April 20, 2011 7:08 PM

Kelley & Ferraro Exits Bankruptcy After Settlement with Ex-Partner's Widow

Posted by Brian Baxter

Kelley & Ferraro, one of the nation's largest asbestos litigation firms, emerged from bankruptcy this week after reaching a confidential settlement with the widow of cofounding partner Michael Kelley.

The settlement ends five years of litigation between Lynn Arko Kelley and Kelley & Ferraro name partner James Ferraro, according to the Daily Business Review, a sibling publication. Ferraro told the DBR that the settlement is somewhere between the $10 million he offered Lynn Kelley and the $35 million she requested in years of litigation against the firm cofounded by her late husband.

Michael Kelley died of a sudden heart attack in 2006 while on his way to attend the Fiesta Bowl in Arizona. He left behind an estate worth $33 million, including homes in suburban Cleveland and Hilton Head, S.C., and 17 cars, according to The Cleveland Plain Dealer.

In the suit, Lynn Arko Kelley claimed that the firm's partnership agreement called for the firm to dissolve in the event one of its founding partners died. A jury awarded Lynn Kelley $4.25 million in 2008, a fraction of the $3.5 billion she initially sought.

Both of Kelley & Ferraro's name partners made a fortune in asbestos litigation. The firm, which estimates that it has 30,000 clients, helped secure a $4 billion settlement with Halliburton in 2003 to resolve asbestos claims against the company. Ferraro owns a penthouse in Manhattan, a 21,000 square foot compound on Martha's Vineyard, and the Arena Football League's Cleveland Gladiators, which he moved to the city from Las Vegas three years ago.

But the ongoing litigation with Lynn Kelley began to threaten Kelley & Ferraro's existence. Last year a state appellate court in Ohio ruled that the firm should be broken up and that Lynn Kelley should receive a new trial on damages after overturning rulings against her by lower state courts.

With Lynn Kelley seeking $35 million from Kelley & Ferraro, Ferraro himself reached out to an old friend from Miami for help in resolving the dispute with Kelley's wife. Ferraro hired Thomas Lauria, global head of the financial restructuring and insolvency group at White & Case, to help him put his firm into bankruptcy earlier this year and remove the litigation risk posed by Lynn Kelley. When Kelley & Ferraro filed for bankruptcy in Miami on January 26, civil proceedings with Lynn Kelley were stayed. They were set to begin that week in Cuyahoga County Common Pleas Court in Cleveland.

Lauria, an American Lawyer Dealmaker of the Year for his work in the Texas Rangers bankruptcy case, was out of the office on Wednesday and unavailable for comment. He told The Am Law Daily in February that Kelley & Ferraro's Chapter 11 case raised the question of whether or not a law firm or other professional services firm could successfully reorganize in bankruptcy.

"There have been a number of law firms over the years that have filed for bankruptcy protection, going back to Finley Kumble, and they've all basically ended up in liquidation," Lauria told us at the time. "Once partners pick up and leave, the clients leave, there's no income, and everybody loses. We viewed filing for Chapter 11 as the least bad option to provide for the possibility that [Kelley & Ferraro] could continue as a going concern, and that the value of the client relationships could be realized for the creditors, whether it's [Kelley's] ex-wife or the other owners of the firm."

On Monday, U.S. bankruptcy judge Robert Mark in Miami approved a settlement between Lynn Kelley and Ferraro. The Plain Dealer reports the judge was expected to order the firm's dissolution if a settlement was not reached.

Lynn Kelley's lawyer, Robert Wuliger of Cleveland firm Wuliger, Fadel & Beyer, told the DBR that the settlement was in the best interests of both sides. "I think it became self-evident to everyone that this was a very destructive war and that my client deserves a lot of credit for her courage and for her compassion," Wuliger said. "And Mr. Ferraro deserve a lot of credit for his skillful direction of his defense and for his appreciation of the wisdom of resolving this dispute. We have been at each other's throats since 2006."

Wuliger and Ferraro agreed to let Vorys, Sater, Seymour and Pease of counsel James McMonagle in Cleveland serve as mediator in their dispute, according to court records. McMonagle did not respond to a request for comment on the settlement.

Ferraro, who was represented by Cleveland firm Climaco, Wilcox, Peca, Tarantino & Garofoli in the Ohio litigation, told the DBR that "everybody's thrilled" with the resolution of the firm's Chapter 11 case and fight with Lynn Kelley. The firm is "not going to be dissolved and our 30,000 asbestos clients are being taken care of," he said. "It's a win-win for everyone."

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