In re Senior Cottages of America, LLC

Senior Cottages of America, LLC (Senior Cottages) (debtor) developed, built, and managed senior-citizen housing projects. Murray Klane was Senior Cottage’s chief manager and co-governor and owned a 60-percent interest in Senior Cottages. Senior Cottages became insolvent and needed to sell its housing projects to another entity. Instead of finding an arms-length buyer, Klane formed a new company called Millennium Properties, LLC (Millennium) and caused Senior Cottages to transfer all or substantially all of Senior Cottages’ assets to Millennium. Millennium assumed Senior Cottages’ debt but did not pay Senior Cottages anything for the assets. Senior Cottages’ minority-interest owners sued Klane and Senior Cottages in Minnesota state court. In that action, the court found that the asset transfer to Millennium was fraudulent and that Klane had improperly directed cash payments intended for Senior Cottages to Millennium. Senior Cottages’ outside counsel—Richard Morris, Michael Cohen, and their law firm (collectively, Morris)—also represented Klane. Morris had advised Senior Cottages to transfer its assets to Millennium and assisted with the transaction. Senior Cottages subsequently filed for bankruptcy, and the bankruptcy trustee filed a complaint in the bankruptcy court against Morris, asserting that Morris had committed malpractice and had helped Klane breach his fiduciary duties to Senior Cottages by looting Senior Cottages’ assets. The bankruptcy court dismissed the complaint and denied the trustee leave to amend, finding that the trustee’s claims were barred by the in pari delicto defense (i.e., the rule that a plaintiff who was a participant in wrongdoing cannot recover damages based on the wrongdoing). The district court affirmed the bankruptcy court’s ruling, but on the ground that the trustee did not have standing to bring the claims against Morris. The trustee appealed.