heller_sues_gt heller v greenberg traurig
TRANSCRIPT
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Complaint For Professional Negligence, Etc.
CHRISTOPHER D. SULLIVAN (148083) MATHEW R. SCHULTZ (220641) KENNETH J. BRUNETTI (156164) TREPEL GREENFIELD SULLIVAN & DRAA LLP 150 California Street, 22nd Floor San Francisco, California 94111 Telephone: (415) 283-1776 Email: [email protected] [email protected] [email protected] Special Litigation Counsel for Heller Ehrman LLP
GREGORY C. NUTI (151754) KEVIN W. COLEMAN (168538) SCHNADER HARRISON SEGAL & LEWIS LLP One Montgomery Street, Suite 2200 San Francisco, California 94104 Telephone: (415) 364-6700 Email: [email protected] [email protected] Co-Special Litigation Counsel for Heller Ehrman LLP
JEFFREY T. MAKOFF (120004) ELLEN RUTH FENICHEL (172142) VALLE MAKOFF LLP 2 Embarcadero Center, Suite 2370 San Francisco, California 94111 Telephone: (415) 986-8001 Email: [email protected] [email protected] Co-Special Litigation Counsel for Heller Ehrman LLP, by and through Michael Burkart, Plan Administrator
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re: HELLER EHRMAN LLP, Liquidating Debtor.
Case No. 08-32514 DM Chapter 11
Adv. Proc. No.
COMPLAINT FOR PROFESSIONAL NEGLIGENCE; ATTORNEYS’ FEES FOR THE TORT OF ANOTHER; RECOVERY OF PREFERENTIAL TRANSFER; AND DISGORGMENT OF FEES
HELLER EHRMAN LLP, Liquidating Debtor, Plaintiff, v. GREENBERG TRAURIG, LLP, a New York limited liability partnership; Leslie D. Corwin, an individual, Defendants.
Case: 08-32514 Doc# 2711 Filed: 10/31/11 Entered: 10/31/11 15:42:59 Page 1 of 45
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1 Complaint for Professional Negligence, Etc.
Comes now plaintiff Liquidating Debtor Heller Ehrman LLP, by and through
Michael Burkart, in his capacity as the duly appointed plan administrator under the Plan of
Liquidation confirmed in this case, and alleges as follows:
INTRODUCTION
1. Liquidating Debtor Heller Ehrman LLP (“Debtor” or “Plaintiff”) brings this
action against the law firm Greenberg Traurig, LLP (“Greenberg”) and one of its partners,
Leslie D. Corwin, to recover millions of dollars in losses the Debtor incurred as a result of
the negligent conduct of Mr. Corwin and Greenberg during the course of their
representation of Heller Ehrman, LLP (“Heller”) in the months prior to December 28,
2008, when the Debtor filed for bankruptcy.
2. As Heller faced increasingly dire financial problems, Greenberg and Corwin
assumed the mantle, in Greenberg’s own words, of acting as Heller’s “lead counsel in
connection with the firm’s dissolution.” From the outset, though, Greenberg failed to live
up to its fiduciary obligations. To begin with, Greenberg concealed a fundamental
conflict of interest – at the time it was retained and throughout the Heller engagement –
Greenberg represented Bank of America, a party obviously adverse to the firm as the bank
was its major lender and was asserting it held a security interest in virtually all of Heller’s
assets. No disclosure was made to Heller and no consent to the conflict was sought or
obtained. Then, Greenberg failed to take a routine and necessary step – the firm neglected
to conduct a routine check of UCC security filings. Had it done so, it would have
discovered that its other client (Bank of America) had terminated its security interest in
Heller’s property. Had Heller been alerted to this key fact at the time of its dissolution,
Heller could have filed for bankruptcy and prevented its banks from seizing tens of
millions from the firm and forcing Heller to try to wind-down in a chaotic, disorderly
posture. Moreover, shortly after Heller adopted a Plan of Dissolution, a third party
specifically advised Greenberg about the UCC termination, but again Greenberg failed to
act. Finally, Greenberg tried to sweep its misconduct under the rug and mischaracterize
the scope of its earlier representation of the Heller firm in order to secure employment as
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2 Complaint for Professional Negligence, Etc.
the Debtor’s bankruptcy counsel. Fortunately, the facts underlying Greenberg’s
negligence did not escape the notice of Heller’s creditors and the creditors were able to
insist that the claims against Greenberg be preserved and steps taken to allow this lawsuit
to be prosecuted.
3. Mr. Corwin and Greenberg’s basic failure to discover that Bank of America
had terminated the banks’ UCC financing statement a year earlier is hard to understand
and irreconcilable with its standard of care. They failed to conduct a routine lien search of
Heller’s assets even after the banks declared a default under their loan agreement with the
firm and seized control of all of Heller’s deposit accounts and accounts receivable. Armed
with the information readily available from a simple lien search, that Bank of America
had terminated the financing statement under which the security interest in the Heller
loans was perfected, Heller would have realized that the banks had no enforceable security
interest in the firm’s deposit accounts and accounts receivable. Armed with that
information Mr. Corwin and Greenberg could have and should have immediately advised
Heller to file for bankruptcy or take some other measures to immediately re-take control
of their accounts. Had Heller filed for bankruptcy prior to the time the banks re-perfected
their security interest on October 2, 2008, the banks would have been treated as unsecured
creditors and the Debtor could have wrested control of their deposit accounts and accounts
receivable from Bank of America. If that had occurred, or if the firm had threatened to do
so and negotiated a proper resolution at that time and/or taken control of their accounts,
not only would the Debtor have been able to conduct an orderly liquidation, which would
have generated millions of additional dollars in collections, it would have prevented Bank
of America and Citibank from paying themselves $56 million, which is what they did
during in the months after issuing their default notice to Heller in September, 2008.
4. The conduct of Mr. Corwin and Greenberg is particularly negligent because
shortly after the banks had re-perfected their security interest on October 2, 2008, Mr.
Corwin and Greenberg were advised both in a telephone call and by email that Bank of
America had terminated the banks’ security interest some fourteen months earlier. Alerted
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to this information, Mr. Corwin instructed an associate to conduct an independent lien
search, which she did. That independent lien search revealed that indeed Bank of America
had filed a termination statement in August 3, 2007, and that the bank had filed a new
financing statement re-perfecting the banks’ lien a mere few days earlier -- on October 2,
2008. Armed with this information, Mr. Corwin should have immediately explored the
notion of having Heller file for bankruptcy as soon as possible, to avoid the re-perfection
of the bank loans, treat the banks as unsecured creditors, and to have Heller re-take
control of its deposit accounts and accounts receivable and attempt to negotiate a
resolution at that time with the Bank of America. Had this happened the Debtor would
have saved millions through an orderly liquidation and could have prevented the banks
from paying themselves the $56 million they paid themselves during the months after
issuing their default notice to Heller in September, 2008. At a minimum Mr. Corwin
should have advised the banks that he discovered that the banks had terminated their lien
in Heller’s assets and that the firm had the ability to avoid the newly perfected lien. The
situation had completely changed, legally. Yet, Mr. Corwin did nothing. He asked an
assistant to place the results of the lien search in the files. The banks continued to control
Heller’s accounts for the next few months, controlling every single payment that the firm
made, resulting in a very disorderly liquidation.
5. In addition to the other negligent acts and omissions committed by Mr.
Corwin and Greenberg, they breached their duties to the law firm partnership and were
negligent to include language in a dissolution agreement they prepared for the firm under
which Heller agreed to waive any rights and claims the firm might otherwise have been
able to assert against its departing shareholders under the doctrine of Jewel v. Boxer, 156
Cal. App. 3d 171 (1984). As a result of that waiver the Debtor has been harmed. More
specifically, in the course of prosecuting Jewel claims against former shareholders, Heller
will be required to show that the creation of the Jewel waiver was in fact an actual or
constructive fraud under 11 U.S.C. § 548, which may include the additional requirement
of having to establish that Heller was insolvent as of the September 26, 2008, the date the
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Plan of Dissolution was approved. Had Mr. Corwin and Greenberg not included the Jewel
waiver in the Heller dissolution agreement, the Debtor would not have avoided these
additional costs.
6. Greenberg is liable to Heller for all of Heller’s attorneys’ fees in connection
with certain litigation that Heller was required to prosecute or defend as a result of
Greenberg’s professional negligence. To the extent that a party incurs attorneys’ fees in
litigation with a third party as a result of another party’s tortious conduct the tortfeasor
can be held liable for such attorneys’ fees under the well accepted “tort of another”
doctrine. Here, Heller incurred significant attorneys’ fees as a result of Greenberg’s
professional malpractice. First, Heller had to defend against a lawsuit by former Heller
employees after the firm was forced by Bank of America to terminate the employees
without the requisite 60-days notice required under the federal WARN Act. Had
Greenberg not committed malpractice and discovered the filing of the Termination
Statement it could have prevented Bank of America from taking control of Heller’s assets
and the firm would not have been forced to terminate these employees without appropriate
notice. Further, as a direct and proximate cause of the conduct of Mr. Corwin and
Greenberg Heller was forced to prosecute the preference lawsuit against Bank of America
and Citibank, for which it incurred over $3 million in fees and costs. Greenberg and Mr.
Corwin are liable for those fees and costs. Finally. as a direct and proximate cause of the
conduct of Mr. Corwin and Greenberg in inserting the Jewel waiver into the Plan of
Dissolution, Heller incurred increased attorneys’ fees and costs incurred in connection
with prosecuting the Jewel lawsuits against its former Heller Shareholders and the law
firms in which they took Heller unfinished business.
7. Greenberg is also liable to Heller for the repayment of approximately $1.46
million which was paid to Greenberg in the ninety days preceding the Petition Date –
December 28, 2008. Such payments constitute preferential payments to Greenberg on
account of an antecedent debt and can be avoided pursuant to 11 U.S.C. § 547. The
Liquidating Trustee may recover all of these payments under 11 U.S.C. § 550.
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8. Finally, Mr. Corwin and Greenberg were negligent when they agreed to act
as the Debtor’s bankruptcy counsel in the weeks leading up to the December 28, 2008
bankruptcy filing when they knew or should have known that there was an irreconcilable
conflict between Greenberg and the Debtor as a result of the potential claims the Debtor
had against Mr. Corwin and Greenberg. Not only did Mr. Corwin and Greenberg ignore
these potential claims -- they apparently tried to cover up these potential claims by, among
other things, misleadingly stating to the Bankruptcy Court that Greenberg had done no
bankruptcy work for Heller prior to December of 2008. In affidavits it filed with the
Bankruptcy Court in support of its application to be retained, Greenberg stated that it did
not begin performing bankruptcy-related services until December 10, 2008. That is belied
by the record, which shows that Greenberg did provide bankruptcy-related advice and
materials in the months prior to December, 2010. Knowing that it had performed
bankruptcy-related work prior to December, 2008, and that this work in part led to the
aforementioned claims against Greenberg, the firm should not have undertaken the work
in preparing for Heller’s bankruptcy filing. The firm should have known that the conflict
was irreconcilable and that another bankruptcy firm should have been retained.
9. As a result of the negligent conduct of Mr. Corwin and Greenberg, the
Debtor suffered tens of millions in damages, including but not limited to unrecovered
amounts of the $56 million that was paid to Bank of America and Citibank in the months
prior to the bankruptcy filing, uncollected accounts receivable that resulted from the
disorderly liquidation and control over Heller’s management by the banks, including acts
resulting in the termination of key employees that were responsible for collections, the
costs of attorney’s fees and costs incurred by the Debtor in prosecuting its preference
claim against the banks, damages for increased attorneys’ fees incurred by the Debtor in
prosecuting Jewel lawsuits against former shareholders as a result of the inclusion of the
Jewel waiver in the Heller dissolution agreement, and damages for attorneys’ fees paid to
Greenberg for bankruptcy work performed by the firm in preparation for the Chapter 11
filing when the firm knew that it had a potential conflict and should not have performed
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that work.
THE PARTIES
10. Heller is a California limited liability partnership, formerly engaged in the
practice of law, which filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code on December 28, 2008 (the “Petition Date”).
11. On August 9, 2010, Debtor and the Official Committee of Unsecured
Creditors filed in this Court the Joint Plan of Liquidation of Heller Ehrman LLP (the
“Plan”). On August 16, 2010, this Court entered its order confirming the Plan, which
order became effective on September 1, 2010. Under the terms of the Plan, Plaintiff has
all right, title and interest of Debtor in the causes of action alleged herein.
12. Michael Burkart is the duly appointed administrator under the Plan (“Plan
Administrator”).
13. Defendant Greenberg Traurig, LLP is a New York limited liability
partnership practicing business in numerous jurisdictions, including San Francisco,
California.
14. Defendant Leslie D. Corwin is a shareholder with Greenberg, who holds
himself out as skilled in bankruptcy and partnership dissolution issues and with respect to
the legal representation of law firms, including representation of law firms in liquidations,
dissolutions and bankruptcies.
JURISDICTION AND VENUE
15. The District Court has jurisdiction over this action because the amount in
controversy herein exceeds $75,000 and because this action is between citizens of
different states. More specifically, Heller Ehrman LLP, Liquidating Debtor is a citizen of
California. Greenberg is a citizen of New York. Upon information and belief Mr. Corwin
is a citizen of New York.
16. The Bankruptcy Court has jurisdiction over this adversary proceeding under
28 U.S.C. §§ 157 and 1334 in that the issues in dispute arise in and/or are related to the
underlying Title 11 case.
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17. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(A),
(O) and is filed in accordance with the Federal Rules of Bankruptcy Procedure, Rule
7001. As such, the Bankruptcy Court has jurisdiction to hear and to determine this
proceeding and to enter an appropriate order and judgment. Any claims alleged herein
that are not core proceedings are legally and factually related to the core proceedings, and
are related to Debtor’s bankruptcy case such that it is lawful, appropriate and economical
to join such claims.
18. Venue is proper in the United States Bankruptcy Court, Northern District of
California under 28 U.S.C. § 1409, as the Debtor’s bankruptcy case is pending in this
judicial district.
GENERAL ALLEGATIONS
19. In business for more than 130 years before its dissolution and ultimate
bankruptcy in December 2008, Heller Ehrman LLP (“Heller”) was a prominent international
law firm with approximately 700 lawyers and offices through the world in places such as
California, New York, Washington, D.C., the United Kingdom and Asia.
20. At the time of its dissolution in 2008, Heller was organized as a limited
liability partnership under the laws of the state of California under a Partnership Agreement
dated January 1, 1994, as amended (“Partnership Agreement”).
21. Under ¶ 2.2 of the Partnership Agreement, Heller’s purpose was to engage in
the practice of law.
22. Five professional corporations originally served as Heller’s partners: Heller
Ehrman (California), a professional corporation; Heller Ehrman (Washington) P.S.; Heller
Ehrman White & McAuliffe (Oregon) P.C.; Heller Ehrman (Alaska) P.C; and William R.
Mackey, a California professional corporation. By subsequent amendments to the
Partnership Agreement, certain additional professional corporations were admitted as
partners to the partnership, in particular Heller Ehrman, P.C., a District of Columbia
professional corporation; Richard L. Cassin, P.A., a Florida professional corporation; and
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Heller Ehrman (New York), a professional corporation (collectively, with the original
partners, the “Heller PCs”).
23. Each of the Heller PCs in turn had shareholders. These shareholders were
required, under the terms of certain Shareholders Agreements, to be eligible and admitted to
practice law in one or more jurisdictions where Debtor practiced law (“Heller
Shareholders”).
The Bank of America Loan and Terminated Financing Statement
24. Since 1991, Bank of America, N.A. (“BOA”), as agent for itself and
Citibank N.A. (BOA and Citibank are hereinafter referred to as the “Banks”), was the
primary lender to Heller up until the time of the firm’s dissolution, beginning in
September 2008. The Banks provided loans to Heller pursuant to a Second Amended and
Restated Credit Agreement, dated as of May 1, 2007, as amended by the First Amendment
to the Second Amended and Restated Credit Agreement, dated April 1, 2008, and the
Second Amendment to the Second Amended and Restated Credit Agreement, dated as of
July 30, 2008 (collectively, the “Credit Agreement”).
25. Through the Credit Agreement, as amended, the Banks provided Heller with
a revolving line of credit up to $50 million, letter of credit commitments of $20 million,
and a term loan of $10 million.
26. Loans made to Heller under the Credit Agreement were purportedly secured
under a Security Agreement, dated as of December 1, 2001, as amended on December 1,
2004 (collectively, the “Security Agreement”), under which Heller purported to grant
BOA, as a lender and as agent for itself and Citibank, a security interest in substantially all
of Heller’s personal property (the “Collateral”), including receivables, and all proceeds
from the same.
27. BOA purportedly perfected its security interest in the Collateral by filing a
UCC-1 Financing Statement with the California Secretary of State on January 3, 1991,
Filing No. 91-001275 (the “Original Financing Statement”), which was amended and
continued in subsequent UCC filings over the years before 2007.
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28. On August 3, 2007, BOA terminated the Original Financing Statement when
one of its authorized employees caused to be filed with the California Secretary of State a
UCC Financing Statement Amendment (the “Termination Statement”). On the
Termination Statement, Box No. 2 “Termination” was checked after which appeared the
following statement: “Effectiveness of the Financing Statement identified above with
respect to security interest(s) of the Secured Party authorizing this Termination.” Box No.
1a identified the Initial Financing Statement to which the Termination Statement applied
as filing No. 91-001275, or the Original Financing Statement.
29. The Banks’ filing of the Termination Statement could have been discovered
at any time by a simple UCC public records search.
30. By letter dated September 19, 2008, BOA provided Heller with formal
notice of default (“Default Notice”) under the Credit Agreement, terminating the
commitment of the Banks to provide any additional credit, declaring all unpaid principal,
interest and other amounts owed under the Credit Agreement immediately due and
payable, declaring that default rate interest to be in effect, stating that BOA was taking
possession of Heller’s deposits and proceeds and advising Heller that all accounts
receivable constituted cash collateral and could not be used without BOA’s consent. At
that time, Heller owed the Banks approximately $56 million.
31. On or about September 25, 2008 Heller publically announced that it was
dissolving as a firm. Beginning on September 26, 2008, the Heller Shareholders voted to
dissolve the firm.
32. On September 30, 2008, BOA conducted a lien search with the California
Secretary of State and discovered that the Termination Statement had been filed some
fourteen months earlier by a BOA employee who was no longer working for the bank.
33. On October 1, 2008, having discovered the filing of the Termination
Statement, BOA filed a Financing Statement Amendment (“Correction Statement”) with
the California Secretary of State. The Correction Statement contained the following
language: The Termination Statement “was filed in error and as a result of a clerical error”
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and the “Initial Financing Statement filed with the California Secretary of State on
January 3, 1991, and assigned Document No. 91001275, as subsequently amended and
continued, remains in full force and effect.”
34. On October 2, 2008, BOA filed a new UCC Financing Statement with the
California Secretary of State, Filing No. 08-7174165847 (the “New Financing
Statement”), purporting to “reaffirm” the perfection of BOA’s security interest in the
Collateral.
Heller’s Retention of Greenberg
35. Heller retained Greenberg to perform legal services for Heller pursuant to a
retainer letter agreement dated June 11, 2008 (the “Retainer Agreement”). The Retainer
Agreement specified that Heller had retained Greenberg to “render advice and consult
with the Heller Executive Committee and Policy Committee in connection with its current
Partnership Agreement and matters relating to its affairs, including potential issues
regarding a combination and/or restructuring.” The Retainer Agreement further provided
that “[w]hile this letter is intended to deal with the specific legal services provided above,
these terms and conditions will also apply to any additional legal services that we may
agree to provide that are outside the initial scope of representation.”
36. Greenberg itself declared in an affidavit filed with the Bankruptcy Court
that, “Since June 2008, Greenberg Traurig has served as the Debtor’s lead counsel in
connection with the firm’s dissolution and has continued to serve as lead counsel
throughout the dissolution process.”
37. When it was retained, Greenberg had a severe undisclosed, and likely
disabling conflict of interest. Greenberg represented Bank of America, which, as Heller’s
primary lender, was likely to become, and soon became, adverse to Heller. Greenberg
failed to obtain informed written consent for this severe conflict of interest.
38. Greenberg thus violated Rule 3-310(C)(3) of the California Rules of
Professional Conduct, which states, “(3) A member shall not, without the informed
written consent of each client: . . . (3) Represent a client in a matter and at the same time
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in a separate matter accept as a client a person or entity whose interest in the first matter is
adverse to the client in the second matter.”
39. Between June 10, 2008 and June 27, 2008, Greenberg provided a variety of
legal services to Heller related to the latter’s partnership structure, including tasks such as
reviewing governing documents, researching deferred compensation and unfunded
pension liability under California law, as well as reviewing and researching partnership
issues.
Expanding Focus of Greenberg’s Legal Services
40. Beginning on August 5, 2008, Greenberg ramped up its work for Heller,
expanding the legal services it was providing and shifting more from restructuring
Heller’s partnership structure and/or advising on a potential “combination and/or
restructuring” to grappling with Heller’s looming financial failure. Around this time
Greenberg began drafting a plan of dissolution and advising Heller regarding the various
components of liquidating the firm.
41. By at least August 5, 2008, Heller advised Greenberg that it was considering
dissolving the firm and requested that Greenberg draft a plan of dissolution for the firm.
On or about August 8, 2008, Greenberg began drafting a plan of dissolution.
42. In addition to drafting a plan of dissolution, Greenberg reviewed Heller’s
various governing documents to determine the votes needed to approve of a liquidation,
explored the creation of a dissolution committee, worked on a timeline for dissolution,
reviewed insurance agreements, malpractice policies and various benefit plans to see how
they would be impacted by a dissolution and reviewed leases and the effect of their
termination.
43. On at least seven occasions in August, 2008 (August 5, 6, 8, 13, 18, 21 and
26), Greenberg attorneys participated in conference calls with certain Heller Shareholders,
during which they discussed, among other things, a potential liquidation of the firm.
Based on these calls, and many other factors, Greenberg must have understood that the
legal services they were requested to perform on behalf of Heller included services related
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to a potential liquidation of the firm, including drafting a plan of dissolution and also
including evaluating a possible bankruptcy filing.
44. On September 12, 2008, Greenberg attorneys participated in respective
conference calls with Heller’s Policy Committee and Executive Committee. In the
meeting with the Executive Committee one of the issues discussed was the rejection of a
merger with Heller by the law firm Mayer Brown LLP as well as the potential dissolution
of Heller.
45. On September 13, 2008, Greenberg attorneys participated in more
conference calls with certain Heller Shareholders as well as with the Executive
Committee. Upon information and belief, among the other issues discussed in both of
these meetings were the potential dissolution of Heller and a potential bankruptcy filing
by the firm.
46. On September 15, 16 and 17, 2008, Leslie Corwin, a senior level
shareholder at Greenberg, met with various Heller Shareholders at the Heller offices in
San Francisco, including but not limited to the Policy Committee. Again, the potential
dissolution of Heller and a potential bankruptcy filing by the firm would have been
understood.
47. At the time these meetings were taking place in San Francisco (from
September 15 through September 17, 2008), other attorneys at Greenberg were providing
services in connection with the dissolution of the firm, including but not limited to
continuing to draft and update the Heller plan of dissolution, drafting resolutions
authorizing the dissolution of the firm, researching the Worker Adjustment and Retraining
Notification Act (“WARN Act”) and its implication for Heller employees, evaluating
potential employee issues related to the overseas offices, evaluating leases, looking into
various issues related to the Banks, and exploring potential termination agreements with
staff.
48. On September 18, 2008, the chairman of Heller specifically raised the need
to talk with Greenberg and Mr. Corwin about contested bankruptcy risks.
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49. Based on the various meetings and telephone calls described above, as well
as on emails exchanged between certain Heller Shareholders and Greenberg attorneys,
Greenberg understood that by the middle of September, 2008, the legal services they were
requested to perform on behalf of Heller, and which they were in fact performing at the
time, were primarily services related to a potential liquidation of the firm, and also
including evaluating a possible bankruptcy filing.
50. Not later than September 18, 2008, at least two Greenberg attorneys were
specifically researching bankruptcy law issues, including but not limited to “outstanding
wages in bankruptcy” and “administrative claim issues.”
51. On September 19, 2008, BOA sent Heller the Default Notice.
52. There is no doubt that Heller was actively adverse to BOA at this time, at
the latest.
53. On September 19, 2008, following Heller’s receipt of the Default Notice
several Greenberg attorneys participated in numerous telephone calls with certain Heller
Shareholders about the Default Notice and strategy in response. Upon information and
belief, among other topics discussed during these calls was a potential Heller bankruptcy
filing.
54. On September 20, 2008 two Greenberg partners, Mr. Corwin and Alan
Annex, participated in a telephone conference call with Heller’s Policy Committee
discussing key issues raised by Heller’s impending financial failure. Upon information
and belief, among other topics discussed during these calls was a potential Heller
bankruptcy filing.
55. On September 21, 2008, a third Greenberg attorney began researching
additional bankruptcy issues, including but not limited to “lease rejection issues.”
56. On September 22, 2008 Mr. Annex drafted the text of a proposed
memorandum to be sent to Heller Shareholders. The text was included in an email sent to
Maria Spampanato, an administrative assistant working in Greenberg’s New York City
office. Mr. Corwin was also cc’d on the email. The text of the draft memo was entitled
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“Heller Ehrman, LLP – Frequently asked questions.” One of the questions listed in the
draft memo was, “Will we filing (sic) for bankruptcy protection?” The response to the
question read as follows:
We are attempting to conduct a dissolution and liquidation outside of a formal bankruptcy proceeding. There is a risk that if we are not successful in monetizing our assets and in minimizing our liabilities that we will need to file for bankruptcy protection. If we do there is a risk that all payments to shareholders in the year prior to filing could be subject to recapture by the firm.
(Emphasis added.)
57. The draft “Frequently Asked Questions” memo was revised and presented to
the Heller Shareholders in final format on September 25, 2008.
58. Over the course of the next few days following September 21, 2008, various
Greenberg attorneys continued researching various aspects of bankruptcy law in
anticipation of a possible Heller bankruptcy filing. On or about September 22 and 23,
2008, a memorandum was prepared by Greenberg attorneys examining various
bankruptcy law issues.
59. From September 22, 2008 through September 24, 2008 various Greenberg
attorneys, including Mr. Corwin and Mr. Annex, participated in numerous calls with
various Heller Shareholders, including the Heller Policy Committee, Dissolution
Committee, Real Estate Groups and various individual Heller Shareholders. Upon
information and belief, among other topics discussed during these calls was a potential
Heller bankruptcy filing.
60. Greenberg attorneys continued drafting and revising a plan of dissolution,
resolutions of the Heller PC’s approving of the dissolution, the Question and Answer
memo referred to above, WARN Act notices and various other dissolution documents
through September 26, 2008.
61. On September 25, 2008, Mr. Corwin attended meetings in San Francisco
with the Policy Committee and other Heller Shareholders to discuss the dissolution of the
firm. Upon information and belief, among other topics discussed during these meetings
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was a potential Heller bankruptcy filing.
62. In an email sent to Heller on October 1, 2008, Mr. Annex advised several
Heller shareholders regarding the effect of a bankruptcy filing on the firm’s ongoing
ability to provide services to its clients
63. In preparation for a Heller Dissolution Committee meeting held on October
3, 2008, Mr. Corwin distributed an agenda. The last item appearing on the agenda is
“Bankruptcy (Keith Shapiro of GT-Chicago).” Upon information and belief, Mr. Corwin
consulted with Mr. Shapiro, a bankruptcy attorney practicing in Greenberg’s Chicago
office, regarding a potential Heller bankruptcy filing. Mr. Corwin was also regularly
communicating with the Dissolution Committee about Heller’s financial failure at
numerous other Dissolution Committee meetings held around that time.
64. Despite all the work Greenberg was undertaking in light of Heller’s
unfolding financial collapse, preparing for its dissolution, researching bankruptcy issues,
and responding to the BOA’s notification of default, Greenberg never took the simple and
basic step of conducting a standard UCC security-filings search. Had Greenberg
undertaken this basic step it would have discovered that the Termination had been filed by
Bank of America a year earlier and that in fact the Banks’ security interest in Heller’s
property was unperfected.
Heller’s Approval of the Plan of Dissolution
65. On September 20, 2008 the Heller Policy Committee created the Heller
Dissolution Committee that would eventually constitute the Dissolution Committee under
the Plan of Dissolution.
66. On September 25, 2008, Heller issued a press release announcing the
dissolution of the firm.
67. On September 26, 2008, Mr. Corwin attended a Heller Shareholder meeting
in San Francisco, at which he presented the “Frequently Asked Questions” memo, the
plan of dissolution, dated as of September 26, 2008 (the “Plan of Dissolution”) and draft
resolutions approving the Heller dissolution, among other documents. At this meeting the
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Heller PC’s, through the Heller Shareholders voted to approve the Plan of Dissolution and
dissolve the firm.
68. The Plan of Dissolution specifically contemplated the firm filing for
bankruptcy and authorized the Dissolution Committee under Chapter 7 or Chapter 11 of
the United States Bankruptcy Code if the Dissolution Committee deemed such a filing
advisable.
69. On or about September 26, 2008, Heller sent out WARN Act notices to all
non-essential employees that the Dissolution Committee had deemed were not needed to
assist the firm in its dissolution. The notices provided sixty days notice of termination and
indicated that the employees would be paid the equivalent of sixty days salary from the
notice date.
BOA’s Possession and Control Over Heller’s Assets
70. BOA sent the Default Notice to Heller on September 19, 2008. Mr. Corwin
was copied on the Default Notice and he received a copy of the Default Notice via
electronic mail on September 19, 2008.
71. Following the issuance of the Default Notice, BOA took possession and
control of all of Heller’s deposit accounts held at the bank. Because all of Heller’s primary
bank accounts were held at BOA, the bank had possession and control over virtually all of
Heller’s cash deposits. Heller was prohibited from drawing on any of its accounts without
BOA’s consent.
72. Further, as stated in the Default Notice, BOA claimed that all of Heller’s
accounts receivable and any proceeds thereof constituted BOA’s cash collateral and it
instructed Heller that it could not use any of such proceeds without BOA’s consent. In
short, Heller had no access to cash without first obtaining the consent of BOA.
73. On September 22, 2008 an outside attorney representing BOA, David
Minnick, sent Mr. Corwin an email in which he stated that BOA had “taken control of
[Heller’s] deposit accounts and proceeds of the banks’ collateral. As a result the firm is
not able to make wire transfers and other payments without the consent of the banks.”
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Further, in the same email Mr. Minnick said that the banks had “elected to engage George
Nicolais & Associates, Inc. to monitor and evaluate the situation at the firm to give us a
better understanding of how things are developing and the factors that affect the banks’
decisions with respect to the firm, the loans and the banks’ collateral. In the same email
Mr. Minnick stated that “George and his people should be in San Francisco tomorrow to
commence their assignment.”
74. On September 23, 2008 George Nicolais and a colleague of his, George
Buys, arrived at Heller’s San Francisco offices where they met with certain Heller
Shareholders and began reviewing Heller’s finances. Over the course of the next three
months Mr. Nicolais and Mr. Buys spent significant time monitoring Heller’s finances
and, working with BOA and its outside counsel, effectively controlling Heller’s ability to
make any payments to anyone, whether it be employees, shareholders, landlords or
outside vendors.
75. As a result of BOA’s having taken control of Heller’s accounts, Heller could
not make any payments to anyone without first obtaining the prior approval of BOA.
76. In or about late September and early October, 2008, BOA rejected Heller’s
request to pay accrued but unpaid vacation pay for terminated employees at the time of
their termination. Further, at or about the same time BOA rejected the firm’s request to
pay terminated employees sixty days of wages as Heller believed it should do under the
WARN Act.
77. In response to BOA’s rejection of Heller’s request to pay accrued but unpaid
vacation and/or sixty days wages to terminated employees Heller sent at least two emails
to its employees advising them of the policy mandated by BOA. The result was extreme
displeasure and loss of morale on the part the affected employees. This displeasure was
displayed in the form of threats of litigation, absenteeism, lack of productivity and early
termination of certain key employees. Among employees affected by the Banks’ policy
were certain employees in charge of collection of Heller’s accounts receivable.
78. On October 6, 2008, Mr. Corwin sent a letter to Mr. Minnick advising him
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of the various disruptions that the Bank’s policies were having on Heller’s orderly
dissolution and the effect it was having on Heller’s remaining employees. However, BOA
did not change its position with respect to vacation pay and sixty days salary for
terminated employees.
79. Based on its actions of taking control over Heller’s accounts and requiring
pre-approval of every single check written or wire transfer made by Heller, BOA
effectively took over control of key aspects of the ultimate management of the firm for the
three months from the notice of the Default Notice (September 19, 2008) until Heller filed
its voluntary bankruptcy petition (December 28, 2008). The result was a disorderly wind-
down of Heller. As a result of this disorderly process, Heller could not maximize its
ability to pursue collections during this three-month period, generally considered the most
important period for collecting accounts receivable.
80. Moreover, the threats of litigation made by Heller’s terminated employees
were real as they ultimately filed a lawsuit, Biggers et al., v. Heller Ehrman LLP.
Adversary Proceeding No. 09-03058 (the “WARN Act Class Action”). The WARN Act
Class action sought substantial wages, statutory penalties and attorneys’ fees arising from
Heller’s failure to comply with WARN Act procedures for notice when a large employer
lays off a substantial portion of its staff. Ultimately, the WARN Act Class Action resulted
in a settlement requiring maximum payments of (1) an administrative claim totaling
$950,000; (2) priority wage claims totaling $4.6 million; (3) general unsecured claims
totaling $7.4 million; and (4) subordinated allowed unsecured claims of $7 million. These
damages could have been avoided if the Banks had permitted Heller to comply with
WARN Act procedures, less the amount that Heller would have been required to pay
under the WARN Act.
81. Further, Heller could have avoided the attorneys’ fees and costs it incurred
in defending against the WARN Act Class Action had the Banks permitted Heller to
comply with WARN Act procedures.
82. During the period from September 19, 2008, when it issued the Default
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Notice, to December 28, 2008, BOA, while controlling Heller’s accounts, paid itself and
Citibank $49.6 million. An additional $6.6 million was paid to the Banks post-petition.
Greenberg’s Failure to Conduct a Lien Search Prior to October 2, 2008
83. At no time from the date of its retention on June 11, 2008 to October 2,
2008, the date BOA filed the New Financing Statement, did Greenberg conduct a simple
lien search to determine if in fact the Banks’ security interest in the Heller Collateral was
perfected.
84. Had Greenberg conducted a lien search at any time prior to October 2, 2008,
it would have discovered that the Original Financing Statement filed by BOA had been
terminated and in fact the Banks’ security interest in the Collateral was unperfected.
85. On September 18, 2008, Paul Sugarman, a Heller Shareholder, sent Mr.
Corwin an email forwarding an email from the general counsel of the firm’s “group-
practice” malpractice carrier, MPC Insurance, Ltd., stating that MPC intended to exercise
its rights to file a UCC financing statement to shore up its position in the event Heller was
required to fund its self-insured retention obligations under the policy. In a response
email sent the same day, Mr. Corwin wrote, “Paul I understand the issue have dealt with it
before and am not surprised – your response was certainly appropriate.” Incredibly, the
fact that another entity intended to file a UCC financing statement against Heller did not
cause Mr. Corwin to conduct a lien search for Heller, even though Mr. Corwin said he
“understood the issue” and had “dealt with it before.”
86. Had Greenberg discovered that the Original Financing Statement was
terminated at any time during the three and a half months that it has been working for
Heller prior to October 2, 2008, it could have, and likely would have, advised Heller to
immediately file for bankruptcy before BOA filed the New Financing Statement and.or
taken other steps with the same effect. Heller, as a debtor-in-possession, would have had
a superior claim to its deposit accounts and accounts receivable (and all of the Collateral)
as a hypothetical lienholder under 11 U.S.C. § 544(a). Pursuant to California Commercial
Code section 9317(a)(2), a security interest is subordinate to any rights of a pre-existing
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judicial lien creditor. Moreover, the automatic stay, 11 U.S.C. § 362(a)(4) would have
prohibited BOA from filing the New Financing Statement after any bankruptcy filing.
87. Alternatively, even if Heller had chosen not to file for bankruptcy, it could
have informed the Banks of its legal position and or take other steps and refused to allow
the Banks to take control of Heller’s accounts, money and accounts receivable.
88. Had Greenberg discovered that the Original Financing Statement was
terminated prior to October 2, 2008, and had Heller filed for bankruptcy prior to that date,
or taken other action to enforce its legal position, the Banks would have been in effect
unsecured creditors and Heller would have had control of all of its accounts, money and
accounts receivable. In that case Heller could have undertaken an orderly liquidation,
retained key employees that were crucial to collection of accounts receivable, collected a
significantly higher amount of accounts receivable than the amount it collected in the
months following BOA’s taking control of Heller’s accounts, and avoided the WARN Act
Class Action and the damages it incurred as a result of that lawsuit, including attorneys’
fees.
89. Further, Heller would have avoided damages in the form of the total amount
of money that was paid to the Banks following September 19, 2008, when BOA issued the
default notice, less the amount that the Banks returned to Heller under the settlement of
the Preference Action, described below, plus attorneys’ fees. If Heller had been in control
of its money, including its deposit accounts and accounts receivable, it would not have
paid it over to the Banks. Instead, it would have used the money to finance its orderly
liquidation and, ultimately, to pay over to all unsecured creditors on a pro rata basis.
Greenberg’s Failure to Take Any Immediate Action Following its Discovery that the Original Financing Statement Had Been Terminated
90. In early October, 2008, as part of its dissolution, Heller was in the process
of negotiating a deal in which the law firm Perkins Coie LLP (“Perkins”) would
essentially acquire the entirety of Heller’s Madison, Wisconsin office, including taking
over the lease, purchasing all leasehold improvements and tangible personal property, and
hiring all non-Shareholder employees (the “Madison Transaction”). Perkins had informed
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Heller that before it could complete the Madison Transaction it would first require, among
other things, the consent of all of Heller’s secured creditors.
91. As part of its due diligence in connection with the Madison Transaction,
Perkins conducted a UCC lien search with the California Secretary of State in or about
early October, 2008. As a result of the search, Perkins discovered that BOA filed the
Termination Statement on August 3, 2007 and also that BOA filed the Correction
Statement on October 1, 2008.
92. During a telephone conference call held on October 7, 2008 between several
Perkins partners and several Heller Shareholders, as well as Mr. Corwin from Greenberg,
one or more of the Perkins attorneys informed the others on the call about the result of
Perkins’ lien search. Specifically, the Perkins attorney(s) informed the Heller
Shareholders and Mr. Corwin that the Termination Statement had been filed on August 3,
2007, and that the Correction Statement had been filed on October 1, 2008. On
information and belief the Perkins attorney(s) questioned the validity and/or effect of the
Correction Statement during this call.
93. On the same day, October 7, 2008, following the telephone call described
above, Al Smith, a Perkins partner who participated in the telephone call referred to
above, sent an email to Mr. Corwin and several Heller Shareholders, including Peter
Benvenutti. The subject line of the email was “Madison – Lien Search and other matters.”
In the email Mr. Smith said: “Nice speaking with everyone this afternoon. I’m glad we
made contact and I look forward to continuing the discussions. . . . Attached as promised
are a few pages from the lien search: . . . – initial summary pages . . . – 2007 termination .
. . – 10/1/08 ‘correction statement’/‘amendment.’” The email then went to discuss other
issues related to the Madison Transaction. Attached to the email was a summary of the
results of the lien search as well as copies of the Termination Statement and Correction
Statement.
94. Corwin received and read Al Smith’s October 7, 2008 email. A few minutes
after receiving it Mr. Corwin forwarded the email to Nellie Graverson, an administrative
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assistant in Greenberg’s New York office, with the instructions, “Please print out and put
in a folder labeled Heller Ehrman-Madison office.”
95. A few minutes after that Mr. Corwin responded to Al Smith’s email. In this
email Mr. Corwin acknowledged receiving it by stating, “Nice speaking with you as
well.” Mr. Corwin then went on to discuss other issues related to the firm’s malpractice
policy but did not mention anything about the results of the lien search, the Termination
Statement or the Correction Statement.
96. On October 8, 2008, upon information and belief, either Mr. Corwin or Mr.
Annex, or both, instructed an associate in Greenberg’s New York office – Julia Engel -- to
conduct an independent lien search of Heller. Ms. Engel contacted an outside lien search
company on October 8, 2008 and October 10, 2008.
97. In an email dated October 10, 2008, Ms. Engel sent Mr. Corwin and Mr.
Annex an email with an attachment containing a summary of the results of the Heller lien
search. The summary reflected the filing of the Termination Statement, the Correction
Statement as well as the October 2, 2008 filing of the New Financing Statement. Ms.
Engel stated in her email that “[t]here will be more coming.” However, it is uncertain
whether Ms. Engel ever provided Mr. Corwin and Mr. Annex with any further results.
98. In response to Ms. Engel’s October 10, 2008 email, on the same date, Mr.
Corwin forwarded the email to Ms. Graverson with the instructions, “Please print out and
place in a labeled folder – thanks.”
99. Having learned about the filing of the Termination Statement as well as the
Correction Statement and the New Financing Statement, neither Mr. Corwin, Mr. Annex,
nor anyone else at Greenberg, took any further action for almost two months. Greenberg
did not look into the circumstances surrounding the filing of the Termination Statement
and it did not undertake any legal analysis of what Heller could do to take advantage of
the filing of the Termination Statement.
100. Had Greenberg looked into these issues it would have concluded, as the
firm concluded two months later, that Heller could have filed for bankruptcy and voided
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the filing of the New Financing Statement as a preferential transfer under 11 U.S.C. § 547.
As such, Greenberg also would have concluded, or should have concluded, and advised
Heller accordingly, that the firm should file for bankruptcy immediately. The reason for
this conclusion and advice is that after filing for bankruptcy Heller could then seek an
immediate judicial determination by the bankruptcy court that the money held in its
accounts with BOA, as well as its accounts receivable, did not constitute the Banks’ cash
collateral, in that the perfected lien created by the filing of New Financing Statement was
a voidable transfer under 11 U.S.C. § 547.
101. Alternatively, Heller could have confronted the Banks and attempted to
negotiate a deal or in any event it could have taken control of its accounts, money and
accounts receivable and conducted an orderly dissolution. Notably, the outstanding
amount on the bank loans was significantly higher than it was in December of 2008, after
the third party landlord alerted Heller to the issue. Heller lost considerable leverage
between early October 2008 and December 2008 because the banks were draining the
value of Heller’s accounts receivable to pay off the “secured” loan.
102. Had Greenberg investigated these issues and advised Heller accordingly,
and had Heller filed for bankruptcy shortly after discovering the filing of the Termination
Statement on October 7, 2008, or taken other steps to protect its financial interests, Heller
immediately could have obtained control of its money, accounts and accounts receivable.
In that case Heller could have undertaken an orderly liquidation either in or out of
bankruptcy, retained key employees that were crucial to collection of accounts receivable,
collected a significantly higher amount of accounts receivable than the amount it collected
in the months following BOA’s taking control of Heller’s accounts, and avoided the
WARN Act Class Action and the damages it incurred as a result of that lawsuit, including
attorneys’ fees. Further, Heller would have avoided damages in the form of a significant
portion of the approximately $56.2 million that was paid to the Banks following October
2, 2008 when the New Financing Statement was filed, less the amount that the Banks
returned to Heller under the settlement of the Preference Action, described below, plus
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attorneys’ fees. If Heller had been in control of its money, including its deposit accounts
and accounts receivable, it would not have paid it over to the Banks. Instead, it would
have used the money to finance its orderly liquidation and, ultimately, to pay over to all
unsecured creditors on a pro rata basis. A Third Party Informs Heller About the Filing of
the Termination Statement and Heller’s Resultant Bankruptcy Filing
103. On November 28, 2008, in a telephone call between Heller Dissolution
Committee member Mr. Benvenutti and Mike Brody, an attorney representing the
landlord for Heller’s San Francisco offices at 333 Bush Street, Mr. Brody told Mr.
Benvenutti that he had undertaken a UCC search and discovered the August 3, 2007 filing
of the Termination Statement, as well as the October 1, 2008 filing of the Correction
Statement and the October 2, 2008 filing of the New Financing Statement. Mr. Brody told
Mr. Benvenutti that based on this discovery he believed that the Banks’ security interest in
Heller’s Collateral was voidable if a bankruptcy was filed within ninety days of the
October 2, 2008 filing of the New Financing Statement. He also requested that Mr.
Benvenutti agree not to pay down the Banks any further until the issue was sorted out.
104. Also on November 28, 2008, after their telephone conversation, Mr. Brody
sent Mr. Benvenutti a fax containing copies of the Termination Statement, the Correction
Statement and the New Financing Statement.
105. On November 28, 2008, after his call with Mr. Brody, Mr. Benvenutti sent
an email to Mr. Corwin and Mr. Annex in which he described his conversation with Mr.
Brody, stating that if it was in fact correct “the banks’ security interest could be avoided in
a bankruptcy case filed within 90 days after October 2,” and asking “What’s the story
here?” He also stated that he had agreed that until the issue was sorted out Heller would
not initiate any further pay-downs to the banks.
106. On November 29, 2008, Greenberg began to focus in earnest for the first
time on the issues surrounding the filing of the Termination Statement and whether in fact
the Banks’ lien on Heller’s Collateral was in fact voidable. In addition to talking to Mr.
Benvenutti, Mr. Corwin and Mr. Annex reviewed the earlier email sent to them on
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October 10 by Julia Engel attaching the results of her UCC search. Mr. Annex sent this
October 10 email to Mr. Benvenutti and Mr. Corwin. In addition, Mr. Corwin and/or Mr.
Annex apparently gave an assignment to a Greenberg associate, Kristin Rinaldi, who
immediately began to research the legal issues surrounding the Termination Statement, the
effect of the Correction Statement and related issues surrounding the Banks’ lien.
107. Over the next few days a flurry of activities took place, including further
discussions between Mr. Corwin, Mr. Annex and Mr. Benvenutti, discussions between
Mr. Corwin and Mr. Brody, discussions between Greenberg attorneys and the Dissolution
Committee and numerous internal discussions among Greenberg regarding the
Termination Statement and whether the Banks’ lien in Heller’s collateral was voidable.
108. On December 7, 2008, Greenberg provided to the Heller Dissolution
Committee a memorandum, from Mr. Corwin and Mr. Annex, regarding the issue of
whether the Banks’ lien was voidable under bankruptcy. The conclusion of this memo was
that the filling of the Termination Statement rendered the Banks’ lien unperfected until it
re-perfected it on October 2, 2008. The memo further concluded that “[a]ssuming a
bankruptcy proceeding is commenced on behalf of the Firm by December 30, 2008, the
Bank’s perfection should be subject to preferential avoidance.”
109. The December 7 memo, with work performed in connection with the memo,
and other work performed by Greenberg that the firm was providing bankruptcy services
to Heller before December 10, 2008 appear to make it indisputable that Greenberg had
been providing bankruptcy related services to Heller for several months by early
December, 2008.
110. Greenberg provided no explanation in the memo or otherwise why they
failed to examine the issues and draw the conclusions they drew in the December 7 memo
until two months after they became aware that the Termination Statement had been filed,
or why Greenberg had not undertaken a lien search on its own initiative.
111. Over the course of the next few weeks Heller, with Greenberg’s assistance,
engaged in negotiations with the Banks in attempt to have the latter return money to
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Heller and reach a settlement without Heller having to resort to a bankruptcy filing. The
negotiations were not successful.
112. In December, 2008, Greenberg intensified preparation for a bankruptcy
filing. On December 28, 2008, Heller filed its Chapter 11 petition.
Heller’s Preference Lawsuit Against the Banks and Settlement
113. On April 23, 2009, Heller, by and through its authorized representative, the
Official Committee of Unsecured Creditors of Heller (the “Committee”), filed an
adversary proceeding against the Banks to avoid the perfection of the Banks’ lien in
Heller’s Collateral and to avoid and recover all of the money that had been transferred by
Heller to the Banks in the ninety days prior to the Petition Date (the “Preference Action”)
– in excess of $56 million.
114. Litigation between Heller and the Banks took place over the course of
almost two years, with substantial discovery taking place, including extensive written
discovery and at least nine depositions in San Francisco, Southern California and New
York. The costs to the Heller estate of litigating the case exceeded $3 million.
115. The outcome of the Preference Action was uncertain. One of the primary
reasons for the uncertainty was that Heller would have been required to go through the
process of establishing the firm’s insolvency as of October 2, 2008, the date of the filing
of the New Financing Statement, an element required to establish a preference claim
under 11 U.S.C. § 547(b).
116. On February 24, 2011, at a mediation held in San Francisco, Heller (now
being represented by the Liquidating Trustee) and the Banks settled the Preference
Action. The terms of settlement were that the Banks would pay the Heller estate $20
million and would dismiss their proof of claim against the Heller estate and waive with
prejudice any and all claims they have against Heller. In turn, Heller would dismiss the
Preference Action with prejudice.
117. Considering that the Bank has waived any and all claims against the estate,
the value of the settlement to the Heller estate is significantly higher than $20 million,
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though the true value cannot be determined until it is ultimately determined what the final
payout will be to unsecured creditors.
Creation of the Jewel Waiver
118. Greenberg was hired by Heller LLP to provide legal services to the
partnership, not to the individual Heller Shareholders. As such, Greenberg had an
obligation to provide legal services to Heller not to the Heller Shareholders.
119. As retained counsel for Heller, Greenberg owed a duty of care and a duty of
loyalty to Heller, not the individual Heller Shareholders.
120. During the course of representing Heller, after Greenberg was assigned the
task of drafting the Plan of Dissolution, it was determined by certain Heller Shareholders
and Greenberg to include language in the Plan of Dissolution under which Heller would
agree to waive any rights and claims the firm might otherwise have been able to assert
against its departing Shareholder under the doctrine of Jewel v. Boxer, 156 Cal. App. 3d
171 (1984) (the “Jewel Waiver”).
121. The Jewel Waiver was beneficial to the Heller Shareholders and detrimental
to Heller in that it caused the firm to waive valuable potential future claims against the
Heller Shareholders.
122. The Jewel Waiver ultimately caused harm to Heller in that it made it more
difficult for Heller to assert claims under Jewel v. Boxer, in that Heller must go through
the process of proving that the creation of the Jewel Waiver was in fact an actual or
constructive fraudulent transfer under 11 U.S.C. § 548, which may include the additional
step of establishing that Heller was insolvent or operating with unreasonably small capital
as of the September 26, 2008, the date the Plan of Dissolution was approved. While
Heller is likely to be successful in proving that the firm was insolvent or operating with
unreasonably small capital as of this date, it will be more expensive to go through this
process in that expert witnesses as to this issue will be required. More significantly,
Heller has settled the Jewel actions for less than it would have collected had the Jewel
Waiver not been inserted by Greenberg into the dissolution plan due to Greenberg’s
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failure to meet the standard of care.
123. Heller has been damaged by Greenberg’s act of including the Jewel Waiver
in the Plan of Dissolution in that the amount of attorneys’ fees and expert witness fees
incurred by the firm in prosecuting the various Jewel lawsuits will be greater than it would
have been if Heller were not required to first establish that the Jewel Waiver is a
fraudulent transfer under 11 U.S.C. § 548. Moreover, if Heller is required to establish
insolvency Heller’s fees and costs, including expert witness costs, will be greater than if
no Jewel Waiver existed. If the Jewel Waiver had not been included in the Plan of
Dissolution, liability under Jewel v. Boxer would be a foregone conclusion and Heller
would only be required to establish damages. The additional element of proof Heller must
establish directly translates into increased attorneys’ fees and costs to Heller.
124. Debtor also asserts a claim for Greenberg’s negligence with respect to other
actions in the run-up to the bankruptcy, including any failure of Greenberg to adequately
cement an agreement the Debtor had reached with a broker regarding the surrender of the
lease of Heller’s New York office. The Debtor is informed and strongly believes that the
broker agreed in writing to provide its services for $325,000 based upon, among other
things, an invoice from the broker dated October 15, 2008 stating the agreed amount due
was $325,000 and a letter from Mr. Corwin dated October 21, 2008, to the debtor’s
secured lenders and the debtor stating that the amount of the commission owed was
$325,000. However, the Broker alleges that the Debtor’s agreement to the $325,000 was
not communicated and, as a result, that the commission was $2,939,496. While the
Debtor vehemently dispute’s the broker’ contentions, Greenberg should have handled the
transaction in a manner that would have avoided the broker’s contentions on this issue. If
it is determined that the broker is entitled to a commission in excess if $325,000, the
Debtor is informed and believes that such increase in the commission shall be attributable
to a failure of Greenberg to adequately cement an agreement regarding the commission.
FIRST CLAIM FOR RELIEF
(Professional Negligence)
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(Against All Defendants)
125. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
A. Failure to Discover Termination Statement Before Bank Re-filed Financing Statement.
126. Mr. Corwin and Greenberg were hired to provide legal services to Heller on
June 11, 2008. The scope of the legal services to be provided initially was to render advice
and consult “in connection with its current Partnership Agreement and matters relating to
its affairs, including potential issues regarding a combination and/or restructuring.”
127. The legal services Mr. Corwin and Greenberg were providing expanded in
August, 2008, to concentrate on legal services in connection with the dissolution of
Heller, including the drafting of a plan of dissolution and advice concerning a potential
liquidation of the firm, including bankruptcy issues. In August and September, 2008, the
legal services Greenberg was requested to perform on behalf of Heller, and which it was
in fact performing at the time, were primarily services related to a potential liquidation
and/or because of the firm evaluating a possible bankruptcy filing.
128. As such, Mr. Corwin and Greenberg should have known to conduct a lien
search of Heller to determine the degree to which secured creditors had perfected security
interests against the firm and to ensure that the Banks’ liens were perfected.
129. At no time from the date of its retention on June 11, 2008 to October 2,
2008, the date BOA filed the New Financing Statement, did Mr. Corwin or Greenberg
conduct a lien search to determine if in fact the Banks’ security interest in the Heller
Collateral was perfected.
130. On September 19, 2008, BOA sent the Default Notice to Heller, a copy of
which was sent to Mr. Corwin, and stated therein that BOA immediately was taking
possession of Heller’s deposit accounts and stating that all accounts receivable constituted
the Banks’ cash collateral and not to use any of it for any purpose without BOA’s prior
approval. Even in response to this, Mr. Corwin and Greenberg failed to conduct a lien
search to confirm that the Banks had a valid security interest in Heller’s deposit accounts
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and accounts receivable.
131. Even after Heller informed Mr. Corwin that its insurance carrier, MPC,
would be filing a UCC financing statement with respect to Heller, Mr. Corwin and
Greenberg still did not conduct a lien search of Heller.
132. Had Mr. Corwin and Greenberg conducted a lien search at any time prior to
October 2, 2008, they would have discovered that the Original Financing Statement filed
by BOA had been terminated on August 3, 2007 and in fact the Banks’ security interest in
the Heller Collateral was unperfected.
133. Had Mr. Corwin and Greenberg known that the Banks’ security interest in
the Heller Collateral was unperfected they could have advised Heller to immediately file
for bankruptcy protection, which would have prevented the Banks from filing the New
Financing Statement under 11 U.S.C. § 362. Alternatively, they could have attempted to
negotiate with the Banks or take other steps to enforce Heller’s legal rights and prevent
BOA from filing the New Financing Statement, to regain control over its money, accounts
and accounts receivable.
134. Had Mr. Corwin and Greenberg undertaken a lien search prior to October 2,
2008 and discovered that the Banks’ security interest in the Heller Collateral was
unperfected, and had Heller subsequently filed for bankruptcy protection prior to October
2, 2008, when the New Financing Statement was filed, the Banks would have been in
effect unsecured creditors and Heller would have had control of all of its accounts, money
and accounts receivable.
135. If Heller had filed for bankruptcy at the time the Banks were unperfected, or
had the firm taken other steps to protect its financial interests, Heller could have
undertaken an orderly liquidation, retained key employees that were crucial to collection
of accounts receivable, collected a significantly higher amount of accounts receivable than
the amount it collected in the months following BOA’s taking control of Heller’s
accounts, and avoided the WARN Act Class Action and the damages it incurred as a result
of that lawsuit, including attorneys’ fees.
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136. As attorneys for Heller Mr. Corwin and Greenberg owed a duty of care to
provide legal advice and services of the skill, prudence and diligence as members of the
legal profession commonly, and purported bankruptcy specialists particularly, possess and
exercise.
137. In failing to conduct a lien search with respect to Heller’s property, and as a
result of its failing to discover that the Banks’ security interest was unperfected, and that
Heller could have filed for bankruptcy or taken other legal steps and in effect rendered the
Banks unsecured creditors, Mr. Corwin and Greenberg breached their duty to use such
skill, prudence, and diligence as members of the legal profession commonly, and
purported bankruptcy specialists particularly, possess and exercise.
138. As one prominent San Francisco bankruptcy attorney stated in a quote
printed in a June 3, 2009 in the San Francisco Recorder, “I’ve been practicing for nearly
30 years and I have never begun a debtor representation without pulling the UCC run.” In
failing to conduct a UCC lien search on Heller’s property Mr. Corwin and Greenberg fell
below the standard of care, skill, prudence, and diligence that members of the legal
profession commonly, and purported bankruptcy specialists particularly, possess and
exercise.
139. As a direct and proximate cause of Mr. Corwin’s and Greenberg’s failure to
conduct a lien search and to advise Heller to file for bankruptcy protection, or take other
appropriate legal steps, at a time when the Banks’ lien in the Heller Collateral was
unperfected, Heller suffered harm. Instead of being able to control its own accounts and
accounts receivable, and to conduct an orderly liquidation, Heller was instead essentially
put under the control of the Banks and underwent a disorderly liquidation. Instead of
treating the Banks as unsecured creditors, which Heller could pay in the same manner as
all other unsecured creditors, the Banks took control over Heller’s deposit accounts and
accounts receivable, and caused Heller to transfer in excess of $56 million to the Banks.
Further, Heller suffered harm in the form of a disorderly liquidation under the control and
management of the Banks, which resulted in lower collections during the three-month
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period after the Banks issued the Default Notice, the loss of key personnel, some of whom
were responsible for collections and the filing of the WARN Act Class Action against
Heller.
140. Heller suffered actual damages as a direct result of Mr. Corwin’s and
Greenberg’s failure to conduct a lien search and to advise Heller to file for bankruptcy or
take other appropriate legal steps prior to October 2, 2008. The damages suffered include
the total amount paid over to the Banks following the issuance of the September 19, 2008
Default Notice (in excess of $60 million), less the $20 million paid to Heller under the
settlement of the Preference Action, plus attorneys fees. In addition, Heller suffered
damages based on the significantly reduced amount of accounts receivable it collected as
a result of the disorderly liquidation caused by the control exercised by the Banks over
Heller and its deposit accounts and accounts receivable. Heller also suffered damages
caused by the WARN Act Class Action, including the amounts it paid under the
settlement of that suit, minus the amount it would have been required to pay under the
WARN Act, plus attorneys’ fees. But for Mr. Corwin’s and Greenberg’s negligent
conduct as alleged herein, Heller would not have suffered these damages.
B. Failure to Alert Heller to the Significance of the UCC Termination.
141. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
142. On October 7, 2008, Mr. Corwin and Greenberg became aware that the
Termination Statement had been filed and that only a few days earlier BOA had filed the
Correction Statement. Greenberg, and specifically, Mr. Corwin, became aware of both of
these filings because he had been told this in a telephone conversation that day with,
among others, Alan Smith, a partner at Perkins Coie.
143. Further, on the same date, October 7, 2008, Alan Smith sent an email to Mr.
Corwin, among others, with attachments showing the results of a UCC lien search for
Heller and a copy of the Termination Statement and Correction Statement. Mr. Corwin
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forwarded these materials to an administrative assistant and requested that she place them
in a file.
144. On October 8, 2008, Mr. Corwin and/or Mr. Annex instructed an associate
in Greenberg’s New York City office to conduct an independent lien search of Heller.
145. The independent lien search confirmed not only the filings of the
Termination Statement and the Correction Statement but also that another UCC financing
statement (the New Financing Statement) had been filed on October 2, 2008.
146. Upon receiving the materials from his associate confirming that the
Termination Statement had been filed on August 3, 2007, the Correction Statement on
October 1, 2008 and the New Financing Statement on October 2, 2008, Mr. Corwin
instructed an assistant to place the materials in a folder. Upon information and belief Mr.
Corwin took no further action following his discovery of these filings and did not
communicate with anyone at Heller about these filings until late November, 2008, when
Heller Shareholder Benvenutti raised the issue with Mr. Corwin and Mr. Annex.
147. Upon learning about the filing of the Termination Statement, and that for
more than a year the Banks’ lien against the Heller assets until very recently, Mr. Corwin
and Greenberg should have advised Heller to immediately file for bankruptcy, stop paying
down the bank loan, or take other steps to protect the firm’s interests. Mr. Corwin and
Greenberg failed to make any such recommendation until December, 2008.
148. If Heller had filed for bankruptcy or taken other steps to protect its interests
in October, 2008, shortly after Mr. Corwin and Greenberg discovered the existence of the
Termination and New Financing Statement filings, it could have sought to void the filing
of the New Financing Statement as a preferential transfer under 11 U.S.C. § 547, or
otherwise. Moreover, Heller could have sought an immediate judicial determination by
the bankruptcy court that the money held in its accounts with BOA, as well as its accounts
receivable, did not constitute the Banks’ cash collateral, in that the perfected lien created
by the filing of New Financing Statement was a voidable transfer under 11 U.S.C. § 547.
Alternatively, Heller could have negotiated with the Banks armed with the information
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that the banks were effectively an unsecured creditor and that Heller could avoid the
Banks’ lien through a bankruptcy filing.
149. In failing to take any action after discovering the filing of the Termination
Statement and the New Financing Statement on October 7, 2008, other than to place
evidence of the filings in a file, and in failing to advise Heller to immediately file for
bankruptcy immediately, or take other steps to protect Heller’s interests, or to even
communicate with Heller about the filings, Mr. Corwin and Greenberg breached their duty
to use such skill, prudence, and diligence as members of the legal profession commonly,
and purported bankruptcy specialists particularly, possess and exercise.
150. As a direct and proximate cause of Mr. Corwin’s and Greenberg’s failure to
advise Heller to file for bankruptcy shortly after learning about the UCC filings in
October, 20008, Heller suffered harm. Had Mr. Corwin and Greenberg investigated these
issues and advised Heller accordingly, and had Heller filed for bankruptcy shortly after
Greenberg had learned about the UCC filings on October 7, 2008, or taken other steps to
protect its legal interests, Heller immediately could have obtained control of its accounts
and accounts receivable. In that case Heller could have undertaken an orderly liquidation
in or out of bankruptcy, retained key employees that were crucial to collection of accounts
receivable, collected a significantly higher amount of accounts receivable than the amount
it collected in the months following BOA’s taking control of Heller’s accounts, and
avoided the WARN Act Class Action and the damages it incurred as a result of that
lawsuit, including attorneys’ fees. Further, Heller would have avoided a damages in the
form of a significant portion of the approximately $56.2 million that was paid to the
Banks following October 2, 2008 when the New Financing Statement was filed, less the
amount that the Banks returned to Heller under the settlement of the Preference Action,
plus attorneys’ fees. If Heller had been in control of its money, including its deposit
accounts and accounts receivable, it would not have paid it over to the Banks. Instead, it
would have used the money to finance its orderly liquidation and, ultimately, to pay over
to all unsecured creditors on a pro rata basis.
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151. Heller suffered actual damages as a direct and proximate result of Mr.
Corwin’s and Greenberg’s failure to advise Heller to file for bankruptcy in October, 2008,
or take other steps to protect the firm’s legal interests. The damages suffered include the
total amount paid over to the Banks following the issuance of the September 19, 2008
Default Notice (in excess of $60 million), less the $20 million paid to Heller under the
settlement of the Preference Action, plus attorneys fees. In addition, Heller suffered
damages based on the significantly reduced amount of accounts receivable it collected as
a result of the disorderly liquidation caused by the control exercised by the Banks over
Heller and its deposit accounts and accounts receivable. Heller also suffered damages
caused by the WARN Act Class Action, including the amounts it paid under the
settlement of that suit, minus the amount it would have been required to pay under the
WARN Act, plus attorneys’ fees. But for Mr. Corwin’s and Greenberg’s negligent
conduct as alleged herein, Heller would not have suffered these damages.
C. Jewel Waiver.
152. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
153. Mr. Corwin and Greenberg knew that Greenberg had been retained by
Heller under the June 11, 2008 retainer agreement between Greenberg and Heller. As
such, Mr. Corwin and Greenberg knew that they owed a duty of care and loyalty to Heller,
not the individual Heller Shareholders.
154. By not advising against including the Jewel Waiver in the Plan of
Dissolution Mr. Corwin and Greenberg were acting in the best interest of the Heller
Shareholders, not the Heller firm itself. The Jewel Waiver allowed Heller Shareholders to
take unfinished business that lawfully belonged to Heller to other law firms and to try and
keep the profits from that unfinished business either for themselves or for themselves and
their new firms. The Jewel Waiver caused harm to Heller in that it waived valuable claims
for profits from such unfinished business.
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155. By not advising against including the Jewel Waiver, an act detrimental to
Heller, Mr. Corwin and Greenberg, violated their duty of care and loyalty to Heller. As
such, Mr. Corwin and Greenberg breached their duty to use such skill, prudence, and
diligence as members of the legal profession commonly, and purported bankruptcy
specialists particularly, possess and exercise.
156. Alternatively, in not advising against including the Jewel Waiver, Mr.
Corwin and Greenberg aided and abetted the Heller Shareholders in usurping rights and
property that belonged to Heller in favor of the Heller Shareholders. As such, Mr. Corwin
and Greenberg breached their duty to use such skill, prudence, and diligence as members
of the legal profession commonly, and purported bankruptcy specialists particularly,
possess and exercise.
157. Greenberg also failed to document the broker agreement so as to avoid a
dispute, as outline above. If the broker is able to establish a claim greater than the agreed
upon amount it will be due to the fault of Mr. Corwin and Greenberg for failing to
adequately document in writing the agreement to accept a reduced commission for
negotiating a surrender agreement.
158. The Jewel Waiver ultimately caused harm to Heller in that it made it more
costly for Heller to assert claims under Jewel v. Boxer, in that Heller must go through the
process of proving that the creation of the Jewel Waiver was in fact an actual or
constructive fraud under 11 U.S.C. § 548, which may include having to show that Heller
was insolvent as of the September 26, 2008, the date the Plan of Dissolution was
approved.
159. Heller has been damaged by Mr. Corwin’s and Greenberg’s act of including
the Jewel Waiver in the Plan of Dissolution in that the amount of attorneys’ fees and costs
that will be incurred by Heller will be greater than it would have been if Heller were not
required to first establish that the Jewel Waiver is a fraudulent transfer under 11 U.S.C.
§ 548. The additional element of proof Heller must establish directly translates into
increased attorneys’ fees, expert witness fees and other costs to Heller.
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D. Failure to Disclose Interest Adverse to the Debtor and That Heller Had Actual And
Potential Causes Of Action Against It For The Preference Period Payments.
160. On January 12, 2009, Greenberg filed with the Bankruptcy Court on behalf
of the Debtor an Application authorizing the employment of Greenberg as co-counsel for
the Debtor in the bankruptcy case (the “Application”). In support of the Application
Greenberg submitted an affidavit of one of its shareholder’s, Keith Shapiro (the “2014
Declaration”) in accordance with Rule 2014 of the Federal Rules of Bankruptcy Procedure
(the “Bankruptcy Rules”) and 11 U.S.C. ' 110(h)(2).
161. In the 2014 Declaration, Greenberg declared under penalty of perjury that
Greenberg does “not hold any interests adverse to the Debtor or its chapter 11 estate.”
While the firm mentioned that it received certain payments from Heller prior to the
Bankruptcy Petition, it did not disclose that Greenberg could be liable for having received
preferential payments with respect to some or all of the $1.47 million as compensation for
attorneys’ fees and costs billed by Greenberg in 2008 and during the 90-day period
preceding the Debtor’s bankruptcy filing (the “Preference Period”) hereinafter
(“Preference Period Payments”).
162. Some or all of the Preference Period Payments met all the requirements for
avoidance under 11 U.S.C. §550 as the payments:
(a) were on account of an antecedent debt owed by Greenberg to Heller;
(b) made at the time that the Debtor was insolvent as that term is meant under
11 U.S.C. § 547(b) and.
(c) as a result of being paid the aforementioned payments by Heller, Greenberg
received more than it would have received if:
i. Heller were a debtor under Chapter 7 of Title 11 of the United States
Code;
ii. The payments had not been made by Heller to Greenberg; and
iii. Greenberg received the same payment as other unsecured creditors as
provided for under Chapter 7.
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163. Accordingly, at the time of the Application and 2014 Declaration, Heller, as
the liquidating Debtor, was entitled to avoid any such payments made by Heller to
Greenberg that exceed the hypothetical amount Greenberg would have been paid had it
not been paid and this was a case under Chapter 7 of Title 11 of the United States Code.
164. As an experienced bankruptcy counsel, Greenberg knew, or should have
known, at the time of the Application and 2014 Declaration and thereafter, the Debtor had
actual and potential claims against Greenberg for these Preference Period Payments.
165. Yet, Greenberg did not advise the Debtor that the Debtor had a potential
claim for the Preference Payments.
166. Nor did Greenberg ever disclose the actual conflict of interest between itself
and the Debtor due to these potential claims.
167. As stated in In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995): A fee applicant must disclose, “the precise nature of the fee arrangement,” and not simply identify the ultimate owner of the funds. Debtor’s counsel [must] lay bare all its dealings . . . regarding compensation. Counsel’s fee revelations must be direct and comprehensive. Coy, or incomplete disclosures . . . are not sufficient. The burden is on the person to be employed to come forward and make full candid, and complete disclosure.
168. Rather, than comply with these duties, Greenberg made misrepresentations
and failed to disclose the potential claims against it to the Bankruptcy Court. In the
Application and 2014 Declaration, Greenberg stated that it “does not hold, or represent
any entity having an adverse interest in connection with this case.”
169. In failing to fully advise the Debtor concerning the Debtor’s claims against
it for the Preference Payments or the conflict of interest arising therefrom and by making
misrepresentations in the Application and 2014 Declaration concerning the lack of any
adverse interest with respect to the Debtor, Greenberg breached its duty to use such skill,
prudence, and diligence as members of the legal profession commonly, and purported
bankruptcy specialists particularly, possess and exercise.
170. Had Greenberg disclosed its potential exposure on a preference claim, it
would have had to overcome the holding of In re Pillowtex, 304 F.3d 246 (3d. Cir. 2002),
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in order to become employed by the estate.
171. Greenberg’s errors, omissions, and misrepresentations have caused
proximately and actually caused Heller injury in the form of additional attorneys’ fees,
interest, and delay in the Debtor’s ability to obtain the Preference Payments.
172. These injuries damaged Heller in an amount to be proven at trial.
SECOND CLAIM FOR RELIEF (Attorneys’ Fees for Tort of Another)
(Against All Defendants)
173. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
174. As a direct and proximate cause of the tortious acts of Mr. Corwin and
Greenberg as alleged above, Heller has incurred significant attorneys’ fees in connection
with defending the WARN Act Class Action.
175. Further, as a direct and proximate cause of the tortious acts of Mr. Corwin
and Greenberg as alleged above, Heller has incurred significant attorneys’ fees in
connection with prosecuting the Preference Action against the Banks that it would not
have incurred but for the tortious acts of Mr. Corwin and Greenberg.
176. Further, as a direct and proximate cause of the tortious acts of Mr. Corwin
and Greenberg as alleged above, Heller has incurred significant additional attorneys’ fees
in connection with prosecuting the Jewel cases against former Heller Shareholders and the
law firms in which they took Heller unfinished business, that it would not have incurred
but for the tortious acts of Mr. Corwin and Greenberg.
177. Further, as a direct and proximate cause of the tortious acts of Mr. Corwin
and Greenberg as alleged above, Heller has incurred significant attorneys’ fees in
connection with objecting to the CB Richard proof of claims, that it would not have
incurred but for the tortious acts of Mr. Corwin and Greenberg.
178. Under both New York and California law, to the extent a plaintiff incurs
attorneys’ fees in prosecuting or defending an action against a third party that is the
proximate and natural consequence of a defendant’s tortious conduct, the plaintiff is
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entitled to collect its attorneys’ fees incurred in such third party litigation.
179. As such, Heller is entitled to collect from Mr. Corwin and Greenberg the
attorneys’ fees Heller incurred in connection with the WARN Act Class Action, the
Preference Action, the Jewel lawsuits and in connection with objecting to the CB Richard
proof of claim.
THIRD CLAIM FOR RELIEF
(Recovery of Preferential Payments) (Against Greenberg)
180. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
181. During the ninety day period prior to December 28, 2008, Heller paid
Greenberg an amount of in excess of $1.48 million as compensation for attorneys’ fees
and costs billed by Greenberg.
182. The payments made by Heller to Greenberg were for the benefit of
Greenberg.
183. The payments made by Heller to Greenberg were on account of an
antecedent debt owed by Heller to Greenberg.
184. The payments made by Heller to Greenberg were made at a time in which
Heller was insolvent as that term is meant under 11 U.S.C. § 547(b).
185. As a result of being paid the aforementioned payments by Heller, Greenberg
received more than it would have received if:
(a) Heller were a debtor under Chapter 7 of Title 11 of the United States Code;
(b) The payments had not been made by Heller to Greenberg; and
(c) Greenberg received the same payment as other unsecured creditors as
provided for under Chapter 7.
186. Heller, as the liquidating Debtor, is entitled to avoid any such payments
made by Heller to Greenberg that exceed the hypothetical amount Greenberg would have
been paid had it not been paid and this was a case under Chapter 7 of Title 11 of the
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United States Code.
187. Under 11 U.S.C. §550, to the extent that the payments made to Greenberg
described above are avoided, Heller is entitled to recover from Greenberg the full amount
of any such avoided payments.
FOURTH CLAIM FOR RELIEF
(Disgorgement of Fees) (Against Greenberg)
188. Plaintiff incorporates herein by reference the allegations set forth in each of
the previous paragraphs alleged above, inclusive, as though fully set forth herein.
189. On January 12, 2009, Greenberg filed with the Bankruptcy Court on behalf
of the Debtor an Application authorizing the employment of Greenberg as co-counsel for
the Debtor in the bankruptcy case (the “Application”). In support of the Application
Greenberg submitted an affidavit of one of its shareholder’s, Keith Shapiro (the “Shapiro
Affidavit”).
190. In the Application and the Shapiro Affidavit, Greenberg claimed that “since
approximately December 10, 2008, Greenberg Traurig has advised the Debtor in regards
to bankruptcy-related matters.” However, in fact Greenberg had performed bankruptcy-
related services for Heller for several months prior to December 10, 2008, including
bankruptcy consulting services. Included within this work was a memorandum dated
December 7, 2008, authored by Mr. Corwin and Mr. Annex, in which Greenberg
effectively recommended that Heller file for bankruptcy protection in order to avoid Bank
of America’s October 2, 2008 re-perfection of its lien in Heller’s assets with the filing of
the New Financing Statement. Further, as alleged in detail above, Heller had been
providing bankruptcy related services to Heller for several months prior December 10,
2008. Thus, the statement that Greenberg had not begun providing bankruptcy related
services to Heller until December 10, 2008 was not accurate. As such, Greenberg failed
to comply with Rule 2014 of the Federal Rules of Bankruptcy Procedure by failing to
fully and accurately disclose the nature of Greenberg’s relationship with the Debtor.
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191. In the Application and the Shapiro Affidavit, Greenberg also failed to
disclose that it had a serious conflict of interest with the Debtor in that at the time the
Debtor had potential claims against Greenberg for professional negligence. Specifically,
as a result of Greenberg’s failure to conduct a lien search either prior to the October 2,
2008 filing of the New Financing Statement by BOA, or the failure of Greenberg to take
any action when it became aware of the filing of the Termination Statement and New
Financing Statement in earlier October, 2008, Heller incurred significant damages as
described in detail above. Heller had potential claims against Greenberg for professional
negligence as a result of these damages. Greenberg was obligated to describe these
potential claims against it under 11 U.S.C. § 329 and Rule 2014. Had Greenberg disclosed
these potential claims to the Bankruptcy Court as it was required to do the Court could
have rejected Greenberg’s Application.
192. Greenberg was well aware at the time it filed the Application that Heller had
potential claims against Greenberg and as such it never should have acted as Heller’s
bankruptcy counsel. Further, Greenberg was well aware that it had a conflict with Heller
in that it was then representing BOA in other matters and could not represent the Debtor
in what would inevitably be a major aspect of the bankruptcy case, namely litigation
against BOA. Instead, Greenberg should have advised Heller to seek independent
bankruptcy counsel.
193. Nor did Greenberg ever disclose the actual conflict of interest between itself
and the Debtor due to the potential preference claims discussed above.
194. The Bankruptcy Court has the authority to disgorge fees paid to professional
persons under 11 U.S.C. § 329 and Rule 2014 for failure to fully and adequately disclose
the professional person’s relationship with a debtor, the scope of work performed on
behalf of a debtor, and any adverse interest the professional person has with a debtor.
Here, Greenberg failed to fully and adequately describe its relationship with Heller and
the potential claims Heller had against Greenberg. For these reasons the Court should
disgorge all fees paid to Greenberg by Heller during its entire representation of Heller
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during the year prior to the December 28, 2008 bankruptcy filing as well as any and all
fees paid post-petition.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays that this Court enter judgment against Defendants as
follows:
1. As to the First Claim for Relief for Professional Negligence, Debtor is entitled
to:
(a) Judgment against Greenberg for damages in the amount to be determined at
trial;
(b) Prejudgment and post-judgment interest to the extent allowed by law;
(c) Reasonable attorneys’ fees and costs of suit to the extent allowed by law; and
(d) For such other and further relief as this Court deems just and appropriate.
2. As to the Second Claim for Relief for Attorneys Fees for the Tort of Another,
Debtor is entitled to:
(a) The amount of Heller’s attorneys’ fees and costs it incurred in connection with
defending the Warn Act Class Action, in connection with prosecuting the
Preference Action against the Banks, in connection with prosecuting the Jewel
cases against former Heller Shareholders and the law firms in which said
Shareholders took Heller unfinished business, and in connection with
objecting to CB Richard’s proof of claim.
(b) Prejudgment and post-judgment interest to the extent allowed by law;
(c) Reasonable attorneys’ fees and costs of suit to the extent allowed by law; and
(d) For such other and further relief as this Court deems just and appropriate.
3. As to the Third Claim for Relief for Recovery of Preferential Payments,
Debtor is entitled to:
(a) Judgment against Greenberg for amounts paid to Greenberg within ninety
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days prior to December 28, 2008, with said amount to be determined at trial;
(b) Prejudgment and post-judgment interest to the extent allowed by law;
(c) Reasonable attorneys’ fees and costs of suit to the extent allowed by law; and
(d) For such other and further relief as this Court deems just and appropriate.
4. As to the Fourth Claim for Relief for Disgorgement of Fees, Debtor is entitled
to:
(a) Judgment against Greenberg for amounts paid to Greenberg for professional
fees and costs within a year prior to December 28, 2008, as well as any fees
paid to Greenberg post-petition, with said amount to be determined at trial;
(b) Prejudgment and post-judgment interest to the extent allowed by law;
(c) Reasonable attorneys’ fees and costs of suit to the extent allowed by law; and
(d) For such other and further relief as this Court deems just and appropriate.
DATED: October 31, 2011 TREPEL GREENFIELD SULLIVAN & DRAA LLP By: /s/ Christopher D. Sullivan Christopher D. Sullivan Special Litigation Counsel for Liquidating Debtor, Heller Ehrman LLP
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