Breuninger v. T. Edward Williams

Background

ITGA, LLC, an Arizona limited liability company whose sole member is Richard Breuninger, owned the Foothills Club West Golf Course in Phoenix, Arizona. The property was subject to a $1,300,000 lien. After ITGA defaulted, creditors began foreclosure proceedings and scheduled a foreclosure sale for August 21, 2018.

The Third Amended Complaint alleged that T. Edward Williams filed a Chapter 11 bankruptcy petition for ITGA on August 20, 2018, to stop the foreclosure. The complaint alleged that Williams communicated with Breuninger, obtained information needed for the petition, provided legal advice, sent the petition to Breuninger for review, and obtained authorization to sign it for ITGA. The bankruptcy court later issued a notice that required missing filings. After Williams did not submit those documents or request more time, the bankruptcy case was dismissed on August 28, 2018. ITGA’s creditors foreclosed on the property on September 4, 2018.

ITGA and Breuninger sued Williams for legal malpractice. They also sought to hold Peyrot and Associates, PC, vicariously liable for Williams’s conduct and named Jane Doe Williams on a theory involving the marital community. In an earlier round of this case, the Court dismissed the complaint without prejudice because it did not sufficiently allege an attorney-client relationship or damages, but allowed another amendment. Plaintiffs then filed the Third Amended Complaint.

Motions to Dismiss

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. They argued that the complaint did not adequately allege an attorney-client relationship between Williams and ITGA or actual damages.

Applying New York law, the Court explained that a legal-malpractice claim requires allegations of attorney negligence, a loss proximately caused by that negligence, and actual damages. A written retainer agreement is not required to establish an attorney-client relationship. The Court may consider the parties’ words and actions, including whether legal services were performed, whether legal advice was given, whether a fee arrangement existed, and whether the alleged client reasonably believed the attorney was representing it.

The Court held that the Third Amended Complaint adequately alleged an attorney-client relationship. Although ITGA had no written contract with Williams and did not pay him, the complaint alleged that Williams acted for ITGA by preparing and filing its bankruptcy petition, communicating directly with Breuninger, requesting information and a signature, providing advice, and later filing a motion to reinstate the bankruptcy case. The Court also found that Breuninger’s alleged belief that Williams was ITGA’s bankruptcy attorney appeared reasonable based on those interactions.

The Court also held that the alleged damages were sufficiently concrete at the motion-to-dismiss stage. Plaintiffs no longer based their damages theory on the loss of a possible $2,000,000 sale to a third party. Instead, they alleged that malpractice caused ITGA to lose Club West itself. They valued the claimed loss at $700,000, calculated as the alleged $2,000,000 value of the property minus the $1,300,000 debt. Whether the property was actually worth that amount, or whether ITGA could have retained it through a successful bankruptcy reorganization, presented factual questions that could not be resolved on a motion to dismiss.

The Court therefore denied both motions to dismiss the Third Amended Complaint.

Motions for Sanctions

The Williams Defendants separately sought sanctions under Federal Rule of Civil Procedure 11 and 28 U.S.C. § 1927. Rule 11 addresses frivolous or unsupported filings and filings made for an improper purpose. Section 1927 permits sanctions against an attorney who unreasonably and vexatiously multiplies court proceedings.

The Court rejected the argument that the complaint was frivolous because it had denied the motions to dismiss. The Court also declined to resolve the defendants’ factual claims that Breuninger had lied or that ITGA had no chance of a successful reorganization. Resolving those issues would require deciding factual disputes central to the malpractice case, which was premature at this stage.

The Court denied the motions for sanctions in their entirety, but the denial was without prejudice. The Williams Defendants could seek permission to refile after discovery if they could establish a basis for sanctions. The Court also lifted the stay of discovery and directed the Clerk of Court to close the listed motions.