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October 23, 2009 2:20 PM

Davis Wright Settles Sunwest Litigation

Posted by Brian Baxter

Davis Wright Tremaine has agreed to a global settlement in litigation against the firm related to the collapse of Sunwest Management, an Oregon-based provider of senior living centers. The reported settlement amount: $30 million, one of the largest malpractice settlements by a law firm in the Pacific Northwest.

The litigation was filed earlier this year by Sunwest investors and a receiver for the company--once valued at $2 billion--after a series of scandals pushed Sunwest to the brink of bankruptcy. SEC charges of securities fraud at Sunwest likened the company's finances to that of a Ponzi scheme. Aggrieved investors sued three of the company's outside law firms: Davis Wright, K&L Gates, and Thompson & Knight.

The Am Law Daily previously reported on the suits filed against the three firms in state court in Oregon. In June, The Am Law Litigation Daily reported that a receiver for Sunwest, Michael Grassmueck from Portland's The Grassmueck Group, slapped Davis Wright with a suit seeking more than $400 million in damages in federal court in Oregon.

Allen Matkins Leck Gamble Mallory & Natsis partners Stephen Walters, David Osias, and David Zaro are representing Grassmueck in the litigation, along with Portland firm Larkins Vacura. Walters tells The Am Law Daily that the receiver's suit acted as the vehicle for the settlement, which will settle all federal and state court actions against Davis Wright related to Sunwest.

"It's still tentative, and there are certain things that still have to happen [such as judicial approval]," says Walters, adding that the agreement came after five days of mediation talks that began last week. He declined to comment on the amount of the settlement.

Investors suing Davis Wright claimed that they were misled by the firm's legal advice on real estate transactions involving Sunwest properties. Cohen Milstein Sellers & Toll partner Kit Pierson, formerly of Heller Ehrman, and Portland solo practitioner Justine Fischer filed an investor class action against Davis Wright in February on behalf of 1,200 investors. (Neither Pierson nor Fischer immediately responded to requests for comment.)

Fischer told us in May that Davis Wright and corporate finance and securities partner Timothy Dozois drafted documents misrepresenting how investments would be allocated among the various Sunwest nursing homes and assisted living communities, which helped further alleged fraudulent activities committed by company executives. (An SEC complaint filed against Sunwest in March claims the company put some of its individual holdings into bankruptcy in order to forestall foreclosure efforts by certain lenders.)

Another plaintiffs lawyer representing Sunwest investors, Michael Esler from Portland's Stephens & Buckley, told The Oregonian that most of the proceeds from the settlement will go to out-of-pocket investors.

"We're pleased with the settlement because settling so early is much more cost-effective, and the investors are really in need of the money," Esler told the newspaper. He noted that investors, who collectively had sunk more than $400 million in equity into Sunwest, would get about 10 cents on the dollar in the settlement.

In a statement released to The Am Law Daily, Davis Wright said that it was happy with how the case was unfolding, but chose to settle for a confidential sum in order to avoid the costs and uncertainties of litigation.

"We stand by the legal representation and advice we provided our client and are happy now to move on," said the statement attributed to firm general counsel John Reed, who was unavailable for comment. An outside lawyer for Davis Wright, Joseph Arellano of Portland's Kennedy Watts Arellano & Ricks, didn't respond to an interview request.

A Davis Wright spokesman tells The Am Law Daily that the settlement payment is fully insured after the firm's normal deductible. Ralph Cromwell, Jr., from Seattle's Byrnes & Keller worked with Arellano in advising the firm on the settlement.

Sunwest agreed in September to sell as many as 148 senior living facilities to private equity giant The Blackstone Group. U.S. district court judge Michael Hogan in Eugene, who is overseeing a thicket of Sunwest-related litigation involving the SEC, lenders, and investors, must approve the sale. The company is being reorganized in the district court, but a Chapter 11 case is pending.

K&L Gates, Thompson & Knight, and an accounting firm for Sunwest are still facing litigation brought by investors and Grassmueck in state and federal court.

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