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Fiduciary Obligations Set Forth Under the Trust Fund Theory Are Limited to Corporate Directors and Officers

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April 19, 2022, South Carolina – The Bankruptcy Court for the District of South Carolina granted in part the motion to dismiss filed by the Defendants McGuireWoods, LLP (“MGW”), Mark Freedlander, and David Pivnick seeking to dismiss the complaint filed against them by the Debtor Oaktree Medical Centre, P.C. The Trustee asserted that the MGW Defendants “owed professional duties to the Debtors and, upon their insolvency, to the Debtors’ creditors.” The Trustee alleged in his complaint that “the MGW Defendants and others did not perform as intended, breached their duties, caused damage to the Debtors and, consequently, damage to all creditors. Specifically, the MGW Defendants depleted the Debtors’ cash as a result of being paid professional fees of approximately $1,458,637.08 while the Debtors’ liabilities grew”. 

The trustee had alleged that MGW owed fiduciary duties to the Debtors and its creditors, but the Court found that “the fiduciary obligations set forth under the trust fund theory are limited to corporate directors and officers,” and the Trustee had not alleged in his complaint that “MGW Defendants served as officers or directors of the Debtors.” The Court also found that the MGW “did not owe an independent fiduciary duty to the Debtors’ creditors” and thereby dismissed the allegation of legal malpractice. The Court also dismissed the Trustee’s claim for aiding and abetting breach of fiduciary duty because the Trustee could not show any “active encouragement or active procurement of the breach of fiduciary duty” by MGW. The claim for civil conspiracy also failed when the Court concluded that the Trustee failed to “allege any intent to harm, alleging only that the MGW Defendants sought to profit from the Debtors’ financial distress.” The Court observed that the Trustee failed to state a claim for unjust enrichment “because no benefit was conferred upon the MGW Defendants by the Debtors’ creditors.” 

However, the Court found that the Trustee’s complaint met “the requisite pleading standards to state a plausible claim for relief under § 547(b).” The Court dismissed the Defendants’ Motion with respect to the allegations of preference transfers under § 547(b). 

In re Oaktree Med. Ctr., 2022 Bankr. LEXIS 1076

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