Date: 08-21-2023

Case Style:

Dominic Iafrate, et al. v. Warner Norcross & Judd, L.L.P.

Case Number: 2:18-cv-12028

Judge: Paul D. Borman

Court: United States District Court for the Eastern District of Michigan (Wayne County)

Plaintiff's Attorney: Scott Hickey and Larry Acker

Defendant's Attorney: Jacqueline Kaltz and Maura K. McKeever for Warner Norcross & Judd, LLP

Jacqueline Kaltz and Maura McKeever for Angelo Iafrate, Inc.

Description: Detroit, Michigan personal injury lawyers represented Plaintiffs who sued Defendant on a legal malpractice theory.

This is a legal malpractice case in which Plaintiffs Angelo Iafrate, Jr., as Personal Representative of the Estate of Angelo Iafrate, Sr., Dominic Iafrate, and Angelo Iafrate, Sr. as Trustee of the John Iafrate Irrevocable Trust,[1] complain that Defendant Warner, Norcross & Judd, LLP (WNJ), through WNJ attorney Justin Stemple, furnished improper legal advice to them during the formation of an Employee Stock Ownership Plan (ESOP) and thereafter subsequent matters. Plaintiffs assert claims against WNJ for (1) professional liability and professional negligence; (2) breach of fiduciary duty; (3) fraudulent misrepresentation; and (4) fraudulent concealment.

Now before the Court is Defendant WNJ's Motion for Summary Judgment (ECF No. 88) seeking dismissal of all of Plaintiffs' claims. WNJ argues that: (1) there is no genuine issue of material fact that Plaintiffs lack an attorney-client relationship with WNJ; (2) Plaintiffs' legal malpractice and breach of fiduciary duty claims are barred by the statute of limitations; (3) Plaintiffs' fraud claims are barred by the doctrines of res judicata and collateral estoppel; (4) Plaintiffs cannot establish the requisite proximate cause element of their legal malpractice claim; (5) Plaintiffs' fraud claims fail as a matter of law; and (6) Plaintiffs' breach of fiduciary duty claim fails. Defendant WNJ's motion for summary judgment has been fully briefed. The Court held a hearing on WNJ's motion on June 21, 2023, at which counsel for Plaintiffs and Defendant appeared.

For the reasons that follow, the Court GRANTS Defendant WNJ's Motion for Summary Judgment (ECF No. 88).

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

1. Angelo Iafrate Construction Company (AICC)

In 1969, Angelo Iafrate, Sr. (Angelo Sr.) established the Angelo Iafrate Construction Company (AICC), a road-building construction company serving metro-Detroit. Angelo Sr., along with his three sons - Dominic lafrate, Angelo E. Iafrate (Angelo Jr.), and John Iafrate, all of whom had worked for the business at different times - owned all the outstanding shares of the Company.

Around the year 2000, Angelo Sr., Dominic, and John moved to Florida, and Angelo Jr. remained in Michigan to run AICC. In 2002, Angelo Jr. became AICC's CEO and President, and Robert Adcock (Adcock) became its Executive Vice President.

2. Formation of the Employee Stock Ownership Plan (ESOP) and Angelo Iafrate Inc. (AII)

In 2011, the Iafrate family members began to discuss the possibility of selling AICC. After consulting with AICC's CPA, Bill Kingsley, and Michael Stefani, who was AICC's corporate counsel and the family attorney, the family decided to sell AICC to the Company's employees via an Employee Stock Ownership Plan (ESOP).

Plaintiffs allege that they (and AICC) formed a relationship with attorney Justin Stemple, a partner of the Defendant WNJ law firm, in February 2013 to explore the possibility of forming an ESOP. In March 2013, AICC established an ESOP Exploratory Committee, of which Angelo Jr., then President of AICC, and Robert Adcock, then Executive Vice President of AICC, were members. (ECF No. 88-6, Stefani Dep. at p. 20, PageID.2242.) (ECF No. 88-9, Angelo Jr. Dep. at pp. 569-70, 719-20, PageID.3188-89, 3387-88.)

In July 2013, the ESOP Exploratory Committee members were given a presentation by Stout Risius Ross, LLC, a corporate financial advisory firm, which Stemple attended, outlining (1) the terms on which the ESOP would purchase the family member's stock in AICC, (2) the proposed fair market value price, and (3) the risks involved with seller-financing of an ESOP transaction. The presentation also provided information regarding an internal rate of return and the issuance of warrants as additional seller compensation. (ECF No. 88-16, Stemple Dep. at pp. 6365, PageID.4171-72) (See ECF No. 88-12, Stemple 7/12/2013 email, PageID.3849-50 (referring to WNJ as “counsel to the company” and discussing “SRR's presentation last week” on the ESOP transaction).) Stemple testified that Angelo Jr. attended the meeting “as both the president of AICC and as an individual. He was a shareholder there on behalf of the family. No other family members were present.” (ECF No. 88-16, Stemple Dep. at p. 65, PageID.4173.)

Ultimately, the Iafrate family members agreed to a plan wherein they would finance 100% of the purchase price of the Company at below-bank/market interest rates, with the loan being secured by a stock pledge. The purchase price was set at $36.7 million. A new holding company known as Angelo Iafrate, Inc. (AII) was formed, by attorney Stefani, to which the Iafrate family contributed all of their AICC stock in exchange for 30,000 AII shares. AII then formed an ESOP which purchased all 30,000 of the Family Members' shares for $36.7 million.

At the December 6, 2013, closing of the ESOP transaction, AII delivered Senior and Junior Promissory Notes, drafted by Stemple, to each Family Member -Angelo Sr., Angelo Jr., Dominic, and the John Trust. The Notes totaled the full $36.7 million purchase price and provided for quarterly interest payments over ten years. (See, e.g., ECF No. 88-5, Senior and Junior Notes issued to Dominic, PageID.2098-2101, 2110-13.) Section 1.3 of each Senior and Junior Promissory Note contained mandatory prepayment provisions if AII had excess funds, and Section 1.4 allowed for discretionary prepayment of “all or part of the principal of this Note at any time.” (See id.) These prepayment provisions authorized only pro rata payments to the Family Members. (See id. (“Any prepayment made under this Section shall be applied pro rata to the Sellers' [Senior/Junior] Notes based on the remaining principal balance of each note.”).)

At the December 6, 2013 ESOP closing, AII also issued Common Stock Warrants, again drafted by Stemple, to each Family Member for 7500 total shares of stock, with each Family Member being issued the following number of shares: 1,687.5 shares to Angelo Sr.; 2,475 shares, Angelo Jr.; 2,475 shares to Dominic; and 862.5 shares to the John Trust. These Warrants entitled each Warrant Holder the option to either: (1) purchase shares from the Company at the $225.00 Exercise Price per share; or, (2) redeem shares for cash payment in the amount of the share price in effect as of such date (“Strike Price”) less the Exercise Price. (See, e.g., ECF No. 885, Common Stock Warrant issued to Dominic, PageID.2179-85.) The Warrants contained the following “Warrant Term” provision:

3. Warrant Term. This Warrant shall terminate on, and may no longer be exercised on or after, the date that is 60 days after the date that the Company has paid in full both the Senior Promissory Note and Junior Promissory [Note] issued by the Company in favor of the Holder.

(Id. PageID.2180.)[2]

The Iafrate Family Members also entered into an Intercreditor Agreement between themselves, dated December 6, 2013. (ECF No. 88-5, Intercreditor Agreement, PageID.2153-60.) While it was Stefani who initially suggested a need for this type of agreement, the actual Intercreditor Agreement was drafted by Stemple for the Family Members and it provided that the Family Member's security interests would have equal priority and would be equally enforced for their pro rata benefit. (Id.) (ECF No. 88-6, Stefani Dep. at pp. 128-29, PageID.2350-51.) Specifically, the Intercreditor Agreement provided:

4. Application of Payments and Collateral. In the event a Creditor receives any payment on the Creditor Indebtedness, or any payment or distribution from any of the Collateral, in each case prior to the time all of the Creditor Indebtedness shall have been fully paid, that Creditor shall receive and hold the same in trust for the benefit of all Creditors and shall forthwith apply the same Pro Rata against the Creditor Indebtedness.

(ECF No. 88-5, Intercreditor Agreement, PageID.2156.)

Thus, the Promissory Notes, the Warrants, and all the ESOP transactional documents, including the Intercreditor Agreement, were prepared by Defendant WNJ partner Stemple, Chair of the firm's Employee Benefits practice section.

After the ESOP transaction closed on December 6, 2013, Adcock became the President of AICC and co-Trustee of the ESOP, along with the two other Trustees, Hal Howlett and Greg Cooper; and Dominic, Angelo Jr., and Stefani were appointed to the Company's Board of Directors. (ECF No. 88-10, Adcock Dep. at pp. 25, 3536, PageID.3696, 3706-07.) Angelo Jr. resigned from the Board of Directors in January 2016. (ECF No. 88-9, Angelo Jr. Dep. at pp. 526-27, PageID.3145-46.) Dominic and Stefani, however, remained on the AICC board at that time, and Robert Tinstman was appointed to fill the vacancy left by Angelo Jr.'s departure. (ECF No. 88-10, Adcock Dep. at pp. 119-20, PageID.3790-91.)

3. Payments to Family Members

In March 2016, Adcock announced that he had sought permission from a bonding company to make a substantial payment in accordance with the Promissory Notes, but the bonding company had denied the request. (ECF No. 89-22, Minutes of AICC Board Meeting, 3/25/16, PageID.5354.) After that discussion, Angelo Jr. advised Adcock in a March 25, 2016 email:

[I]f you eventually do any prepayment now or more down the line, I request only one thing. I want 100% of any prepayment amounts only to the extent of my pro-rata prepayment allocation (I only speak for myself and only my note and no other family member on this directive) to be paid to my Dad exclusively in lieu of me. If any waiver or some other kind of documentation is needed to reflect that directive, please send that paperwork to me direct.

(ECF No. 89-21, Email, PageID.5349-50 (emphasis added).) Dominic Iafrate and the John Trust also subsequently agreed to have their share of any prepayment go first to their father, Angelo Sr., as well. (ECF No. 88-6, Stefani Dep. at p. 50, PageID.2272.) (ECF No. 88-17, November 22, 2016 Meeting Minutes, PageID.4375 (“Mr. Adcock said that Angelo E. Iafrate [Jr.], the John Iafrate Trust and Dominic Iafrate had agreed that any prepayment on the junior and senior notes should be applied first to pay the notes to Angelo Iafrate Sr.”).) No amendment or waiver of the Promissory Notes or any other documents was drafted or executed based on this newly proposed non-pro rata payment schedule.

In November 2016, Adcock obtained approval for a $5.4 million prepayment on Angelo Sr.'s Notes. (ECF No. 89-23, Kinsgley (UHY) 11/17/2016 Email to Stemple, PageID.5360.) The parties agree that on December 20, 2016, AII made a $5.4 million pre-payment, in full, directly to Angelo Sr. on his Senior and Junior Promissory Notes. Defendants state that this pre-payment was held in trust by Angelo Sr. for all of the Family Members under the terms of the Intercreditor Agreement.

Around that time, Adcock sent an email to Stemple stating that he had paid Angelo Sr.'s Notes in full and inquiring about how to handle/execute the Warrant.

(ECF No. 88-10, Adcock Dep. at p. 51, PageID.3722.) Stemple responded by referring Adcock to the forms included in the closing binder required to be submitted to execute the Warrants, and he explained to Adcock that if the paperwork is not submitted by each individual Holder within 60 days, the Warrants expire and the Company has no obligation to pay them. (Id.) (ECF No. 89-20, Emails, PageID.5346-47.)

The parties agree that on February 17, 2017, AII made additional prepayments, in full, on the Promissory Notes of Dominic Iafrate and the John Trust - $9.7 million to Dominic Iafrate and $3.3 million to the John Trust - which monies were held in trust for the Family Members under the Intercreditor Agreement. At this same time, Dominic and Stefani resigned from the Company's board of directors. (ECF No. 89-25, Acknowledgement and Resignation of Dominic, PageID.5365-66.) (ECF No. 88-6, Stefani Dep. at pp. 227-29, PageID.2479-81.)

Approximately one year later, on February 2, 2018, Adcock directed the payment of $8.9 million to Angelo Jr. for the full amount owed on his Promissory Notes. At this point, the entire indebtedness evidenced by the Promissory Notes, plus interest, was paid in full.

In February and March of 2018, all the Family Members, believing that the final February 2, 2018, payment to Angelo Jr. was the triggering event for all four Warrants, attempted to exercise their Warrants for cash, through their attorney, Stefani. (ECF No. 88-6, Stefani Dep. at pp. 533-34, PageID.2824-25.) Adcock refused payment to Angelo Sr., Dominic, and the John Trust because their Warrants had expired 60 days after the Company paid the outstanding principal balances on their respective Notes. (ECF No. 88-10, Adcock Dep. at p. 47, PageID.3718 (Adcock acknowledging that he alone made the decision not to pay on the Warrants for Angelo Sr., Dominic, and the John Trust, and that he did not talk to Dominic or Angelo Sr. about the Warrants expiring within 60 days of their respective Note payments).) The Company honored Angelo Jr.'s Warrant because it was exercised within 60 days after his Notes were paid in full.

4. Iafrate Family Members' Litigation Against AII and Adcock

In April 2018, the Iafrate Family Members sued Adcock and AII in federal court, alleging, in relevant part, securities fraud and state law claims for breach of contract, reformation, unjust enrichment, and fraud, based on the Company's refusal to honor the Warrants. Iafrate, et al. v. Angelo Iafrate, Inc., et al., Case No. 18-cv-11150 (E.D. Mich.) (Tarnow, J.). In that case, Judge Tarnow determined that the Family Members failed to state plausible security fraud claims, and thus the Court dismissed the security fraud claims and remanded the state law claims to state court.

Iafrate, Sr. v. Angelo Iafrate, Inc., No. 18-cv-11150, 2019 WL 1863816 (E.D. Mich. Apr. 25, 2019).

The Family Members appealed this decision, and the Sixth Circuit Court of Appeals affirmed. Iafrate, Sr. v. Angelo Iafrate, Inc., 827 Fed.Appx. 543 (6th Cir. 2020). The Sixth Circuit stated that “[t]he terms of the Warrants are unequivocal,” and found that “Plaintiffs' failure to understand the consequences of the terms of their deal with Defendants does not mean Defendants [committed fraud] by not correcting Plaintiffs' mistaken impression.” Id. at 548, 551.

The Family Members then filed a second lawsuit against Adcock and AII in the Wayne County Circuit Court, alleging state law claims for breach of contract, reformation, unjust enrichment, and fraud. Iafrate v. Angelo Iafrate, Inc., Case No. 19-009098-CB (Wayne Cnty. Cir. Ct.). The state circuit court dismissed this lawsuit, and the Family Members appealed. On January 27, 2022, the Michigan Court of Appeals affirmed the trial court, concluding that it was “starkly inescapable that plaintiffs ... mutually agreed to waive the pro-rata provision of § 1.4 of Angelo Sr.'s Promissory Notes” and “through course of conduct” they mutually waived the same provisions in Dominic's and the Trust's Notes. Iafrate v. Angelo Iafrate, Inc., No. 355597, 2022 WL 259248, at *8-9 (Mich. Ct. App. Jan. 27, 2022) (concluding that the Warrant language is unambiguous and that “plaintiffs failed to understand the legal ramifications of their waivers of the prohibitions against pro rata payments”). The Michigan Court of Appeals further noted that:

[A] plaintiff may not willfully close his eyes to that which others clearly see. Plaintiffs could have read the plain and unambiguous language of their Warrants. Although there are rare circumstances under which failing to advise someone of the law - which all persons are otherwise presumed to know - may be actionable, generally something more than mere silence is required, even where a fiduciary relationship exists.

Id. at *10 (internal citations and quotations omitted, emphasis added).

Outcome: The parties have 21 days to file with the court and Court Reporter/Transcriber a Redaction Request of this transcript. If no request is filed, the transcript may be made remotely electronically available to the public without redaction after 90 days. Redaction Request due 9/11/2023. Redacted Transcript Deadline set for 9/21/2023. Release of Transcript Restriction set for 11/20/2023. Transcript may be viewed at the court public terminal or purchased through the Court Reporter/Transcriber before the deadline for Release of Transcript Restriction. After that date, the transcript is publicly available. (Mapp, Shacara) (Entered: 08/21/2023)

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