A bankruptcy trustee for Saint Vincent's Catholic Medical Centers of New York has sued McDermott, Will & Emery for legal malpractice, charging that partners at the Chicago-based law firm "put their personal relationships and selfish economic concerns above the interests of the charitable institution they were entrusted to protect."
The 75-page complaint, filed Monday in Manhattan Supreme Court by trustee Richard Gray, alleges McDermott Will put off a much-needed Chapter 11 filing to facilitate self-dealing by two other members of the hospital group's restructuring team. As a result of the delay, the trustee claims, Saint Vincent's incurred greater operating losses, paid more professional fees and took longer to emerge from bankruptcy after it finally did file.
The suit is seeking $200 million for each of six causes of action, including legal malpractice, fraud and breach of fiduciary duty, as well as disgorgement of $4.5 million in previously paid legal fees. In addition to the firm itself, partners William P. Smith, Stephen B. Selbst and David D. Cleary are individually named as defendants.
In a statement, McDermott Will said it would not comment on the case because it is a pending matter.
The other members of the restructuring team cited in the suit are financial advisory firm Huron Consulting Inc., and turnaround boutique Speltz & Weis, whose principals David Speltz and Timothy Weis respectively stepped into the roles of chief executive officer and chief financial officer at Saint Vincent's in 2004. McDermott Will was retained to advise on the group's financial situation in December 2003.
According to the trustee, Huron offered to acquire Speltz & Weis for $17 million and a share of the latter firm's future revenue, much of which was expected to come from work for Saint Vincent's. But this deal would have been jeopardized by an earlier filing because court policy would have barred Huron and Speltz & Weis from both continuing to work for Saint Vincent's.
The suit claims McDermott Will decided to help facilitate this deal by concealing it from the board of Saint Vincent's as well as by delaying the bankruptcy filing as long as possible.
"Had the McDermott Defendants timely informed the Board of the [Speltz & Weis/Huron] Transaction and advised the Board of the adverse ramifications ... the Board could have replaced the Speltz and Weis parties and/or Huron in a timely manner and taken other appropriate steps to protect itself from the subsequent damages it suffered by heading into bankruptcy with conflicted and non-disinterested parties at its helm," the complaint states.
The trustee claims that, even after Saint Vincent's filed for bankruptcy in July 2005, McDermott Will continued trying to help Huron and Speltz & Weis remain in the case, annoying the judge, creditors' committee and U.S. Trustee's Office. The board of Saint Vincent's replaced McDermott Will with Weil, Gotshal & Manges in September 2005.
Saint Vincent's emerged from bankruptcy last year with a plan to focus more on its flagship hospital in Manhattan's Greenwich Village after the closing of money-losing hospitals in Brooklyn, Queens and Staten Island. The suit claims McDermott Will's actions delayed in particular the closing of St. Mary's in Brooklyn, which the suit claims was losing $20 million a year.
Gray declined to comment on the suit Wednesday. He is being represented by Alfredo F. Mendez of Abrams, Fensterman, Fensterman, Eisman, Greenberg, Formato & Einiger.
Suits by bankruptcy trustee have become a major hazard for law firms representing companies facing financial distress. Clifford Chance and Mayer, Brown, Rowe & Maw are other firms facing trustee litigation over their work for companies that went bankrupt.
Unlike shareholder claims, which are frequently subject to dismissal because of the U.S. Supreme Court's bar on claims for "aiding and abetting" securities fraud, trustees generally bring common-law claims based on duty or contract. Trustee cases are also generally funded by litigation trusts that can afford to pursue claims against firms more aggressively than securities lawyers, whose contingent fees incline them to focus on financial institutions with deeper pockets.