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Howe Investments Ltd. v. Quarles & Brady LLP

United States District Court, S.D. California

March 21, 2017

HOWE INVESTMENTS LTD., Plaintiff,
v.
QUARLES & BRADY LLP, et al., Defendant.

          ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT IN ITS ENTIRETY [DOC. NO. 31]

          JOHN A. HOUSTON United States District Judge

         INTRODUCTION AND BACKGROUND

         This matter comes before the Court on motion for summary judgment, or, in the alternative, for partial summary judgment, filed by Defendant Quarles & Brady, LLP (“Quarles & Brady” or “Defendant”), [doc. no. 31], following this Court's order dismissing three of Plaintiff How Investments LTD.'s (“Howe” or “Plaintiff”) original causes of action, [doc. no. 7]. Only Howe's fraud and negligence causes of action remain. Defendant's motion has been fully briefed by the parties. See Doc. Nos. 36, 40. After careful consideration of the record, including the pleadings and exhibits submitted by the parties, oral argument from counsel, and for the reasons set forth below, the Court GRANTS Quarles & Brady's motion for summary judgment, in its entirety.

         1. Factual Background[1]

         A. Howe's Removal from CRM Membership

         When CRM Co. LLC was formed in 1998, its four original members executed an operating agreement. See Doc. No. 36, Exh. 4. Tim Tuttle was CRM's initial CPA and attorney, and formed CRM Co. and CRM Holdings, LLC (collectively “CRM”). See Doc. No. 36-20 at 16. At formation, CRM included four members (Barry Takallou, Hamid Malakooti, Shepard B. Ansley, and Robert Jull). See Doc. No. 36, Exh. 4 at 1171. Since inception, Ansley held his original shares in an entity referred to as “The SodaMaster Corporation.” Id. at 1173. On May 5, 2000, Tuttle wrote a memo to the members of CRM opining on the propriety of Jull's transferring his membership interest to Howe, a limited liability company formed in the British Virgin Islands. See Doc. No. 36, Exh. 6. Tuttle expressly limited his opinion to Jull's ability to make such a transfer, and did not address the ramifications the transfer may have on CRM in the future. Id.

         In 2003, Quarles and Brady, a law firm, was retained as counsel to represent CRM, and Robert Bornhoft took over Tuttle's legal responsibilities with respect to CRM. See Complaint ¶ 5. Between 2003 and 2010, Quarles & Brady formed four additional companies under the CRM umbrella. See Complaint ¶ 7. On November 8, 2004, Robert Jull transferred his interest to Howe, a decision made on the advice of his accounting firm, KPMG Dublin, and his Canadian attorney.[2] Howe is owned by nominee banks who have agreed that Jull is the sole financial beneficiary of the company, which makes Jull the “beneficial owner” of Howe. See Doc. No. 36, Exh. 5. Howe, CRM's largest shareholder, owned a 32.31% interest in each of the CRM entities, located in California and Arizona. See Amended Complaint ¶ 9. In November 2004, Quarles & Brady advised CRM that, in the interest of prudent business, any CRM entity, should have a U.S. taxpayer ID number, because Quarles & Brady couldn't tell whether Howe had one. See Doc. No. 36 Exh. 26 at 303.

         On December 29, 2011, at the annual CRM member meeting, the CRM member representatives discussed the need for transparency with respect to all of the ownership interests in CRM. See Doc. No. 36, Exh. 19 at 224. At that meeting, Jull agreed to promptly provide to CRM documentation evidencing his ownership of Howe Investments Limited. Id. On January 31, 2012, Howe's senior trust officer, Andrew Briddon, submitted a letter which failed to include documentation verifying Jull's ownership of Howe. See Doc. No. 36, Exh. 24 at 295-96. Accordingly, on February 3, 2012, Quarles & Brady requested ownership verification documents such as (1) the formation, organization, and existence of Howe; (2) the binding and enforceable transfer by Jull of his rights in CRM to Howe; (3) the decision-making authority of Jull in transactions at the member level on behalf of Howe; and (4) whether the sole ownership interest and title in Howe is held by Jull. Id. Howe's response to the letter was to give notice that its attorney, Patrick W. Martin, was tasked to “deal with it.” See Doc. No. 31, Exh. B at 37.

         Until September 2011, CRM's primary source of bank financing was M&I Bank. See Doc. No. 31, Exh. II at 8. M&I extended a $5, 000, 000 line of credit to CRM. Id. However, CRM's $5, 000, 000 line of credit expired on September 5, 2011. Id. Barry Takallou continued his efforts to obtain a new line of credit from other banks while Quarles & Brady was attempting to obtain more information from Howe. See Doc. No. 31, Exh. A at 137. When Takallou was unsuccessful in obtaining a new line of credit, as of February 20, 2012, he made a personal loan of $500, 000 to CRM, then issued a $2, 000, 000 capital call. Id. The capital call caused a rift between Jull and other CRM members. See Doc. No. 31, Exh. D at 50. Due to the inability to obtain a line of credit while ambiguity swirled around Howe's ownership interest, in April 2012, the CRM members voted to amend their operating agreement to further transparency among members and preclude ownership that inhibited financing. See Doc. No. 31, Exh. P.

         On May 14, 2012, President and CEO of CRM, Barry Takallou, received a response from Union Bank regarding a “Credit request for CRM Co., LLC, ” indicating that the bank was at an impasse due to the inability to identify the ownership-particularly who or what entity held a controlling interest of Howe and its 31% ownership stake of CRM. See Doc. No. 36, Exh. 15 at 204. Additionally, on May 15, 2012, Takallou received another denial letter declining to extend a line of credit to CRM. See Doc. No. 31, Exh. J at 3. Specifically, the letter stated that M&I Bank was apprehensive because identification of Howe's ownership interest was not clear, and did not comply with the Patriot Act. Id. In June of 2012, CRM amended its operating agreement by approval from its members. See Doc. No. 31, Exh. A at 186; Exh. D at 78; Exh. E at 107. Jull initially considered changing Howe's ownership interest to comply with the amendments, but decided against it. See Doc. No. 31, Exh. B at 181. Quarles & Brady communicated to Howe, its attorney, and to Jull, that, as of June 29, 2012, (1) CRM had not yet received the requested documentation from Howe or Jull to verify that Howe met the United States Ownership and the Patriot Act compliance sections of the amended operating agreement; and, therefore, (2) Howe was disqualified as a member of CRM. See Doc. No. 36, Exh. 30 at 382.

         B. Howe's Settlement

         After being removed as a CRM member, Howe promptly exercised its arbitration rights under the operating agreement, seeking to determine the fair market value for Jull's shares. See Doc. No. 31, Exh. B at 16-17. CRM hired two appraisers to evaluate Howe's ownership, but Jull believed the values calculated were not adequate or complete. Id. at 17. One appraiser valued Howe's interest at $3.5 million, and another experienced appraiser determined Howe's shares to be worth $3.62 million. See Doc. Nos. 31, Exh. W; Exh. T. As of November 16, 2013, Vantage Point Advisors determined the fair market value for Howe's interest, as of December 31, 2011, to be $3.63 million. See Doc. No. 36, Exh. 11 at 21. Although Jull knew he could proceed and have an arbitrator rule on the value of Howe's shares, CRM and Howe reached a voluntary settlement with respect to Jull's belief, due to the condition allowing Howe to sue Quarles & Brady. See Doc. No. 31 Exh. B at 18-19, 26.

         2.Procedural History

         On May 9, 2014, Howe filed a complaint against Quarles & Brady in the Superior Court of California, County of San Diego, asserting claims for fraud, intentional interference with contractual relationship, defamation, negligence, and unlawful discrimination. See Doc. No. 1-2.

         On June 13, 2014, Quarles & Brady removed the action to this Court, asserting diversity jurisdiction. See Doc. No. 1. On June 20, 2014, Quarles & Brady filed a motion to dismiss Howe's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). See Doc. No. 3. After the motion was fully briefed by the parties, on March 25, 2015, this Court granted in part and denied in part Quarles & Brady's motion without prejudice. See Doc. No. 7. On March 29, 2016, Howe filed its first amended complaint, asserting claims for fraud and negligence. See Doc. No. 24. Quarles & Brady filed its answer to Howe's amended complaint on April 15, 2016. See Doc. No. 27.

         On May 23, 2016, Quarles & Brady filed the instant motion for summary judgment. See Doc. No. 31. Howe filed its response in opposition on July 1, 2016, including objections to evidence used to support the summary judgment motion. See Doc. Nos. 36, 37. Quarles & Brady filed its reply on July 11, 2016. See Doc. No. 40. On July 18, 2016, this Court held a hearing and entertained oral argument on Quarles & Brady's motion for summary judgment. See Doc. Nos. 41, 42. Both parties appeared at the hearing, and, ultimately, the matter was taken under submission. See Doc. No. 42 at 48.

         DISCUSSION

         1. Summary ...


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