Spinazola v. Mass. Environmental Associates, Inc., et al. (Lawyers Weekly No. 12-078-17)
1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 0684CV00949BLS1
ROSEMARY SPINAZOLA, as Executrix of the Estate of Clarence Spinazola and as Co-Trustee of the Clarence Spinazola 1994 Revocable Trust
vs.
MASS. ENVIRONMENTAL ASSOCIATES, INC. and PATRICK J. HANNON
MEMORANDUM OF DECISION AND ORDER ON MOTION TO SUBSTITUTE ASSIGNEE, KING ROOT CAPITAL, LLC, AS PLAINTIFF AND REQUEST FOR EXECUTION
This case was filed on March 6, 2006. On March 8, 2007, a Final Judgment by Default Upon Assessment of Damages by the Court entered in favor of the plaintiff, Rosemary Spinazola, as Executrix of the Estate of Clarence Spinazola and as Co-Trustee of the Clarence Spinazola 1994 Revocable Trust (the Judgment)1, in the amount of $ 982,316, with interest from the date of filing. On August 20, 2007, the defendants filed a “Motion to Vacate Judgment by Default for Failure to Produce Discovery and for Failure to Comply with Court Orders.” On September 18, 2007, that motion was denied. Then, nearly ten years later, the motion now before the court was filed. It is styled: “Motion to Substitute Assignee, King Root Capital, LLC, as Plaintiff and Request for Execution” (the Motion). In that motion, King Root Capital, LLC (King Root) alleges that: (1) Spinazola assigned her interest in the Judgment to ABCD Holdings, LLC (ABCD Holdings or, simply, ABCD); (2) ABCD, thereafter, assigned its interest to King Root; (3) after accounting for payments by the defendants and the further accrual of post-
1 It is not clear to the court whether the judgment is in favor of Rosemary Spinazola, individually, or the Estate or a Trust. The court will simply use the term “plaintiff.”
2
judgment interest, as of October 18, 2016 the Judgment balance is $ 2,055,540.59, with interest accruing from that date; and (4) the court should “substitute it as the plaintiff in this case and issue an execution in its name [in that amount].”
The defendants appeared by counsel and opposed the motion. The principal grounds for their opposition was that the sole member of ABCD is attorney George A. McLaughlin, III, whose brother is the sole member of King Root. McLaughlin represented defendant Hannon for a number of years, and, in particular, in connection with the negotiation and execution of a Settlement Agreement between the plaintiff and Hannon pursuant to which the Judgment would be satisfied in full by payment to plaintiff of $ 400,000 according to a payment schedule (the Agreement).2 The defendants also alleged that McLaughlin diverted funds available to pay the balance of the $ 400,000 due under the Settlement Agreement to other entities.3 Based on these allegations, the defendants assert that the assignments “are void against public policy, fatally infected by McLaughlin’s misuse of confidential client information and self-dealing.”4
At an initial hearing on the Motion, the court ruled that an evidentiary hearing was necessary to consider the defendants’ public policy arguments and scheduled an evidentiary hearing for May 1, 2017. A hearing was convened on that day. Three witnesses testified: the plaintiff’s lawyer, McLaughlin, and his brother; 23 exhibits were entered in evidence.
2 It appears undisputed that Hannon did not fulfill his obligations under the Agreement.
3 The defendants also generally assert questions concerning the validity of the terms of the assignment.
4 McLaughlin’s numerous disputes with Hannon over the last five years are recounted in at least three written decisions: Hannon v ABCD Holdings, LLC, First Circuit Court of Appeals, No. 15-2269 (Oct. 7, 2016) (the “Bankruptcy Case,” in which the First Circuit affirmed the dismissal of Hannon’s bankruptcy petition and denial of discharge based on his making false statements in financial reports filed in the bankruptcy court); ABCD Holdings, LLC v. ABC&D Recycling, Inc., Hampshire Sup. Ct. No. 12-0171 (Jan. 9, 2013) (“the Loan and Warrants Case,” in which the Superior Court (Carey, J.) found that loans to Hannon controlled entities from McLaughlin controlled entities were enforceable because Hannon was represented by competent, independent counsel when the loans were made and warrants which were issued in connection with the loans properly exercised); and ABCD Holdings, LLC v. Patrick J. Hannon, Suffolk Sup.Ct. No. 16-1840 (June 24, 2016) (the “Collection Case,” in which the Superior Court (Salinger, J.) found that ABCD was likely to succeed in obtaining a judgment on Hannon’s guarantees of loans to entities he controlled, but denying preliminary injunctive relief freezing Hannon’s assets because the relief requested could only be granted to a judgment creditor).
3
FINDINGS OF FACT
Based on the testimony of the witnesses, the exhibits, decisions entered in other cases, and reasonable inferences drawn therefrom, the court makes the following findings of fact, by a preponderance of the evidence.
McLaughlin has been a member of the bar of the Massachusetts Supreme Judicial Court since 1985. He is a principal in the firm, McLaughlin Brothers P.C. He represented Hannon and various businesses that Hannon controlled on a variety of matters from 2006 until 2012, but did not represent the defendants in this case (Hannon and Mass. Environmental Associates, Inc. (MEA)) prior to the time judgment entered against them. However, he did represent them in the negotiation of the Settlement Agreement with the plaintiff’s counsel, Peter Sutton, a partner in the Boston firm, Reimer & Braunstein. The Agreement was executed on November 16, 2007. As relevant to this case, it provided that if Hannon made periodic payments (in the aggregate $ 400,000) according to a schedule set out in the Agreement (the last of which was due on November 1, 2008), he and MEA would be released from any claims under the Judgment. If he breached the Agreement, the plaintiff would be entitled to enforce the Judgment, and the defendants would be credited with any payments made pursuant the Agreement.
McLaughlin also represented Hannon in connection with another substantial judgment that had been entered against him. He was similarly able to negotiate with that judgment creditor an arrangement in which the total amount of the judgment would be reduced if periodic payments were made on an agreed schedule. Apparently, for reasons not explained at the hearing, Hannon was due payments from an entity called: Casella Waste Systems (Casella). This judgment creditor required that these Casella payments be made to McLaughlin, who would then
4
be responsible for paying the creditor. McLaughlin described the arrangement, pursuant to which he received all payments due Hannon from Casella and then made distributions to creditors, Hannon and McLaughlin’s own law firm for legal fees, as an escrow agreement. There is, however, no evidence that a written escrow agreement was ever prepared. A schedule showing receipts from Casella and payments made to various payees, over the period January 21, 2010 to March 20, 2012, was offered in evidence. It reflects approximately $ 572,000 in receipts from Casella and 570,500 of payments made to various payees (of which $ 146,502 went to Hannon) over that period. Hannon did not challenge the accuracy of the schedule at the hearing. The court credits McLaughlin’s testimony that he only made payments out of the Casella account after clearing them with Hannon, at least to the point that McLaughlin received notice of Hannon’s bankruptcy petition.
Hannon defaulted on his payments under the Agreement. At some point, McLaughlin negotiated a reinstatement of the Agreement in return for a $ 25,000 payment, not to be counted toward the $ 400,000 settlement amount. In an email from Sutton to McLaughlin dated June 14, 2011, Sutton confirmed that Agreement was “reinstated,” but if Hannon failed to make monthly payments of $ 5,000 “the full amount of the judgment will become due.” According to the email, $ 140,500 then remained outstanding. The Casella account suggests that Hannon stopped making payments to Reimer & Braunstein, for the benefit of the plaintiff, in January, 2012. The court credits McLaughlin’s testimony that he never redirected payments from this account to other creditors that Hannon had instructed him to pay to Reimer & Braunstein.
In July, 2011, through an entity controlled by him (Bright Horizon Finance, LLC), McLaughlin loaned Hannon $ 219,759 to purchase an interest in a company called ABC&D Recycling. The details surrounding the loan and Hannon’s default on it are described in the Loan
5
and Warrants Case. See n. 4, supra.
In May, 2012, Hannon and his wife filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code (later converted to a Chapter 7 petition). McLaughlin and ABCD Holdings filed proofs of claim in the bankruptcy proceeding, as did the plaintiff. Sutton, as attorney for the plaintiff, examined Hannon concerning the Judgment, Agreement and his assets in the course of those proceeding. McLaughlin caused ABCD Holdings and other companies he then controlled to file an adversary complaint challenging Hannon’s right to a discharge in the bankruptcy proceeding based upon allegedly false income statements filed with the Bankruptcy Court. The Bankruptcy Court found for ABCD Holdings and dismissed the petition, denying Hannon a discharge. This ruling was affirmed by the District Court and by the First Circuit Court of Appeals in the Bankruptcy Case.
On June 10, 2016, McLaughlin caused ABCD Holdings, Inc. and another entity he controlled to file the Collection Case in the Suffolk Superior Court against Hannon and a number of other individuals and entities (some of which were reach and apply defendants); it was assigned to BLS 2. ABCD Holdings moved for a preliminary injunction against Hannon enjoining him from encumbering or disposing of any of his assets or income, except to satisfy ordinary living or business expenses. In a written opinion dated June 24, 2016, the court (Salinger, J.) denied ABCD Holdings’ motion finding that: “Since Plaintiffs are not yet judgment creditors of Hannon, the Court may not exercise its general equity jurisdiction to temporarily grant injunctive relief in the nature of a creditors’ bill attachment.”
Sutton read an article describing the June 24th decision in the July 8, 2016 edition of Lawyers Weekly. He telephoned McLaughlin offering to sell him the Judgment entered in this case. On July 11, 2016, McLaughlin emailed Sutton: “Hi Peter-Please send me the Assignment
6
of the Spinazola matter for collection or whatever you were going to send, as I want to spend some time this summer trying to get some money out of Mr. Hannon.” Thereafter, Sutton and McLaughlin negotiated over the terms of the assignment of the Judgment. Sutton demanded $ 10,000 plus 50% of whatever McLaughlin recovered, after McLaughlin was reimbursed the $ 10,000 and costs of collection, and McLaughlin agreed. McLaughlin sent Sutton drafts of the documents to memorialize their agreement. Dissatisfied with his draft, Sutton had a member of his firm prepare the transactional documents. They consisted of an “Agreement Pursuant to a Non-Recourse Assignment of Judgment and Indemnification Dated as of the 14th Day of September, 2016” and a “Non-Recourse Assignment of Judgment and Indemnification Agreement” also dated as of September 14, 2016. Under these documents, the plaintiff assigned to ABCD Holdings her rights under the Judgment. On September 15, 2015, another entity controlled by McLaughlin (Rising Tides LLC) provided Reimer & Braunstein with a check for $ 10,000.
On December 8, 2016, ABCD Holdings sold the Assignment of Judgment to King Root under exactly the same terms as ABCH Holdings purchased it from the plaintiff. In fact, McLaughlin appears to have used the same two transactional documents drafted by Reimer & Braunstein that Sutton used to sell him the Assignment, just changing the names of the parties and the dates. King Root attempted to pay ABCH Holdings for the Judgment on December 8, 2016, but that check was returned for insufficient funds as King Root then had only $ 751.14 in its checking account. Thereafter, $ 10,000 was deposited in the King Root account, and another check issued to ABCD Holdings on December 15, 2016. Also on December 15, 2016, King Root’s attorney served Hannon with the motion now before the court.
7
RULINGS OF LAW
Mass.R.Civ.P. 25(c) provides: “In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.” The court has found no Massachusetts case, nor any reference in the Massachusetts Practice Series, addressing the right of an assignee of a judgment to bring a motion, long after the entry of final judgment, seeking to be substituted as the party plaintiff and then to have an execution issued in its name. There are, however, federal cases in which a court has done this under the federal version of Rule 25(c), although it appears that this generally occurs when a corporate judgment creditor becomes the successor to another corporate entity by merger or other acquisition. See Vision Bank v. Algernon Land Co., L.L.C., 2012 WL 827011 (S.D. Al., March 12, 2012) and cases collected there. Whether Massachusetts would follow the federal approach, especially when a judgment is sold ten years after its entry, is not clear. However, as neither party has addressed this issue, the court will assume that it has this authority.
Hannon’s first argument in opposition to the Motion is factual. Hannon notes that in February and March of 2012, $ 131,667.02 was paid from the Casella account to McLaughlin’s company, Bright Horizon, in partial repayment of its loan to Hannon’s companies. According to Hannon, this money should have been used to pay the Judgment. However, as noted above, the court credited McLaughlin’s testimony that he did not make any payments from the Casella account that Hannon had not cleared. Additionally, on January 26, 2012, $ 55,000 was paid from the Casella account to Hannon, who apparently chose not to pay any of that sum to the plaintiff.5
5 The court notes that Hannon did not testify at the hearing and did not offer any evidence to rebut McLaughlin’s assertion that he pre-cleared payments from the account or to explain why Hannon did not make monthly payments to Reimer & Braunstein when he received such a substantial payment himself.
8
Hannon next argues that the assignment is void because it violates public policy. In support of this proposition he cites New Hampshire Ins. Co., Inc. v. McCann, 429 Mass. 202 (1999) in which the Supreme Judicial Court stated: “We think the [legal malpractice] claim should be assignable unless some clear rule of law of professional responsibility, or some matter of public policy, necessitates that the assignment should not be enforced.” Id. at 210. In seeking to establish that a clear rule of professional responsibility is violated by the assignment in this case, Hannon directs the court to Otis v. Arbella Mut. Ins. Co., No. CA 99-2907-F, 2003 WL 21385792 (Mass. Super. Apr. 18, 2003), aff’d 443 Mass. 634. Otis, however, is another case involving the assignment of a legal malpractice claim (not a judgment), and the assignment there at issue bears no resemblance to the assignment in this case.
In Otis, the plaintiff/assignee of a legal malpractice claim was also the plaintiff in a personal injury case in which the defendant sought to avoid liability by asserting that Otis was comparatively negligent. When a judgment far in excess of the limits of the defendant’s policy entered after trial, Otis obtained an assignment of the defendant’s putative legal malpractice claim against his defense counsel, premised on the theory that defense counsel had done an inadequate job of proving that Otis’ own negligence caused the accident. Otis, using the same trial counsel that prevailed in the personal injury action, now as the assignee of the legal malpractice claim, intended to prove that he was the principal cause of his own injuries and the assignor’s defense lawyers were negligent. The Superior Court properly concluded that under these circumstances, Otis and his lawyer were both engaging in “disreputable public role reversal” that should not be permitted.
In this case, McLaughlin did not represent Hannon until after a judgment of default
9
entered against him. Moreover, and more importantly, McLaughlin (as de facto assignee)6 does not have to prove anything. He is not the assignee of a claim against Hannon, he is the assignee of a final judgment. In particular, McLaughlin does not have to prove facts contrary to those proved to obtain the judgment, and, therefore, there is no “public role reversal.”
Next Hannon argues that under the Massachusetts Rules of Professional Conduct, the assignment is void as a matter of public policy. Hannon first directs the court to Rule 19(c) which states, as relevant to this case:
A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter:
(1) Use confidential information relating to the representation to the disadvantage of the former client or for the lawyer’s advantage or the advantage of a third person . . . .
“Confidential information” is not specifically defined in the Rules, but Comment 3A to the Editor’s Notes to Rule 16 explains, as relevant to this case:
“Confidential information” consists of information gained during or relating to the representation of a client, whatever its source, that is . . . (b) likely to be embarrassing or detrimental to the client if disclosed, or (c) information that the lawyer has agreed to keep confidential. “Confidential information” does not ordinarily include . . . (ii) information that is generally known in the local community or in the trade, field or profession to which the information relates. . . . Information that is “generally known in the local community or in the trade, field or profession to which the information relates” includes information that is widely known. Information about a client contained in a public record that has received widespread publicity would fall within this category. On the other hand, a client’s disclosure of conviction of a crime in a different state a long time ago or disclosure of a secret marriage would be protected even if a matter of public record because such information was not “generally known in the local community.”
In this case, the court finds that McLaughlin did not use confidential information gained through his representation of Hannon to obtain an assignment of the Judgment. One can imagine
6 The court recognizes that the actual assignee was ABCD Holdings, which then transferred the assignment to McLaughlin’s brother’s firm, King Root. For reasons that are discussed, infra, the court disregards these corporate entities in addressing the validity of the assignment.
10
a set of circumstances in which a lawyer who previously represented a client in negotiating an agreement with a judgement creditor, like the one at issue here, would violate Rule 9(c) by purchasing the judgment. For example, if, as a result of a prior representation, the lawyer knew that the full amount of the judgment was still outstanding because the former client/debtor had breached the payment agreement and then sought out the judgment creditor some time later for purpose of purchasing it, this might well constitute a misuse of confidential client information. That is not what happened in this case.
Here, Hannon first accepted the possibility that his lawyer could become his creditor in 2011, when he borrowed money from McLaughlin7. In 2012, he unavoidably and permanently altered his relationship with McLaughlin when he filed for bankruptcy, defaulted on the loans, and thereby caused McLaughlin to be adverse to him in the bankruptcy proceedings. Indeed, McLaughlin was forced to pay Hannon’s bankruptcy estate some of the loan repayments because they were held to be preferences. The Judgment, the Agreement, and the McLaughlin loans all became a matter of public record in this community when they became the subject of the bankruptcy proceedings. Sutton even examined Hannon with respect to the Judgment and the Agreement during those proceedings. Finally, McLaughlin did not use confidential information to seek out the holder of the Judgment. It was Sutton who believed that he might be able to recover something for his client when he read the decision in the Collection Case which specifically explained that McLaughlin could not obtain a freeze order against Hannon’s assets because he was not yet a judgment creditor.
Hannon also argues that McLaughlin would have learned confidential information concerning Hannon’s assets when he represented him in negotiating deals with Hannon’s
7 Again, the court recognizes that the loans went from McLaughlin controlled entities to Hannon controlled entities, but, for purposes of this professional responsibility analysis the court disregards the LLCs.
11
creditors. The court finds no evidence that McLaughlin presently has any confidential information concerning Hannon’s assets. In denying, McLaughlin preliminary relief in the Collection Case, Judge Salinger specifically pointed-out that McLaughlin’s allegations concerning Hannon’s assets were based on “information and belief.” Moreover, McLaughlin has already engaged in litigation adverse to Hannon concerning Hannon’s assets—not only in the Collection Case, but also in the adversary proceeding which McLaughlin filed against Hannon in the Bankruptcy Case.
Hannon also bases his public policy arguments on Rule of Professional Conduct 19(a) which states:
A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.
Hannon argues that the enforcement of the Judgment is a matter substantially related to the negotiation of the Agreement ten years ago. Perhaps, although Hannon stopped making payments under the Agreement many years ago, and it is obviously no longer in force. In any event, McLaughlin is not representing any party adverse to Hannon. Rather, in purchasing the Judgment, he was acting as a principal not an attorney or agent. The Rule does not address this circumstance. Rather, under many situations, McLaughlin’s actions would run afoul of Rule 19(c). In this case, for the reasons discussed above, they do not. McLaughlin was already a creditor of Hannon and adverse to him in many actions when he purchased the Judgment.
In the end, the court finds that there is something unseemly about McLaughlin purchasing a judgment against Hannon where he previously represented Hannon in negotiating an arrangement for its payment with the original judgment creditor. Furthermore, the court finds
12
that the transfer of the assignment from ABCD Holdings to King Root did not ameliorate the optics of the situation, it made them worse. ABCD Holdings is a limited liability company with one member and manager—McLaughlin. King Root is a limited liability company with one member and manager—McLaughlin’s brother. The transaction between ABCD Holdings and King Root was not an arm’s length commercial sale. ABCD Holdings simply transferred the Judgment to King Root on exactly the same terms as ABCD Holdings purchased it from the plaintiff. In fact, McLaughlin used the transactional documents prepared by Reimer & Braunstein; he just changed the names and date. If the assignment was void as against public policy when held by McLaughlin’s LLC, it was also void when owned by his brother’s LLC.
While too much should not be read into the SJC’s decision in New Hampshire Ins. Co., Inc. v. McCann, which was case in which the SJC was addressing the broad question of whether legal malpractice claims should be assignable, there the Court stated: “We think the claim should be assignable unless some clear rule of law of professional responsibility, or some matter of public policy, necessitates that the assignment should not be enforced.” As discussed above this is not a case in which a clear rule of law or professional responsibility prevents assignment. With respect to the public policy concern raised by this assignment, McLaughlin and Hannon have been adverse to one another in a number of cases over the last five years. McLaughlin’s testimony at the evidentiary hearing suggested that their animosity has spilled-over into personal matters that have been addressed in District Courts. Under these unique circumstances, the court finds that there are no prevailing public policy reasons that prevent McLaughlin from purchasing the right to enforce an unsatisfied judgment entered ten years ago in a case in which he did not represent Hannon.
13
ORDER
For the foregoing reasons, King Root’s motion to substitute it as the plaintiff in this action and for the issuance of an execution pursuant to G.L. c. 235, § 19 is ALLOWED. King Root shall however submit a sworn statement calculating the amount of the execution that the clerk shall issue. This statement shall credit Hannon with all payments made to plaintiff, including the $ 25,000 paid to reinstate the Agreement.
___________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: May 9, 2017