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Trustee Seeks $30 Million Hit for SonicBlue Law Firms, Creditors
The Recorder
April 07, 2008
The court-appointed trustee in the SonicBlue bankruptcy case has asked the judge to order two law firms and three creditors to pay a total of at least $30 million in compensatory damages for breaches of fiduciary duty.
In the complaints filed last week, the trustee asks San Jose, Calif., bankruptcy Judge Marilyn Morgan to force the Los Angeles-based firms -- Pillsbury Winthrop Shaw Pittman and Levene, Neale, Bender, Rankin & Brill -- to disgorge all fees and expenses. Pillsbury has collected $4.2 million in the case, and Levene earned $1.2 million.
The filings ask for compensatory damages of at least $11 million from Pillsbury, former counsel for SonicBlue; $5 million from Levene, former counsel for the creditors' committee; and $14 million from the group of three creditors. The trustee also asks that the court consider punitive damages for Pillsbury and the creditors.
"These are large numbers for any firm, for anybody. And the threat of punitive damages is always something that can make you stay up at night," said Michael Cooper, a partner with Wendell, Rosen, Black & Dean who represents various parties in bankruptcies and is not involved in the case. The trustee, Dennis Connolly, was appointed at the urging of the U.S. bankruptcy trustees last year when misconduct allegations heated up.
Monday's filings came 10 days after a creditor's attorney asked the judge to refer Pillsbury partner William Freeman to the U.S. Attorney for the Northern District of California for alleged criminal misconduct relating to a failure to disclose information under penalty of perjury.
Bankruptcy lawyers noted that there's no guarantee Morgan will adopt the trustee's position, or set any compensatory damages so high.
"It's a well-drafted complaint," Cooper said, "but it's subject, of course, to proof."
Alleged failures to disclose key information are at the heart of each complaint.
In 2002, Pillsbury promised in a letter to three hedge funds, which had invested in a $75 million bond issue, that they would be repaid in full should SonicBlue undergo bankruptcy. The hedge funds threatened to sue for repayment in September 2006. Failure to disclose that promise, which Pillsbury attorneys called a "scrivener's error," eventually led to the judge kicking the firm off the case in March 2007. That disclosure failure is also part of the recent complaint.
Another disclosure failure was brought to light in recent months. The court in 2005 had ordered the creditors' committee, led by partner Ron Bender of the Levene firm, to investigate whether Pillsbury received preference payments on account of antecedent debt -- payments in the 90 days leading up to SonicBlue's Chapter 11 bankruptcy filing. All parties hired in a bankruptcy are legally required to disclose any existing connections with debtors, including preference payments.
The failure of both firms to disclose that Pillsbury had allegedly received preference payments is central to the complaints filed on Monday and the criminal referral requested by another attorney in the case a few weeks ago. After persuading the committee not to pursue a preference action against Pillsbury, Levene Neale congratulated Pillsbury on the expiration of the limitations period.
"[R]ecognizing that Pillsbury's declaration -- that no payment Pillsbury received was on account of an antecedent debt -- was incorrect as a matter of law, Levene Neale sent Pillsbury an e-mail in which it advised Pillsbury on procedures that Pillsbury could implement to avoid future preferential transfer exposure."
Steven Schon, a Howard, Rice, Nemerovski, Canady, Falk & Rabkin partner representing Pillsbury, criticized the trustee's complaints in an e-mail on Friday.
"The issues involved in the SonicBlue bankruptcy and various claims are ongoing and have evolved over the past several months," Schon wrote. "We are disappointed the complaint does not take into account the evidence favorable to Pillsbury or recognize that Pillsbury's efforts benefited the estates and their creditors."
The trustee listed a series of allegations in three complaints filed March 31. Besides the issues of preference payments and disclosure omissions, Connolly stated:
- that Levene failed to pursue claims against the 2002 hedge funds and failed to implement and comply with the committee by-laws;
- that Pillsbury took the case when it had an interest that should have precluded it from doing so; and
- that three creditors committed fraud and misappropriation of confidential and privileged information.
"It's very unusual," said Michael Isaacs, who represents trustees, creditors committees and other court-appointed fiduciaries. He is not involved in the case.
"The whole point is you have to overdisclose, not underdisclose," he said.
"No final determination on any of the Trustee's claims has yet been made," Schon noted by e-mail, "and we intend to address these matters in the court."
