of limitations did not begin to run until July 5, 1991, because until then "the BCCI Group was adversely dominated by corrupt senior managers and directors." Complaint P96. Under this theory, "a cause of action will be tolled during the period that a plaintiff corporation is controlled by wrongdoers." RTC v. Gardner, 798 F. Supp. 790, 795 (D.D.C. 1992); see 3A Fletcher Cyc. Corp. § 1306.20 at 686 ("the statute is tolled while a corporate plaintiff continues under the domination of the wrongdoers").
The plaintiffs' factual allegations are sufficient to withstand the motion to dismiss. As noted above, the Court will not impute the knowledge of the defendants or of BCCI's corrupt senior managers and directors to the plaintiffs. Whether the BCCI Group was adversely dominated and, if so, when such domination ceased are questions of fact that cannot be resolved on a motion to dismiss prior to discovery.
3. The substantive claims
Breach of Fiduciary Duty
In Count I, the plaintiffs contend that the defendants breached the fiduciary duties that they, as counsel, owed to the BCCI Group through the simultaneous representation of "the BCCI Group and CCAH in the illegal acquisition and maintenance of First American." Complaint P99. Defendants Clifford and Altman argue that this count should be dismissed because no irreconcilable conflict of interest can be found. According to Clifford and Altman, simultaneous representation of these two entities involved the representation of two clients with the same interests, "a decidedly odd basis for allegations of 'conflict.'" C&A's Motion to Dismiss, at 25; see Tuttle's Motion to Dismiss, at 20-21; Clifford & Warnke partners' Motion to Dismiss, at 5. Additionally, the Clifford & Warnke partners and Defendant Tuttle argue that the plaintiffs are barred from suing the defendants due to BCCI's own fraudulent acts. The defendants also claim that no cognizable damage is alleged because there is no nexus between the conflict and an allegation that the Clifford & Warnke partners were caused to exercise poor judgment as a result of the divided allegiances. The plaintiffs counter that the Complaint adequately alleges that the BCCI Group and First American had differing interests sufficient to trigger application of the defendants' duties as attorneys to avoid conflicts of interest.
A breach of an attorney's ethical standards can constitute a breach of the fiduciary duty owed to a client. Hendry v. Pelland, 315 U.S. App. D.C. 297, 73 F.3d 397, 401 (D.C. Cir. 1996) (citing Griva v. Davison, 637 A.2d 830, 846-47 (D.C. 1994)), r'hg denied, (Mar. 5, 1996). A lawyer is required to decline employment "if the exercise of his independent professional judgment . . . would be likely to involve him in representing differing interests [unless] it is obvious that he can adequately represent the interest of each [client] and . . . each consents to the representation after full disclosure." Hendry, 73 F.3d at 401 (citing D.C. Code of Professional Responsibility DR 5-105). Unless the clients consent after full disclosure, the duty of undivided loyalty is breached where a lawyer represents clients with conflicting interests. Id. Lawyers are also prohibited from placing their own interests above those of their clients. See DR 5-101(A); DR 5-104(A).
The Complaint states a cognizable claim. Among the conflicts alleged were the defendants' simultaneous representation of the BCCI Group and CCAH, First American's parent. The plaintiffs allege that the secret and illegal acquisition of First American by BCCI placed the defendants in a clear conflict of interest because BCCI and CCAH had interests that were inimical and likely to lead to litigation. See Complaint P99.
The plaintiffs also state that nonrecourse multi-million dollar loans were accepted by Clifford and Altman, but were not disclosed or recorded. Id. P76. Moreover, "the true terms of the loans to Defendants Clifford and Altman were misrepresented to the BCCI Group." Id. P76. Profiteering at the expense of a client constitutes a per se violation of DR 5-104(A). See also D.C. Rule of Professional Conduct, Rule 1.8. Further, it is their contention that the defendants' "continuous and ongoing breach of their fiduciary duties," id. P103, was the direct and proximate cause of the injuries sustained by "the BCCI Group as well as its depositors and creditors." Id. Put simply, the plaintiffs have pled sufficient facts to prevail on a motion to dismiss.
The argument that the plaintiffs are precluded from suing their counsel fails, because, at this stage, the Court has rejected the defendants' imputation theory. See Carmel v. Clapp & Eisenberg, P.C., 960 F.2d 698, 704 (7th Cir. 1992); Diamond Mortgage Corp. of Ill. v. Sugar, 913 F.2d 1233, 1248 (7th Cir. 1990), cert. denied, 498 U.S. 1089, 112 L. Ed. 2d 1054, 111 S. Ct. 968 (1991).
Count II alleges that the defendants negligently failed to provide legal advice to the BCCI Group, and Count III avers that the Clifford & Warnke partners negligently failed to supervise and monitor the provisions of legal services by members and employees of the firm. The defendants move for dismissal contending that their legal advice was accurate and that the plaintiffs cannot state a claim for negligence merely because the BCCI Group used that legal advice for its own nefarious purpose: i.e., to evade U.S. regulatory requirements. Since the Court has, at the Rule 12(b)(6) stage, declined to impute the actions of BCCI's corrupt senior managers and officers to the plaintiffs, the defendants' argument again collapses. See Diamond Mortgage, 913 F.2d at 1248, As to Count III, negligent supervision is a cognizable claim in the District of Columbia. See, e.g., Anderson v. Hall, 755 F. Supp. 2, 5 (D.D.C. 1991); American Security Bank v. American Motorists Ins. Co., 538 A.2d 736, 738 (D.C. 1988).
In Count IV, the plaintiffs allege fraudulent concealment contending that Clifford and Altman "misrepresented and concealed material facts relating to the identity . . . of the purchasers of Financial General Bankshares shares [and of] CCAH shares." Complaint P114. The plaintiffs seek to hold Defendant Tuttle liable on an aiding and abetting theory and the Clifford & Warnke partners on a vicarious liability theory. Id. PP113 & 114. The defendants argue that there was no concealment, because BCCI had all of the pertinent facts. This argument fails for the same reason that the Court rejected the defendants' attack on the negligence count. Absent imputation of the knowledge of the corrupt senior managers and officers to the plaintiffs, the Complaint states a cognizable claim. The defendants' argument will be rejected.
Counts Arising out of the Stock Transactions
The defendants next attack Counts I, V, VI, VII and IX. In these counts, the plaintiffs claim that Clifford and Altman's actions in negotiating and accepting nonrecourse loans and purchasing CCAH shares violated their fiduciary duties (Count I), and constituted actionable fraud (Count V), conversion (Count VI) and unjust enrichment (Count VII). The defendants contend that these counts are infirm because Abedi and Naqvi, senior BCCI officers, played central roles. They attack the RICO claim (Count IX) on three grounds: (1) that the plaintiffs have failed to identify any racketeering activity; (2) assuming the presence of racketeering activity, the plaintiffs have failed to allege a pattern of such activity; and (3) the plaintiffs have failed to plead a legally cognizable acquisition injury under 18 U.S.C. § 1962(b).
The defendants' common law attack is again blunted by the fact that the Court has not imputed Abedi's and Naqvi's knowledge or conduct to the plaintiffs. Count IX, asserted under RICO, will also survive Clifford and Altman's motion to dismiss, but for different reasons.
Section 1962(b) "makes it unlawful to acquire control of an enterprise through a pattern of racketeering activity." Danielsen v. Burnside-Ott Aviation Training Ctr., Inc., 291 U.S. App. D.C. 303, 941 F.2d 1220, 1231 (D.C. Cir. 1991). As a result, one of the elements that a plaintiff must allege (and, of course, ultimately prove) is that it suffered an "'acquisition' injury, analogous to the 'use or investment injury' required under § 1962(a)." Id. (quoting Old Time Enters., Inc. v. International Coffee Corp., 862 F.2d 1213, 1219 (5th Cir. 1989)). This injury is that which "arises from the acquisition or maintenance of an interest in or control of an enterprise." Danielsen, 941 F.2d at 1231. It is to be distinguished from the injury which results from the predicate acts themselves. Id. at 1230-31; see Compagnie de Reassurance D'Ile de France v. New England Reinsurance Corp., 57 F.3d 56, 92 (1st Cir.) (plaintiffs must prove "harm beyond that resulting from the fraud which constituted the predicate act"), cert. denied, 133 L. Ed. 2d 490, 116 S. Ct. 564 (1995); Casper v. Paine Webber Group, Inc., 787 F. Supp. 1480, 1494 (D.N.J. 1992) ("a plaintiff must allege injury from the defendant's acquisition or control of an interest in a RICO enterprise, in addition to injury from the predicate acts").
The defendants contend that the plaintiffs have failed to meet their burden to plead racketeering activity, a pattern of such activity, or acquisition injury sufficient to satisfy the requirements of RICO. The Court disagrees. The plaintiffs have met their pleading burden by alleging with specificity various acts of wire fraud and mail fraud.
See Jed S. Rakoff & Howard W. Goldstein, RICO: Civil and Criminal Law and Strategy §§ 1.04[d], 2.01 (1996). The scienter requirements for wire and mail fraud can be inferred from the detailed pattern of conduct alleged in the Complaint. Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990); Schrag v. Dinges, 788 F. Supp. 1543, 1550-51 (D. Kan. 1992); see Rakoff & Goldstein, supra § 2.02[d].
The fact that Abedi and Naqvi may have participated in the scheme is not fatal, particularly where the plaintiffs have described in detail a pattern of racketeering activity by Defendants Clifford and Altman through numerous related instances of mail and wire fraud over a three-year period. See Complaint PP135-157. Clifford and Altman's alleged "no-risk" acquisition of CCAH shares in 1986 and 1987, as well as their 1988 stock "sale," the guaranteed "repurchase" agreement at a set value, and their 1990 participation in the convertible debenture issue establish predicate acts sufficiently related to BCCI's fraudulent takeover of First American. It is charged that these acts were part of a long-term association for criminal purposes, Edison Elec. Inst. v. Henwood, 832 F. Supp. 413, 417-18 (D.D.C. 1993), and they were neither isolated events nor sporadic activity, H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237-39, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989), involving injury to multiple victims. Id. at 240. In sum, the Complaint sufficiently pleads "continuity plus relationship" to establish the requisite pattern of conduct under RICO. Id. at 239; Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.14, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985).
The alleged acquisition injury stems from Clifford and Altman's acquisition of CCAH shares, directly funded by the no-interest, risk-free loans from BCCI with guaranteed buy-back provisions. The plaintiffs state that Clifford and Altman "sold" their shares back to the BCCI Group through a nominee arrangement and at inflated values. Clifford and Altman's alleged fraudulent acquisition of the CCAH shares, combined with the guaranteed return at inflated values and with a promise of future payments, are said to have caused injury. This is sufficient to plead cognizable acquisition injury. See Rakoff & Goldstein, supra § 1.06; see, e.g., Schrag, 788 F. Supp. at 1552; Perez-Rubio v. Wyckoff, 718 F. Supp. 217, 242 (S.D.N.Y. 1989); Long Island Lighting Co. v. General Elec. Co., 712 F. Supp. 292, 298 (E.D.N.Y. 1989).
4. Defendant Stovall's claim
Defendant Stovall moves for dismissal on the ground that the plaintiffs' claims against him were fully discharged through his "no asset" personal bankruptcy.
Stovall filed for bankruptcy on June 30, 1992, and he was discharged on June 14, 1993, pursuant to 11 U.S.C. § 727. Relying upon 11 U.S.C. § 727(b), Stovall contends that he was discharged from all debts that arose prior to the date of the order of relief, and that the plaintiffs' claims against him must be construed as a pre-petition debt because the operative facts underlying the plaintiffs' claim occurred long before he filed for bankruptcy. Additionally, he argues that only the bankruptcy court has jurisdiction regarding his discharged debts, and thus, it is the proper forum to entertain any challenge to his bankruptcy discharge.
However, the plaintiffs contend that Defendant Stovall "cannot escape liability because debts arising from breaches of fiduciary duties and fraud are not dischargeable." Plaintiffs' Opposition, at 54. Alternatively, they argue that Stovall's liability was not discharged, because he failed to schedule the debt in his bankruptcy proceedings.
Section 523(a) of the Bankruptcy Code exempts from discharge any debt "to the extent obtained by . . . false pretenses, a false representation, or actual fraud" or by "fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. §§ 523(a)(2), (a)(4). "Defalcation is not a synonym for fraud, embezzlement, or misappropriation, but has a broader meaning relative to the failure of a fiduciary to account for money received in a fiduciary capacity as a result of misconduct." Benjamin Weintraub & Alan Resnick, Bankruptcy Law Manual P3.09, at 3-35 (1980). Partners are fiduciaries within the meaning of Section 523(a)(4). Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986).
Contrary to his characterization, Stovall is not merely charged with vicarious liability for Clifford and Altman's conduct. See Defendant Stovall's Motion to Dismiss, at 1. The plaintiffs assert that Stovall breached his fiduciary duty to the BCCI Group through "intentional, reckless and/or negligent " actions (Count I) and that the Clifford & Warnke partners, which includes Stovall, were unjustly enriched through double billing and billing for work that was not performed (Count VIII). Moreover, the alleged fraud by Stovall's partners, Clifford and Altman, can be imputed to him as a bankruptcy debtor, regardless of his actions or knowledge. In re Calhoun, 131 B.R. 757, 760 (Bankr. D.D.C. 1991); see also In re Luce, 960 F.2d 1277, 1282 (5th Cir. 1992).
Further, Stovall's contentions that the bankruptcy court has exclusive jurisdiction over this matter and that this Court is thus barred under 11 U.S.C. § 524 from entertaining this suit are meritless. Federal district courts have original jurisdiction (although not exclusive jurisdiction) over civil proceedings arising under, or related to, bankruptcy. 28 U.S.C. § 1334(b). This includes the jurisdiction to hear dischargeability actions. See 3 Collier on Bankruptcy P523.05A, at 523-17 to 523-18 (15th ed. 1996). On the other hand, a bankruptcy court's jurisdiction is neither original nor exclusive, see Matter of Richardson, 52 B.R. 527, 528-29 n.1 (Bankr. W.D. Mo. 1985), but is derived from that of the district court. 3 Collier on Bankruptcy P523.05A, at 523-17 to 523-18 (describing restructuring of bankruptcy courts as adjuncts of district courts after the jurisdictional scheme of 28 U.S.C. § 1471(b) was declared unconstitutional by the Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 73 L. Ed. 2d 598, 102 S. Ct. 2858 (1982)); see In re American Solar King Corp., 92 B.R. 207, 209 (Bankr. W.D. Tex. 1988). Bankruptcy courts may hear all cases and "core" proceedings under Title 11, U.S. Code, including determinations as to the dischargeability of certain debts. Id. Moreover, under 28 U.S.C. § 157(d), automatic referrals to bankruptcy courts must be withdrawn "if the matter involves law that should or must be adjudicated by an Article III court." In re American Solar King Corp., 92 B.R. at 209.
While the bankruptcy court does not have exclusive jurisdiction to determine the dischargeability of Stovall's debts, neither does 11 U.S.C. § 524(a) bar the instant suit to determine Stovall's liability. The purpose of the litigation bar under § 524 was to end the harassment of discharged debtors by prohibiting creditors from attempting to collect debts in state courts. Houghton v. Foremost Financial Serv. Corp., 724 F.2d 112, 116 (10th Cir. 1983); see 3 Collier on Bankruptcy P524.01, at 524-11 to 524-16. This provision does not preclude a federal court from hearing a matter involving liability for a debtor's alleged breach of fiduciary duty, particularly where issues arise that are properly decided by an Article III court. See In re American Solar King, 92 B.R. at 209; see also In re Horton, 87 B.R. 650, 652 (Bankr. D. Colo. 1987) ("Simply stated, the discharge under § 524 extinguishes the debt, not the liability). Of course, if the debt has not been discharged, there is no bar to litigation. Collier on Bankruptcy P524.02, at 524-16. And, here, the nondischargeability of any debt under 11 U.S.C. § 523(a)(2), (a)(4) would turn on the merits of the plaintiffs' claims. The merits of such claims are properly resolved in this Court, not in a bankruptcy court. Stovall's motion will be denied.
5. Defendants Duff's, Hecht's and Cortese's claims
Defendants Duff, Hecht and Cortese seek dismissal of the Complaint as it pertains to them, arguing that they were not partners in Clifford & Warnke during the times relevant to the Complaint. Hecht became a partner on January 1, 1989; Duff became a partner on January 1, 1990; and Cortese was a partner from 1979 to 1981. While Hecht and Duff contend that they became partners after the alleged misconduct, Cortese contends he withdrew before the relevant events.
D.C. Code § 41-112 governs a partner's liability for the wrongful acts of his or her partner(s):
Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his copartners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.