Tavenner v. ULX Partners, LLC (In re Leclairryan PLLC)

MEMORANDUM OPINION

KEVIN R. HUENNEKENS, UNITED STATES BANKRUPTCY JUDGE.

This matter comes before the United States Bankruptcy Court for the Eastern District of Virginia (this "Court") upon the Defendants ULX Partners, LLC's, ULX Manager LLC's, and UnitedLex Corporation's Motion to Partially Dismiss the First Amended Complaint [ECF No. 87] (the "ULX Motion") filed by ULX Partners, LLC ("ULXP"), ULX Manager LLC ("ULX Manager"), and UnitedLex Corporation ("UnitedLex," and together with ULXP and ULX Manager, the "ULX Entities") and Gary D. LeClair's Motion to Dismiss [ECF No. 104] (the "GDL Motion" and, together with the ULX Motion, the "Motions")^[1] filed by Gary LeClair ("LeClair"

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and, together with ULX Entities, the "Defendants"). The Defendants seek to have dismissed a number of the counts included in the First Amended Complaint [ECF No. 86] (the "Amended Complaint") filed by Lynn L. Tavenner (the "Trustee"), in her capacity as Chapter 7 trustee for the bankruptcy estate of LeClairRyan PLLC (the "Debtor"), in the above-captioned adversary proceeding (the "Adversary Proceeding"). The Trustee filed an omnibus response [ECF No. 106], addressing both Motions. The ULX Entities filed a reply [ECF No. 109]; LeClair likewise filed a reply [ECF No. 108]. The Court conducted a hearing (the "Hearing") on the Motions on October 19, 2021. At the conclusion of the Hearing, the Court took the Motions under advisement. After due consideration of the arguments of counsel at the Hearing, the pleadings, and the authorities cited by the parties in their memoranda of law, the Court will deny the Motions for the reasons set forth below.

Jurisdiction and Venue

The Court has subject matter jurisdiction under 28 U.S.C. § 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia (the "District Court") dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (C), (F), (H), (K), and (O).^[2] Venue is appropriate pursuant to 28 U.S.C. § 1409(a).

Legal Standard

The Defendants' Motions ask the Court to dismiss certain of the thirty-four counts pled by the Trustee in her Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedures (the "Civil Rules") as made applicable to this proceeding by Rule 7012(b) of the

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Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), for "failure to state a claim upon which relief can be granted."^[3] Fed.R.Civ.P. 12(b)(6); Fed.R.Bankr.P. 7012(b). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A motion to dismiss under [Civil Rule] 12(b)(6) tests the sufficiency of a complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). "Because only the legal sufficiency of the complaint, and not the facts in support of it, are tested under a [Civil Rule] 12(b)(6) motion, [the Court] assume[s] the truth of all facts alleged in the complaint and the existence of any fact that can be proved, consistent with the complaint's allegations." Fessler v. Int'l Bus. Machs. Corp., 959 F.3d 146, 152 (4th Cir. 2020). "Ultimately, '[t]o survive a motion to dismiss, a claim must contain factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Edley-Worford v. Va. Conf. of United Methodist Church, 430 F.Supp.3d 132, 139 (E.D. Va. 2019) (alteration in original) (quoting Iqbal, 556 U.S. at 678).

Procedural History and Factual Allegations

The Trustee initially brought a fourteen-count complaint [ECF No. 4] (the "Original Complaint") against ULXP and UnitedLex in this Adversary Proceeding. On July 20, 2021, the

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Court entered an Order [ECF No, 58] (the "Order Ruling on Motion to Dismiss"), granting ULXP and UnitedLex's motion to dismiss as to one count, but otherwise denying the motion as to the remaining thirteen counts.^[4] In response to the Order Ruling on Motion to Dismiss, the Trustee timely filed her Amended Complaint, which added ULX Manager and LeClair as parties, added or enhanced certain factual allegations, and asserted twenty additional counts.

LeClair jointly founded the Debtor in 1988. Am. Compl. ¶ 34, ECF No. 86 at 9. Beginning in 2006, the Debtor began rapidly expanding, adding offices over the East Coast. See id. ¶ 24, ECF No. 86 at 9. At its peak, the Debtor had 25 offices nationwide and 385 employees. Id. ¶ 38, ECF No. 86 at 9. As part of its rapid expansion, the Debtor acquired a law firm which had a discovery center, known as "DSP." Id. ¶¶ 36-37, ECF No. 86 at 9. DSP had many significant clients such as Johnson & Johnson and Ford. Id. ¶ 37, ECF No. 86 at 9. In 2013, DSP generated revenues of $31.7 million. Id.

Contemporaneously with this rapid expansion, LeClair negotiated soft-landing contracts for himself and other legacy shareholders, which, inter alia, provided guaranteed compensation without benchmarks. Id. ¶ 39, ECF No. 86 at 9-10. Although other shareholders were aware of the existence of these golden parachute contracts, the specific compensation terms were not disclosed. Id.

The period of rapid expansion was cut short by the financial crisis of 2008. As a way to continue growth, LeClair decided to attract funding from outside non-lawyer capital investors. LeClair was convinced that he could either change the law prohibiting non-lawyers from holding

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economic interests in law firms or figure out a way to circumvent the law. See id. ¶¶ 41-42, ECF No. 86 at 10. The Debtor invested heavily in terms of both time and money developing and pursuing a strategic plan for obtaining outside capital. Id. ¶ 43, ECF No. 86 at 10.

In October 2012, the Debtor and UnitedLex began discussing the possibility of forming a joint partnership. Id. ¶ 54, ECF No. 86 at 12. UnitedLex is a global technology and legal services company that provides back-office support to law firms and corporate legal departments. LeClair and the UnitedLex CEO decided to move forward with a pilot program in Spring 2013. Id. ¶ 55, ECF No. 86 at 13. Ultimately, that pilot program morphed into the creation of the "LeClairRyan Knowledge Center."^[5] Id. ¶¶ 56-57, ECF No. 86 at 13. As part of this transaction, the Debtor received access to the LeClairRyan Knowledge Center and $3.4 million from United Lex. Id. ¶ 61, ECF No. 86 at 14. In exchange, the Debtor conveyed DSP to United Lex. Id. UnitedLex then leveraged the business connections that the Debtor and LeClair had developed, as well as the technology of DSP, to grow the client base of UnitedLex. Id. ¶¶ 67-68, ECF No. 86 at 15.

As these transactions unfolded, the Debtor began to experience financial difficulty. In August 2012, LeClair announced that the firm had not met its yearly targets and would not pay projected shareholder salaries. Id. ¶ 69, ECF No. 86 at 16. Despite a mandatory preferred stock offering which raised approximately $2.5 million in new capital, the Debtor continued to miss its financial projections. Id. ¶¶ 70-73, ECF No. 86 at 16.

Notwithstanding the Debtor's financial difficulties, Debtor's management, including LeClair, proposed and authorized certain contingent payments to shareholders. Id. ¶¶ 77-78, 85-86, ECF No. 86 at 17, 18. These contingent payments were supposed to be triggered only once

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the Debtor had met certain financial metrics. Id. ¶¶ 75-76, ECF No. 86 at 16. Even though the conditions precedent were never satisfied, the Debtor made these payments in violation of the firm's internal policies. Id. ¶¶ 74-78, 85-86, ECF No. 86 at 16-17, 18. The contingent payments were made to the shareholders at a time when the Debtor was generally not paying its debts as they became due. See id. ¶¶ 73, 79, ECF No. 86 at 16, 17. The Debtor structured the timing of the contingent payments to avoid breaching a covenant with its lender.^[6] Id. ¶¶ 79, 81-84, ECF No. 86 at 17-18. In total, the Debtor transferred $459, 687 to LeClair in contingent payments in 2014, 2015, and 2016 (the "Contingent Income Payments"). Id. ¶ 92, ECF No. 86 at 19.

In 2016, LeClair stepped down as chairman of the Debtor. Id. ¶ 96, ECF No. 86 at 20. LeClair did not relinquish control of the Debtor, nor did he abandon his vision for the use of outside capital. Beginning in October 2017, LeClair led negotiations on behalf of the Debtor to formally partner with UnitedLex. See id. ¶¶ 109-11, ECF No. 86 at 23.

In April 2018, the Debtor and UnitedLex finalized an agreement to create a joint venture, ULXP. The Debtor contributed all of its non-legal intellectual property and administrative support staff to the joint venture. This included its administrative resources for (i) lateral attorneys; (ii) training; (iii) personnel; (iv) marketing & business development; (v) pricing; (vi) program management; (vii) information technology and tools; (viii) legal industry collaboration & insight; (ix) industry research & analysis (x) risk management in operations and templets; (xi) library and research services; (xii) operations; and (xiii) attorney development. Id. ¶ 157, ECF No. 86 at 32. ULXP thereby took control of the Debtor's "Legal Operations & Administration," "Client Relations & Business Development," "Marketing & Communications," "Conflicts & Engagement

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Management," "Value Pricing & Legal Project\Management,"...