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Skadden Sues Thelen to Shift Liability
The American Lawyer
November 13, 2008
As law firms look to take advantage of Thelen's pending demise through hiring, Skadden, Arps, Slate, Meagher & Flom is looking to offload some potential liability in a six-year legal dispute over a bankrupt funeral home company.
The day after Thelen announced it would likely dissolve, Skadden sued the collapsing firm. In a complaint dated Oct. 29 filed in New York state court, Skadden says it is a defendant to a lawsuit (pdf) that evolved out of the 1999 bankruptcy of The Loewen Group Inc. Skadden says the claims against it aren't valid, but if the court rules against the firm, Thelen should be held to blame and forced to pay all of the damages.
Skadden is asking for compensatory damages, attorney fees and any relief the court deems proper. While Thelen is expected to be fully dissolved by Dec. 1, damages still could be collected -- typically, if a partnership dissolves, it must maintain adequate assets to meet creditor demands. But Thelen's lawyer, Allen & Overy partner Michael Feldberg, says "at this point I don't think anybody knows what will happen."
Calls to Skadden and its lawyer, Michael Allen at Shapiro Forman Allen & Sava, went unreturned. A spokesman for Skadden did not return a call seeking comment. Skadden indicated last week that it would withdraw the complaint and file a cross motion in the main litigation, Feldberg says.
Thelen could face even more claims against it. A lawyer for the plaintiffs in the original lawsuit, James Stricker at Kasowitz, Benson, Torres, Friedman says some of the other defendants in that case have indicated they may put in claims against Thelen as well.
"They just want to be on record in case Thelen liquidates," Stricker says. Damages in the case could reach $100 million, Stricker says.
The Skadden suit against Thelen is just the latest twist in a long, drawn-out litigation between banks and law firms revolving around the bankruptcy of funeral home company Loewen Group International.
In 1999, Loewen filed for Chapter 11 bankruptcy. In the years before the filing, the company had issued a series of debt securities. In three of them, valued at $750 million when issued, Loewen engaged State Street Corp. to administer the issue. For each issuance, Loewen and State Street executed a registration statement for the secured debt.
Loewen's collateral trustee, Bankers Trust, never received copies of those registration statements, even though it was contractually required to get copies. When Loewen collapsed in 1999, uncertainty developed regarding whether the debt holders had secured-creditor status. Loewen settled with those note holders during the bankruptcy, giving them a discounted value for the notes.
The note holders -- various mutual funds, investment funds and insurers -- weren't satisfied, and in 2002, sued State Street, claiming it had a duty to give Bankers Trust the documents.
Finger-pointing ensued. State Street, in a third-party complaint, put the alleged blame on Thelen, UBS and Salomon Smith Barney Inc. Thelen was Loewen's legal counsel, while UBS and Salomon were the company's underwriters on various securities.
UBS, in turn, filed a fourth-party complaint, blaming its own lawyers at Skadden. If UBS was found liable, the Swiss bank claims Skadden "should be found liable to UBS." (UBS continues, of course, to argue the entire suit is without merit and to deny any liability.)
The litigation has been bouncing around in the courts for a while. Most recently, in June, the New York Court of Appeals reinstated a previously dismissed negligence claim against State Street. It was the second time the case landed in an appeals court without first having gone to trial.
Skadden, in the Oct. 29 complaint, lays all alleged responsibility squarely on State Street's and Thelen's shoulders. The firm "vigorously disputes that any party other than State Street is liable" to the note holders' claims in light of the bank's contractual obligations to deliver the document. But if the court agreed with State Street that other parties are responsible, "any liability must be borne by Thelen, counsel for Loewen," Skadden claims.
The complaint continues, "By virtue of the foregoing, any judgment which may lie against Skadden Arps for damages should be satisfied in whole by Thelen, whose negligence exposed Skadden Arps to potential liability. To the extent that Skadden Arps is compelled to make a payment to UBS or incur any costs in defending the [complaint], Thelen is obligated to indemnify Skadden Arps to that same extent."
Thelen denies that claim. "First of all, [Skadden's complaint] doesn't mean [Thelen] has any liability to anybody," Feldberg says. "But beyond that, [Thelen] can't imagine how it would have any liability to counsel for one of the underwriters when it was counsel to the issuer. In other words they're on opposite sides of the transaction. Thelen is representing the borrower, and Skadden is representing the lender."
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
