A judge on Wednesday ordered the appointment of a receiver to defunct IP shop Morgan & Finnegan and enjoined it from selling or transferring its assets after the failed New York firm found itself the target of a lawsuit from lender JPMorgan Chase.
JPMorgan filed suit against Morgan & Finnegan in New York Supreme Court on February 27, claiming the firm defaulted on its loan agreement and owed the bank more than $4 million. The firm dissolved last month after Locke Lord Bissell & Liddell agreed to hire more than 30 of its lawyers.
In his order (download the document here), Judge Richard Lowe is requiring Morgan & Finnegan to hand over copies of its invoices and billing information to JPMorgan. It must also identify all its assets, including partner capital accounts. Lowe appointed University Management Associates & Consultants Corp. as temporary receiver to take control of the firm's books and safeguard JPMorgan's collateral.
A lawyer for JPMorgan, Jay Teitelbaum of Teitelbaum & Baskin, calls the injunction "appropriate in this circumstance." A spokeswoman for Locke Lord says the firm is aware of the lawsuit, but notes it is not a party to the lawsuit.
"The handling of it is totally up to the former Morgan & Finnegan lawyers and their counsel," the spokeswoman says. Senior partner John Sweeney was not immediately available for comment.
The lawsuit was first reported by the blog Above the Law.
JPMorgan is just the latest bank to find itself dealing with the sticky issues that arise in the wake of a law firm's collapse. Three Citigroup law firm clients -- Heller Ehrman, Thelen, and Thacher, Proffitt & Wood -- were forced to dissolve in 2008 after the bank called in the loans. Citi and Bank of America might lose a collective $50 million to the Heller estate because of a "clerical error."
According to the February 27 complaint (download the document here), JPMorgan agreed in 2008 to finance a credit facility for Morgan & Finnegan to help the firm cover its leasing costs at Three World Financial Center. As detailed in the court filing, the annual cost for the two floors Morgan & Finnegan originally leased in 2003 would have reached $4.34 million by 2008.
JPMorgan agreed to provide Morgan & Finnegan with a $2 million revolving line of credit and a letter of credit for nearly $4.97 million, enabling the firm to pay the security deposit required under the lease. JPMorgan secured its interest in Morgan & Finnegan's loan in March 2008.
By December, Morgan & Finnegan was in active negotiations with Locke Lord, the complaint says. In February, the firm voted to dissolve and cease operations. Locke Lord hired 30 of the attorneys, including senior partners John Sweeney and James Gould. Lock Lord agreed to pay them at least $1.6 million and $1 million, respectively, the complaint says, with revenues of $26 million.
Under a cross licensing agreement, Locke Lord and Morgan & Finnegan occupied the World Financial Center premises and used the former boutique's property and fixtures, the complaint says.
JPMorgan says it did not agree to allow its collateral to be so "encumbered." It says Morgan & Finnegan had previously tried to escape its lease and missed its February rent.
The firm's landlord on February 3 asked to draw the full $4.9 million under the letter of credit. Three days later, the bank says it declared Morgan & Finnegan in default and demanded payment. Locke Lord is now using the space, the complaint says.
Morgan & Finnegan has since failed to repay the $4.9 million. JPMorgan says it has seized the firm's bank accounts, valued at $981,641. University Management, which JPMorgan hired to review the law firm's books, found the firm had $6.6 million in billable accounts receivables through December 31. About $1.7 million were marked as disbursements.
The firm claimed it had unbilled accounts worth $900,000. More than half of the receivables, or $3.6 million, are 90 days past due.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.