Martha Camp v. RCW & Co., Inc., No. H-05-3580 (S.D. Tex. May 3, 2007). Ruling on legal malpractice and Deceptive Trade Practices Act (DTPA) claims.

In a tag-team application of the anti-fracturing and anti-assignment rules, a federal court collapsed multiple state law claims into a single legal malpractice claim and then rejected an attempted assignment of the legal malpractice claim. However, because the assignment was invalid as a transfer of the malpractice claim to the assignee, the assignor was permitted to pursue the malpractice claim.

Background

This case involved a business transaction related to the sale of a closely-held corporation, University Bookstore, Inc. (“UBI”), to a college bookstore’s employee stock ownership plan. Earnest Camp was the sole shareholder of UBI and his wife, Martha Camp served as President. The Camps hired defendant Preferred Business Services, Inc., to investigate the possibility of procuring a buyer for UBI’s assets. Eventually, Business Exchange and Mr. Camp signed a best-efforts listing agreement giving Business Exchange the exclusive right to sell assets of UBI, for which Business Exchange would receive $120,000.

In November 1999, Business Exchange recommended that the Camps retain defendant R.C.W. & Co., Inc., to assist in the potential sale of UBI stock to an employee stock ownership plan. The Camps alleged that they had relied on Business Exchange's representation that Roland Criss was "a reputable investment bank and consulting firm with specialized knowledge and experience with employee stock ownership plans and stock related transactions" when they hired Roland Criss to undertake the transaction.

On November 30, 1999, UBI and Roland Criss entered into an agreement whereby Mr. Camp was to conduct a business valuation of UBI's stock. Roland Criss represented that it would assist in the planning, arrangement, and administration of the employee stock ownership plan, in exchange for a $3,500 fee for the plan design services and fees for other services, retaining an attorney to prepare documents for filing with appropriate agencies, and to draft the sales agreement with costs to be paid by UBI. In July 2000, Criss Investments valued the stock of UBI at $2.4 million. The Camps and UBI allegedly relied on this valuation in their decisions to proceed with the implementation of an ESOP, and to continue with the services of Roland Criss.

UBI established the UBI Employee Stock Ownership Plan and adopted the UBI Employee Stock Ownership Trust. The Hollmanns were retained to draft documents and to assist in the design of the UBI ESOP and the UBI Trust. The Hollmanns and Criss allegedly represented to the Camps that the transaction complied with controlling law. UBI Trust purchased all 250 shares of UBI owned by Mr. Camp in January 2001, for $2.4 million. Part of the purchase price was funded by a third-party lender and personally secured by Mr. Camp. Mr. Camp paid Business Exchange $93,750, based on the adjusted sales price of 75% of UBI stock. Criss Investments later updated its valuations of stock in 2001 at $1.6 million and August 2002 at $1.8 million. Defendants McClure and Schumacher issued a valuation to UBI that the fair market value of UBI was $1.1 million as of January 2001, $1.3 million less than the value by Criss Investments in July 2000.

Ms. Camp, individually and as executor entered into a settlement agreement with the UBI ESOP in June 2004, and in so doing allegedly relied on the opinion of defendant Bruce Ruud & Associates that the proposed settlement was reasonable. Under the agreement, Camp paid $1.3 million in the form of a check and debt forgiveness to the UBI ESOP, and received in exchange "certain claims believed to be assignable at the time of settlement." Camp allegedly "became aware" that UBI or the UBI ESOP sold a parcel of land for $1.2 million when the Camps made the initial sale of UBI stock.

Camp filed suit in state court in September 2004, alleging claims under Texas law and ERISA against Criss, Hollmanns, and Business Exchange. The case was subsequently removed to federal court and the action was automatically stayed when UBI filed for bankruptcy. When the stay was lifted, the trustee for the bankruptcy estate of UBI filed an amended complaint against Criss and the Hollmanns for malpractice, violation of the Deceptive Trade Practices Act ("DTPA"), and breach of fiduciary duty under ERISA and Texas common law. The defendants brought multiple challenges to the claims.

The listing contract was alleged to have given Business Exchange the exclusive right to sell the assets of UBI to a third party for $2.4 million. Plaintiff alleged that Mr. Camp paid a commission based upon an adjusted sales price of $1.8 million, that the Book Store Trust was not ready, willing, and able to purchase UBI because the services and structure of the transaction failed, money was later required to be refunded, and that the Business Exchange "breached their contract by not producing a ready, willing and able purchase[r] as promised in their contract." Damages were claimed to have been incurred for, among others, commissions that plaintiff contends defendants failed to return.

The Hollmann Defendants contended that Plaintiffs Ms. Camp and the Trustee could not maintain their claims against them because (1) Plaintiffs improperly attempted to fracture a single malpractice claim into multiple claims; (2) the assignment through which Ms. Camp acquired her interest in the malpractice action is void under Texas law; and (3) the malpractice claim is barred by the applicable limitations period.

Anti-fracture rule applied

"Texas law . . . does not permit a plaintiff to divide or fracture her legal malpractice claims into additional causes of action." Goffney v. Rabson, 56 S.W.3d 186, 190 (Tex. App.-Houston [14th Dist.] 2001, pet. denied) (citing numerous authorities); see also Aiken v. Hancock, 115 S.W.3d 26, 28 (Tex. App.--San Antonio 2003, pet. denied); Ersek v. Davis & Davis, P.C., 69 S.W.3d 268, 274 (Tex. App.--Austin, 2002, pet. denied) (quoting Sledge v. Alsup, 759 S.W.2d 1, 2 (Tex. App.--El Paso 1988, no writ), for the proposition that "[n]othing is to be gained by fracturing a cause of action arising out of bad legal advice or improper representation into claims for negligence, breach of contract, fraud or some other name"). Notwithstanding its label, an action that arises out of an attorney's alleged poor legal advice or improper representation is one for legal malpractice. See Sullivan v. Bickel & Brewer, 943 S.W.2d 477, 481 (Tex. App.--Dallas 1995, writ denied); see also Goffney, 56 S.W.3d at 190 (characterizing the issue in legal malpractice actions as "whether the attorney exercised that degree of care, skill, and diligence as lawyers of ordinary skill and knowledge commonly possess and exercise"); Kahlig v. Boyd, 980 S.W.2d 685, 688-89 (Tex. App.--San Antonio 1998, pet. denied) (construing a fraud claim arising from an attorney's failure to disclose to his client an affair with his client's wife while representing the client in a child custody battle as one for malpractice, because it related to alleged deficiencies in the representation). Thus, mere recitation of independent claims does not preclude their treatment as a single cause of action if the "alternative causes of action are all essentially means to an end to achieve one complaint of legal malpractice." Klein v. Reynolds, Cunningham, Peterson & Cordell, 923 S.W.2d 45, 49 (Tex. App.--Houston [1st Dist.] 1995, no writ) (internal quotations omitted).

Here, Ms. Camp's claims for breach of contract, negligent misrepresentation, violation of the DTPA, breach of fiduciary duty, and gross negligence were comprised of all or some of the following allegations: that the Hollmann Defendants (1) misrepresented that the valuation, the ESOP transaction, and certain commissions charged by Defendants complied with controlling law; (2) failed to advise UBI and the UBI ESOP of "the risks associated with highly leveraged transactions," and "the relevance and significance of securing and reviewing a repurchase liability study"; and (3) failed to disclose conflict of interests between the relevant parties. These allegations are substantially the same as those recited in the Trustee's claims against the Hollmann Defendants for malpractice, violation of the DTPA, and breach of fiduciary duty under Texas common law. In sum, Plaintiffs' contentions pertain to an alleged failure by the Hollmann Defendants to exercise the requisite care, skill, and diligence in their representation of UBI and the UBI ESOP and therefore "amount to no more than restated claims for legal malpractice." Goffney, 56 S.W.3d at 190. Thus, the various state law claims asserted by Ms. Camp and the Trustee are properly construed as a single malpractice action, and the additional state law claims against the Hollmann Defendants were dismissed.

Anti-assignment rule applied

Ms. Camp's complaint expressly stated that she received by assignment from UBI and UBI ESOP the state law claims she asserts against the Hollmann Defendants, which must be construed as a single claim for malpractice. However, under Texas law, assignments of legal malpractice claims are void as contrary to public policy. See Britton v. Seale, 81 F.3d 602, 604 (5th Cir.1996) (construing Texas cases to bar all assignments of such actions); Wright v. Sydow, 173 S.W.3d 534, 553 (Tex. App.--Houston [14th Dist.] 2004, pet. denied) (concluding such assignments are injurious to the legal system); City of Garland v. Booth, 895 S.W.2d 766, 769 (Tex. App.--Dallas 1995, writ denied) (listing the numerous jurisdictions that follow this approach); Zuniga v. Groce, Locke & Hebdon, 878 S.W.2d 313, 316 (Tex. App.--San Antonio 1994, writ ref'd). As one court explained, "allowing assignability would debase the legal system and imperil the attorney-client relationship." City of Garland, 895 S.W.2d at 771. If such an assignment is void, the right to bring the action reverts to the assignor--in this case, the Trustee. See Vinson & Elkins v. Moran, 946 S.W.2d 381, 400 (Tex. App.--Houston [14th Dist.] 1997, writ dism'd by agr.) (voiding an assignment of a malpractice action, but holding an assignor who participated in the appeal could prosecute his claims against the attorneys on remand); see also 7 Williston On Contracts § 15:5 (4th ed. 1999) ("If the assignment or conveyance is champertous, it does not destroy the assignor's right; the assignor may still prosecute the claim in his own name."). Accordingly, the right to bring a malpractice action properly belonged to the Assignor/Trustee and not to Ms. Camp.

Camp also asserted claims for breach of fiduciary duty under ERISA, which she allegedly received by assignment. Federal common law governed the rights and obligations under ERISA. There is authority that "an express and knowing assignment of an ERISA fiduciary breach claim is valid." Tex. Life, Accident Health & Hosp. Serv. Ins. Guar. Ass'n v. Gaylord Entertainment Co., 105 F.3d 210 (5th Cir.1997).

Limitations

Lastly, the Hollmann Defendants argued that the Trustee's malpractice action was time-barred because it accrued more than two years before the filing of suit, specifically, on September 20, 2001, when Criss Investments restated its earlier valuation.

Under Texas law, legal malpractice claims are subject to a two-year limitations period. See Kansa Reins. Co. v. Cong. Mortgage Corp. of Tex., 20 F.3d 1362, 1374 (5th Cir.1994); Parsons v. Turley, 109 S.W.3d 804 (Tex. App.--Dallas 2003, pet. denied) (citing Tex. Civ. Prac. & Rem. Code § 16.003(a)). "Normally, a cause of action accrues when a wrongful act causes some legal injury." Via Net v. TIG Ins. Co., 211 S.W.3d 310, 313 (Tex. 2006). However, the discovery rule may defer accrual of a claim "until the plaintiff knew or, exercising reasonable diligence, should have known of the facts giving rise to the cause of action." In re Coastal Plains, Inc., 179 F.3d 197, 214 (5th Cir.1999) (citation omitted); see also Indus. Indem. Co. v. Chapman & Cutler, 22 F.3d 1346, 1356 & n .21 (5th Cir.1994) (noting the applicability of the discovery rule to legal malpractice claims).

Here, the complaint alleged that the errors in Criss Investments' valuation, and in the advice and services provided by the Hollmanns, were not discovered by UBI until April 2004, the date on which MSA issued an opinion assessing the fair market value of UBI at the time of sale to be $1.3 million, substantially less than the July 2000 valuation provided by Criss Investments. Thus, the applicability of the discovery rule and facts pled in the complaint supported the possibility that the action accrued on April 19, 2004, or within the two-year limitations period.

Final Ruling

Camp's counts for breach of contract, negligent misrepresentation, violation of the DTPA, gross negligence, and breach of fiduciary duty under Texas law were dismissed with prejudice, and the motions were otherwise in all other aspects were denied.