Court Opinion

ID: 3007107
Source: CourtListenerOpinion
Date Created: 2015-10-05 19:01:09.635098+00
Date Added: 2024-06-11T18:03:16.001758
License: Public Domain

Case: 15-11506   Date Filed: 10/05/2015   Page: 1 of 12

                                                           [DO NOT PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS

                       FOR THE ELEVENTH CIRCUIT
                         ________________________

                               No. 15-11506
                           Non-Argument Calendar
                         ________________________

                     D.C. Docket No. 1:13-cv-03925-TWT

S. GREGORY HAYS,
Receiver for Lighthouse Financial Partners, LLC,

                                                           Plaintiff-Appellant,

                                    versus

PAGE PERRY, LLC,
ESTATE OF J. BOYD PAGE,
ALAN R. PERRY, JR.,
J. STEVEN PARKER,
ROBERT D. TERRY, et al.,

                                                           Defendants-Appellees.

                           ________________________

                  Appeal from the United States District Court
                      for the Northern District of Georgia
                         ________________________

                               (October 5, 2015)

Before WILLIAM PRYOR, JORDAN and JILL PRYOR, Circuit Judges.
              Case: 15-11506     Date Filed: 10/05/2015     Page: 2 of 12

PER CURIAM:

      S. Gregory Hays, the receiver for Lighthouse Financial Partners, LLC,

appeals the dismissal of his complaint against the law firm of Page Perry, LLC;

four of its partners, Steve Parker, Robert D. Terry, Daniel I. MacIntyre, and Alan

R. Perry Jr.; and the estate of deceased partner J. Boyd Page. Hays complained

about professional malpractice and the breach of fiduciary duties and of contract

by Page Perry, Parker, Terry, and MacIntyre, and about negligent supervision by

Page and Perry. Hays alleged that the lawyers violated their ethical and legal

obligations to Lighthouse, a registered investment advisor, by failing to report it

for regulatory noncompliance and by allowing its president and managing owner,

Benjamin DeHaan, to misappropriate clients’ funds. The district court dismissed

the complaint for failure to state a claim that had facial plausibility. See Ashcroft v.

Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949 (2009); Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555–56, 127 S. Ct. 1955, 1965 (2007). We affirm.

                                 I. BACKGROUND

      Lighthouse provided financial advice and investment services to its clients.

Its managing owner, DeHaan, diverted clients’ funds into a bank account labeled

“Client Holding – Pass Through” that he opened ostensibly as an account for

Lighthouse. DeHaan concealed his wrongdoing by representing to federal and state

regulatory agencies that Lighthouse did not have custody of client funds and that

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the funds had been transferred to broker-dealers who served as custodians.

       Between 2008 and 2012, Lighthouse retained Page Perry as legal counsel.

Their agreement, signed by DeHaan, stated that Page Perry would “advise

[Lighthouse] regarding all registration, licensing and regulatory requirements”;

assist in “drafting, reviewing, [and] advising as to the content and form of all

documents required to be filed by said regulators”; and advise Lighthouse about

“selected communications proposed to be issued,” “general business matters

relating to corporate formation and/or reorganization,” existing contracts, and “the

general legality, advisability, and regulatory implications of any actual or

prospective line of business . . . .” The agreement specified that Page Perry “will

not serve as General Counsel and will not make independent inquiry or

investigation without specific request” and its responsibilities did not include

“[c]ompliance matters, except as expressly identified.”

      During the representation, Page Perry advised DeHaan about regulations

governing the custody of client funds and conducted a two-phase mock audit to

identify deficiencies in client files and account records. After each phase of the

audit, Page Perry issued a report that delineated shortcomings in Lighthouse

procedures and records. Some of the information exchanged by the lawyers and

DeHaan was preserved in email messages.

      In the beginning of 2012, the Georgia Secretary of State audited Lighthouse,

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and on March 30, 2012, the Securities and Exchange Commission subpoenaed

DeHaan to testify. Parker and MacIntyre assisted DeHaan during the hearing. In

June 2012, Page Perry withdrew as counsel for Lighthouse and, after obtaining

DeHaan’s consent, Page Perry notified the Commission that DeHaan had been

purloining client funds. The Commission filed a civil enforcement action against

DeHaan and Lighthouse, which resulted in a freezing of its assets and the

appointment of Hays as receiver.

      Hays filed a complaint against Page Perry and five of its partners. Hays

alleged that the law firm, Parker, Terry, and MacIntyre violated their duties to

report DeHaan’s misconduct to “the highest authority that can act on behalf of the

[business] organization,” Ga. R. of Prof’l Conduct 1.13(b); to avoid conflicts of

clients’ interests, id. R. 1.7; “len[ding] credibility to DeHaan’s fraudulent

enterprise by . . . mak[ing] their presence highly visible . . . [in] Lighthouse’s

operations” and helping DeHaan to “garner trust and confidence with Lighthouse’s

clients”; “fail[ing] to inquire about” and disregarding “glaring irregularities” in

records that they uncovered during the mock audit; and “protecting . . . and even

facilitating [DeHaan’s] fraudulent scheme against Lighthouse.” Page Perry and the

three partners, Hays alleged, also “breached their fiduciary duty to Lighthouse by

treating DeHaan as their client and putting his interest above that of Lighthouse”

and breached their contract by “failing to properly advise Lighthouse with respect

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to the numerous regulatory violations by DeHaan, failing to address the material

regulatory deficiencies it discovered or should have discovered in the mock audits,

and failing to act in Lighthouse’s best interest with respect to known regulatory

violations and other misconduct by DeHaan . . . .” Hays also alleged that “Page and

Perry, as the senior partners of the firm, [were] vicariously liable in respondeat

superior for the acts of . . . Parker, Terry and MacIntyre” and were negligent in

their supervision of those lawyers. Hays attached 36 exhibits to the complaint,

including the retainer agreement, some emails and correspondence, and an

affidavit from Mercer Bullard, an attorney, opining that Page Perry was negligent

and caused Lighthouse to incur damages.

      Page Perry, Parker, and Terry filed motions to dismiss, which the district

court granted. The district court ruled that the complaint lacked factual material to

support a claim of malpractice. Lighthouse hired Page Perry “to perform an

advisory role,” and after “[d]isregarding the wild exaggerations, implausible

inferences and selective quotations from e-mails,” the district court determined that

the complaint failed to identify “a single instance in which Page Perry gave

Lighthouse bad advice” and that Bullard’s affidavit failed to cite any authority

requiring legal counsel “to report regulatory non-compliance to a government

agency.” The theory “that Page Perry had to inform on Lighthouse of suspected or

known regulatory violations” would, the district court reasoned, “convert private

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corporate lawyers representing financial advisers and other regulated industry

participants into unwilling government auditors required to utilize information

gained in the course of their representation to the potential detriment of their

clients” and cause lawyers to “routinely violate” rules safeguarding client

confidentiality. Even assuming that Page Perry “breached [its] duty of care by

performing deficient mock audits,” that breach was not the proximate cause of any

damages to Lighthouse, the district court ruled, because “the Complaint ma[de]

clear that Lighthouse’s compliance issues were . . . caused . . . by DeHaan’s

decision to flout applicable regulations to further his fraudulent scheme, and then

lie to his clients and his lawyers” and “[t]he Complaint fail[ed] to indicate how a

more adequate mock audit . . . would have prevented DeHaan’s criminal conduct.”

The district court ruled that the claims of breach of fiduciary duties and of contract

failed because they were “duplicative of the professional malpractice claim” and

because the complaint did not identify any authority or a provision in the contract

that required Page Perry to report Lighthouse.

      The district court also granted the motions of Page, Perry, and MacIntyre to

dismiss the complaint. The claims against Page and Perry failed, the district court

explained, because Georgia law eliminates vicarious liability for members of a

limited liability company and because the complaint did not allege, to support

claims of negligent supervision and general negligence, that Page or Perry knew or

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should have known that junior members had a tendency to engage in malpractice.

The district court also determined that the claims against MacIntyre failed because

the complaint did not allege “what [MacIntyre] specifically advised DeHaan to do”

during the hearing before the SEC or “how it affected Lighthouse in any way.”

                           II. STANDARD OF REVIEW

      We review de novo the dismissal of Hays’s complaint for failure to state a

claim. Jean v. Dorelien, 431 F.3d 776, 778 (11th Cir. 2005). “To survive a motion

to dismiss, a complaint must contain sufficient factual matter, accepted as true, to

‘state a claim to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678, 129 S.

Ct. at 1949 (quoting Twombly, 550 U.S. at 570, 127 S. Ct. at 1974). The complaint

must contain “more than labels and conclusions”; its well-pled allegations must

“nudge[] the[] claims across the line from conceivable to plausible.’” Twombly,
550 U.S. at 555, 570, 127 S. Ct. at 1965, 1974.

                                  III. DISCUSSION

      Hays’s complaint purports to allege errors and misconduct by Page Perry

and its partners. To survive a motion to dismiss, the complaint had to allege facts

that “allow[ed] the [district] court to draw the reasonable inference that the

[lawyers] [were] liable for the misconduct alleged.” Iqbal, 556 U.S. at 678, 129 S.

Ct. at 1949. “[F]acts that are ‘merely consistent with’ . . . liability” and

demonstrate only a possibility, but not the plausibility, of relief fail to satisfy this

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standard. Id. As explained below, Hays’s allegations, individually or cumulatively,

do not allow a plausible inference that the lawyers knew of DeHaan’s theft or

support Hays’s claims that the lawyers violated their ethical and legal duties to

Lighthouse.

      Hays’s complaint fails to state an allegation of legal malpractice by Page

Perry, Parker, Terry, or MacIntyre that is plausible on its face. A claim of legal

malpractice has two elements: the lawyers must have failed to “exercise ordinary

care, skill and diligence” when “perform[ing] the task for which [they] were

employed” and that negligence must have been the proximate cause of damage to

the client. See Tante v. Herring, 453 S.E.2d 686, 687 (Ga. 1994). Hays alleged that

the lawyers were negligent in failing to notify regulatory officials of

noncompliance by Lighthouse, but the complaint failed to identify any authority

requiring the lawyers to report their client. Hays alleged that the lawyers violated

the Georgia Rules of Professional Conduct, but a dereliction of ethical obligations

cannot “establish civil liability,” Allen v. Lefkoff, Duncan, Grimes & Dermer, P.C.,

453 S.E.2d 719, 720 (Ga. 1995) (quoting Davis v. Findley, 422 S.E.2d 859, 860

(Ga. 1992)). Moreover, the well-pleaded allegations in the complaint establish that

the lawyers had no conflict of interest, in violation of Rule of Conduct 1.7, because

“DeHaan was not their client” (Compl. ¶ 111; Ex. 2) and “the firm . . . ‘never

represented [DeHaan] and [refused to] do so in [the SEC investigation] or any

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other matter” (Compl. ¶ 112; Ex. 32). Hays alleged that the lawyers violated Rule

1.13(b) by failing to report DeHaan to regulatory officials, but that rule instead

required counsel to report misconduct to “the highest authority that can act on

behalf of the organization,’” Ga. R. of Prof’l Conduct 1.13(b). Hays argues that

Page Perry should have reported its findings to Anatoly Melamud, a shareholder in

Lighthouse, but Hays never mentioned Melmud in the complaint. And, even if we

assume, like the district court, that the lawyers were remiss in conducting the mock

audit, the complaint did not allege a causal connection between the audit and

damages incurred by Lighthouse. Factual matter in the complaint and its exhibits

establish that DeHaan misled the lawyers and misappropriated client funds

notwithstanding their advice to remedy regulatory noncompliance by Lighthouse.

      Hays’s challenges to the dismissal of his complaint of malpractice lack

merit. Hays argues that the lawyers had to report that DeHaan was stealing from

Lighthouse and facilitated DeHaan’s wrongdoing by assisting him during the

hearing before the Securities Commission, but the allegations in the complaint fell

short of supporting a plausible inference that Page Perry knew of or aided in

DeHaan’s theft. See Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1188

(11th Cir. 2002). The complaint and exhibits establish that the lawyers knew about

some regulatory noncompliance and accepted DeHaan’s explanations for the

holding account and recordkeeping irregularities, but that fails to “nudge[]

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[Hays’s] claim[] [about knowledge of criminal activity] across the line from

conceivable to plausible.” See Twombly, 550 U.S. at 570, 127 S. Ct. at 1974. Hays

also argues that Bullard’s affidavit establishes that the lawyers knew of DeHaan’s

theft, but as disclosed in the affidavit, Bullard’s “opinion is based on [his]

assumption that the factual allegations in the Complaint are true.” Hays contests

the summary rejection of his assertion that the lawyers also violated Rules of

Conduct 1.2(d) and 4.1, but the district court was entitled to disregard theories of

liability “previously available, but not pressed” by Hays until he moved for

reconsideration. See Wilchombe v. TeeVee Toons, Inc., 555 F.3d 949, 957 (11th

Cir. 2009) (quoting Stone v. Wall, 135 F.3d 1438, 1442 (11th Cir. 1998)).

      Hays has abandoned any challenge that he could have made to the dismissal

of his complaints about the breach of fiduciary duties and of contract. “[T]he law is

by now well settled in this Circuit that a legal claim or argument that has not been

briefed before the court is deemed abandoned and its merits will not be addressed.”

Holland v. Gee, 677 F.3d 1047, 1066 (11th Cir.2012) (quoting Access Now, Inc. v.

Sw. Airlines Co., 385 F.3d 1324, 1330 (11th Cir. 2004)). The district court

dismissed Hays’s complaints of breach of fiduciary duties and of contract as

duplicative of his complaint about professional malpractice, and Hays does not

contest that determination. We deem abandoned any challenge Hays might have

raised to the dismissal of that part of his complaint.

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      Hays’s complaint also is insufficient to state a claim against Page and Perry.

The complaint alleges that “Page and Perry, as the senior partners of the firm, are

vicariously liable in respondeat superior for the acts of Defendants Parker, Terry

and MacIntyre in the course of their employment,” but under Georgia law, “a

member[ or] manager . . . of a limited liability company is not liable, solely by

reason of [his position], . . . for the acts or omissions of any other member,

manager, agent, or employee of the limited liability company, whether arising in

contract, tort, or otherwise.” Ga. Code Ann. § 14-11-303(a). Hays alleges that

“Page and Perry failed to adequately supervise Defendants Parker, Terry, and

MacIntyre,” but the complaint is devoid of any factual matter pertaining to Page’s

or Perry’s oversight of other lawyers. Hays argues that “Perry . . . likely ‘managed

the relationship’” with Lighthouse, “Page and Perry were consulted on key events

when the fraud was detected by the regulators and the firm wrestled with its legal

and ethical obligations,” and “all of the partners met and discussed what to do

when their client’s CEO needed separate criminal counsel,” but these facts are not

stated in the complaint. “For an employer to be held liable for negligent

supervision, there must be sufficient evidence to establish that the employer

reasonably knew or should have known of an employee’s tendencies to engage in

certain behavior relevant to the injuries allegedly incurred by the plaintiff.” Novare

Grp., Inc. v. Sarif, 718 S.E.2d 304, 309 (Ga. 2011) (internal quotation marks and

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citation omitted). The complaint is devoid of allegations that Parker, Terry, and

MacIntyre had a tendency to engage in malpractice or that Page and Perry knew or

should have been aware of such tendencies.

      The district court did not err by dismissing Hays’s complaint. Because the

complaint lacked well-pleaded facts from which the district court could draw a

reasonable inference that any lawyer was liable for misconduct, the complaint was

properly dismissed for failure to state a claim.

                                IV. CONCLUSION

      We AFFIRM the dismissal of Hays’s complaint.

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