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NFTD, LLC v. Haynes & Boone, LLP

Court of Appeals of Texas, Fourteenth District

December 17, 2019


          On Appeal from the 269th District Court Harris County, Texas Trial Court Cause No. 2015-10626

          Panel consists of Justices Christopher, Hassan, and Poissant.


          Meagan Hassan, Justice.

         Appellants, NFTD, LLC f/k/a Bernardo Group, LLC, Bernardo Holdings, LLC, Peter J. Cooper, and Jacqueline Miller appeal the grant of (1) a summary judgment and (2) a plea to the jurisdiction in favor of Appellees, Haynes & Boone, LLP and Arthur L. Howard. We reverse and remand, holding that attorney immunity does not apply in a business transaction.


         I. The Parties

         This appeal stems from a lawsuit relating to business asset sales and involving, among other parties, three consecutive owners of the Bernardo women's footwear company, investor Jacqueline Miller, attorney Arthur Howard, and the law firm Haynes and Boone, LLP (who represented the first owners in the sale of the company's business assets to the second owners).[1] Appellants and Appellees refer to the relevant parties as follows:

• Bernardo 1 (Owner No. 1): TEFKAB Footwear, LLC f/k/a Bernardo Footwear, LLC, Wilma Jean Smith, and Cynthia Smith (third-party defendants in the trial court);
• Bernardo 2 (Owner No. 2): NFTD, LLC f/k/a Bernardo Group, LLC, Bernardo Holdings, LLC, and Peter J. Cooper (defendants and third-party plaintiffs in the trial court and Appellants herein);
• Bernardo 3 (Owner No. 3): JPT Group, LLC (plaintiff);
• The Lawyers: Haynes and Boone, LLP and Arthur Howard (third-party defendants in the trial court and Appellees herein); and
• The Investor: Jacqueline Miller (intervenor in the trial court and an Appellant herein).

         II. Factual Background

         Bernardo 1 was owned by Roy R. Smith, Jr., his wife Wilma Jean Smith, and designer Dennis Comeau. Roy R. Smith, Jr. died in 2002, leaving one half of his estate to his daughter Cynthia Smith and the other half of his estate to his son Roy R. Smith, III (known as "Trae") and Trae's three children. After Roy Smith, Jr.'s death, Trae started managing the company.

         By 2008, Jean, Cynthia, and Dennis were concerned about Trae's management of the company. In August 2009, they hired Haynes and Boone and Howard to "represent the Company and communicate concerning any and all business, financial and legal matters related to the Company." On the same day, Howard terminated Trae's employment with the company. Dennis and Jean removed Trae as the managing member of Bernardo 1, and they started serving as managers.

         Bernardo 1's managers engaged Howard to conduct an internal investigation of the company and prepare an "investigative report." Bernardo 1's outgoing attorney, James Hanson, sent a memorandum to Howard to provide an "update/status of legal matters and issues of client [Bernardo 1]" in September 2009. In the memorandum, Hanson disclosed, among other things, that another attorney (who is not a party to this case) had brought a "design infringement claim relating to Olem's knock off of [Bernardo 1]'s Miami sandal" on behalf of Bernardo 1, but had to dismiss the suit after learning in discovery that Bernardo 1's "patent applic[ation] filing was tardy." Hanson also disclosed that another attorney had filed a legal malpractice suit in Maryland against attorneys "on the Miami Sandal late filing," and Hanson advised Howard to check with Trae whether the suit was still pending.

         Dennis averred in an affidavit that he discussed Bernardo 1's legal malpractice suit against its former patent and intellectual property attorneys on several occasions with Arthur Howard in August and September 2009. Specifically, he alleged Bernardo 1's "former patent/IP lawyers had messed up several design patents, of which [Dennis] was the inventor, by filing the patent applications too late." Howard denied that he had knowledge about the allegations Bernardo 1 made in the Maryland malpractice suit or that there were potential issues with several of Bernardo 1's design patents.

         In August 2010, managers Dennis and Jean signed a resolution to sell Bernardo 1's assets and authorized Dennis and Haynes and Boone to "immediately pursue the potential sale of the Company or its assets." Howard prepared a confidential business profile in November 2010. The profile contained statements about Bernardo 1's intellectual and intangible property, such as, "Bernardo Footwear owns intellectual property in many forms, including patented, trademarked, and copyrighted properties." The profile also listed numerous trademarks and patents, including patents that were allegedly unenforceable and "worthless" because the applications were filed late.

         Cynthia knew Bernardo 2 co-owner Peter Cooper from college, so a business profile was sent to Peter and Todd Miller (the other co-owner of Bernardo 2), in February 2011. Bernardo 2 was interested in buying Bernardo 1's assets and negotiations continued for several months; Bernardo 1 was represented by Howard while Bernardo 2 was represented by its own counsel. According to Bernardo 1, with regard to due diligence surrounding the 2011 asset sale, Bernardo 2 had access to records, including a box of materials related to the Maryland malpractice suit, during the negotiation process.

         According to Todd Miller, he had many conversations with Bernardo 1 and Howard and he was never told "Bernardo 1 had filed a malpractice lawsuit against its Maryland patent lawyers, alleging that a number of its valuable patents were filed too late and [were] thus unenforceable and/or invalid." Todd Miller averred in his affidavit that Howard never told him "there were issues with several of Bernardo 1's design patents that would have prevented a future owner of those assets from being able to enforce the patent rights for various sandals that it sold." He also averred Howard told him several times "that he wanted to represent Bernardo 2 if Bernardo 2 ended up acquiring the Bernardo assets."

         Bernardo 1 and Bernardo 2 signed an asset purchase agreement in September 2011 (the "2011 APA"), under which Bernardo 2 acquired all of Bernardo 1's assets for a $3 million payment at closing and potential earn-out payments based on Bernardo 2's performance over several years. Bernardo 2 ran the business for a few years and then sold the assets (including "all of the copyrights, trademarks, patents, and other intellectual property") to Bernardo 3 in early 2014. Later that year, Bernardo 3 allegedly attempted to enforce its rights for seven women's shoes design patents that it purchased as part of the asset sale, but "it discovered that five of those seven patents were worthless, having previously been declared invalid years before" its asset purchase from Bernardo 2 in 2014.

         III. Procedural Background

         Bernardo 3 sued Bernardo 2 in February 2015 for breach of contract and breach of warranty. It alleged that despite Bernardo 2's warranty that all its patents were enforceable and valid, the five most valuable design patents were all invalid based on untimely patent applications.

         Bernardo 2 then asserted third-party claims against Bernardo 1 for, among other things, breach of the 2011 APA, misrepresentation, and fraud. Bernardo 2 also filed a third-party petition against the Lawyers, alleging negligence, negligent misrepresentation, fraud, and fraud in the inducement (arising from the Lawyers' alleged concealment and false representations regarding the validity of design patents).

         Jacqueline Miller (an investor in Bernardo 2) filed a petition in intervention asserting fraud and negligent misrepresentation claims against Bernardo 1 and the Lawyers. Miller alleged she relied on representations made in the business profile Howard drafted for Bernardo 1 and other representations regarding the validity of design patents made during the negotiations of the 2011 APA.

         The Lawyers moved for summary judgment based on their asserted attorney immunity defense, arguing that attorney immunity barred Bernardo 2's fraud claim and Miller's claims in intervention for fraud and negligent misrepresentation. The Lawyers argued attorney immunity applies not only in the litigation context but also in a transactional setting, and their actions in this case were ...

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