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Conflicts Continue to Plague SonicBlue Bankruptcy, This Time With O'Melveny
The Recorder
April 21, 2009
O'Melveny & Myers is under fire in the SonicBlue bankruptcy for failing to disclose potential conflicts of interest until asking the court to approve $1.3 million in fees last week.
The electronics maker filed for bankruptcy protection in 2003, in a case that led to major trouble for its law firm, Pillsbury Winthrop Shaw Pittman, over undisclosed conflicts of interest. According to last week's filing, by O'Melveny partner Suzzanne Uhland, her firm represented SonicBlue at the same time that it was counsel to a parent company of one of SonicBlue's debt holders. The company, Smithfield Fiduciary, was acquired by a subsidiary of JPMorgan Chase in 2004. O'Melveny has represented JP Morgan on more than 400 matters between 2003 and now.
O'Melveny, through a spokeswoman, said it was a voluntary disclosure of "nonconflicting client relationships," which adheres to the standard for special litigation counsel in a bankruptcy case.
But William McGrane, who represents a SonicBlue creditor, said O'Melveny's involvement in a controversial SonicBlue settlement means they should have disclosed the relationship much earlier.
Uhland served as special counsel to SonicBlue in a patent licensing dispute between Intel and its rival VIA. SonicBlue had a licensing agreement with VIA that involved it in the case, which ended in a $12.5 million settlement in 2006. It was later revealed that the judge was not told about a waiver included in the settlement that benefited SonicBlue's debt holders, including Smithfield, over VIA.
The controversy surrounding the settlement was a key factor in the judge kicking Pillsbury off the case, reconfiguring the creditors committee, and appointing a trustee. Pillsbury was representing debtholders and the bankrupt company at the same time. SonicBlue's estate sued Pillsbury for malpractice and breach of fiduciary duty, demanding the firm return $4.2 million in fees and pay $11 million in damages. In a settlement reached last month, the firm will pay $7.6 million and forgo $2.4 million in outstanding fees to SonicBlue's estate.
Duane Morris' Ron Oliner, counsel to SonicBlue's creditors committee, asserted that O'Melveny shouldn't be paid because it was involved in the VIA settlement, referring to it as a "fraud on the court" in a draft opposition motion that he used to negotiate a $500,000 cut to O'Melveny's fees.
Oliner sent the draft to McGrane, an attorney for creditor Freefall Claims, who filed it on April 16 with the bankruptcy court. Oliner's document invokes "the unseemly events" which ultimately gave rise to Pillsbury's disqualification.
"While O'Melveny's culpability may not be as great as others'," Oliner's draft states, "it is certainly not without blame, and undeniably played a key role in both the inclusion of the waiver in the settlement agreement and omission of this important deal term from the settlement motion and supporting documents."
McGrane, a partner with McGrane Greenfield, had already objected to O'Melveny's fee request, but when the conflict issue came to light last week, he reiterated that O'Melveny should have to pay back $1.1 million it has already collected. McGrane was the one who informed Uhland of O'Melveny's relationships with Smithfield, according to footnotes in Uhland's filing. McGrane is known for being one of the most vocal lawyers on the case.
"I can't object to them not suing O'Melveny, but I can object to [O'Melveny] getting any money out of this case," McGrane said.
A response is forthcoming from SonicBlue's creditors, Oliner said. Independent of the surprise disclosures, Oliner had negotiated that O'Melveny chop $500,000 off its fees, down to a final payment of $250,000, according to the firm's fee request filings.
"The committee was surprised to see O'Melveny's belated disclosures of additional connections and is evaluating the significance," Oliner said on Monday.
The conflict disclosures throw a wrench into the progress of the six-year-old bankruptcy, which lawyers were hoping to conclude this summer, to coincide with the retirement of the case's judge, Marilyn Morgan of the U.S. Bankruptcy Court for the Northern District of California. A liquidation plan was approved last fall, and $75 million has already been paid to creditors.
A hearing is slated for May 5 in San Jose, Calif., before Morgan.
The fee request was first filed under seal in November but did not contain the disclosures. That is the same month Uhland says she became aware of the connection between Smithfield and J.P. Morgan.
