As Mayer, Brown, Rowe & Maw readies for potential claims arising out of its representation of failed commodities brokerage Refco, the Chicago law firm's work for another bankrupt company has already triggered a $17 million suit against it.
The bankruptcy trustee for defunct health care management company CMGT Inc. has sued its former lawyers at Mayer Brown for failing to challenge lawsuits brought against the company by its former financial adviser, Gerry Spehar. According to the trustee, the unopposed litigation crippled the company and handed Spehar a $17 million default judgment.
But Mayer Brown claims the trustee's suit is part of a scheme by none other than Spehar, who it claims is financing the case in the hopes of turning a worthless default judgment based on meritless and speculative damages claims into a $17 million windfall. In court papers, the firm has denounced the suit as a "perversion of the civil and bankruptcy systems."
Last month, the suit largely survived the motion to dismiss Mayer Brown filed in federal court in Chicago. In her June 28 decision, U.S. District Court Judge Virginia M. Kendall said the firm had failed to sufficiently demonstrate fraud by the trustee, David Grochocinski, and Spehar to merit dismissal. She also said there were questions of whether Mayer Brown had a duty to advise CMGT on Spehar's suit.
In a July 13 filing, Mayer Brown moved to have the court reconsider, insisting that Spehar was the true party in interest, as he stood to receive 90 percent of the recovery. In the alternative, the firm asked the judge to certify for interlocutory appeal to the 7th U.S. Circuit Court of Appeal the question of whether an unpaid default judgment can form the basis for a claim of actual damages in a legal malpractice case.
One of the trustee's lawyers, Robert Carroll of Chicago's Edward T. Joyce & Associates, deferred comment to court filings except to say Mayer Brown's allegations of a scheme were "totally bogus." Mayer Brown's lawyer, Stephen Novack of Chicago's Novack & Macey did not return a call seeking comment.
Spehar also declined to comment on the case.
In its court filings, Mayer Brown has consistently denied it was representing CMGT in the dispute with Spehar, though the firm's position is complicated by the fact that the lead partner on the matter addressed and opined on the dispute in a number of e-mails.
That partner was Ronald Given, who is also named as an individual defendant in the trustee's suit. Given, who left Mayer Brown in May to become general counsel at the Argonaut Group, an insurance underwriter, began representing CMGT in 2000. At that time, the Chicago-based company's chief concern was finding $2 million in financing in order to fund its operations. Spehar of Glendale, Calif.-based Spehar Capital was hired the following year to explore financing options.
Given and Spehar clashed in 2003 when CMGT began leaning toward a transaction proposed by one of its investors. Spehar insisted his compensation agreement, which provided for a success fee and stock incentives, applied to the deal, but Given said the company had come across the deal without Spehar's assistance.
The trustee claims that, in the course of heated discussions on the topic, Given actually invited suit by urging Spehar to "bring it on." In an August 2003 e-mail copied to CMGT head Louis Franco, Given told Spehar his claim was without merit.
On Sept. 12, 2003, Spehar sued in California for a temporary restraining order blocking the proposed financing deal. No one from CMGT appeared to contest it and the TRO was granted. In an e-mail forwarding the TRO order to CMGT officers and shareholders, Given said: "Mayer Brown has not been retained to deal with this matter, and we do not expect to be."
In another e-mail to the same group a few days later, Given explained that Spehar's action had caused the financing deal to fall through, leaving the company without future options. He offered an assessment of the case, noting possible jurisdictional issues and calling Spehar's claim "absolutely spurious." But he added: "Spurious or not, CMGT has no money to fight this battle."
Given concluded the e-mail by inviting recipients to contact him with any questions they had about the situation.
CLIENT RELATIONSHIP
Kendall cited this e-mail extensively in her decision, finding that Given's offered assessment of Spehar's suit and his invitation to discuss the matter further may have given rise to an attorney-client relationship with regard to the suit. If such a relationship existed, Mayer Brown would have had a duty to act on CMGT's behalf.
Spehar went on to get a preliminary injunction that was also unopposed. In December 2003, he amended his complaint to seek monetary damages.
At a hearing in Los Angeles in February 2004, where Spehar was again unopposed, the financial adviser explained that he was entitled to around $300,000 in fees and expenses. He also claimed he was to have received a success fee equal to 6 percent of CMGT and investment banking rights on an initial public offering that had been projected for 2006. He argued that, according to CMGT projections that valued the company at almost $200 million, his stock should have been worth about $11.25 million and his investment banking rights another $5.4 million.
According to a transcript of the hearing, the judge who granted the default judgment expressed skepticism about Spehar's ability to collect on it. "Okay, so probably one of two things will happen," the judge said. "They will set it aside, walk away from the company or they will go bankrupt."
But Mayer Brown claims Spehar had another scenario in mind.
"Ultimately, the default judgment did Spehar no good," Mayer Brown said in its motion to dismiss. "After all, CMGT had no money to pay it -- and never will pay even one penny of it."
Spehar was able to use his default judgment to file an involuntary bankruptcy petition against CMGT, forcing the company into a Chapter 7 liquidation proceeding. The firm claims Spehar is using the bankruptcy forum to cast blame on the lawyers for a spurious default judgment Spehar is himself responsible for.
"In short, the claim is that CMGT's lawyers should pay Spehar $17 million because they did not prevent Spehar from committing an injustice," the firm said in its motion to dismiss.
In response, the trustee decried the firm's "unprofessional, procedurally improper and unwarranted attack" on himself and Spehar, whom he noted was not a party to the case. The trustee noted that there was no evidence of bad faith on his part in filing the case, which he said was his decision and not Spehar's. He also rejected the characterization of the default judgment as bogus, noting that Mayer Brown had presented no evidence as to why the California order was not facially valid.
Kendall agreed that Mayer Brown had not provided enough evidence of fraudulent activity by the trustee to warrant dismissal of the case.
In its motion to reconsider, Mayer Brown urged the court to put aside any distinction between the trustee and Spehar. It also pushed the judge on the issue of damages, arguing that prior case law should bar a bankruptcy trustee recovering on judgment against CMGT that the company is never going to pay.
