Kimbro Stephens Ins. Tr. v. Smith

2021 Ark. App. 127

KIMBRO STEPHENS INSURANCE TRUST AND A.K. TENNESSEE IRREVOCABLE RESIDUARY TRUST APPELLANTS v. JAMES E. SMITH, JR.; KIMBERLY WOODYARD; AND SMITH AKINS & GLADDEN, P.A. APPELLEES

No. CV-19-134

ARKANSAS COURT OF APPEALS DIVISION II

March 17, 2021

APPEAL FROM THE GARLAND COUNTY CIRCUIT COURT

[NO. 26CV-16-27]

HONORABLE JOHN HOMER WRIGHT, JUDGE

AFFIRMED; MOTION TO DISMISS DENIED

RITA W. GRUBER, Judge

The appellants, Kimbro Stephens Insurance Trust and A.K. Tennessee Irrevocable Residuary Trust, appeal the Garland County Circuit Court's order granting summary judgment in favor of appellees James E. Smith, Jr. (Smith), Kimberly Woodyard (Woodyard), and the firm Smith Akins & Gladden, P.A. (Smith-Akins) The circuit court determined that the appellees were immune from liability under Arkansas Code Annotated section 16-22-310 (Supp. 2019), the attorney-immunity statute, because the appellants and the appellees were not in direct privity of contract. The circuit court also determined that neither of the exceptions to the privity requirement—for fraud and misrepresentation and for third-party beneficiaries of counsel's services—applied.

On appeal, the appellants argue that the circuit court erred when it determined that they failed to offer proof of fraud to warrant an exception to direct privity. The appellees have filed a motion to dismiss the appeal for lack of jurisdiction, and they alternatively assert that the appeal has no merit. We deny the motion to dismiss and affirm the order granting summary judgment.

I. Factual Background

Kimbro Stephens (Kimbro) is the beneficiary of appellant Kimbro Stephens Insurance Trust. He was formerly a beneficiary of appellant A.K. Tennessee Irrevocable Trust, which, following a divorce, is now exclusively for the benefit of Kimbro's ex-wife, Daphna Alice Stephens (Alice). Kimbro, Alice, and other members of the Stephens family owned various entities—all using a variation of the name "Living Hope"—that provided psychiatric services in Arkansas. The factual background of the dispute between the appellants and the appellees involves separate federal bankruptcy cases filed by two of those entities, Living Hope Southwest, LLC (Southwest), and Living Hope Southeast, LLC (Southeast), which was represented by the appellees.

A. The Southwest Bankruptcy

The Southwest bankruptcy began when Pinewood Enterprises L.C. (Pinewood) sued Southwest in the Miller County Circuit Court for overdue lease payments on a building that Southwest rented. Pinewood's lawsuit and other circumstances led Southwest to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on July 18, 2006. The petition was filed in the United States Bankruptcy Court for the WesternDistrict of Arkansas (Western District), and it triggered an automatic stay of collection by Southwest's creditors, including Pinewood.

After Southwest filed its petition for bankruptcy, it transferred its business to a new company, Southeast, which Kimbro created on May 5, 2006, shortly before Southwest filed its petition.¹ This transfer became a focal point of the Southwest bankruptcy following the conversion of the bankruptcy petition from Chapter 11 to Chapter 7 in 2008.

The conversion to Chapter 7 led to the appointment of a bankruptcy trustee (SW Trustee), who, in exercise of her fiduciary duty to Southwest's creditors, initiated an adverse proceeding (AP) against Southeast in 2009. Specifically, the trustee filed a complaint that challenged the postpetition transfer of assets from Southwest to Southeast, alleging that Kimbro committed postpetition fraud by transferring Southwest's funds to Southeast and using Southwest's human and financial resources to operate Southeast. Later in 2009, the SW Trustee, Southeast, and the Stephens family reached a settlement in the AP.

The AP settlement was reversed in October 2012, and shortly thereafter, the SW Trustee filed an amended complaint in the Western District. The SW Trustee again alleged that Southwest had made unauthorized postpetition transfers to Southeast, and she sought a constructive trust in favor of Southwest "on a sufficient number of Southeast's assets which will compensate [Southwest] for the wrongful transfer of assets for the use and benefit of Southwest and its creditors." The Western District set the AP for trial on January 15, 2013.

According to the exhibits attached to the complaint filed in the Garland County case, the relationship between Kimbro and the appellees began to break down shortly before the AP trial. In an affidavit, Mike Grundy, the chief executive officer (CEO) of Southeast, described a December 2012 meeting in which Smith and Kimbro had a difference of opinion regarding Southeast's defense in the AP trial. According to Grundy, Smith explained that it "was useless to defend the [AP] case." Kimbro, however, wanted to put on a defense because an adverse judgment in the AP "would be damaging to him and [Southeast] in the upcoming trial in Miller County." Grundy claimed that Smith remained on the case despite twice threatening to resign during the conversation.

The minutes of a January 3, 2013 "emergency" meeting of Southeast's board of directors further demonstrated Kimbro's and Smith's differences of opinion concerning trial strategy in the AP proceeding. The minutes indicate that Smith again recommended that Southeast concede the case because Southeast was formed "with the financial and human resources of [Southwest]," as the SW Trustee alleged. Rather than follow Smith's advice, however, Kimbro "wanted to defend the case . . . and put on witnesses and exhibits to prove and corroborate [that] no . . . assets were transferred." Therefore, according to the minutes, Kimbro explained that he wanted to file a motion to intervene in the AP trial, and Smith allegedly assured Kimbro that he would not object to the motion to intervene.

Grundy's affidavit claimed, however, that the appellees later reneged on Smith's promise to stay silent. He alleged that when the AP trial convened on January 15, 2013, Woodyard told the bankruptcy court that Southeast "was not in favor of the interventionand that [Kimbro's] complaint was not proper." Grundy further alleged that the chairman of the board, Steve Ward, subsequently attempted to terminate the appellees as Southeast's counsel over the allegedly reneged promise, but the bankruptcy judge "denied a motion for continuance and allowed [the appellees] to proceed with the [AP] trial anyway." According to Grundy, Smith "then proceeded to stipulate to all 82 or so exhibits submitted by [counsel for the SW Trustee] without consulting with [Grundy] about their relevance or accuracy."

At the close of the AP trial, the bankruptcy judge announced that the SW Trustee was entitled to a judgment of $1.19 million against Southeast. The judge also announced that he was taking under advisement the issue of whether the SW Trustee was entitled to a constructive trust on Southeast's assets.²

The day after the AP trial concluded—and while the imposition of a constructive trust was still under advisement—Kimbro, representing that he was Southeast's attorney, and his brother, Greg, representing the cross-claimants in Pinewood's case in Miller County, mailed a letter informing the Miller County Circuit Court that Southeast and the cross-claimants (also entities controlled by members of the Stephens family) had settled the cross-claims and agreed to the entry of a consent judgment. The consent judgment, as it happened, purported to grant the cross-claimants a constructive trust and an equitable lien on Southeast's assets and on the assets of appellant A.K. Tennessee Irrevocable Trust.

B. The Southeast Bankruptcy

On February 27, 2012, while Pinewood's appeals from the AP settlement were ongoing, Southeast filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Eastern District of Arkansas (Eastern District). The purpose of that petition was to allow Southeast to continue operating as it managed the ongoing legal proceedings in the AP in the Western District and Pinewood's lawsuit in Miller County.

On January 25, 2013—shortly after the judgment in the AP trial and Kimbro's attempt to obtain a consent judgment in Miller County—the SW Trustee took the uncommon step of requesting the appointment of a trustee in the Chapter 11 bankruptcy that Southeast had filed in the Eastern District.³ According to the bankruptcy court, the motion was filed following Kimbro and Greg's attempt to obtain a constructive trust in Miller County and "the board [of trustees'] firing of [Southeast's] counsel, Smith, in the midst of the Southwest AP trial," among other things.

After a hearing in which Smith and other witnesses testified, the bankruptcy court granted the motion to appoint a trustee. In an order entered on July 9, 2013, the court summarized its findings as follows:

The Court bases its findings of cause on the actions of Kimbro. Despite being an educated professional well-acquainted with bankruptcy (having been involved in multiple bankruptcy proceedings including his own), Kimbro has shown no respect for the bankruptcy process. He has been dishonest about who controls [Southeast] when in fact he controls [Southeast]. Kimbro's actions prove that he is not motivated by what is best for [Southeast] and its creditors, but that he is motivated by self-interest, which includes protecting himself from further liability and preserving his income stream from [Southeast]. Kimbro has taken actions on behalf of [Southeast] that have frustrated [Southeast's] efforts to reorganize and violated [Southeast's] fiduciary duties. Those actions . . . include: firing [Southeast's] counsel after opening statements in a trial against [Southeast], attempting to manipulate [Southeast] to allow him to intervene in the Southwest AP, filing multiple pleadings on behalf of [Southeast] without court approval, and, of utmost

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