HUSCH BLACKWELL LLP
William Lynch D. Kan. #77919, Michael E. Norton Kan. #17508, John J. Cruciani Kan. #16883, Tyler Scott Kan. #78256 Attorneys for the Trustee
LATHROP & GAGE LLP
James L. Moeller Attorneys for Defendants Sandler O’Neill & Partners, L.P., Macquarie Holdings (USA) Inc., and Oppenheimer & Co., Inc.
STINSON MORRISON HECKER LLP
John C. Aisenbrey Attorneys for Kutak Rock LLP
REPORT OF PARTIES’ PLANNING CONFERENCE
1. Rule 26(f) Conference. Pursuant to Fed.R.Civ.P. 26(f), discovery and case management conferences were held on January 12, 2012, January 26, 2012, September 5, 2012 and May 8, 2013, and were attended by:
a. William Lynch Michael E. Norton Tyler Scott
Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112
Chris Redmond, Trustee and plaintiff
b. James L. Moeller
Lathrop & Gage LLP 2345 Grand Blvd. Suite 2200 Kansas City, Missouri 64108
Defendants Sandler O’Neill & Partners, L.P., Macquarie Holdings (USA) Inc., and Oppenheimer & Co., Inc. (the “Underwriters”)
c. John C. Aisenbrey Kristin L. Farnen Brian E. Sobczyk
Stinson Morrison Hecker LLP 1201 Walnut Street, Suite 2900 Kansas City, Missouri 64106
Defendant Kutak Rock, LLP ("Kutak")
a. The following persons will appear at the upcoming Rule 16(b) scheduling conference with the court:
Michael E. Norton and John Cruciani for the Trustee.
John Aisenbrey and Brian Sobczyk for Kutak
James Moeller, Brian Fenimore, and James Moloney for Underwriters
b. The parties provide the following information regarding themselves and their counsel:
Christopher Redmond, Trustee and Plaintiff Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Wk 816-983-4672 Fx 816-983-8080 Christopher.Redmond@huschblackwell.com
William Lynch Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Hm 913-649-1643 Wk 816-983-4665 Cell 816-719-2115 Fx 816-983-8080 William.Lynch@huschblackwell.com
Michael E. Norton Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Hm 913-851-0829 Wk 816-983-4665 Cell 913-526-3950 Fx 816-983-8080 Michael.Norton@huschblackwell.com
John Cruciani Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Hm 913-851-2472 Wk 816-983-8197 Cell 816-260-5617 Fx 816-983-8080 John.Cruciani@huschblackwell.com
Tyler Scott Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Hm 816-522-5422 Wk 816-983-8197 Cell 816-522-5422 Fx 816-983-8080 Tyler.Scott@huschblackwell.com
ii. Defendant Kutak Rock LLP
John Aisenbrey Stinson Morrison Hecker LLP 1201 Walnut, Suite 2900 Kansas City, MO 64106 Wk 816-691-3111 Fx 816-412-0997 firstname.lastname@example.org
Brian E. Sobczyk Stinson Morrison Hecker LLP 1201 Walnut, Suite 2900 Kansas City, MO 64106 Wk 816-691-2325 Fx 816-412-9308 email@example.com
Kristin L. Farnen Stinson Morrison Hecker LLP 1201 Walnut, Suite 2900 Kansas City, MO 64106 Wk 816-691-2446 Fx 816.412.1132 firstname.lastname@example.org
iii. Defendants Sandler O’Neill & Partners, L.P., Macquarie Holdings (USA) Inc., and Oppenheimer & Co., Inc. (the “Underwriters”):
James L. Moeller Lathrop & Gage LLP 2345 Grand Blvd., Ste. 2200 Kansas City, MO 64108 Wk 816-460-5512 Fx 816-292-2000 email@example.com
Brian T. Fenimore Lathrop & Gage LLP 2345 Grand Blvd., Ste. 2200 Kansas City, MO 64108 Wk 816-460-5525 Fx 816-292-2001 firstname.lastname@example.org
James Moloney Lathrop & Gage LLP 2345 Grand Blvd., Ste. 2200 Kansas City, MO 64108 Wk 816-460-5561 Fx 816-292-2001 email@example.com
Clay Britton Lathrop & Gage LLP 2345 Grand Blvd., Ste. 2200 Kansas City, MO 64108 Wk 816-460-5825 Fx 816-292-2001 firstname.lastname@example.org
i. Plaintiff submits the following summary (which defendants dispute):
Trustee Christopher Redmond is the Chapter 7 Trustee of Brooke Corporation, Brooke Capital Corporation, and Brooke Investments, Inc. (collectively “Brooke”). In this case, the Trustee seeks to recover from Defendant Kutak Rock LLP (“Kutak”) and Defendants Sandler O’Neill & Partners, L.P., Macquarie Holdings (USA) Inc., and Oppenheimer & Co. Inc. (collectively the “Underwriters”) for claims related to Defendants’ role in the economic collapse of Brooke. Defendant Kutak acted as outside counsel for Brooke Corporation and its principal subsidiaries and provided wide ranging legal services regarding issues such as corporate governance, compliance with applicable securities law and regulations, SEC reporting requirements, securitization issues, and other legal issues related to the overall operation of Brooke’s business. The Trustee alleges that Kutak was negligent in the performance of its duties related to these services, which caused extensive damage to Brooke. The Trustee’s Second Amended Complaint seeks recovery on the following theories against Defendant Kutak: Legal Malpractice (Count VI); Aiding and Abetting Breach of Fiduciary Duty (Count VII); Preferential Transfer (Count X); Constructive Fraudulent Conveyance (Count XI); and Recovery of Avoided Transfers (Count XII). Defendant Underwriters were retained by Brooke Corporation and its principal subsidiaries to undertake due diligence, including a review of Brooke’s franchise relationships, the background, history, and qualifications of Brooke’s auditors, as well as the overall financial condition of the Brooke entities in relation to a potential follow-on public offering of Brooke common stock. The Underwriters had a duty to exercise reasonable care in providing these services in a manner consistent with the knowledge and ability ordinarily possessed by underwriters. The Underwriters breached that duty by failing to conduct adequate due diligence and/or by failing to alert Brooke to the accounting irregularities, the misleading SEC disclosures and the true nature of Brooke’s financial condition causing extensive damage to Brooke. The Trustee’s Second Amended Complaint seeks recovery against the Defendant Underwriters on a theory of Negligence (Count XIII). Plaintiff intends to file a motion for leave to file a Third Amended Complaint on or before the deadline set by the Court. This Court has jurisdiction over this matter pursuant to 28 U.S.C. Sections 157 and 1334 and 11 U.S.C. Section 328. Venue lies in this Court pursuant to 28 U.S.C. Sections 1408 and 1409.
ii. The Second Amended Complaint places at issue every major transaction in which Brooke engaged between 2002 and its collapse in 2008, and seeks up to $80 million in damages. The case is in its early stages; preliminary disclosures have not occurred, no depositions have been taken, and document discovery is in its early stages. The defendants submit the following summaries (which plaintiff disputes):
Defendant Kutak submits the following summary of the case and Kutak’s defenses (which plaintiff disputes):
The Trustee's state law claims against Kutak are premised on the flawed and unsupported allegation that Kutak had a duty independently to verify the accuracy of statements in Brooke's audited financial statements regarding Brooke's solvency and income recognition practices, that Kutak knew or should have known (1) that the financial statements were incorrect and not in accordance with generally accepted accounting principles, (2) that Brooke's independent auditors erred when they certified Brooke's financial statements each year from 2003-2007, and (3) that Brooke, therefore, was insolvent when it issued securities and paid dividends.
Kutak was Brooke's securities counsel. It was engaged for specific purposes and did not undertake the duties the trustee alleges, and had no duty to go beyond the scope of its legal knowledge and expertise to investigate Brooke's financial health or independently to verify Brooke's certified financial statements. To the contrary, lawyers are entitled to rely upon the opinions of other professionals, especially include financial statements audited by certified public accountants engaged by the lawyer's client.
The damage theory alleged by the Trustee is deepening insolvency, i.e., that Kutak's alleged negligence wrongfully prolonged Brooke's corporate life to Brooke's detriment. Even if this were a valid theory of damages, which it is not, the Trustee stands in the shoes of the insolvent corporation, not its creditors, and an insolvent business is not harmed by deepened insolvency. Therefore, the Trustee has no damages.
Any damages that may have been suffered by Brooke were caused by its own negligence or fault or by the negligence or fault of others, and not by any alleged negligence or fault of Kutak. Kutak specifically denies that it was at fault in any manner for the alleged injuries to Brooke. Pursuant to K.S.A. 60-258a, any negligence or fault attributed to Kutak must be compared with the negligence or fault of all other parties and non-parties that contributed to Brooke's alleged damages. Moreover, pursuant to K.S.A. 60-258a, the aggregate negligence or fault of all such parties and non-parties, if any, must be compared with Brooke’s own negligence or fault. Other parties or non-parties who may have contributed to Brooke's alleged damages include, without limitation, Brooke Corporation, Brooke Capital Corporation, Brooke Holdings, Inc., Aleritas Capital Corp. and the officers and directors of each such entity; the accounting firm of Summer, Spencer & Callison, CPA's Chartered; and underwriters and other professional advisors, and (assuming the Trustee's theory of liability is correct) other lawyers for the Brooke entities .
iii. The Underwriters submit the following summary of the case and the Underwriters’ defenses (which plaintiff disputes):
The Trustee has manufactured from thin air supposed duties that the Underwriters allegedly owed to Brooke, claiming among other things that the Underwriters “were retained to perform due diligence.” Actually, the Underwriters’ duties were defined and described in a written engagement letter which squarely and unequivocally placed on Brooke the responsibilities that Brooke’s trustee now creatively seeks to cast back upon the Underwriters. Underwriters are not auditors. Underwriters are not lawyers. Underwriters are not officers, directors, or management. Underwriters are simply that, underwriters who agreed to purchase shares of Brooke’s stock under certain conditions, and who did just that – raising $28 million in debt-free equity in 2005 to support Brooke’s business. The Underwriters owed no duties to Brooke apart from the limited obligation contained in the engagement letter, and with no duty owed, there can be no breach of duty to support the Trustee’s claims.
To the extent Brooke suffered any damage, such damage was caused by the careless and negligent conduct of Brooke’s officers, Brooke’s directors, Brooke’s auditors, and the scores of other professionals who actually owed various duties to Brooke as more fully described in the Underwriters’ answer. Brooke’s only articulated damage theory to date is one of deepening insolvency: that the Underwriters, by assisting Brooke in obtaining an infusion of $28 million in debt-free capital, enabled Brooke in later years to run itself deeply into insolvency. The Underwriters deny that theory is a valid damage theory or that it applies to a party who assists in providing debt-free capital, but if the Court permits Brooke to pursue such a theory, then the jury must compare the Underwriters’ “fault” in assisting Brooke with the fault of numerous other parties who subsequently assisted Brooke with obtaining additional capital and debt, and who had superior opportunities to identify the issues and alleged problems for which the Trustee now attempts to hold the Underwriters responsible (all as the Underwriters allege in their answer).
3. Plan for Alternative Dispute Resolution (ADR).
a. The Trustee shall submit to defendants a written, good faith settlement proposal by August 15, 2013. By September 6, 2013, defendants shall make a written, good faith response to such proposal, either accepting it or submitting a good faith counterproposal to settle the case. By September 16, 2013, the parties shall send confidential reports to the magistrate judge, stating the efforts to settle the case, current evaluations of the case, views concerning future settlement negotiations, prospects for settlement, a specific recommendation regarding mediation and/or any other ADR method, and an indication (preferably jointly) concerning who has been selected by the parties to serve as a mediator or other neutral in an ADR process.
b. To date, the parties have engaged in the following good faith efforts to resolve this matter:
The Trustee and the Underwriters have agreed to participate in voluntary mediation. The Trustee and the Underwriters are currently working on selecting a mediator and setting a date for the mediation. The Trustee anticipates that the mediation will occur in the 30-60 days.
In early 2011, the Trustee submitted a settlement demand to defendant Kutak. This settlement demand was later withdrawn when Kutak’s attorney reported that Kutak could not respond at that time. More recently, the Trustee has suggested mediation to defendant Kutak. Kutak is willing to mediate but asserts that it needs more information about the basis of the Trustee’s claims before a mediation could be fruitful.
c. The parties have agreed on the following ADR procedure, which will ...