Murray v. Dinsmore & Shohl, LLP (In re Murray Energy Holdings Co.)

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In re: MURRAY ENERGY HOLDINGS CO., et al., Debtors.

Brenda L. Murray, et al., Plaintiffs, v. Dinsmore & Shohl, LLP et al., Defendants.

No. 19-56885

Adv. Pro. No. 24-2028

United States Bankruptcy Court, S.D. Ohio, Western Division

October 31, 2024

Chapter 11

Attorneys for the Plaintiffs Benjamin R. Ogletree Donald J Tennant, Jr. Kerry Verdi

Attorneys for the Defendants Elaine Goldenberg Daniel Kane Bethany Woodward Kristovich Bradley Schneider Joel E. Sechler

MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION TO DISMISS (DOC. 48)

John E. Hoffman, Jr. United States Bankruptcy Judge

I. Introduction

This adversary proceeding arises in the Chapter 11 cases of Murray Energy Holdings Co. ("Murray Energy") and its affiliated debtors and debtors in possession ("Debtors"). In state court, the plaintiffs brought a legal malpractice claim ("Malpractice Claim") against the defendants-a law firm and certain of its partners. The plaintiffs allege that in negotiating and seeking confirmation of the Debtors' second amended Chapter 11 plan ("Chapter 11 Plan") (Doc. 2135-1),^[1] the defendants (1) exposed the plaintiffs to billions of dollars of liability, and (2) failed to advise the plaintiffs on how to protect themselves from that liability. The defendants removed the Malpractice Claim to this Court, and the plaintiffs sought its remand, which the Court denied in an earlier decision. See Murray v. Dinsmore & Shohl, LLP (In re Murray Energy Holdings Co.), 662 B.R. 604 (Bankr. S.D. Ohio 2024) ("Dinsmore I").

Before the Court now is the defendants' motion to dismiss this adversary proceeding under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") for failure to state a claim upon which relief can be granted. The Court previously dismissed-for failure to state a claim- an adversary proceeding based on a similar malpractice claim brought by the plaintiffs against another law firm. See Murray v. Willkie Farr & Gallagher LLP (In re Murray Energy Holdings Co.), 654 B.R. 469 (Bankr. S.D. Ohio 2023) ("Willkie"). For the reasons stated below, the result must be the same here.

II. Jurisdiction and Constitutional Authority

The plaintiffs contend that the defendants' motion to dismiss should be denied because the Court lacks subject-matter jurisdiction over this dispute. But as explained in Dinsmore I, the Court has arising-in jurisdiction to hear and determine this matter under 28 U.S.C. § 1334(b) and the general order of reference entered in this district under 28 U.S.C. § 157(a). Dinsmore I, 662 B.R. at 612-632.

Because the Court has arising-in jurisdiction, this is a core proceeding. See Brown v. Harrington (In re Brown), No. 21-11284-GAO, 2022 WL 1200783, at *2 (D. Mass. Apr. 22, 2022), aff'd, 55 F.4th 945 (1st Cir. 2022); S. Canaan Cellular Invs., LLC v. Lackawaxen Telecom, Inc. (In re S. Canaan Cellular Invs., LLC), 427 B.R. 85, 90 (Bankr. E.D. Pa. 2010). And because this dispute "stems from the bankruptcy itself," the Court has the constitutional authority to enter a final order. Stern v. Marshall, 564 U.S. 462, 499 (2011).

III. Procedural History

The complaint in this adversary proceeding was first filed in the Belmont County, Ohio Court of Common Pleas ("State Court"). As in Willkie, the plaintiffs here ("Plaintiffs") include Brenda L. Murray ("Mrs. Murray"), the widow of the Debtors' founder, Robert E. Murray ("Mr. Murray"), who died in October 2020. Mrs. Murray is a Plaintiff on her own behalf and in her capacities as executrix of Mr. Murray's estate and trustee of the Brenda L. Murray Trust. The other Plaintiff is Michael J. Shaheen, in his capacity as trustee of the Robert E. Murray Trust.

The State Court complaint alleges that the defendants-Dinsmore & Shohl LLP ("Dinsmore") and three of its current or former partners, Jerrad T. Howard, J. Michael Cooney and Kim Martin Lewis (collectively, "Defendants")-engaged in legal malpractice. The Defendants removed the State Court complaint to this Court under 28 U.S.C. § 1452(a), which provides for the removal of actions over which bankruptcy courts have jurisdiction under 28 U.S.C. § 1334, and Rule 9027 of the Federal Rules of Bankruptcy Procedure. Notice of Removal, Adv. Doc. 1. The parties then entered into an agreed order establishing deadlines for filing (1) the Defendants' motion to dismiss, (2) the Plaintiffs' opposition to that motion or an amended complaint, and (3) the Defendants' reply in support of their motion to dismiss. See Adv. Doc. 6.

Under the terms of the agreed order, the Plaintiffs filed an amended complaint ("Amended Complaint") (Adv. Doc. 47) in response to the Defendants' initial motion to dismiss this adversary proceeding (Adv. Doc. 42). The Defendants then moved to dismiss the Amended Complaint ("Dismissal Motion") (Adv. Doc. 48). The Plaintiffs opposed the Dismissal Motion ("Objection") (Adv. Doc. 52), and the Defendants replied in support of it ("Reply") (Adv. Doc. 54).

IV. Background

Because the Defendants moved to dismiss the Amended Complaint for failure to state a claim, the following facts are taken in part from that complaint, and its allegations are accepted as true for the purpose of deciding the Dismissal Motion. See Boudette v. Buffington, No. 20-1329, 2021 WL 3626752, at *1 (10th Cir. Aug. 17, 2021) ("This factual background is taken from Plaintiffs' complaint . . ., the non-conclusory allegations of which we, like the district court, take as true when evaluating a motion to dismiss under [Rule 12(b)(6)]."); Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598, 608 n.5 (6th Cir. 2005) ("[B]ecause this case is before the Court on review from a grant of a motion to dismiss for failure to state a claim, we accept as true all of Plaintiffs' well-pleaded allegations."). And because the defenses on which the Dismissal Motion is predicated can be "plainly gleaned" from the Chapter 11 Plan, Willkie, 654 B.R. at 498 (quoting Chavis v. Fuerst, 62 Fed.Appx. 116, 117 (6th Cir. 2003)), the background is also based on applicable provisions of the Chapter 11 Plan.

A. The Defendants' Representation of the Debtors and the Plaintiffs

On October 29, 2019, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Am. Compl. ¶ 26. For decades before the Debtors filed bankruptcy, the Defendants represented Mr. and Mrs. Murray and their trusts (collectively, "Murray Clients") in personal matters. Id. ¶ 18. In particular, the Defendants advised the Murray Clients on, among other things, estate planning matters. Id. ¶¶ 19-23. The Defendants continued to represent the Murray Clients in personal matters after the Debtors filed their bankruptcy petitions. Id. ¶ 24. But at the same time, the Defendants represented the Debtors as their local bankruptcy counsel. Id. ¶ 26. That is, the Defendants served as the Debtors' counsel in their bankruptcy cases while continuing to represent the Murray Clients in personal matters. Id. ¶ 27.

B. ERISA Withdrawal Liability

Before they filed their Chapter 11 cases, some Debtors were signatories to a collective bargaining agreement ("CBA") with the United Mine Workers of America. Id. ¶ 29. The CBA required the Debtors to contribute to the United Mine Workers of America 1974 Pension Plan and Pension Trust ("1974 Plan"), a multiemployer pension plan under the Employee Retirement Income Security Act of 1974 ("ERISA"). See id. ¶¶ 1, 12. While representing the Debtors during their bankruptcy, the Defendants sought and obtained Court approval for the Debtors to reject the CBA. Id. ¶ 29. Rejecting the CBA terminated the Debtors' contribution obligations to the 1974 Plan, but "[i]f an employer withdraws from a multiemployer pension plan, ERISA imposes 'withdrawal liability,' meaning that the withdrawing employer is liable to the plan for its proportionate share of the plan's unfunded vested benefits." Id. ¶ 13, 29. "As negotiated by [the] Defendants, the withdrawing [] Debtors paid only a small fraction of their resulting ERISA withdrawal liability, and the remainder of their withdrawal liability was discharged by the Bankruptcy Court." Id. ¶ 31.

ERISA withdrawal liability is not limited to employers-it can also be imposed on members of a "controlled group," including individuals who "carr[y] on an unincorporated 'trade or business.'" Id. ¶¶ 15-16. The Plaintiffs are defending a lawsuit stemming from the Murray Clients' alleged withdrawal liability to the 1974 Plan. See Buckner, et al. v. Pers. Representative of the Est. of Robert E. Murray, et al., Case No. 1:24-cv-1268-TJK (D.D.C. filed Apr. 30, 2024). In that lawsuit, the 1974 Plan is seeking more than $6.5 billion from the Plaintiffs based on the Murray Clients' alleged withdrawal liability. Am. Compl. ¶ 1.

C. The Alleged Malpractice

The Plaintiffs contend that representing both the Debtors and the Murray Clients created a conflict of interest for the Defendants:

Unbeknownst to Plaintiffs, a conflict arose in which Defendants knew that the interests of Plaintiffs and the . . . Debtors diverged on the critical issue of potential ERISA withdrawal liability. In the face of this conflict, Defendants willfully and deliberately breached their duties to Plaintiffs by exposing them to potential claims by the 1974 Plan for ERISA withdrawal liability and/or by failing to expose their conflict of interest, withdraw from the representation of the . . . Debtors, and warn and advise Plaintiffs of the potential liability Defendants created by their actions on behalf of Defendants' other clients.

Id. ¶ 28.

The Plaintiffs also allege that they were targeted for withdrawal liability "[d]ue to Defendants' legal malpractice[.]" Id. ¶ 1. As stated above the Defendants' alleged malpractice arose from their actions in negotiating and...