Elmo v. Callahan

F. Ronald Elmo, W. Scott Schimpf, Guardian FireEquipment Co., and Guardian Fire Equipment, LLC

v.James M. Callahan, Bowditch & Dewey, LLP, and Brighton, Runyon & Callahan, PA

Civil No. 10-cv-286-JL

Opinion No. 2012 DNH 144

UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Date: August 24, 2012

MEMORANDUM ORDER

English essayist Charles Lamb famously wrote that "he is no lawyer who cannot take two sides." But it is usually bad policy for a lawyer to take two sides in the same transaction, and according to plaintiffs Ron Elmo, Scott Schimpf, and their company, Guardian Fire Equipment, defendant James Callahan did just that. They have sued Callahan and his law firms, Bowditch & Dewey, LLP and Brighton, Runyon & Callahan, PA, alleging that Callahan committed legal malpractice by (among other things) representing both them, as the sellers in a "roll-up" merger, and the buyer in that transaction.

As part of their consideration for the deal, plaintiffs received subordinated debt and equity in the resulting company, which became worthless when that company failed almost immediately. Plaintiffs now assert claims for legal malpractice, negligent misrepresentation, breach of fiduciary duty, breach ofcontract, and violation of the New Hampshire Consumer Protection Act, N.H. Rev. Stat. Ann. § 358-A. They claim that, if not for Callahan's malpractice, they never would have proceeded with the transaction. This court has jurisdiction pursuant to 28 U.S.C. § 1332(a)(1) (diversity).

Defendants have moved for summary judgment on all counts of the complaint. See Fed. R. Civ. P. 56. They argue that plaintiffs cannot, as a matter of law, establish the requisite causal link between Callahan's conduct and their loss. They further argue that Callahan's conduct concerned "[t]rade or commerce that is subject to the jurisdiction of . . . the director of securities regulation," and is therefore exempt from the Consumer Protection Act.¹ See N.H. Rev. Stat. Ann. § 358-A:3, I. Plaintiffs, for their part, have moved for default judgment against defendants as a sanction for their alleged failure to preserve potentially relevant evidence.

After hearing oral argument, the court grants summary judgment to defendants on plaintiffs' claims for malpractice, negligent misrepresentation, breach of fiduciary duty, and breach of contract. As explained herein, plaintiffs have proffered evidence that they would not have proceeded with the transactionif not for Callahan's allegedly wrongful conduct--in other words, that Callahan's conduct was a "but-for" cause of their loss. But they have not produced competent evidence creating a genuine issue of fact as to whether his conduct was the legal and proximate cause of that loss.

The court denies defendants' motion, however, as to plaintiffs' Consumer Protection Act claim. Plaintiffs need not show that Callahan's conduct caused their loss to recover under the Act, and, contrary to defendants' argument, the "securities regulation" exemption to the Act does not apply here. As for plaintiffs' motions for default judgment, the court does not believe that defendants' conduct, though potentially worthy of some sanction, is deserving of the harsh sanction plaintiffs have proposed. Those motions are therefore denied.

I. Applicable legal standard

Summary judgment is appropriate where "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A dispute is "genuine" if it could reasonably be resolved in either party's favor at trial. See Estrada v. Rhode Island, 594 F.3d 56, 62 (1st Cir. 2010) (citing Meuser v. Fed. Express Corp., 564 F.3d 507, 515 (1st Cir. 2009)). A fact is "material" if it could sway the outcome under applicable law.Id. (citing Vineberg v. Bissonnette, 548 F.3d 50, 56 (1st Cir. 2008)). In analyzing a summary judgment motion, the court "views all facts and draws all reasonable inferences in the light most favorable to the non-moving party." Id. But the court need not credit "conclusory allegations, improbable inferences, or unsupported speculation." Meuser, 564 F.3d at 515 (quotation omitted). The following facts are set forth accordingly.

II. Background

In 1986, Ron Elmo and Scott Schimpf founded Guardian Fire Equipment as an Emergency One (or "E-One") dealership for Eastern Pennsylvania and Southern New Jersey. Guardian acquired a Hurst dealership in that same territory in 1989. E-One manufactures fire trucks, while Hurst manufactures the "Jaws of Life" and other emergency-related equipment. Both E-One and Hurst distribute their products through a network of exclusive dealers. By 2007, Guardian had grown to encompass two physical facilities, employing around 25 to 31 people in total, including a sizeable service department.

In 2006, former defendant Steve Lawrence approached Elmo and Schimpf about selling Guardian's assets to an acquiring entity as part of a so-called "roll-up" merger of several emergency services equipment dealers. The resulting company--Emergency Resources Incorporated, or "ERI"--would, in theory, have greater"critical mass" and be better positioned to compete in the marketplace.

Elmo and Schimpf were receptive to the idea. In May 2006, they met with Lawrence and a representative of the Havens Group, the expected purchaser in the roll-up, in Baltimore. Several other potential sellers also attended. After the meeting, Elmo and Schimpf retained Lawrence's company, Rosecliff Partners, LLC, to represent Guardian in the sale.

In June 2006, two of the sellers who had attended the meeting in Baltimore sent a memorandum to other potential sellers, including plaintiffs, regarding the "merits of using a common attorney for the process of a group purchase." These sellers mentioned they had successfully utilized this practice in an earlier transaction, "thereby saving money and avoiding the pitfalls of using attorneys inexperienced in such transactions." They recommended that the other sellers, including plaintiffs, engage the attorney whose services they had used in the former transaction, defendant James Callahan (who had also represented Lawrence previously). They continued: "you are welcome to discuss any concerns you have with Steve Lawrence as Steve has also utilized Mr. Callahan. However, keep in mind that this attorney is intended to represent us, not Steve or the Havens Group so this is technically not Steve's issue."

Following this recommendation, plaintiffs reached out to Callahan. On June 19, 2006, Callahan sent Schimpf an engagement letter. The letter stated, in relevant part:

Thank you for engaging me in this matter. I would be happy to represent your company regarding your contemplated sale of substantially all of your company's assets to The Havens Group, or its nominee, although it is important to outline the scope of services prior to undertaking any work.

As has been previously explained by Steve Lawrence, I would serve as special counsel, with the engagement limited to this contemplated transaction. In this capacity, I would serve as legal counsel and liaison between not only your company, but also each of the other companies that intend to sell to Havens. As part of this process, I will assist with: (i) the negotiation and execution of a Letter of Intent; (ii) the negotiation and execution of a definitive purchase agreement; and (iii) assistance with the closing. . . .

On another matter, I need to disclose, and request your assent and acknowledgment, that, as you know, I am also serving as special counsel to other selling companies involved in this transaction. I also previously represented Rosecliff Partners, LLC, and Steve Lawrence.

Elmo and Schimpf chose to retain Callahan as their counsel for Guardian's sale, and Schimpf signed Callahan's engagement letter.² Neither Elmo nor Schimpf had ever been involved in a transaction of the size and complexity of the proposed sale.

They looked to Callahan for counsel on all aspects of the sale because of his training and his supposed expertise on such deals.

After retaining Callahan, Elmo and Schimpf executed a letter of intent to sell Guardian to the Havens Group for "a price in the vicinity of $5.6 million in cash." Plaintiffs claim that this agreement did not permit Elmo and Schimpf to share Guardian's financial information or the terms of their deal with any other potential sellers, and likewise did not permit them to examine the financial information of other sellers.³ They further assert that this aspect of the agreement was unfavorable to them because it kept them from understanding the business operations of entities that would become a part of the company purchasing their business. Callahan did not so advise them, plaintiffs say, although an attorney in his position should have done so.

Citicorp had expressed an interest in funding the proposed transaction. The Havens Group, however, was unwilling to advance the fees Citicorp demanded to cover its due diligence analysis. Ultimately, the transaction initially envisioned--a roll-up purchase by the Havens Group--did not proceed to fruition. Instead, Lawrence himself resolved to form a separate company, S3 Sentinel Safety Supply, Inc., to acquire the assets of the various emergency services equipment dealers involved in the roll-up. This acquisition was to be funded by Wachovia Bank.

In early 2007, Callahan (while still representing Elmo and Schimpf) agreed to represent Lawrence and S3 in connection with the roll-up. In an engagement letter dated January 10, 2007 (but which Callahan admitted preparing at some later date and backdating), Callahan and Lawrence confirmed that Callahan would represent S3 "regarding the acquisition of the assets of various emergency services sales and distribution companies as well as taking the holding company through the financing process." Lawrence agreed that S3 would pay Callahan $110,000 for his services, "contingent upon the transaction...