IN RE: UNIVERSAL MINING CORPORATION CASE NO. 99-70918  ADV. NO. 00-7018 MEMORANDUM OPINION AND ORDER  MOTIONS SUMMARY JUDGMENT OR DISMISS

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE

IN RE:

UNIVERSAL MINING CORPORATION CASE NO. 99-70918

DEBTOR

PHAEDRA SPRADLIN, trustee PLAINTIFF

VS. ADV. NO. 00-7018

ESTATE OF BILL COLLETT

SANDRA COLLETT

RAFE EARLESTON COLLETTE

SHARON COLLETTE

MICHAEL D. BOWLING DEFENDANTS

MEMORANDUM OPINION AND ORDER

The Defendant, Michael D. Bowling ("Bowling"), having filed Motion to Dismiss, or Alternatively, Motion for Summary Judgment on August 11, 2000 (Document # 11) and having filed Memorandum of Law and Evidence in Support of Motion for Summary Judgment of Dismissal (Document # 28) and Affidavit of Michael D. Bowling (Document # 29) on October 13, 2000 (Documents # 11, 28, and 29 hereinafter collectively referred to as "Motion"), and the Court having heard arguments of counsel on October 25, 2000 (See Document # 40), having reviewed the record, and being sufficiently advised; IT IS ORDERED AND ADJUDGED as follows:

Bowling's Motion is governed by Federal Rule 56 summary judgment principles as set forth in Celatex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), and Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In conformity with these principles, Bowling has met the initial burden of showing the absence of a genuine issue of material fact as to any essential element of the plaintiff's case. The plaintiff has had ample opportunity for discovery ⁽¹⁾ but in her Response (Document # 35) offered no affidavit or additional documentary evidence beyond what was provided in Bowling's Memorandum. Although Plaintiff did obtain discovery in four depositions of the defendants and can rely upon proof contained therein, proof therein does not create any genuine issue of material fact.

The absence of a genuine issue of material fact, however, does not end the inquiry. To prevail on his Motion, Bowling must demonstrate that he is entitled to a dismissal of the complaint, as amended (Document # 44), as a matter of law.

Sigmon Coal Company, Inc., Jeriocol Mining, Inc., and James A. Sigmon ("Sigmon plaintiffs, Sigmon") filed a collection action in the Bell Circuit Court against the two corporations Universal Mining Corporation ("Universal Mining") and Eastern Mountain Contractors, Inc. and against the four individual Colletts in the action styled Sigmon Coal Company, Inc., Jericol Mining, Inc., and James A. Sigmon, v. Universal Mining Corporation, Eastern Mountain Contractors, Inc., Bill Collett, Sandra Collett, Rafe Collett, a/k/a Ray Collett, and Sharon Collett, Case No. 97-CI-00328 ("State Action"). The defendants retained Bowling and his law firm of Stumbo, Bowling & Barber of Middlesboro, Kentucky.

Bowling's firm entered into a written contingency fee agreement on September 12, 1997 with Bill and Ray Collett, individually, to represent all six of the defendants.

The six defendants ("Counter-claimants") asserted a counterclaim in the State Action consisting of seven Counts of fraud, breach of contract, fraud in the inducement, and punitive damages ("Counterclaim").

While the State Action was pending, two creditors of Universal Mining filed a collection suit for unpaid mining supplies in the Harlan Circuit Court, Case No. 98-CI-00464, styled G&M Oil Company, Inc, and Farmers Supply & Explosives, Inc. v. Universal Mining, Sigmon Coal, Jericol Mining and Penn Virginia Coal Company. The two plaintiffs ("Judgment Creditors") obtained judgments against Universal Mining for $283,606.14 and $722,697.33 and, respectively, plus interest.

In the Bell Circuit Court action, the Sigmon plaintiffs obtained a judgment of $922,447.46 for two unpaid notes and of $902,652.00 for reclamation costs against all Counter-claimants, jointly and severally. However, at trial the jury awarded judgment on May 27, 1999 for $5,570,464.00 against the Sigmon plaintiffs.

After the judgments were entered, several post-trial motions were filed by both the plaintiffs and defendants, and a hearing on the motions was scheduled for August 3, 1999. While the post-judgment motions were pending, Bowling retained Gerald L. Greene of Pineville, Kentucky to defend against Sigmon's motions and to handle any appeal, if necessary.

A global settlement was reached between the parties in both the Harlan and Bell Circuit Court actions. The settlement was structured so that the Sigmon plaintiffs would release their Judgment of $1,825,099.46 against the Counter-claimants, would pay $150,000 and $500,000 directly to the two corporate Judgment Creditors, and would pay $1,350,000 to the Counter-claimants and their attorneys by cashier's check, for a total payment of $2 Million in cash.

Bowling's legal fees and costs equaled approximately $700,000; $650,000 would be paid directly to the two Judgment Creditors, leaving approximately $650,000 for the clients. Bowling did not advise the Counter-claimants how to divide the remaining balance but communicated to them that they should divide the settlement funds between the six of them in an "equitable division."

On Monday, August 2, 1999, the day before the scheduled Closing on the settlement, Bowling calculated his exact litigation expenses and gave his clients the final closing figures in a settlement statement. The statement itemized attorneys' fees and expenses, leaving a Net Balance of $641,515.92 ("Net Balance") to be retained by the six settling clients.

The $1.35 Million settlement check, payable to all six Counter-claimants, Bowling, and Greene was endorsed by all the payees at the Closing. Bowling states that he left the Closing after he endorsed the check and that he was not informed as to the specific division of the Net Balance to be distributed to each of the six settling clients.

The Net Balance of $641,515.92, less payment of $53,000 for two unsecured corporate creditors (leaving $588,515.92), was the amount received by individual Colletts. The Colletts signed the closing documents, the $1.35 Million check, the Settlement Agreements, and the Mutual Releases at the August 3, 1999 Closing and later received their money in the form of cashier's checks.

Although Bowling was not aware of the exact distribution that each individual client was to receive, he knew that the wives were to receive more than their husbands and that all six Counter-claimants were in agreement as to the division of the Net Balance.

Bowling had been hired as "speciality litigation counsel" whose work was completed once the settlement funds were turned over to his six clients, all of whom had agreed to the global settlement package. Bowling did not undertake the responsibility of advising them as to what the exact ultimate division of the Net Balance should be.

On Tuesday, August 3, 1999 when Bowling endorsed the settlement check, he knew that the Net Balance was available at First State Bank. After the Closing Bowling's role as "speciality litigation counsel" for the six settling clients was concluded and his legal responsibilities discharged.

Count I of the plaintiff's Complaint, as amended, alleges that Bill and Ray Collett, as officers, directors, and shareholders of Universal Mining and Bowling, their attorney, wrongfully transferred the settlement monies within one year before October 5, 1999, the date Universal Mining filed bankruptcy, "with the actual intent to enrich themselves and to hinder, delay or defraud Universal Mining's creditors." (Document # 44).

Even in the light most favorable to the trustee, if the Colletts' division of the Net Balance can be equated to the level of fraud, such fraud cannot be imputed to Bowling because there is no proof that he had anything to do with the division or calculation of what his six clients received from the Net Balance.

For fraud to be present there must be a material misrepresentation made which is known to be false, or made recklessly, with intent to be acted upon by another and which is acted upon in reliance of the misrepresentation, resulting in injury. Moore, Owen, Thomas & Company v. Coffey, 992 F.2d 1439 (6^th Cir. 1993).

The trustee in this case cannot establish the prima facie elements of fraud under the facts presented. Bowling received only his attorney's fee. He did not participate in division of the Net Balance, in the decision-making process or in physical distribution of the final decision. If what the individual Counter-claimants did, without Bowling's legal advice or knowledge, was improper, then their act cannot be imputed to Bowling in order to prove fraudulent intent by him.

Inherent in fraud is that the defrauder obtains a benefit "with an actual intent to enrich" himself or another. Here, Bowling did not enrich himself because he received only that to which he was entitled as special litigation counsel for the Counter-claimants, specifically, his one-third contingency fee and litigation expenses. ⁽²⁾ Bowling therefore was not participating in fraud for taking that which he was entitled to receive.

As has been stated, Bowling's legal relationship with his clients was one of principal and agent. He, as their attorney, was his clients' legal representative. As their agent, Bowling could have bound the six settling clients to liabilities incurred in the State Action and could have bound them to decisions made by him as their attorney. By contrast, as principals when the Colletts took the action of disbursing the Net Balance to themselves, their action cannot be imputed to their agent Bowling.

To reiterate, there is no showing from the record that Bowling committed any fraudulent act. He represented all six Counter-claimants and secured a $5.5 Million verdict. Bowling collected his fee with the understanding that his clients would decide on the final distribution of the Net Balance. On the facts presented here Bowling cannot be held liable for fraud because there is no proof in the record that he participated in or intended to defraud Universal Mining or its creditors. Furthermore, he did not receive a benefit greater than what he was legally entitled to receive and did not act outside the scope of authority granted to him as attorney and agent. Consequently, Count I of the complaint, as amended, fails to state a cause of action against Bowling and must be dismissed.

The law applicable to an attorney acting for his client is well-settled and is best summarized in Herfuth v. Horine, 98 S.W.2d 21, 23 (Ky. 1936), as follows:

The relation of attorney and client embodies all the essential elements of principal and agent, but the office of attorney is even more exacting than that of agent, since in addition to the duty of strict fidelity and fair dealing with his client, "he is also an officer of the court, and as such he owes the duty of good faith and honorable dealing to the courts before whom he practices his profession." 2 R.C.L. 939.

In Daugherty v. Runner, 581 S.W.2d 12, 16 (Ky. App. 1979), the Court of Appeals for Kentucky analyzed the standard of care owed to clients as follows:

What is the level of service demanded from members of the legal profession? The relationship of attorney-client is a contractual one, either expressed or implied by the conduct of the parties. The relationship is generally that of principal and agent; however, the attorney is vested with powers superior to those of any ordinary agent because of the attorney's quasi-judicial status as an officer of the court; thus the attorney is responsible for the administration of justice in the public interest, a higher duty than any ordinary agent owes his principal. Since the relationship of attorney-client is one fiduciary in nature, the attorney has the duty to exercise in all his relationships with this client-principal the most scrupulous honor, good faith and fidelity to his client's interest.

"[H]onor, good faith, and fidelity" requirements are equated to the "fiduciary" obligations of an attorney to his client. When an attorney violates his "fiduciary" obligations and the result is injury to the client because of the attorney's act, or inaction, the attorney has committed malpractice. Phrased differently, an attorney who acts or fails to act and causes injury to his client as result of his conduct is liable for damages. Malpractice, simply put, is professional negligence or an attorney's violation of the standard of duty owed to his client.

Since an attorney owes a duty only to his client, only a client can have a claim for malpractice. Here the claim for malpractice, breach of duty, or violation of fiduciary obligation is made by Bowling's former client, Universal Mining. Because there is no dispute as to the material facts presented here, the issue is a legal one, that is, whether Bowling legally breached his attorney/ fiduciary duties to Universal by committing malpractice.

Bowling did not commit malpractice in undertaking the representation of all six Counter-claimants. Rippon v. Mercantile Safe Deposit and Trust Company of Baltimore, 213 Md. 215, 131 A.2d 695 (1957); Grove v. Grove Valve and Regulator Company, 213 Cal.App.2d 646, 29 Cal.Rptr. 150 (1963). Reference is made to the Kentucky Rules of the Supreme Court, SCR 3.130, Rule 1.7:

(A) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

(1) The lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and

(2) Each client consents after consultation.

The Counter-claimants had a joint interest in the litigation, including their counterclaims. There appears to be no outwardly adverse or hostile interests among them because the six clients all had asserted a counterclaim that was common to all of them.

Bowling did not commit malpractice when he endorsed the $1.35 Million settlement check and handed over the endorsed check to his clients at the Closing. The parties who received the settlement check represented one hundred percent of Universal Mining's and Eastern Mountain's officers and directors and were the four individual clients.

When Bowling endorsed and turned over the settlement check to his clients, he had carried out his legal and ethical duty to all of them. Such action by an attorney is mandated by Rules of the Kentucky Supreme Court, specifically by SCR 3.130, Rule 1.2(a) which states in part: "A lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter." Division or distribution of the settlement sum is also part of a settlement. The parties to the settlement and the decision-making process of monetary division comprised all of Bowling's six clients, i.e., the four individuals and the two corporations.

The trustee cannot sustain a claim of malpractice against Bowling on the basis he failed to take some affirmative step "to guarantee" or "to assure" that Universal Mining receive all of the Net Balance. If Bowling had detected an adverse interest among the six Counter-claimants, he had two choices: remonstrate (and be fired) or withdraw.

A reading of SCR 3.130, Rule 1.7 and its commentary indicates the proper conduct for Bowling, if and when a conflict occurred, was to withdraw from representation. Here Bowling's clients were all in agreement as to the global settlement package and division of the settlement. No conflict occurred so there was no requirement that he resign, and he finalized his duties as special litigation counsel at the Closing.

To summarize, Bowling did not breach any fiduciary duty or commit any violation of duty under the facts present here because: 1) all six parties had reached a settlement; and 2) there is no evidence that Bowling took part in the division of the Net Balance. Count VI of the Complaint, as amended, must therefore be dismissed.

These claims also should be dismissed. U. S. Bankruptcy Code Section 547 authorizes a trustee in bankruptcy to recover preferential transfers from the transferee. There is no penalty applied to the transferor for making or failing to make a transfer within the reach back period. This Court cannot impose an additional penalty upon the transferor's attorney where there exists no Congressional or judicial mandate therefor.

In conformity with the foregoing, IT IS ORDERED AND ADJUDGED that all Counts of the Complaint as amended be dismissed, with the exception of Count VII which alleges a preference in regard to payment of Bowling's litigation expenses totaling $66,817.08. Because the Court reserves ruling on Count VII of the Amended Complaint, this is not a final and appealable order.

Dated:

By the court -

____________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE

Copies to:

Matthew B. Bunch, Esq.

John O. Morgan, Jr., Esq.

James W. Gardner, Esq.

1. An order was entered on 11/16/00 extending the discovery period to and including12/14/00 (Document # 52). However, as stated by the court at hearing on the motion, the extension was for discovery on the issue asserted in Count VII of the amended complaint (whether payment of litigation costs was a preference), not on the issues presented here.

2. This is not comment on the viability of Count VII of the trustee's Amended Complaint which asserts a preference in payment of the litigation costs (Document # 44).