The Firms

May 5, 2011 10:32 PM

Bryan Cave, Holland & Knight Hit with Suits in Bankruptcy Court

Posted by Brian Baxter

Bryan Cave and Holland & Knight both face newly filed suits over their alleged roles advising two former clients that are now in bankruptcy.

Bankruptcy trustees for mortgage loan broker Estate Financial Inc. (EFI) and affiliate Estate Financial Mortgage Fund (EFMF) filed malpractice complaints against Bryan Cave in U.S. bankruptcy court in Santa Barbara, Calif., on April 28.

The trustees, who are seeking to recover assets for EFI and EFMF investors, claim that Bryan Cave and restructuring counsel Katherine Windler in Los Angeles looked the other way while their client, the now-defunct lenders EFI and EFMF, fraudulently sold mortgage-backed securities to investors, according to Cal Coast News. Bryan Cave maintains that the suits, which seek $100 million in damages, have no merit.

EFI and EFMF filed for bankruptcy in June 2008, and EFI principals Karen Guth and Joshua Yaguda pleaded guilty in October 2009 to 26 felony counts that included charges of fraudulently selling mortgage-backed securities to investors. Guth was given a 12-year prison sentence in December 2009, while Yaguda was sentenced to eight years in prison, according to local news reports.

EFI trustee Thomas Jeremiassen and EFMF trustee Bradley Sharp contend that Bryan Cave was complicit in Guth's and Yaguda's illicit conduct by failing to advise EFI to comply with various state and federal laws.The suits seek $100 million in damages from the firm. (Click here for the 60-page EFI complaint and here and here for the 80-page EFMF complaint.)

"These lawsuits are nothing more than an unfortunate and misguided attempt by the bankruptcy trustees to hold Bryan Cave liable for events that occurred solely at EFI and EFMF and which apparently began long before the firm was retained," said Bryan Cave spokesman Bennett Kleinberg in a statement. "The cases are without merit and we intend to vigorously defend against them."

Kevin Rosen, chair of the legal malpractice defense group at Gibson, Dunn & Crutcher in Los Angeles, and bankruptcy partner Samuel Newman are representing Bryan Cave in the suits. Rosen also is representing Bingham McCutchen in a suit filed last month against Los Angeles Dodgers owner Frank McCourt over the firm's role in drafting an invalidated marital property agreement that could determine control of the team after a nasty divorce battle.

Steven Gubner and Larry Gabriel of Woodland Hills, Calif.-based Ezra Brutzkus Gubner are serving as special litigation counsel to EFI trustee Jeremiassen, while EFME trustee Sharp is being represented in his suit by John Reitman and Aleksandra Zimonjic of L.A. litigation and bankruptcy boutique Landau Gottfried & Berger.

Bryan Cave wasn't the only Am Law 100 firm to become ensnared in bankruptcy litigation this week. Holland & Knight was slapped with a 20-page civil complaint filed by bankrupt Industrial Enterprises of America (IEAM) on April 30.

As previously reported by The Am Law Daily, former IEAM chief executive John Mazzuto and outside lawyer James Margulies, a founding partner of Cleveland firm Margulies & Levinson, were indicted by state prosecutors in New York last year for running a $60 million stock scheme that contributed to the collapse of Pittsburgh-based IEAM, which sold antifreeze and other automotive chemicals before filing for Chapter 11 in May 2009.

Both Mazzuto and Margulies are contesting the criminal charges, which claim that the two used a pump-and-dump scheme to drive up the price of IEAM's stock. But rather than reward company employees, the stock scheme contributed to IEAM's collapse when Mazzuto and Margulies used that money for personal expenses and to pay their lawyers, according to the criminal charges.

Holland & Knight, which had been litigation and securities counsel to IEAM, is accused of participating in a "large-scale scheme to loot IEAM" through "willful participation, gross negligence, conflicts of interest, and fraud" that allowed the stock scheme to proceed and to deprive IEAM of its working capital. The company claims in its complaint that it "had the right not to have its attorneys be disloyal to it" and loyal to Mazzuto instead.

A Holland & Knight spokeswoman had not responded to an Am Law Daily request for comment by the time of this story. The suit against the firm comes less than a month after IEAM sued Baker & McKenzie and former partner Martin Weisberg over their alleged roles contributing to the company's demise. Baker & McKenzie has declined to comment on the complaint.

Filed over the weekend by Thomas Curran of New York's Peckar & Abramson and Christopher Loizides of Delaware's Loizides, the Holland & Knight suit is one of nine civil adversary complaints filed by IEAM and its affiliated debtors against defendants that allegedly profited from the company's collapse.

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