government became hopelessly gridlocked under the ineffective Articles of Confederation. Delegates from the 13 states met at the Philadelphia Convention to repair the Articles. But instead they created a new Constitution, which in manifest ways was fresh legal terrain. The frame of government went beyond anything the barons and King John were trying to accomplish, and they had no models to follow. “We are in a wilderness without a single footstep to guide us,” Madison wrote to Thomas Jefferson. “Our successors will have an easier task.”

“The issue in the 13th century and the 17th century was competing notions of who had what power within an existing government,” says Howard. “Nobody was trying to create a new government. In writing the federal Constitution, Americans were exploring new territory.”

Magna Carta resurfaced after the Philadelphia Convention, says Howard. The convention had rejected the proposal that the Constitution include a Bill of Rights. The Anti-Federalists charged that the federal government would be too powerful and threaten civil liberties. “The Federalists realized that they had a problem on their hands so they made the implicit promise that, if the states would ratify the Constitution, the first Congress would move to add a Bill of Rights.”

The political debate that followed was not about civil rights or civil liberties in the modern sense, according to White. The supporters of the 1789 Constitution realized they needed to sell a document that restricted the power of the states more than ever before.

“The debate about the Constitution is really about whether there should be a unit of government, including a judicial branch, that restrains the power of the state legislatures,” he says. “One of the things they do in the Federalist Papers is create this idea that sovereignty resides in the people, so it’s not a matter of transferring power from one set of elites to another. The people were the ultimate sovereign. But that was a rhetorical strategy, not a representation of the reality of American political culture at the time.”

If the Articles of Confederation did anything, they proved that the new country badly needed a stronger central government. “Madison was absolutely right in his diagnosis of the problem: that the states left to their own devices would be prey to European powers,” says Howard. “We had to have a functional central government.”

But the Anti-Federalists struck the cautionary note about the temptations of power and threat to liberty from a strong central government that still ignites debate today. “This has been a process of confrontation and cross-examination in debates over what’s the right balance,” says Howard. “It tends to swing back and forth, but I find it a fundamentally healthy process that began with the Federalists and Anti-Federalists.”

Only in America

The American contribution to constitutionalism, and what makes it distinctly American, arose from its several generations of colonial self-government in an environment abundant with natural resources and conducive to explosive economic growth.

White doesn’t find any comparable episode in the history of colonialism where a colony is given that much autonomy to regulate itself at the same time that it becomes prosperous. “When the British attempted to reassert authority, they were confronting 200 years of American history that tilted in the direction of autonomy for residents of America,” he says. “The British found themselves up against a powerful and singular historical experience.”

Thomas Jefferson’s copy of Edward Coke’s  The Second Part of the Institutes of the Laws of England at the Library of Congress.

Thomas Jefferson’s copy of Edward Coke’s The Second Part of the Institutes of the Laws of Englandat the Library of Congress.

Moreover, while building the framework of their local governments, the colonial “creole elites” (third- or more generation settler families) had been listening to Lord Coke’s arguments. His foundational set of treatises, Institutes of the Lawes of England, overwhelmingly populated their libraries. They had time to develop powerful legal arguments supporting their cause.

The American innovation that the authority for government flows directly from the people emerged from the structural necessity of the moment. They needed government. It follows naturally that in forming that government the colonists intended to retain their inherent fundamental rights within it.

“One way of understanding American constitutional law is to realize that it flows from a common law tradition,” says Howard. “It’s not simply legislation. It is organic and has deep roots in English and American constitutional history. It evolves. It’s dynamic. It becomes, to borrow a phrase that today is very controversial, a living Constitution.”

The Stamp Act, the first time that Parliament had tried to impose an internal tax in America, outraged the colonists. They fashioned resolutions and tracts and pamphlets, repeatedly invoking Magna Carta. Echoing Coke, they argued that their ancestors had been promised the rights of Englishmen as found in Magna Carta, and that the tax violated its principles. “Magna Carta was front and center in this battle with the Parliament and the Crown,” says Howard.

Coke’s authority, the rhetoric of the creole elites, and the language in the charters themselves ultimately gave rise to the unique American insistence on a written Constitution based on concepts of natural law, common law, and the English constitutional system, sometimes pulling together and at other times apart, and still controversial today.

A “Baffling” Form of Government

It’s difficult to explain American constitutionalism to Europeans, says Howard. “The English don’t understand federalism because the notion that you can have dual sovereignties escapes them. Our mix of practices and ideas is also baffling to many people in other countries.

“American constitutional law has a dialectical quality. It’s a conversation among people, most of whom share some basic assumptions about liberty and freedom and order but have often very conflicting views of how to make it work.”

The American fealty to a written Constitution, partly British and partly American, comes from a long tradition of putting in writing documents reflecting the terms and balance of government power, from Magna Carta through the Petition of Right and the English Bill of Rights to the colonial charters and state constitutions.

“We like to look at a text and say, ‘There’s the answer,’” says Howard. “There’s a certain comfort in the assurance of the written word. But we also carry unwritten ideas about inherent rights, fundamental rights, natural law. We put different labels on them, and a dualism between the written and unwritten continues.”

Further, and particularly in New England, colonial Congregationalists and Presbyterians added to the mix their ideas about covenant theology. Originating in Europe and Scotland, covenant theology was based on a voluntary association between members of a congregation who make a compact between each other and with God. Covenant theology developed its modern form in New England in the 17th century, and the Constitution took on some of its flavor, says Howard.

Visitors tour the Library of Congress new exhibit, Magna Carta: Muse and Mentor, in Washington, D.C.

Visitors tour the Library of Congress new exhibit, Magna Carta: Muse and Mentor, in Washington, D.C.

“I think it helps explains how, when the American Civil War erupted, the North had become committed to the notion of the Constitution as a covenant of the people that you couldn’t rip apart,” says Howard. “In the South, John C. Calhoun’s compact theory claimed that the states had made the Constitution and were free to leave it. These two fundamentally different ways of thinking about the Constitution are highlighted by the religious fervor of the North in the Civil War. Think of the ‘Battle Hymn of the Republic,’ that God was part of this plan.”

“There are many people today who will tell you that the Constitution was divinely inspired; that is distinctively American,” says Howard. “In most parts of the world, constitutions are thought to be useful but certainly not divine. They don’t have the enduring quality that the American Constitution has had.”

Still a Touchstone

Or that Magna Carta still has today. “It would be interesting to do a formal count of how many times Magna Carta has been cited in state and federal opinions,” says Smith. “My guess is hundreds of times. Magna Carta has been referenced as the keystone of the rule of law in many significant opinions in the 21st Century.”

In 2003 Justice O’Connor calculated that the Supreme Court alone had cited Magna Carta 50 times in the past 40 years. In Hamdi v. Rumsfeld, the 2004 case involving the holding of suspected terrorists indefinitely without charge or trial, they would do it again. Justice Souter wrote, in partial concurrence and partial dissent:

‘[W]e are heirs to a tradition voiced 800 years ago by Magna Carta, which on the barons’ insistence, confined executive power by ‘the law of the land.’”

Later in Boumediene v. Bush, another detainee rights case, Justice Kennedy wrote for the majority:

Magna Carta decreed that no man would be imprisoned contrary to the law of the land. Important as the principle was, the Barons at Runnymede prescribed no specific legal process to enforce it. [G]radually the writ of habeas corpus became the means by which the promise of Magna Carta was fulfilled.

And he linked it directly to Article I of the U.S. Constitution:

The Framers viewed freedom from unlawful restraint as a fundamental precept of liberty, and they understood the writ of habeas corpus as a vital instrument to secure that freedom. Experience taught, however, that the common-law writ all too often had been insufficient to guard against the abuse of monarchial power. That history counseled the necessity for specific language in the Constitution to secure the writ and ensure its place in our legal system.

Aside from the Supreme Court, politicians and activists of all stripes from the earliest days of the Republic to this day, from the right and the left, have used Magna Carta as a tool to support very different understandings of what “liberty” and “freedom” mean.

“Curiously, I think we have made more use of Magna Carta’s legacy and symbolism in this country than they have in England, where it was first written,” says Howard.

Smith agrees. “My sense is that Americans, led by the Founding Fathers may have an even stronger reverence than the British for Magna Carta,” she says. “Our dedication to restrictions on government and protection of individual liberty by law is more a part of our societal structure than in Britain.”

If symbols mean anything, then Magna Carta really does mean more to Americans, and understandably so. The settlers leveraged it to build a working government and the framers to build a republic. So it is fitting that the only monument built at the Magna Carta memorial at Runnymede, a white portico cupola in the meadow by the Thames and a short royal barge trip from London, came courtesy of the American Bar Association in 1957. So happy 800th, Magna Carta. America might have been a very different nation without you.

Adamson Family Files $53.8-Million Suit Over Balloon Crash

By Melissa Caskey
(The Malibu Times)

The Adamson family is pictured here before a hot air balloon trip in Switzerland last August. Grant Adamson was killed when the balloon hit power lines and fell 165 feet, while each of his family members suffered serious injuries.  From left: Lauren, Terry, Megan and Grant Adamson

The Adamson family is pictured here before a hot air balloon trip in Switzerland last August. Grant Adamson was killed when the balloon hit power lines and fell 165 feet, while each of his family members suffered serious injuries.

From left: Lauren, Terry, Megan and Grant Adamson

Malibu’s Adamson family is seeking $53.8 million in damages relating to a 2013 hot air balloon crash that killed family patriarch Grant Adamson and seriously injured his wife Terry and daughters Lauren and Megan.

A lawsuit filed in LA County Superior Court last week details the harrowing final moments of Grant Adamson’s life and accuses a travel agent, two travel companies and a Swiss hotel of major negligence in the events leading up to the August 2013 tragedy.

The suit also alleges that the man who piloted and survived the doomed hot air balloon trip, Christian Dupuy, has a long history of alcoholism and had been drinking the night before the early-morning balloon ride. According to evidence presented, Dupuy registered a blood-alcohol level between .01 and .02 percent after the crash, in violation of Swiss law. He is currently facing manslaughter charges in the Swiss court system, according to the suit.

Moments before the balloon crashed into power lines and fell 165 feet to the ground near the Swiss Alps, Grant Adamson is said to have “had his wife and daughters lay on the bottom of the balloon’s basket and he tried to shield them with his own body to protect them. The members of the family told each other they loved each other and prayed.”

Grant Adamson died of an aortic rupture on impact, while Terry, Megan and Lauren were knocked unconscious. Terry suffered a shattered jaw and pelvis and several internal injuries. Megan’s spine was broken and “severed from her pelvis,” and Lauren’s legs were broken. All three have undergone extensive surgeries on the road to recovery. Their medical bills have totaled $1 million to date, attorneys said, and each of them will likely continue dealing with medical problems the rest of their lives.

“None of them will ever get back to where they were before this accident,” said Suzelle Smith, an attorney for the Adamsons.

The suit seeks $10.2 million for Terry’s damages, $3.8 million for Lauren’s, $3 million for Megan’s and $36.8 million for the death of Grant Adamson.

Grand Hotel Park, Protravel International, Bucher Travel and travel agent Simone Rayden are named as defendants in the case filed by attorneys on behalf of the Adamson estate.

“[The hotel] advertises it as a top-of-the-line safe trip, you can count on them to supply a competent pilot and take you on a once in a lifetime experience, but that’s not what happened,” Smith said. “They put the Adamsons into the balloon, they had a pilot who was not competent...he devastated this family.”

The Adamsons travelled to Switzerland last summer for a family vacation after booking the trip with Grand Hotel Park through Rayden and the two travel agencies. Terry Adamson purchased the hot air balloon trip over the Swiss Alps after researching it as early as 2011 and being told by Rayden that it was a “must do,” according to court documents.

What the Adamsons did not know, the suit alleges, is that Dupuy had been fired from a previous piloting gig for allegedly drinking on the job and “visiting the pub during working hours.” He was hired by Grand Hotel Park and its manager, Dupuy’s brother-in-law, even though Dupuy’s rocky employment history was evident, according to Adamson attorneys.

The suit further alleges Dupuy had very little familiarity with the route the hot air balloon was flying but that hotel employees assured the Adamsons beforehand that Dupuy was experienced on the route. But as the trip neared its landing point in Montbovon, the Adamsons asked Dupuy to land the balloon early because constant shifts in altitude of the balloon were frightening them. Dupuy’s nephew was following the balloon from the ground and at one point radioed Dupuy to say he was flying too low.

“Approaching the landing site at Montbovon, Dupuy was flying too low,” the suit states. “Megan saw that the balloon was headed for power lines and cried out to Dupuy. Dupuy was looking in the opposite direction.”

Moments later, the balloon hit the lines and began falling.

“The Grand [Hotel] either did not properly investigate the condition of its pilot before entrusting the Adamson family to him,” the suit alleges, “or knew he had been drinking before the flight and ignored it.”

The great-grandson of Frederick and Rhoda May Rindge, who in 1892 purchased the land that is now Malibu, Grant Adamson descended from a family known as Malibu’s founders. He was an owner of the Mariposa Land Company, which managed the family’s real estate holdings, and was a founding member of Pepperdine University’s Crest Board, among other community involvements. He and his family resided in Serra Retreat.

A pretrial conference date has been set for Oct. 20, 2014.

Ex-NBC Reporter Says He Was Fired For Being Too Old

By Alex Lawson
(Law360, New York)

Fired NBC News reporter Frank W. Snepp sued his former employer in California state court Tuesday, alleging he was terminated because of his age and because he had complained about discrimination against older workers at the company.

The complaint against NBC News, a unit of Comcast Corp., alleged that the journalist was the victim of a so-called youth movement taking hold at the network when he was terminated in October 2012 at age 69, a policy that Snepp took steps to curb while he was still employed.

“Plaintiff is informed and believes, and thereon alleges, that a substantial motivation for his termination was because of his age, as well as retaliation for his engagement in protected activity by complaining to management about age discrimination and ageism at NBC News,” the suit said.

Snepp was granted the prestigious Peabody Award in 2006 for his investigative work but was passed over for a critical promotion in favor of a younger and less qualified employee, the suit alleged.

Throughout his employment, Snepp made several complaints about the company's apparent age discrimination, including submitting a 150-page summary of his experiences at the network to his superiors. Snepp's experience with ageism was not unique, according to the complaint.

“Defendants know they have an issue with age discrimination and retaliation, but have done nothing to eradicate those issues, thus perpetuating and ratifying the unlawful discrimination,” the suit said.

After Snepp was let go by the network, the complaint said he was soon replaced by investigative reporters who were either under age 40 or “substantially younger” than Snepp.

Snepp's complaint seeks a jury trial and demands punitive and compensatory damages in an amount to be proven with evidence, along with attorneys' fees and expenses.

Ahead of bringing the suit, Snepp filed two separate administrative complaints with the California Department of Fair Employment and Housing alleging age discrimination.

Snepp's attorney, Joel W. Baruch, told Law360 that the company has faced several age discrimination lawsuits in recent years from its journalists and pointed to Snepp's efforts to reform the company's policies while he was still under employment there.

"Basically, they fired him, and I think that they fired him in retaliation for this," Baruch said. "They have a youth movement and that's what they want, but it's against the law."

In an e-mailed statement, a spokeswoman for NBC said the suit was "without merit."

Snepp began working for the network in 2005 and established himself with a feature series about methane gas hazards within a prominent California commercial-residential project and various other stories centered on public health concerns, according to the suit. Before his employment at NBC, Snepp served as an analyst for the Central Intelligence Agency during the Vietnam War.

Snepp is represented by Joel W. Baruch and Nikki Fermin of the Law Offices of Joel W. Baruch PC.

Counsel information for NBC was not immediately available.

The case is Frank W. Snepp v. Comcast Corp. et al., case number BC523279, in the Superior Court of the State of California for the County of Los Angeles.

Seniors Losing Savings to 'Pension Advance' Firms

by Melanie Hicken
(CNN)

A U.S. Senate committee is looking into pension advances to determine whether the deals come with "illegally high rates of repayment interest" and defraud investors.

A U.S. Senate committee is looking into pension advances to determine whether the deals come with "illegally high rates of repayment interest" and defraud investors.

Federal and state officials are looking into so-called "pension advances," deals they say are digging retirees and military veterans deep into debt, while also putting individual investors at risk.

The advances, in which retirees sign away a portion of their monthly pension check for an upfront cash payment, hit pensioners with hidden fees and interest rates of 35% or higher, critics say. Investors, who usually provide the upfront cash, can also face high fees as well as the risk of losing their investment if the pensioner stops paying.

On Monday, a U.S. Senate committee said it is investigating pension advances to determine whether the deals come with "illegally high rates of repayment interest" and defraud or mislead investors.

Pension advance firms use the Internet and ads in niche publications to market the deals (also called "pension sales" or "buyouts") to those with military, government or corporate pensions.

Here's how they work: In exchange for a lump sum cash payment, pensioners give up all or some of their monthly pension checks for a period of time, usually for between five and 10 years. In many cases, the upfront cash is provided by individual investors -- often retirees themselves -- who are drawn to the promise of a low-risk investment that provides monthly payments with an annual return of 7% or higher.

But there is a costly flip side to these deals: They often include additional fees that help push the effective interest rates on the loans to anywhere from 27% to 106%, according to an analysis by the National Consumer Law Center. Often, the retiree is required to purchase a life insurance policy -- with the firm or investor named as the beneficiary -- to insure that the pension payments continue.

The firms usually claim the advances do not qualify as loans so they do not need to follow banking regulations, such as providing written disclosures of the effective interest rates. Yet some state regulators, like New York's Benjamin Lawsky, say the advances appear to be "payday loans in sheep's clothing."

New York's Department of Financial Services announced this month that they are investigating 10 pension advance firms to determine if they committed fraud, used deceptive advertising or violated state usury laws, which limits the interest rates charged on loans. Massachusetts is also investigating many of the same firms.

Only one of the firms under investigation responded to requests for comment. That firm, Veterans Benefit Leverage, says that its transactions are legal and customers are aware of the costs.

And while federal law bans the "assignment" of a military veteran's retirement or disability pension to a third party, the firms say the transactions are legal since the pensioner retains control and makes payments out of their own bank account each month. Still, some judges have ruled that the advances are illegal and unenforceable, meaning pensioners have the right to stop payments -- leaving the investor high and dry. With his credit ravaged by money troubles and an earlier personal bankruptcy, Charles Steen, a 71-year-old Corona, Calif., resident, was unable to get a credit card or bank loan to help make ends meet.

To help him pay off payday loans, he took out an advance against his $1,028 monthly retirement pension from his years working at Hunt-Wesson Foods, now owned by ConAgra.

In exchange, he received an $8,000 payment from Cash Flow Investment Partners, a firm that is currently being investigated by the state of New York. Steen said he agreed to make monthly payments of $284 for five years. By the end of the advance term, he'll have paid $17,040, which works out to an effective APR of 35%.

Once the advance's $300 "origination fee" and the extra $86 a month he pays on the 10-year life insurance policy that he had to take out to secure the deal is added in, the effective interest rate tips even higher.

"It was my only option," he said.

Investors should also be wary of the deals, which are usually not subject to oversight by the Securities and Exchange Commission, can carry commissions of 7% or higher and are difficult to liquidate, federal officials said.

In April, the Arkansas Securities Commissioner issued a cease and desist order against Little Rock-based Voyager Financial Group, LLC, alleging it had illegally arranged the sale of pension payments to hundreds of investors without properly registering them as securities.

Less than a year after 50-year-old California resident Lawrence Vicari spent $62,574 to purchase $90,000 worth of pension payments over a decade through Voyager, the pensioner stopped making the monthly $750 payments, said his attorney Suzelle Smith.

"The investor pays out their money, and then that money is gone," Smith said. "He's lost what he had hoped would be a secure investment, largely for medical bills."

Vicari filed a class-action lawsuit against Voyager, alleging that he and other investors had been misled to believe that their investments would be "risk-free."

Christopher Shaw, Voyager's attorney, said that Vicari was clearly warned of the possible investment risk within the signed contracts.

K&L Gates Can't Escape KB Home's $9.4M Malpractice Suit

By Matthew Heller
(Law360, Los Angeles)

A California judge on Wednesday refused to toss a $9.4 million malpractice suit alleging K&L Gates LLP mishandled the defense of a consumer class action against developer KB Home, saying it was too early to decide whether the firm can be liable for strategic decisions.

Los Angeles Superior Court Judge Jane L. Johnson declined to rule that, as a matter of law, K&L Gates was immune from suit because KB Home had alleged negligent conduct consisting mostly of tactical decisions and professional judgments the firm and partner Matthew Ball made while representing the developer. The class action ended in a $7.1 settlement KB Home claims was avoidable.

“Even where 'strategic decisions' are involved, these decisions must still 'be based upon a rational, professional judgment that would have been made by other reputable attorneys in the community under the same or substantially similar circumstances,'” Judge Johnson said in a written order denying K&L's motion to dismiss. “This is a factual determination, not appropriate for a [motion to dismiss].”

At a hearing on the motion, K&L's attorney, Scott Garner of Morgan Lewis & Bockius LLP, argued that no matter what KB Home might allege, it could not meet the standard for malpractice.

“It's not clear what they could possibly say ... that would show that not filing a demurrer [in the class action] was malpractice,” he said. “Even if they got Mr. Ball to admit that, 'I didn't do any research on whether to file a demurrer' ... that's not going to get them to the point where, as a matter of law, the court would be able to find that was somehow below the standard of care.”

But Judge Johnson would not be swayed, concluding, “I really think these are issues for another day.”

KB Home, along with subsidiary KB Home Mortgage Co., filed suit in May, accusing K&L and Ball of misrepresenting their ability to handle class actions and failing to adequately represent the company in the suit.

Angela Bates, who had used KB Home's now-defunct subsidiary Homesafe Escrow Co., claimed in the class action that she and others were promised interest on house deposits that they never received and Homesafe had unlawfully provided and charged for escrow services.

According to the malpractice complaint, KB Home was forced to pay a "highly inflated settlement" of $7.1 million because of K&L's negligence. The suit challenged, among other things, the firm's decision not to file a motion to dismiss the complaint — or demurrer — as well as arguments it used in opposing the motion for class certification and its decision not to conduct discovery on the plaintiffs' class damages theory.

K&L said none of that alleged conduct could support a malpractice claim.

“California law gives attorneys, especially litigators, wide latitude in formulating case strategy and making tactical decisions,” it noted in its motion to dismiss, and “every instance of alleged misconduct involves the type of tactical and strategic decisions that California courts have deemed immune from liability.”

KB Home settled the class action, according to K&L, “based on a recognition of unfavorable facts surrounding its escrow practices, not any negligence on the part of K&L Gates.”

But Judge Johnson said she was not prepared to throw out the malpractice case “at this point, but I do realize — and I'm sure plaintiff knows — that they have a tough row to hoe” to prove negligence.

KB Home is represented by Don Howarth, Suzelle M. Smith and Padraic Glaspy of Howarth & Smith.

K&L Gates is represented by Robert E. Gooding, Scott B. Garner and Todd W. Smith of Morgan Lewis & Bockius LLP.

The case is KB Home et al. v. K&L Gates LLP et al., case number BC484090, in the Superior Court of the State of California, County of Los Angeles.

Muse Family Enterprises $21M Verdict

(Los Angeles Daily Journal)

ALTER EGO
Fraudulent Transfer of Real Property

VERDICT: $21,061,219.

CASE/NUMBER: Muse Family Enterprises, Ltd., Linda Ehlers as Co-Trustee for the Muse Children's GS Trust, JRM Interim Investors, LP, Oak Stream Investors II, Ltd., Wood Luxembourg Properties, SARL, Holbrook Properties, Inc., Strongback Holdings, ABF Note Holdco, LLC, A WF Note Holdco, LLC, BCC Note Holdco, LLC, BFC Note Holdco, LLC, DVB Note Holdco, LLC, FFC Note Holdco, LLC, IFC Note Holdco, LLC, NCC Note Holdco, LLC, RMA Note Holdco, LLC, TTMNote Holdco, LLC, TW Note Holdco, LLC, and VOC Note Holdco, LLC v. Mira Overseas Consulting Ltd., BTM Funding Inc., David Thomas Smith, Carmen Copple (Silva) Smith, an individual; Carmen Copple (Silva) Smith, as Trustee of the Carmen Copple Silva Revocable Trust dated Sept. 24, 2009, and Does 1 through 10, inclusive / BC445532.

COURT/DATE: Los Angeles Superior Central / Nov. 13, 2012.

JUDGE: Hon. Richard L. Fruin Jr.

ATTORNEYS: Plaintiff - Don Howarth, Jessica L. Rankin (Howarth & Smith, Los Angeles); F. Phillip Hosp, Jon L. Rewinski (Locke Lord, LLP, Los Angeles).

Defendant - Saied Kashani (Law Offices of Saied Kashani, Los Angeles) for David Smith, Carmen Copple Smith and Carmen Copple Silva Trust.

TECHNICAL EXPERTS: Plaintiff - John F. Van der Zee, real estate appraisal, Los Angeles

FACTS: David Smith is the sole shareholder of BTM Funding Inc. The Muse plaintiffs invested in loans made by BTM Funding Inc. to finance the construction of churches around the country. In 2009, the Muse plaintiffs discovered significant problems with the church loan program. The Muse plaintiffs also discovered that real property purchased by BTM Funding Inc. had been quitclaimed from BTM Funding Inc. to David Smith, from David Smith to his wife Carmen Copple Smith, and from Carmen Copple Smith to the Carmen Copple Silva Revocable Living Trust.

The Muse plaintiffs sued for breach of contract, fraud: intentional misrepresentation, fraud: concealment, negligent misrepresentation, breach of fiduciary duty, and for fraudulent transfer, alleging that David Smith was the alter ego of BTM Funding Inc. David Smith allowed BTM Funding Inc. to default and, faced with a summary judgment motion, agreed that BTM Funding Inc. was liable for $21 million for its breach of contract. Judgment for this amount was entered against BTM Funding Inc. The parties then tried to a jury the issue of whether the Kobe Bryant house in Pacific Palisades was fraudulently transferred to David Smith and whether David Smith was the alter ego of BTM Funding Inc.

PIAINTIFF'S CONTENTIONS: The Muse plaintiffs contended that David Smith is the alter ego of BTM Funding Inc. and liable for its debt of $21 million to the Muse Plaintiffs. The Muse Plaintiff also contended that the real property was fraudulently transferred.

DEFENDANTS CONTENTIONS: Defendants contended that the real property was not fraudulently transferred and that David Smith was not the alter ego of BTM Funding Inc.

JURY TRIAL: Length, 10 days; Deliberation, three hours.

RESULT: The jury found that BTM Funding Inc. had fraudulently transferred real property (the home formerly owned by Kobe Bryant in Pacific Palisades) to its sole shareholder, David Smith.

The jury found damages against David Smith in the amount of $10 million for the fraudulent transfer.

The jury also found that David Smith is the alter ego of BTM Funding Inc., making David Smith personally liable for the debts of the company, including Plaintiffs' judgment against BTM Funding Inc. in the amount of $21,061,219.

KB Home Hits K&L Gates With $9.4M Malpractice Suit

By Lana Birbrair
(Law360, New York)

Real estate developer KB Home on Friday slapped K&L Gates LLP with a $9.4 million legal malpractice and breach of contract suit in California, alleging the firm mishandled two cases accusing the developer of illegally charging service fees and failing to pay interest on home deposits.

KB Home, along with subsidiary KB Home Mortgage Co., accused K&L and partner Matthew Ball of misrepresenting their ability to handle class actions and failing to adequately represent the company in a suit that ended in a $7.1 million settlement the developer says was avoidable.

In 2008, a woman who had used KB Home's now-defunct subsidiary Homesafe Escrow Co. launched a class action against them in state court, alleging she and others were promised interest on house deposits that they never received and Homesafe had unlawfully provided and charged for escrow services. The company soon was hit with a federal class action as well.

KB Home hired K&L, along with Ball, for both suits based on the firm's assurances that it was especially qualified to handle class-action defense for the homebuilding and financial services industries, according to the complaint.

K&L assured KB Home that class certification in the state suit was likely to be defeated and that the company probably would win a motion for summary judgment, suggesting a reserve of $250,000 to handle the case and failing either to retain a damages expert or to conduct discovery on the plaintiffs' class damages theory, according to the complaint.

Contrary to the attorneys' expectations, the plaintiffs won class certification on most counts and KB Home's motion for summary judgment was denied in full, the suit says.

KB Home then retained Munger Tolles & Olson LLP as lead trial counsel, but by then it was too late, according to the complaint. Because of K&L's errors and omissions, KB Home was forced to pay a "highly inflated settlement" of $7.1 million, plus more than $1 million to Munger Tolles to avoid losing at trial. The company already had paid K&L $1.2 million as well, the complaint states.

KB Home then hired a Harvard Law School professor, as well as the former president of the California Bar, to analyze K&L's handling of the cases. Both concluded that K&L had bungled the cases, especially the state suit, failing to adequately respond to the motion for class certification or plead its motion for summary judgment, according to the complaint.

The suit alleges professional negligence and breach of contract and seeks approximately $9.4 million in damages plus interest.

Representatives for the parties were not immediately available to comment Monday.

KB Home is represented by Don Howarth, Suzelle M. Smith and Padraic Glaspy of Howarth & Smith.

Counsel information for the defendants was not immediately available.

The case is KB Home et al. v. K&L Gates LLP et al., case number BC484090, in the Superior Court of the State of California, Los Angeles County.

California Fellows Suzelle Smith & Don Howarth Secure $10 Million Verdict in Legal Malpractice Case

(Litigation Commentary & Review)

Suzelle Smith and her law partner, Don Howarth of Howarth & Smith represented plaintiff JP Hyan in a lawsuit against Los Angeles firm, Rutter, Hobbs & Davidoff to jury verdict on June 15, 2011. Mr. Hyan was a highly compensated executive at Lowe Enterprises Inc. from 1993-1997. Mr. Hyan had brought the Los Angeles County Employees Retirement Account ("LACERA") business to Lowe. Lowe was an investment manager on certain real estate housing investments ("Housing Program"). Part of Mr. Hyan's negotiated compensation from Lowe was 10% of the gross revenues Lowe received from the LACERA housing account.

In 1997, Mr. Hyan changed his status at Lowe from employee to consultant. He hired Frank Hobbs from the firm Rutter, Hobbs & Davidoff ("RHD") to negotiate the contracts memorializing his change in status and including protection for his ongoing 10% of the fees in the event Lowe should transfer or sell the LACERA housing account. RHD assured Mr. Hyan that his stream of income was protected in the event of any transfer of the Housing Program due to "successors and assigns" language in the contract. For 10 years, Mr. Hyan received his 10% share, amounting to more than $11 million.

In 2006, Lowe sold the housing account and the new owner, Tri Pacific, stopped paying Mr. Hyan's fees. Mr. Hyan returned to RHD for legal advice when his payments were cut off. RHD told Mr. Hyan that the 1997 contract they drafted required Lowe or TriPacific to continue paying due to the "successors and assigns" clause and that Mr. Hyan should retain RHD to sue Tri Pacific. The matter went to binding arbitration and Mr. Hyan lost. A judgment of over $500,000 was entered in favor of TriPacific, because RHD had inserted an attorney’s fees provision in the 1997 contract.

RHD charged Mr. Hyan for over $700,000 in fees for their handling of the arbitration. Mr. Hyan sued RHD and Franks Hobbs for professional negligence, breach of fiduciary duty, breach of contract and punitive damages. Mr. Hyan's economic damages included over $3 million in past revenues and over $5 million present value in future revenues for 5 years, as well as the RHD fees and the value of the Tri Pacific judgment.

On defendants’ motion the court bifurcated the action, sending the breach of fiduciary duty and punitive damages claims to binding arbitration. After a five week jury trial, a verdict of $10,155,559 (to the dollar the amount plaintiff sought) on the professional negligence claim was returned in favor of Mr. Hyan. The breach of fiduciary duty and punitive damages claims will be arbitrated by ADR.

Suzelle Smith, Fellow of the Litigation Counsel of America, is a partner and co-founder of the Los Angeles, California law firm of Howarth & Smith. Ms. Smith has extensive complex litigation, class action, professional malpractice, products liability, and business law experience and has tried numerous complex cases to verdict, representing both plaintiffs and defendants. In 2010, Ms. Smith was awarded the Top Corporate White Collar Crime Defense Counsel Award. Ms. Smith was selected as one of the top ten litigators in the United States for 1997 by the National Law Journal; in 2004 she was named as one of "America’s Top 50 Women Litigators," in 2005 and every year thereafter she was named an one of California’s "Super Star" litigators. Ms. Smith received a Bachelor of Arts summa cum laude, with special distinction in Political Science, in 1975 from Boston University and a Master of Philosophy in 1977 from Oxford University. From 1978-1980, she served as a Legislative Assistant to United States Senator Howell Heflin. In 1983, she received her Juris Doctorate from the University of Virginia School of Law, Order of the Coif. Ms. Smith is a Lecturer in Law and Visiting Fellow of Lady Margaret Hall, Oxford University, England. She is also a Trustee of the University of Virginia Law School and a member of the Advisory Council of The American Ditchley Foundation.

California Fellow Don Howarth is a partner and co-founder of the Los Angeles law firm of Howarth & Smith. Mr. Howarth has extensive litigation experience and has tried numerous high-profile cases and class actions to verdicts. He represents both plaintiffs and defendants. Mr. Howarth received a Bachelor of Arts magna cum laude from Harvard College, and earned a Juris Doctor cum laude from Harvard Law School, as well as a Masters in Public Policy from the Kennedy School of Government at Harvard University. Mr. Howarth served as a Law clerk for the Honorable Shirley M. Hufstedler, United States Court of Appeals, Ninth Circuit. Mr. Howarth is admitted to practice in California as well as the United States Court of Appeals, Ninth Circuit, United States District Courts, Central, Southern and Northern Districts of California, and the Supreme Court of the United States. Mr. Howarth is an elected Fellow of the American College of Trial Lawyers, of the International Academy of Trial Lawyers, and of the American Bar Foundation; a member of the American Bar Association, Litigation Section and Contributor to the Litigation Journal; a certified Provider for Continuing Legal Education in Litigation for the State Bar of California, of which he is a member; a featured speaker for ATLA and CTLA; a member of the Federal Bar Association and the Los Angeles County Bar.

Firm Slammed With $10 Million Malpractice Verdict

By Amanda Bronstad
(The National Law Journal)

A jury has issued a $10 million malpractice verdict against Rutter, Hobbs & Davidoff Inc. and two of its senior attorneys over a 1997 business contract.

The June 15 verdict, which followed a month-long trial in Los Angeles County, Calif., Superior Court, was returned against the Los Angeles firm; name partner Frank Hobbs, who has since retired; and shareholder Geoffrey Gold, former head of the firm's litigation department.

An additional arbitration proceeding over related claims, including potential punitive damages associated with a failed lawsuit the firm filed to enforce the 1997 contract, will take place in the near future against Hobbs; Gold; Brian Davidoff, managing director of the firm; transactional attorney Fred Fenster; Olivia Goodkin, chairwoman of the labor & employment practice; and Rosslyn Hummer, a former attorney at the firm.

Don Howarth, co-founder of Howarth & Smith in Los Angeles, who represented the plaintiff in the malpractice case, said he expects to ask for punitive damages of up to three times the $10 million verdict during the arbitration hearing.

"We will be seeking punitive damages of two to three times the actual damages of $10 million because they went forward... with an action that had no basis without telling their client," Howarth said. "That's a common problem today, where lawyers think they're in business for themselves instead of being in business for their client."

Davidoff said the firm planned to file post-trialmotions to review the jury's decision and, if that fails, would appeal the verdict. "We strongly disagree with the jury's conclusion. We believe the.verdict was in error and failed to follow clear California law as annunciated by the California Supreme Court," Davidoff said. "Our view is clearly that the verdict will either be corrected by the trial court or the court of appeal."

The suit was filed Jan. 19, 2010, by J.P. Hyan, a former sheriffs deputy in Los Angeles County, Calif., who became a stockbroker during the late 1980s. In 1990, he created a business plan for the Los Angeles County Employees' Retirement Association to invest pension money in local residential building projects. He pitched the idea to Lowe Enterprises Inc., a national real estate company, where he began working as an investment adviser for a subsidiary in 1993. The Lowe subsidiary agreed to pay Hyan 10% of the gross fees received from the pension investment project, which was launched in 1995 and generated tens of millions of dollars over 12 years.

"He designed a program for LACERA, which has to invest pension fund money, and he brought in a manager called Lowe to manage pension fund money in this new program he started," Howarth said. "Lowe earned a fee for managing this pension fund money and investing it. Mr. Hyan was entitled to 10% of that fee."

But their partnership fell apart. In 1997, Hyan hired Rutter Hobbs & Davidoff to negotiate a separation agreement from Lowe. The primary attorney was Hobbs, but Gold also worked with Hyan on the deal. According to Howarth, the separation agreement should have allowed Hyan to continue to receive 10% from gross fees in the pension investment program indefinitely.

"The problem was they left a hole in it that a truck could drive through," he said of the 1997 contract.

L.A.'s Rutter, Hobbs & Davidoff Hit with $10 Million Malpractice Verdict

By Amanda Bronstad
(The National Law Journal)

A jury has issued a $10 million malpractice verdict against Rutter, Hobbs & Davidoff Inc. and two of its senior attorneys over a 1997 business contract.

The June 15 verdict, which followed a month-long trial in Los Angeles County, Calif., Superior Court, was returned against the Los Angeles firm; name partner Frank Hobbs, who has since retired; and shareholder Geoffrey Gold, former head of the firm’s litigation department.

An additional arbitration proceeding over related claims, including potential punitive damages associated with a failed lawsuit the firm filed to enforce the 1997 contract, will take place in the near future against Hobbs; Gold; Brian Davidoff, managing director of the firm; transactional attorney Fred Fenster; Olivia Goodkin, chairwoman of the labor & employment practice; and Rosslyn Hummer, a former attorney at the firm.

Don Howarth, co-founder of Howarth & Smith in Los Angeles, who represented the plaintiff in the malpractice case, said he expects to ask for punitive damages of up to three times the $10 million verdict during the arbitration hearing.

“We will be seeking punitive damages of two to three times the actual damages of $10 million because they went forward...with an action that had no basis without telling their client,” Howarth said. “That’s a common problem today, where lawyers think they’re in business for themselves instead of being in business for their client.”

Davidoff said the firm planned to file post-trial motions to review the jury’s decision and, if that fails, would appeal the verdict.

“We strongly disagree with the jury’s conclusion. We believe the verdict was in error and failed to follow clear California law as annunciated by the California Supreme Court,’’ Davidoff said. “Our view is clearly that the verdict will either be corrected by the trial court or the court of appeal.”

The suit was filed Jan. 19, 2010, by J.P. Hyan, a former sheriffs deputy in Los Angeles County, Calif., who became a stockbroker during the late 1980s. In 1990, he created a business plan for the Los Angeles County Employees’ Retirement Association to invest pension money in local residential building projects. He pitched the idea to Lowe Enterprises Inc., a national real estate company, where he began working as an investment adviser for a subsidiary in 1993. The Lowe subsidiary agreed to pay Hyan 10% of the gross fees received from the pension investment project, which was launched in 1995 and generated tens of millions of dollars over 12 years.

“He designed a program for LACERA, which has to invest pension fund money, and he brought in a manager called Lowe to manage pension fund money in this new program he started,” Howarth said. “Lowe earned a fee for managing this pension fund money and investing it. Mr. Hyan was entitled to 10% of that fee.”

But their partnership fell apart. In 1997, Hyan hired Rutter Hobbs & Davidoff to negotiate a separation agreement from Lowe. The primary attorney was Hobbs, but Gold also worked with Hyan on the deal. According to Howarth, the separation agreement should have allowed Hyan to continue to receive 10% from gross fees in the pension investment program indefinitely.

“The problem was they left a hole in it that a truck could drive through,” he said of the 1997 contract.

Hyan continued to receive the 10% for the next 10 years, with his annual income reaching $2.5 million by 2006. But by 2006, Lowe had sold the subsidiary that managed the program to a third party, TriPacific Capital Advisors LLC. Hyan’s payments stopped after December 2006. When he contacted Rutter Hobbs & Davidoff, the firm’s lawyers – specifically, Hobbs, Fenster, Gold, Goodkin, Davidoff and Hummer – pursued a lawsuit on his behalf against TriPacific for declaratory relief, asserting that a clause in the contract made it binding on “successors and assigns” to the Lowe subsidiary, according to court documents.

That lawsuit went to arbitration, and an arbitrator ruled against Hyan in 2008, awarding TriPacific $419,510 in attorneys’ fees, expenses and costs. Hyan, who claims he faced foreclosure of his home in Park City, Utah, and was hospitalized for a cardiac incident related to stress, sued the firm for more than $30.5 million, including $24.6 million in lost income.

The jury’s verdict pertained only to his malpractice claims against the firm, Hobbs and Gold. Hyan’s claims against the lawyers at Rutter, Hobbs & Davidoff who handled his unsuccessful lawsuit against TriPacific seeking to enforce the contract will be the subject of the pending arbitration proceeding, which has not yet been scheduled.

“That’s what the second portion is about – the decision to go forward when they knew or should have known they didn’t do this right,” Howarth said.

Rutter Hobbs & Davidoff argued that Hyan failed to prove he would have obtained a better deal but for the firm’s alleged legal malpractice –the standard set by the California Supreme Court’s 2003 decision in Viner v. Sweet.

“To prove causation, a plaintiff must present evidence that without defendant’s negligence, it would have obtained a more advantageous agreement – a better deal,” Davidoff said. “We don’t think the evidence was that he had a better deal.”

In fact, he said, the evidence at trial showed that the firm’s lawyers attempted to insert a clause that would have maintained Hyan’s 10% deal indefinitely, but Lowe balked at the idea.

Davidoff also disputed Hyan’s claims for punitive damages.

“His theory in that case is that knowing that allegedly the clause was wrong, we instituted an action to attempt to cover it up,” he said. “We think that’s just plainly absurd. That is just not the case.”

Jury Orders Firm to Pay $10 Million for Malpractice

By Anna Scott
(Los Angeles Daily Journal)

A jury last week found the former managing partner and a senior partner for law firm Rutter, Hobbs & Davidoff, Inc. committed legal malpractice, awarding $10 million in economic damages to a former client.

Plaintiff JP Hyan, a former executive with the real estate developer Lowe Enterprises Inc., targeted five Rutter Hobbs partners and the firm itself for negligence and other claims related to a separation agreement they negotiated when Hyan left Lowe 14 years ago.

When problems with the contract became apparent several years later, Rutter Hobbs lawyers tried to cover up the error rather than fix it, Hyan alleged. His complaint said Hyan lost millions of dollars in income, was forced to sell his homes and suffered health problems.

Suzelle M. Smith of Howarth & Smith, who represented Hyan along with her partner, Don Howarth, said the case hinged on “a clear error of basic contract law.”

“If you make a mistake, you have to admit it and control the harm to your client and also yourself,” she said. “That, to me, is the overarching lesson to be learned from this.”

Rutter Hobbs, a business litigation firm based in Los Angeles, plans to file post-trial motions asking the court to review the jury’s decision, according to Managing Director Brian Davidoff.

“Our view is that the verdict was in error and failed to follow clear California law,” Davidoff said. “We don’t believe the facts and the law support the verdict, and we’re confident it’s going to be reversed.”

Hyan joined Lowe in 1992 to help the developer set up an investment partnership with the Los Angeles County Employees’ Retirement Association. The initiative launced in 1995, according to Hyan’s complaint, eventually netting Lowe tens of millions of dollars a year. Hyan decided to leave the company in 1997. Lowe’s then president had verbally agreed Hyan could indefinitely continue to receive 10 percent of the fees grossed from the pension fund investment program after his departure, according to the complaint. Hyan retained Rutter Hobbs to formally document the arrangement.

However, unbeknownst to him, a provision in the final contract put his ongoing income streak at risk, he alleged. As a result, Hyan’s payments from the company abruptly stopped 10 years later. Hyan returned to Rutter Hobbs for advice and, instead of pointing out the original contract clause that legitimately led to the pay cutoff, the firm advised Hyan to sue for his lost income and proceed to arbitration, according to the complaint. Hyan lost, and in January 2010 filed his suit against Rutter Hobbs and the various attorneys there who advised him on the 1997 contract and the ensuing litigation.

The June 15 jury verdict capped a five-week trial in Los Angeles County Superior Court. The jury assigned 99 percent of the blame, according to the verdict form, to the firm’s now retired managing partner, Franklin Dean Hobbs. The remaining 1 percent went to current senior partner Geoffrey Mark Gold.

Davidoff disputed Hyan’s contention that Rutter Hobbs could have negotiated a better deal for heal in 1997, a crucial condition of establishing malpractice under state law, and said the firm’s continuing defense will emphasize that point as it seeks to overturn the jury’s verdict.

Ariyoshi Appeals Lawsuit Dismissal

By Ken Kobayashi
(Honolulu Star Advertiser)

Two years ago, former Gov. George Ariyoshi and others filed a lawsuit seeking as much as $725 million for what they said was an invalid 2002 merger involving the high-technology company Pihana Pacific.

But now Ariyoshi and his fellow plaintiffs, including the University of Hawaii, must pay $3.4 million in fees and costs to the attorneys who represented the companies named in the suit.

Ariyoshi and high-technology entrepreneur Lambert Onuma, both of whom helped raise more than $200 million in investments in Pihana prior to the merger, alleged that they and other shareholders of common stock were "frozen out" when it merged with Equinix, a California-based company.

The suit said they did not receive any money for their stock.

But Circuit Judge Rom Trader granted a request by the civil defendants in May to dismiss the lawsuit and later awarded their attorneys the fees and costs, a staggering amount, legal observers say, for a matter that did not go to trial.

The litigation has raised eyebrows in the legal community with the dismissal of such a complex case and the amount of the fees and costs incurred before either side could mount the even more costly process of deposing witnesses and preparing for other pretrial matters.

It also underscores the price tag and the risks of high-stakes litigation over contract disputes that can allow the winning side to recover attorney fees.

Ariyoshi and the others are appealing the dismissal ruling and the fees and costs award to the Hawaii Supreme Court.

He and Onuma, who held the bulk of the common stock, said in court papers that if they lose the appeal, they will cover the $3.4 million judgment, which would mean UH and other plaintiffs would not have to pay.

Ariyoshi, 84, Hawaii’s governor from 1974 to 1986, and Onuma, who founded Pihana in 1999, both declined to comment because the matter is still pending in court, according to their attorney, John Edmunds.

The suit was filed on behalf of the common stock shareholders in Pihana, a data center company that caused a sensation by raising within two years about $240 million, the largest single venture investment in a Hawaii technological company.

Onuma owned about 4 million shares, or 75 percent of the management common stock, according to the suit. Ariyoshi’s revocable trust owned about 360,000 shares of common stock. The University of Hawaii held 100,000 shares.

UH was given the stock for its help in Hawaii’s first initiative to establish "a neutral network colocation facility" and did not pay for the shares, UH officials said.

Despite its promise and as economic and market conditions worsened, Pihana shut down in 2002 when it merged with Equinix.

In the merger, the common stock shareholders were notified that Pihana’s value had tumbled and they would not receive any compensation.

They were told investor companies that poured in millions of dollars in exchange for Pihana preferred stock would get 22.5 percent of Equinix’s common stock.

But those investors would still end up losing more than 90 percent of their investments, the shareholders were told.

Among the investors were financial firms such as Goldman Sachs, Morgan Stanley and Columbia Capital and their related companies.

Equinix was considered "virtually bankrupt" at the time of the merger but bounced back and grew in value, according to the suit. In 2008, Equinix’s market capitalization was $3.3 billion, the suit said.

Ariyoshi, Onuma, UH and about a dozen other common stock shareholders sued more than 40 companies and individuals, including Equinix and Goldman Sachs and the other major investors.

It alleged that Pihana executives, the board and the investors used the merger to "freeze out" the common stock shareholders and take for themselves the value of the common stock.

The suit asked for damages that may be "all or a substantial portion" of the $725 million, the value of the 22.5 percent of Equinix.

The suit’s claims included breach of contract and fiduciary duty; unjust enrichment; civil conspiracy; fraudulent misrepresentation and concealment; and constructive fraud.

Although the civil defendants deny wrongdoing, the merits of the lawsuit were not litigated because Judge Trader dismissed the case. He essentially found that the suit, filed six years after the merger, came too late under the statute of limitation laws of Delaware, where Pihana was incorporated.

In his appeal, Edmunds argued that the fraud allegations allow more time for filing the lawsuit; Hawaii and not Delaware law applies in the case; and that Trader ignored facts in the complaint and relied on misstatements by the civil defendants.

Even though Trader reduced the attorney fees and cost award from $4.2 million, it was still unreasonable for a case that never went to trial, Edmunds said.

Honolulu lawyer Paul Alston, one of the attorneys for Morgan Stanley, said they will defend Trader’s ruling as well as the award for attorney fees and costs.

"We believe Judge Trader accurately determined that their claims were barred by the Delaware law, which applies to the operations of the company," he said.

Alston said that under a legal doctrine over internal disputes of a company, the law of the state where the corporation was formed is controlling, not where some of the shareholders reside.

It is the only way to establish a rational system of regulations for the company, he said.

"If you have shareholders in 50 states, you’d be subject to 50 different rules regarding when claims could be brought," he said.

Alston said though the fees were substantial, they must be viewed in light of the plaintiffs’ demand for $725 million.

"You can’t defend a case where the claims are that big by taking any chances and not doing less than the best possible job to defeat the claims," he said.

The investor companies named in the suit did not necessarily make any profits, according to lawyers. Alston said Morgan Stanley lost most of its investment because it sold its shares shortly after the merger.

"The Morgan Stanley companies suffered substantial losses in this transaction, and the plaintiffs are wrongly trying to punish them further, which is unjustified," he said.

In court papers, investors’ lawyers said they produced tens of thousands of pages of documents, responded to questions from the plaintiffs, conducted interviews, drafted motions and performed numerous other tasks.

Lyle Hosoda, a Honolulu attorney and one of the lawyers for Columbia Capital, said the large mainland companies wanted their mainland lawyers to work on the defense but that each had to have a local firm working on the case.

"You had a considerable amount of legal fees incurred for a matter that was going on for a couple of years," he said.

Edmunds is also working with mainland lawyers, the prominent Los Angeles firm of Don Howarth and Suzelle Smith, which handled high-profile cases including representing Doris Duke in the legal dispute over her billion-dollar estate.

Edmunds was able earlier this year to persuade the Hawaii Supreme Court, over opposition by the defense, to hear the case, bypassing the Intermediate Court of Appeals.

He argued that the appeal raises issues never addressed here by the courts, one of the exceptions under state law for the high court to directly handle an appeal.

"No reported Hawaii decision exists awarding fees and costs of this magnitude at so early a stage of litigation, for so little legal work accomplished," he said in his brief.

In August, then-Chief Justice Ronald Moon issued an order transferring the case from the appeals court to the Supreme Court.

Trader refused last month to postpone the enforcement of the $3.4 million judgment without the plaintiffs posting a bond to cover that amount should they lose on appeal. Bonding companies charge a fee, usually 10 percent of the judgment, to ensure payment if the award is upheld.

Edmunds said in court papers that if they lose, Ariyoshi and Onuma have agreed to be responsible for the $3.4 million and not seek any reimbursement from other plaintiffs.

Edmunds told Trader they would ask the high court to stay enforcement of the judgment without the plaintiffs posting a bond. The high court will rule later on the request.

The court is not expected to rule on the appeal of the dismissal and fees and costs until sometime next year at the earliest.

Coakley Rebuffed by SJC In Bid to Prosecute Nursing Home Firm

By John R. Ellement
(The Boston Globe)

"In this case, we allege the nursing home failed to live up to its obligations to properly care for its residents which resulted in the tragic death of the 74-year-old victim," Coakley’s statement said.

"In this case, we allege the nursing home failed to live up to its obligations to properly care for its residents which resulted in the tragic death of the 74-year-old victim," Coakley’s statement said.

The state’s highest court yesterday rejected Attorney General Martha Coakley’s effort to prosecute a nursing home company for manslaughter because numerous employees allegedly failed to safeguard a 74-year-old resident who died when her wheelchair overturned, sending her tumbling down the home’s front steps.

The Supreme Judicial Court ruled unanimously against Coakley’s unprecedented attempt to hold Life Care Centers of America criminally liable for the “aggregate actions’’ of all the employees she said played a role in the failed care of Julia McCauley. The court said Coakley’s tactic was “illogical.’’

“A corporation may be criminally liable for the crimes alleged here only where at least one of its employees could be found individually liable for the crime,’’ Justice Judith Cowin wrote for the court.

The SJC ruling does not end the criminal case because Coakley may be able to pursue a manslaughter prosecution on a different legal theory — that the actions of a single supervisor caused the woman’s death.

McCauley, who had dementia, was in her wheelchair at 7 a.m. on April 17, 2004, without an alert device on her wrist that closes the facility’s doors. She apparently wheeled herself through the double doors and fell down eight steps, according to the SJC.

Coakley said in a statement that she was disappointed by the ruling and that she would review it before deciding what to do next. Life Care, meanwhile, said it was “delighted with the wisdom’’ the SJC showed in its conclusion.

In the ruling, Cowin wrote that Coakley’s theory of “aggregation’’ was a misguided attempt to improperly transform negligent actions by employees — the basis for civil lawsuits — into crimes committed by the corporations that employ nursing home workers.

“The Commonwealth is attempting to promote conduct that is no more than negligent on the part of one or more employees into wanton or reckless conduct on the part of the corporation,’’ Cowin wrote.

She added, “This theory is illogical and such an argument cannot succeed. If at least one employee did not act wantonly or recklessly, then the corporation cannot be held to a higher standard of culpability by combining various employees’ acts.’’

Cowin noted that in Massachusetts, the legal ground rules for prosecuting someone for involuntary manslaughter were established in 1944 when Barnett Welansky, an owner of the Cocoanut Grove nightclub in Boston, was charged in the Nov. 28, 1942, fire, which killed 492 people. He was convicted and sentenced to 12 to 15 years in prison. He had served three years and seven months of that term when he was granted a pardon.

“Conduct is wanton or reckless only when the actor disregards a high likelihood of probable harm to others,’’ Cowin wrote as she cited the Welansky case in the ruling. She wrote the evidence suggested the company was negligent, not criminal, in its handling of McCauley.

The Globe reported in 2007 that McCauley had lived at Life Care Center in Acton since 1996, but had a habit of wandering away. Doctors ordered her to have a device put on her wrist that sets off an alarm and closes the center’s doors when patients get near them.

But investigators found that for 2 1/2 months before her death, McCauley hadn’t worn the protective bracelet because the doctor’s orders were not written on her medical charts. If the orders were on her charts, McCauley would have to have been checked daily to make sure the safety device, called WanderGuard, was in place and functioning.

In 2007, Coakley’s prosecutors convinced a Middlesex grand jury to return a manslaughter charge against Life Care, a Tennessee-based operator of nursing homes nationwide.

In her statement yesterday, Coakley said that “we respect but are disappointed by this decision. In this case, we allege the nursing home failed to live up to its obligations to properly care for its residents which resulted in the tragic death of the 74-year-old victim. We are continuing to review this decision to determine its impact and will evaluate our next steps in prosecuting this case.’’

Life Care said the SJC “has completely vindicated Life Care Centers of America on the theory of collective knowledge and has sent an important statement, not just for Life Care, but on a national level for criminal corporate law. As always, the protection and care of our residents remains our highest priority — in Acton and across the country.

Ariyoshi, Onuma Sue Over Pihana Merger

By Rick Daysog
(The Honolulu Advertiser)

George Ariyoshi

George Ariyoshi

A PIHANA PACIFIC INC. CHRONOLOGY

1999: Lambert Onuma founds Pacific Internet Exchange Corp., which operates Internet data exchange centers.

2000: The company is renamed Pihana Pacific Inc.

2000: Onuma, with the assistance of former Gov. George Ariyoshi, a Pihana board member, raises $224 million in financing.

2001: Pihana lays off 22 workers, including 10 in Honolulu, because of a slump in the high-tech industry.

2002: Company merges with Equinix Inc., which provides data centers for Internet companies' server computers, and SST Communications, a Singapore government-financed venture capital fund.

2008: Company founder Onuma and Ariyoshi sue Equinix.

Source: Advertiser research

Former Gov. George Ariyoshi and high-tech entrepreneur Lambert Onuma made a splash in Silicon Valley and on Wall Street by raising more than $200 million in financing for local startup Pihana Pacific Inc. nearly eight years ago.

Now, the two are taking legal action over allegations that they were improperly "frozen out" of Pihana.

In an Aug. 22 lawsuit in state Circuit Court, Ariyoshi and Onuma alleged that Pihana's former CEO Richard Kalbrener and Pihana's successor company, California-based Equinix Inc., concealed key financial information and failed to hold a shareholder vote on a 2002 merger between Equinix and Pihana. Onuma founded Pihana and owned 75 percent of its management common stock at the time of the merger, and Ariyoshi served on the company's board.

According to the suit, neither received compensation as a result of the merger.

"Pihana (executives), the board, its agents and all defendants determined that the purported merger of Pihana ... would give them an opportunity to unlawfully freeze out plaintiffs, thereby taking the value of plaintiffs' ownership in Pihana for themselves," the lawsuit said.

Kalbrener could not be reached for response, and a spokesman for Equinix did not return a call seeking comment.

Pihana, which was founded in 1999, operated Internet data-exchange centers. At its peak, the company employed about 200 people and operated data centers in Los Angeles, Sydney, Seoul, Tokyo, Hong Kong and Singapore.

In 2002, the company merged with SST Communications, a Singapore government-financed venture capital fund, and Equinix, which is a publicly traded company that provides Internet exchange services for networks, Internet infrastructure companies and content providers.

The lawsuit also said that Equinix was "virtually bankrupt" at the time of the merger but has bounced back since then.

The company now has a market capitalization of about $2.9 billion, annual revenues of more than $400 million and more than 900 employees in the United States, Asia and Europe.

The suit said the value of the Pihana stock that was merged into Equinix represents about 22.5 percent of Equinix's outstanding shares.

At today's stock price, the value of those shares is about $700 million.

The suit asks for damages, to be proven at trial. But attorneys for Onuma and Ariyoshi said their clients believe that they may be entitled to all or some of the $700 million amount.

The lawsuit was filed by local attorney John Edmunds and Los Angeles litigators Don Howarth and Suzelle Smith. Howarth and Smith represented the widow of the former Malboro Man who sued the tobacco industry in 1996 after her husband died of lung cancer.