Greenberg Traurig is facing a malpractice investigation by the Heller Ehrman estate, according to Greenberg's court filings (.pdf) and an attorney representing Heller's creditors committee.
At issue is Greenberg's apparent failure to discover that Heller's biggest creditor, Bank of America, had terminated its security interest in the firm. Lawyers familiar with the matter say that Heller, which retained Greenberg last summer, would have had much better leverage with its banks and other creditors if it had known BofA wasn't a secured creditor and may have even been able to avoid bankruptcy.
"You have to imagine that if Heller had known [the bank's situation] for months before, it might have negotiated a much more orderly dissolution, and one that would have caused much less pain to everyone involved," said Michael St. James, a solo bankruptcy practitioner who represents 17 vested retirees who are among Heller's creditors.
BofA's termination -- which it has since characterized as a "clerical error" -- should have been found in a routine search of public documents typically done within days of being retained by a distressed client, bankruptcy lawyers said.
Instead, lawyers involved say, it was unearthed by lawyers for Heller's San Francisco landlord just weeks before the Dec. 28 bankruptcy filing.
A lot of money is at stake: Bank of America has been sued by Heller's other creditors, who want the bank to return $51 million Heller paid to it in the 90 days leading up to the bankruptcy filing.
Heller's dissolution plan predicted a 90 percent success rate collecting on $174 million in accounts receivable and work in progress. Since the bankruptcy, Heller has only been able to collect $8 million. If the investigation leads to a malpractice suit, Greenberg could face tens of millions in damages if Heller successfully argues Greenberg's failure hurt its collections.
More than 1,100 creditors have filed claims totalling $376 million in the Heller bankruptcy. Hundreds of former employees who weren't paid severance or accrued vacation have filed a claim for $30 million. Scores of former partners have scattered to dozens of firms where they know they may be sued one day for fees they earned while at Heller.
In February, a lawyer for Heller's creditors signaled that he had an undisclosed deep pocket in his sights. Thomas Willoughby, who represents Heller's creditors committee, said in February that he was "thinking about people way beyond shareholders," whom he declined to name at the time. The creditors have since filed the suit against Bank of America, and have said they will go after former Heller shareholders next if attempts to work out an all-encompassing deal fail.
Willoughby said Monday that the estate and the creditors have hired a firm, Lovitt & Hannan, to investigate "potential claims against third parties," which include the Greenberg issue.
But several sources close to the case who spoke on condition of anonymity said the main issue is Greenberg's failure to search Heller's public Uniform Commercial Code filings when it was first retained by the firm in the middle of last year. Greenberg also represented Bank of America at the same time, according to a disclosure in its employment application before the bankruptcy court.
The application, filed by Heller dissolution committee chairman Peter Benvenutti, acknowledges that the creditors and the estate "will jointly investigate whether those pre-petition services give rise to any claims in favor of the estate."
Les Corwin, a partner at Greenberg Traurig who was hired in June to handle the firm's dissolution, referred questions to a firm statement.
"As previously disclosed in Greenberg Traurig's retention papers, we were advised that the creditors' committee believes there should be a review of the firm's representation of Heller Ehrman prior to the bankruptcy," the statement said. ... "We have not yet ... been contacted .. with respect to any investigation concerning the pre-bankruptcy services our firm provided. We are proud of the results we have achieved and the work we have done, and continue to do, for Heller Ehrman."
Corwin specializes in partnership law, partnership dissolution and partnership bankruptcies, as well as general commercial litigation and appellate law, according to his biography.
According to the employment application, Greenberg did not begin advising Heller on bankruptcy matters until Dec. 10, although it was retained last June. Corwin charged $800 an hour, while Keith Shapiro, the head of Greenberg's bankruptcy practice, charged $850 an hour.
On the eve of the filing, Greenberg and Corwin were replaced as general counsel by John Fiero at Pachulski Stang Ziehl & Jones, who referred comments to Corwin. Greenberg has worked as co-counsel, mainly advising on the overseas aspects of the bankruptcy, earning $415,000.
The UCC filings show who is a secured creditor and to whom a distressed client might or might not owe money.
On Oct. 2, a week after Heller decided to dissolve, Bank of America filed a UCC statement attempting to correct the 2007 filing.
St. James said lawyers for 333 Bush Associates, Heller's landlord, found the mistake and were the first to inform Heller and Greenberg Traurig.
St. James and several other bankruptcy lawyers who declined to be named said a UCC search is one of the first things to do when retained by a client facing possible bankruptcy.
"I've been practicing for nearly 30 years and have never begun a debtor representation without pulling the UCC run," St. James said.
"After hearing about Heller, I raised the issue with many of my colleagues, and none of them could imagine commencing a debtor representation without commencing a UCC run first, within the first day or two. One of the reasons is because it could materially alter the negotiating dynamic, and in many cases, possibly including Heller, might have made a bankruptcy filing unnecessary."
The amount of time attorneys have spent on the Greenberg issue became clear Monday, after the first fee applications were filed to the court. The applications include dozens of references to the "Greenberg issue" or simple "GT." Lovitt & Hannan's fee application does not mention Greenberg but includes several redacted lines. Former Heller partner Jonathan Hayden, who sits on the dissolution committee and is now at the four-attorney Lovitt & Hannan, did not return a call for comment.