Court Opinion

ID: 810508
Source: CourtListenerOpinion
Date Created: 2012-10-18 18:54:15+00
Date Added: 2024-06-11T18:00:37.651349
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                               No. 10-2040

FRANKLIN C. BROWN; KAREN S. BROWN,

                Plaintiffs - Appellants,

           v.

NEUBERGER, QUINN, GIELEN, RUBIN & GIBBER, P.A.; ISAAC M.
NEUBERGER, Esquire; MICHAEL L. QUINN, Esquire; MARTIN L.
GRASS,

                Defendants - Appellees.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.    Catherine C. Blake, District Judge.
(1:09-cv-01684-CCB)

Argued:   September 20, 2012                 Decided:   October 18, 2012

Before SHEDD and DUNCAN, Circuit Judges, and Timothy M. CAIN,
United States District Judge for the District of South Carolina,
sitting by designation.

Affirmed by unpublished opinion.        Judge Duncan         wrote   the
opinion, in which Judge Shedd and Judge Cain joined.

ARGUED: Ray M. Shepard, SMITH, GILDEA & SCHMIDT, LLC, Towson,
Maryland, for Appellants.      James Patrick Ulwick, KRAMON &
GRAHAM, PA, Baltimore, Maryland; Sara Elizabeth Kropf, BAKER
BOTTS, LLP, Washington, D.C., for Appellees. ON BRIEF: Susan M.
Euteneuer, DUANE MORRIS LLP, Baltimore, Maryland; George A.
Reihner, WRIGHT   AND   REIHNER   PC,   Scranton,   Pennsylvania,   for
Appellants.

Unpublished opinions are not binding precedent in this circuit.

                                  2
DUNCAN, Circuit Judge:

     This appeal arises out of the district court's grant of

summary   judgment      in    favor    of       Appellees   Isaac     Neuberger    and

Michael Quinn, their law firm, Neuberger, Quinn, Gielen, Rubin &

Gibber, P.A. (“NQGRG”), and Martin Grass, in an action against

them by Franklin Brown and his wife, Karen Brown (collectively,

the “Browns”).      The Browns allege fraud and breach of fiduciary

duties, and seek as damages their defense costs from a prior

lawsuit, in which the Browns and Appellees were sued by Rite

Aid, the mutual employer of Franklin Brown and Martin Grass.

The primary question before us is one of timing: whether the

Browns’   claims,    based      on     events      that    occurred    in   2005   and

before, are barred by the applicable statute of limitations.

Because   the   district       court    was      correct    in   finding    that   the

Browns’ failure to exercise due diligence after being on inquiry

notice    of    their        claims     renders       their      tolling    theories

inapplicable as a matter of law, we affirm.

                                            I.

                                            A.

     This case has its origin in a fraudulent scheme perpetrated

by various officers of Rite Aid against the corporation, and

Rite Aid’s resulting lawsuit.               In the present action, the Browns

claim they did not participate in or know about the scheme and

                                            3
assert       Rite    Aid     only   sued     them    because    they     were    wrongfully

implicated by Appellees.

      A brief description of the roles and interrelationships of

the individuals involved provides helpful context.                              Alex Grass

founded Rite Aid in 1962, and served as CEO until 1995, when he

was succeeded by his son, Martin Grass.                          Franklin Brown is a

longtime friend of Alex Grass, and served as both his personal

attorney and as general counsel of Rite Aid until 2000.                                Isaac

Neuberger was a personal friend of the Grasses and the Browns,

and     he    and     his        associates     at     NQGRG    operated        in   various

capacities          for    the    Grasses.      For    example,    NQGRG    helped         Alex

Grass    form       A.G.     Capital,    Inc.       (“A.G.   Capital”)     as    a   holding

company for the purpose of purchasing stock from Rite Aid, which

was     integral          to     the    fraudulent       scheme     explained         below.

Neuberger was also the attorney for the 1994 Alexander Grass

Descendants’          Trust      (the   “Grass       Trust”),   established          for   the

benefit of Alex Grass’s issue.                       In 2001, Karen Brown accepted

Martin Grass’s request to become a trustee of the Grass Trust.

Rite Aid believed all of these players were part of a scheme in

which valuable securities were stolen from the corporation.

      The fraudsters’ scheme divested Rite Aid of two investment

securities           worth       approximately         $30     million     without         its

knowledge.           They accomplished this by bundling the securities,

through forged documentation, with Rite Aid’s legitimate sale of

                                                4
Sera-Tec     Biologicals,          Inc.         (“Sera-Tec”)        to   Alex        Grass. 1

Specifically, the fraudsters’ scheme relied on the creation of

two sets of disclosure documents for the Sera-Tec sale.                          One was

a    legitimate     set    listing       only    the     Sera-Tec    stock,     on     which

Franklin Brown’s signature appears.                      This set was sent out to

potential investors and ultimately incorporated into the Stock

Purchase Agreement (“SPA”).                The second (forged) set included

the investment securities, and was created in part by “lifting”

Franklin Brown's signature from the original document.

       As   Alex    Grass’s       personal       attorney,      Franklin      Brown      was

considered    an    “insider”       as    soon     as    Alex   Grass    announced       his

interest in bidding on Sera-Tec, and was properly excluded from

many meetings regarding the sale. 2                      On October 7, 1994, the

closing of the Sera-Tec deal was held at NQGRG's offices in

Baltimore, Maryland.          At Martin Grass's request, Franklin Brown

did not attend.

       Later, after Martin Grass succeeded his father as Chairman

of    the   Board    and    CEO    of     Rite     Aid    on    March    5,   1995,      the

fraudsters managed to transfer the investment securities in a

       1
       Technically, the sale was not to Alex Grass but to his
holding company, A.G. Capital, which the Browns allege was owned
in significant part by the Grass Trust.
       2
       During that time, Franklin Brown also served as an officer
and director of Sera-Tec, in addition to being Rite Aid’s
counsel.

                                             5
manner that made it appear to have been done as part of the

October       1994   Sera-Tec    closing.        By   forging   time   stamps    and

delivery certificates, the fraudsters made the SPA look as if it

contained the forged disclosure documents, which had been stored

in a “Secret File” at Rite Aid.                The stolen securities then made

their way through a series of shell companies before being sold

by Martin Grass for $50 million.                 Those funds came to rest in

the Grass Trust.

                                          B.

       Although the Browns assert they were ignorant of the scheme

to defraud Rite Aid, even the facts as recounted by the Browns

reveal at least a gradual awareness. 3                 As trustee, Karen Brown

received a Grass Trust balance sheet in April 2001 reflecting a

balance of approximately $40 million, most of which seemingly

had come from nowhere.               She claims she initially “accepted the

balance as accurate and legitimate” because she was a new co-

trustee, but later she became suspicious and began to inquire

into       the   source   of   the    funds,   including   by   consulting      Jack

Bernstein, an attorney who is married to her cousin.                    J.A. 690.

Bernstein advised her to ask Neuberger for an accounting, which

       3
        Because we review the district court’s ruling on
Appellees’ motion for summary judgment, we view all facts in the
light most favorable to the Browns.    See Henry v. Purnell, 652
F.3d 524, 531 (4th Cir. 2011) (en banc).

                                           6
she did.     But she never received an accounting, and in May 2004

she was asked by Neuberger to resign as co-trustee.

       By this time, the Browns had become “very suspicious that

the    Investment      Securities         had       been     embezzled        by    Defendants

[NQGRG, Neuberger, Quinn, and Martin Grass] in the Sera-Tec/A.G.

Capital    transaction.”            J.A.       679.         In     2004,     Franklin      Brown

alerted both the government and Rite Aid’s new general counsel,

William    Slaughter,        to     his    theory           that    Rite     Aid     had    been

defrauded.       In a proffer session following his 2003 criminal

conviction on different fraud charges, Franklin Brown revealed

his suspicions and was confronted by the government’s copy of

the    counterfeit      Sera-Tec          disclosure            documents.          Apparently

Franklin    Brown      did    not    recognize            the    significance        of    those

documents, which bore his signature, at the time.                                  The proffer

session    was    unsuccessful,            because          the     government        remained

unconvinced that Franklin Brown had not himself been involved in

the Sera-Tec scheme, and no assistance credit was given.                                     The

Browns assert they remained unaware throughout these events that

they    might    be    implicated         in        the     theft       of   the    investment

securities by Appellees.

       On September 12, 2005, Rite Aid filed fraud, theft, and

related    claims      in    Pennsylvania           state       court    against     Alex    and

Martin Grass, A.G. Capital, Franklin Brown, and Karen Brown as

Trustee    of    the    Grass       Trust,          among    others.          The    complaint

                                                7
described the fraudulent scheme in detail.                                Specifically, Rite

Aid    alleged       that      the      defendants           had       secretly      caused       the

investment         securities        to     be        transferred         as       part     of    the

legitimate         Sera-Tec      sale     by     doctoring         a    separate         disclosure

schedule      in     which     the      investment           securities        were       included,

affixed with Franklin Brown’s signature, which was “maintained

exclusively        in    Franklin       Brown’s        personal         files”      (the     Secret

File) and backdated with altered time stamps.                             J.A. 501.

       Karen Brown received a copy of the complaint on September

23, 2005, and a few hours later answered a call from Neuberger.

During      that    phone      call,      Karen       Brown    understood          Neuberger       to

offer NQGRG’s           representation         to      the    Browns      for      the    Rite    Aid

litigation without charge.                 Neuberger, who was also representing

Martin      Grass,      assured      Karen       Brown       that      the     claims      asserted

against the Browns “were specious and nothing to worry about.”

J.A.   692-93.           She   immediately            accepted         Neuberger’s        offer    of

representation.            The    Browns       maintain        that      an     attorney-client

relationship        existed      with      NQGRG,       Neuberger,           and    Quinn    for    a

period encompassing at least the next year.

       On    March       20,     2006,      after       the        Pennsylvania           suit    was

dismissed for improper venue, Rite Aid filed an identical action

in New York.            The Browns state they hired separate counsel for

their defense in that case, and on June 26, 2006, that local

counsel sent them some documents filed by Rite Aid.                                        Franklin

                                                  8
Brown    claims     this      is     the   first    time    he    saw       his   own    forged

signature on the “amended” disclosure documents and began to

suspect his own entanglement in the fraudulent scheme.

      The       Browns   subsequently         hired    another         attorney,        Stephen

Nudel, to investigate further.                     Still, the Browns continued to

trust Neuberger and NQGRG.                 It was only after Nudel informed the

Browns     of    some    of    his    findings--namely        the      specifics        of   the

shell corporations formed to house and transfer the investment

securities--that the Browns “learned for the first time that

Isaac Neuberger, Michael Quinn and NQGRG had facilitated the

corporate name changes that helped Martin Grass secret his theft

of the Investment Securities from Rite Aid.”                       J.A. 1373.

                                              C.

      Ultimately, Rite Aid's lawsuit in New York was dismissed as

untimely.        On June 25, 2009, the Browns filed the instant action

in   the    District      of    Maryland,      asserting         fraud      and   breach       of

fiduciary duty claims against Appellees.                         They argue Appellees

abused the Browns’ attorney-client relationship with NQGRG by

failing     to    disclose         their   serious    conflict         of    interest,       and

concealed       crucial       information     about     how      the    Browns     had       been

implicated in the fraudulent scheme.

      The district court converted Appellees’ motion to dismiss

into a motion for summary judgment.                        The district court found

that the Browns were on inquiry notice of their claims at the

                                              9
latest by September 23, 2005, when Karen Brown received a copy

of the complaint. 4          The Browns had three years to file their

claims, see Md. Code Ann., Cts. & Jud. Proc. § 5-101, unless the

statute of limitations was tolled during that period.                        The court

reasoned that equitable tolling was not available to the Browns

because     they     had    failed    to    exercise       ordinary      diligence   in

discovering the alleged fraud.                    Consequently, the court found

the Browns’ claims were time-barred, and granted the motion for

summary judgment.          The Browns timely appealed.

                                            II.

      On appeal, the Browns assert their complaint was timely

filed     because     the    statute    of       limitations      should    be   tolled

between the date they received Rite Aid’s complaint, September

23,   2005,    and    the    date    they    received      Rite    Aid’s    opposition

papers    in   the    New    York    lawsuit,       June    26,    2006,    under    two

theories.      First, the continuation of events doctrine should

toll the statute where a confidential relationship, such as an

attorney-client       relationship,         exists    between      the     parties   and

operates to prevent the client from discovering facts underlying

their claim.        Second, the fraudulent concealment doctrine should

      4
       The Browns do not dispute this finding. Thus, we assume
without deciding that the Browns’ claims accrued on September
23, 2005.

                                            10
postpone the accrual date of the Browns’ cause of action because

NQGRG fraudulently concealed facts which are the basis of their

claim.       We address both of these arguments below. 5                   In doing so,

we   review       the    district       court’s    grant    of   summary   judgment     de

novo.       Webster v. U.S. Dept. of Agriculture, 685 F.3d 411, 421

(4th Cir. 2012).             We also review de novo the district court’s

interpretation of state law in a diversity case such as this

one.        Trimed, Inc. v. Sherwood Medical Co., 977 F.2d 885, 888

(4th Cir. 1992).

                                              A.

        Maryland        recognizes       a   “continuation       of   events”    theory,

whereby       the    statute       of    limitations       may   be   tolled    while    a

confidential            or   fiduciary       relationship        exists    between      the

parties.          MacBride v. Pishvaian, 937 A.2d 233, 239 (Md. 2007).

In such situations, “failure to discover the facts constituting

fraud       may     toll     the    statue        of   limitations,       if:   (1)     the

relationship continues unrepudiated, (2) there is nothing to put

the injured party on inquiry, and (3) the injured party cannot

be said to have failed to use due diligence in detecting the

fraud.”       Frederick Road Ltd. P’Ship v. Brown & Sturm, 756 A.2d

963, 975 (Md. 2000).               The justification for this theory is that

        5
        Because we            conclude neither equitable tolling theory
applies, we need              not address Appellees’ judicial estoppel
argument.

                                              11
relationships premised on trust generally give the reliant party

the right to depend on the good faith of the other.                    Id. at 975.

Because of the nature of that confidential relationship, the

reliant party “is under no duty to make inquiries about the

quality or bona fides of the services received, unless and until

something occurs to make him or her suspicious.”                    Id.    However,

blind ignorance of wrongdoing by the fiduciary will not trigger

the application of this rule.          If the reliant party knows facts

“that     would   lead    a    reasonable      person        to     undertake    an

investigation     that,   with     reasonable        diligence,       would     have

revealed    wrongdoing    on     the   party    of     the        fiduciary,”   the

limitations period is not tolled.              MacBride, 937 A.2d at 240

(quoting Dual, Inc. v. Lockheed Martin Corp., 857 A.2d 1095,

1108 (Md. 2004)).

     The Browns also seek tolling under the more general theory

of fraudulent concealment, recognized by statute in Maryland.

“If the knowledge of a cause of action is kept from a party by

the fraud of an adverse party, the cause of action shall be

deemed to accrue at the time when the party discovered, or by

the exercise of ordinary diligence should have discovered the

fraud.”    Md. Code Ann., Cts. & Jud. Proc. § 5-203.                      Thus, the

fraudulent concealment theory may serve to toll the statute of

limitations where “(1) the plaintiff has been kept in ignorance

of the cause of action by the fraud of the adverse party, and

                                       12
(2) the plaintiff has exercised usual or ordinary diligence for

the discovery and protection of his or her rights.”               Frederick

Road, 756 A.2d at 975.        As with the continuation of events

theory, a party’s diligence is crucial in establishing his right

to equitable tolling due to fraudulent concealment.             This court

explained in Go Computer, Inc. v. Microsoft Corp., 508 F.3d 170,

179 (4th Cir. 2007), that

     nothing . . . excuses a negligent plaintiff from the
     diligence   requirement--not  even  if   a   fraud  is
     allegedly well-disguised.    Fraud by its nature is
     something perpetrators take pains to disguise, and
     plaintiffs’ notion that allegedly concealed fraud
     excuses the need for any diligence on the plaintiffs’
     part would permit statutory periods to be tolled
     indefinitely, even when plaintiffs could reasonably be
     expected to bring suit.

In the circumstances presented here, for the reasons discussed

below, the Browns’ lack of diligence alone is fatal to both of

their tolling arguments. 6

                                   B.

     As   the   district   court   found,    there   is    no   basis    for

equitable tolling in this case.         Even assuming arguendo that an

attorney-client   relationship     existed   between      the   Browns   and

NQGRG, an abundance of facts in the record indicate the Browns’

     6
       Because we conclude neither theory applies to NQGRG or its
principals, we need not address whether the statute could be
tolled under either theory with respect to Martin Grass by way
of conspirator liability or the like.

                                   13
suspicions should have been--and indeed were--raised, both as to

their underlying claims and as to the trustworthiness of NQGRG.

       By their own admission, the Browns suspected Martin Grass

embezzled      the      investment       securities      in       conjunction         with    the

Sera-Tec sale as early as 2001, and in any event no later than

2004, when Karen Brown was asked to resign as trustee.                                       That

same   year,       Franklin      Brown     was    shown       a    copy       of    the   forged

disclosure documents in a proffer session with the government,

and    was    at     least      alerted     to    the        fact        of   his    suspected

involvement        by    the    government’s      refusal          to     award     assistance

credit.       Franklin         Brown’s    position      as    counsel         for    Rite    Aid,

officer      and   director       of     Sera-Tec,     and        Alex    Grass’s     personal

attorney,      alone      would    seem     sufficient        to     make      a    reasonable

person fear he was implicated in this fraudulent scheme.

       And, although the Browns allege they were close personal

friends with Neuberger, their knowledge that the firm was also

representing Martin Grass and had been intimately involved in

the original Sera-Tec conveyance should have alerted them to the

obvious conflict of interest with NQGRG.                           At the very least, a

reasonably diligent person in the Browns’ position would have

investigated        immediately.           Such   an    investigation               would    have

revealed that Franklin Brown’s signature had been forged as a

part of the fraudulent transfer of the investment securities,

which is the genesis of their present claims.

                                             14
      Thus,        even     assuming        Neuberger        and    the       other     Appellees

exploited        a    confidential          relationship           with       the     Browns      and

fraudulently         concealed        crucial          information       in    an     attempt      to

delay    or    prevent       discovery          of   their   claims,          there    is    simply

nothing       in     the     record        to     excuse     the     Browns’          failure      to

investigate in the face of a parade of suspicious facts.                                         With

reasonable investigation, they would have discovered that their

reliance on NQGRG and its principals was misplaced.                                         Because

they cannot be said to have used due diligence in detecting

fraud in their confidential relationship, to which they had been

alerted from the outset, the continuation of events doctrine

cannot apply.          Likewise, the fraudulent concealment theory does

not     excuse       the    need    for         diligence.         The    exercise          of    any

diligence by the Browns would have revealed the basis for their

asserted causes of action, rendering tolling due to fraudulent

concealment similarly inappropriate.

        On    these        facts,     we        agree    with      the    district          court’s

conclusion that the Browns’ failure to exercise diligence, when

they had ample reason to suspect fraud, bars their equitable

tolling       theories.        Consequently,             their     claims,      which       accrued

over three years prior to the date filed, are time-barred.

                                                  15
                           III.

    For the foregoing reasons, the judgment of the district

court is

                                                  AFFIRMED.

                            16