Appeals court allows legal malpractice case between brothers to go forward

Steve Korris Aug. 7, 2008, 3:27am

In a case of brother versus brother, Montgomery County District Judge Frederick Edwards committed 13 errors in favor of the brother with the law license, according to the Ninth District appeals court in Beaumont.

In a July 31 opinion, two of three justices agreed that Edwards must hear a legal malpractice claim that jeweler Gregory Gordon and wife Lisa Gordon filed against David Gordon.

At trial, David denied acting as attorney for Greg and Lisa, testifying that he represented a company they owned along with other companies in mergers and acquisitions.

Edwards agreed, finding that Greg and Lisa failed to prove an informal or confidential fiduciary relationship between themselves and David.

Edwards blamed Greg's losses on his own failure to act.

On appeal, Chief Justice Steve McKeithen and Justice Charles Kreger declared the decision "clearly wrong and manifestly unjust."

They ruled that Greg and Lisa could sue David for actual and exemplary damages.

They hinted at astonishment that Edwards would summarize contradictory testimony and stacks of evidence in 12 findings of fact and four conclusions of law.

In dissent, Justice Hollis Horton detected no errors in Edwards's decision.

"While evidence of a close family relationship can support a favorable finding to impose an informal fiduciary duty, the evidence that Greg and David had such a close relationship to allow a court to impose an informal fiduciary duty was a disputed fact," he wrote.

Greg and Lisa owned Con-Tex, a jewelry retailer in Conroe. Lisa and her mother had started the business.

David ran a law firm that created "shells," legal entities without assets or activities.

"David had various individuals either employed by him or officing with him, involved in the preparation of documentation necessary for trading or selling shells," Kreger wrote.

In 1999, when the value of Con-Tex exceeded $1 million, David urged Greg and Lisa to turn it into a publicly traded corporation.

He told them they would transfer ownership of Con-Tex to Goldonline, a publicly traded shell subsidiary of another shell, International Internet.

He told them they would receive 75 million shares of Goldonline stock in exchange.

He said they could sell enough shares to recover their investment while maintaining their position as majority shareholders.

He said the Securities and Exchange Commission would classify them as insiders and require them to wait a year before selling stock.

Lisa and Greg agreed to transfer Con-Tex.

David then executed a "reverse acquisition," with International Internet spinning off Goldonline to another shell, Transun International Airways.

Transun absorbed Con-Tex in what Kreger called a "one for six reverse split."

David then changed Transun's name to Goldonline International, Inc.

Documents for the transactions were "replete with errors," according to Kreger.

David designated Jesse Clayton, an employee in his firm, as president and sole director of Goldonline International.

After Clayton suffered a stroke, David designated Greg as president and sole director.

Goldonline International offered a private placement of shares, and investors who regularly traded shells with David bought them at 25 cents.

On the anniversary of the transactions, Greg and Lisa said they wanted to sell shares and David said the SEC wouldn't allow it.

"David continued to advise Greg and Lisa that they were legally prohibited from selling or otherwise trading any of their shares of stock," Kreger wrote.

In 2001, David changed the name to SGD Holdings Limited and added directors.

In 2002, Greg refused to sign SGD's annual audit and report to the U.S. Securities and Exchange Commission.

The other directors removed him as president, and Con-Tex fired him and Lisa.

SGD Holdings filed for bankruptcy.

Greg and Lisa sued David, claiming he prevented them from selling shares before the shares lost all value.

Trial began with jurors in the box, but in the midst of trial both sides agreed to discharge them and leave the matter in the hands of Edwards.

At the end Edwards ruled that, "in many ways, the Plaintiff's failure to act on his own behalf was the proximate cause of his own fate."

Greg and Lisa didn't prove that David negligently misrepresented anything or induced them with false or fraudulent statements, he ruled.

"At all times Plaintiffs were entitled to take action on behalf of themselves and their own interests," he wrote.

Greg didn't have authority to prevent them from doing so, he wrote.

On appeal, Greg and Lisa raised 21 issues and prevailed on most of them.

Greg and David shared a close relationship and had been business partners, Kreger wrote, and David had previously provided legal representation to Greg and Lisa.

"David, using his knowledge and training in the law and experience acquired through years of trading and selling shells, identified the opportunity and purposefully sought the confidence of plaintiffs to utilize the assets of Con-Tex, even if it be for mutual gain," he wrote.

"The record is replete with incidents where David would have documents prepared and faxed to Greg for his signature without Greg having any understanding of what he was signing," he wrote.

In other instances, he wrote, David signed Greg's name.

Contrary to Edwards's finding that Greg didn't use his authority, Kreger wrote that his attempts to educate himself and exercise his authority led to the loss of his business.

Horton argued in dissent that on conflicting testimony, Edwards the controlling fact issues in David's favor.

Greg failed to establish a long standing prior business relationship, Horton wrote.

Kreger and McKeithen didn't explain how prior transactions led Greg to expect that David would represent only Greg's interests, he wrote.

Eric Yollick represented Greg and Lisa. Jules Slim represented David.

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