In Re: Basic Food Group, LLC

Background

Lee and Park acquired the membership interests in Basic Food from Kim in December 2012. The purchase was supported in part by a $1.3 million loan from Noah Bank, which Lee and Park guaranteed and which was secured by a lien on Basic Food’s assets. Basic Food later defaulted and filed a Chapter 11 bankruptcy petition.

In an adversary proceeding, the plaintiffs sued several defendants, including Ahne and Ahne Law. The claims against the Ahne defendants originally included violations of the Racketeer Influenced and Corrupt Organizations Act, breach of fiduciary duty, declaratory judgment, and breach of contract and the implied covenant of good faith and fair dealing. The Bankruptcy Court dismissed the RICO claims, and the plaintiffs voluntarily dismissed the declaratory-judgment claim. The Bankruptcy Court later granted the Ahne defendants summary judgment on the remaining claims.

The Bankruptcy Court concluded that the plaintiffs had not shown evidence from which a reasonable jury could find that Ahne failed to meet the professional standard of care. It also concluded that the claim for breach of the covenant of good faith and fair dealing duplicated the malpractice-related allegations.

Issues on Appeal

The plaintiffs argued that the Bankruptcy Court should not have allowed the Ahne defendants to file their summary-judgment motion after the deadline. They also argued that factual disputes required a trial, pointing to Ahne’s alleged failure to perform due diligence, his alleged conflicts of interest, his failure to obtain a written conflict waiver, and his drafting of the buyback agreement.

The district court reviewed the summary-judgment decision independently. Summary judgment is appropriate when the evidence shows no genuine dispute over a fact that could affect the outcome and the moving party is entitled to judgment as a matter of law.

Late Summary-Judgment Motion

The district court held that the Bankruptcy Court did not abuse its discretion by allowing the Ahne defendants to file their motion late. The Ahne defendants’ newly appointed counsel promptly notified the Bankruptcy Court that he believed there were grounds for summary judgment, submitted a detailed explanation, and gave the plaintiffs an opportunity to respond. The district court also noted that the plaintiffs had not identified prejudice caused by the delay.

Due Diligence and Expert Testimony

The district court rejected the argument that the Ahne defendants’ failure to submit expert testimony alone prevented summary judgment. Under the federal summary-judgment standard, the nonmoving party must produce admissible evidence supporting its claim once the moving party identifies an absence of supporting evidence.

The court also agreed that the evidence did not create a triable issue based on Ahne’s failure to conduct financial due diligence. The record indicated that Lee did not ask Ahne to conduct due diligence and that due diligence was not part of the scope of Ahne’s representation. The plaintiffs also did not provide evidence that Ahne knew about the alleged misrepresentations by the other defendants.

Conflict of Interest

The court held that evidence of a conflict of interest, even if it showed a violation of professional-conduct rules, did not by itself establish a damages claim for legal malpractice or breach of fiduciary duty. A plaintiff alleging malpractice based on a conflict must show both that a conflict existed and that the conflict caused damage. The failure to obtain written consent may support a disciplinary complaint, but it does not alone establish a right to damages.

Buyback Agreement

The district court disagreed with the Bankruptcy Court’s conclusion that the record contained no evidence that the buyback agreement was intended to give Lee a right to require Kim to repurchase Basic Food. The agreement as drafted instead gave Kim the option to buy back the business from Lee.

Deposition testimony from an agent of Noah Bank supported the plaintiffs’ account that the agreement was intended to protect Lee and give him the option to require Kim to buy back the business. Kim’s testimony also supported that understanding. The district court concluded that a reasonable jury could find that Ahne negligently drafted the agreement, failed to ask about its purpose, and failed to explain its potentially harmful consequences to Lee.

The court further found evidence supporting causation and damages. A jury could conclude that, if Ahne had questioned the wording, the parties would have corrected the agreement, and Lee could have required Kim to repurchase the business at the original purchase price. The court also rejected the argument that Lee and Park suffered no damages because they had not personally paid their own money toward the purchase, noting that they had personally guaranteed the Noah Bank loan and remained liable for the unpaid amount.

The court held that expert testimony was unnecessary on this claim because the alleged failure involved a straightforward question of whether counsel understood and explained an important agreement. The court stated that the issue was within the ordinary experience of a juror.

Disposition

The court REVERSED the grant of summary judgment in favor of the Ahne defendants and REMANDED the case for further proceedings consistent with the opinion. The clerk was directed to close the appeal.