Brown v. Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.

UNPUBLISHED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Affirmed by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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