Damian v. Nelson Mullins Riley & Scarborough, LLP

317 F.Supp.3d 1228

Melanie E. DAMIAN, as Receiver FOR PFGBI, LLC, Plaintiff,

v.NELSON MULLINS RILEY & SCARBOROUGH, LLP, J. Brennan Ryan, and Jason R. Wolfersberger, Defendants.

CIVIL ACTION FILE NUMBER 1:14-cv-3498-TCB

United States District Court, N.D. Georgia, Atlanta Division.

Signed September 28, 2017

Barbara Junge, Kenneth Dante Murena, Peter F. Valori, Guy F. Giberson, Melissa Damian Visconti, Damian & Valori LLP, Miami, FL, Andrew E. Worrell, Petitt Worrell Craine Wolfe, LLC, Atlanta, GA, for Plaintiff.

Claire Carothers Oates, Lawrence Albert Slovensky, David Lewis Balser, Julia Constance Barrett, King & Spalding, LLP, Atlanta, GA, for Defendants.

ORDER

Timothy C. Batten, Sr., United States District Judge

This case comes before the Court on the parties' amended cross-motions for summary judgment [89 & 90].

I. Introduction

This lawsuit is one of several stemming from the exploits of Aubrey Lee Price, a financier-turned-fraudster who over the course of several years lost millions of dollars of his investors' money. In 2012, he confessed to his wrongdoing, faked his own death, and disappeared for eighteen months, only to be discovered alive on New Year's Eve in 2013.

The facts giving rise to this case relate to a December 31, 2010 transaction in which PFGBI, LLC—an investment company founded by Price—paid $10.2 million to acquire a controlling interest in Montgomery County Bankshares ("Bankshares"), the holding company for Montgomery Bank & Trust ("MBT" or the "Bank"). After the deal closed, the Bank operated for a year and a half before it was shut down by regulators in July 2012, shortly after Price's confession and disappearance. PFGBI lost the entirety of its investment.

Plaintiff Melanie Damian is the receiver for PFGBI and several other entities through which Price's dealings were carried out, including PFG, LLC and PFG Asset Management, LLC (collectively with PFGBI, the "PFG Entities"). In an attempt to recoup some of the losses suffered by PFGBI's investors, she filed this lawsuit against the lawyers who represented PFGBI in connection with the Bankshares transaction—Defendants Nelson Mullins Riley & Scarborough, LLP and two lawyers with the firm, Brennan Ryan and Jason Wolfersberger.¹ Damian brings claims for legal malpractice and breach of fiduciary duty against all three Defendants, and she asserts a claim for breach of contract against Nelson Mullins alone. At its core, Damian's complaint alleges that had Defendants not failed to conduct adequate due diligence, particularly with regard to the Bank's financial health, PFGBI would never have invested in MBT and would not have lost that investment when the Bank was later closed.

Presently before the Court are cross-motions for summary judgment. Defendants move for summary judgment on all of Damian's claims, arguing that they breached no duty owed to PFGBI and that even if such a breach did occur it was not the proximate cause of PFGBI's losses. Damian cross-moves for partial summary judgment as to duty and breach, but she contends that questions of fact preclude the granting of summary judgment to either party on the issue of proximate cause.

As discussed below, the existence of genuine issues of material fact precludes summary judgment in favor of either party with respect to the scope of the duty owed by Defendants to their client. But even if the Court were to grant summary judgment in favor of Damian on the issues of duty and breach, the undisputed evidence of record compels the conclusion that PFGBI's losses were not proximately caused by any negligence on the part of Defendants. Accordingly, the Court will grant Defendants' motion for summary judgment and deny Damian's.²

II. Factual Background

A. Price Forms PFG and Later Seeks a Distressed Bank in Which to Invest

In 2008, after seven years of working as a financial and investment advisor at two national banks, Aubrey Lee Price formed an investment fund named PFG, LLC. PFG began soliciting funds from investors in June 2009, and it would eventually raise more than $50 million from 115 investors, among them Daniel McSwain, Daniel's son Keith McSwain, and Mike Gunter.

By June 2010, Price and some of his PFG investors, including Gunter and the McSwains, had become interested in investing in a distressed bank. At the end of the next month, they would form PFGBI as the vehicle through which to carry out that investment, but even before PFGBI was formed, Price began narrowing down possible targets for the investment. Eventually the investors settled on MBT, a troubled community bank in Montgomery County, Georgia.

B. The October 2009 Cease and Desist Order

In October 2009, MBT had been made the subject of a cease and desist order (the "C & D Order") issued by federal and state regulators. The C & D Order found that MBT had engaged in numerous unsafe and unsound banking practices, including following hazardous lending policies and operating in such a manner as to produce insufficient earnings to support operations. [54-20] at 2.³ With respect to MBT's loan portfolio, the C & D Order noted that the Bank had a large volume of poor quality loans and that its allowance for loan and lease losses ("ALLL")—a reserve fund set aside by the Bank to cover estimated probable losses within the Bank's loan portfolio—was inadequate. Id.

The C & D Order imposed numerous requirements on the Bank relating to improving its management, strengthening its loan practices and portfolio, increasing its tier 1 capital ratio,⁴ and properly funding its ALLL allowance. See id. at 3–18.

It is undisputed that Price reviewed the C & D Order in or prior to June 2010, well before PFGBI invested in MBT.

C. The Kline Report and PowerPoint Presentation

In December 2009, John Kline—a former bank examiner hired as a consultant by MBT pursuant to the requirements of the C & D Order—prepared a report of a strategic planning session held by the Bank's directors.

The Kline report identified as some of MBT's weaknesses its "excessive level of problem loans," its high concentration of real estate loans, the existence of regulatory sanctions, the need for better training, the need to raise additional capital, and the overall economic situation. [53-7] at 69. It listed threats to the Bank as, among others, an "inability to attract more capital in this economy," the failure of board leadership to evolve, the risk that the Bank's liquidity could worsen, other real estate losses, and the prolonged downturn in the economy. Id. at 70.

In March 2010 Kline prepared a PowerPoint presentation titled "Montgomery Bank & Trust Five Year Financial Projections." Id. at 49–55. That presentation summarized the Bank's poor financial state—with non-performing loans and other real estate owned ("OREO," or simply "REO")⁵ representing twenty percent of MBT's assets and more than 400 percent of its capital—and it predicted that MBT would suffer significant additional losses between 2010 and 2013. To fund those anticipated losses and maintain required capital, Kline recommended that the Bank immediately raise $7.5 million in new equity and take actions to cut its expenses.

Price was given the Kline report in June 2010, before PFGBI invested in MBT. Kline's PowerPoint presentation was also given to Price at some point, although it is unclear precisely when. A copy of the presentation contained in Price's files bear Price's handwritten (but undated) notes that read "John (regulatory consultant)," "read consent order," "Trey," "Steve Powell & Co.—Loan Review," "15 million," and "loan loss reserves." Id. at 49–51.

D. The April 2010 Offering Memorandum

In April 2010, Bankshares responded to the recognized need to raise new capital by issuing an offering memorandum (the "offering memorandum" or the "PPM") that contemplated the issuance of 100,000 shares of common stock at $100 per share. The PPM, which Price reviewed in June 2010, disclosed that MBT's "business, financial condition and operating results have been and continue to be significantly affected by ongoing disruptions in the real estate and capital markets," and it expressly noted that the purpose of the offering was to "supplement [MBT's] capital base" and "address [the Bank's] nonperforming assets and ... the potential for continued deterioration in [its] loan portfolio." [54-19] at 4, 7.

Attached to the PPM were MBT's audited financial statements for 2007 and 2008, as well as its unaudited financial statements for 2009. The PPM also summarized key components of the Bank's financial condition. For example, it explained that as of December 31, 2009, MBT's tier 1 capital ratio was 6.09 percent, almost two percent less than the level required by the 2009 C & D Order. Id. at 8. It also disclosed that between 2008 and 2009, MBT's non-performing assets had more than tripled in value, from $13.4 million in December 2008 to $49.5 million in December 2009. Non-performing loans had been valued at $7.9 million in 2008 but increased by more than 275 percent to $29.7 million in 2009. The Bank's REO had likewise grown from $5.5 million in 2008 to $19.8 million in 2009, an increase of 260 percent. Id.

The offering memorandum outlined nine pages of "risk factors" that could potentially affect the Bank's operations. Id. at 14–22. These factors included regulators' enforcement action against the Bank and capital requirements, the deterioration of the housing market, MBT's significant number of development and construction loans, the poor state of the local economy, and the possibility that MBT's ALLL reserve would not cover the Bank's actual loan losses. The PPM expressly stated that due to the anticipated continued problems in the housing market, "additional downgrades, significant provisions for loan losses and charge-offs related to [MBT's] loan portfolio will likely occur." Id. at 15. It cautioned that the Bank was not well-capitalized, would "likely need to raise additional capital," could not assure investors of its "ability to raise additional...