Heller Estate, Creditors Pursue Banks Blamed for Firm's Bankruptcy

Amanda Royal

The Recorder

Like a pack of hounds, the Heller Ehrman estate and its creditors teamed up Friday to go for the jugular of the banks blamed for the firm's bankruptcy.

"The resolution of this claim is the silver bullet to a plan and everybody wants to get there except the banks," John Fiero of Pachulski Stang Ziehl & Jones, who represents the Heller estate, told a bankruptcy judge.

The creditors, with the estate's support, are asking for standing to sue the banks to get back $50 million Heller paid them in the months leading up to its bankruptcy in December.

Fiero argued that the banks are just trying to confuse and delay by objecting to the creditors' motion.

And while lawyers for both sides begged, cajoled and argued for more than an hour, Judge Dennis Montali of the U.S. Bankruptcy Court for the Northern District of California said he was still "on the fence" and didn't rule on the motion Friday.

It was the first time the estate and the creditors have said how badly they want to sue Bank of America and Citibank.

Because of what the banks claimed was a "clerical error" in 2007, the banks failed to secure their loan with Heller. Bank of America, the main lender, attempted to correct the error in October, but both that action and the $50 million in payments fall in the 90-day "preference" period before the bankruptcy and can be tossed out by the judge.

Also for the first time, Fiero sat on the same side of the courtroom as Thomas Willoughby, of Felderstein Fitzgerald Willoughby & Pascuzzi, who represents the creditors.

They hammered again and again at their point that everyone wants to know whether the banks were secured or unsecured. With that decided, the parties can arrive more quickly at a bankruptcy-ending liquidation plan, they said, and speed up settlements.

"We need to know this fact. Is there a preference action or not? And many other things fall in the rest of the case based on this fact," Willoughby said. A half-hour later, he returned to that again: "Bringing the preference now in this case is absolutely critical to the progress of this case," he said.

Montali seemed to agree that the question was crucial, but he was hesitant to "split claims without knowing what I'm splitting."

But he agreed with the banks that if the creditors committee tried and failed to get the banks declared unsecured based on a "preference claim," the estate could not sue on the same claim.

"That would be two bites at the apple," Montali said. "And you only have one [bite], and the question is, can you eat the whole apple?"

Fiero and Willoughby agreed that if the creditors are allowed to sue, the estate couldn't also bring the claim.

Lawyers for the banks, including M. David Minnick of Pillsbury Winthrop Shaw Pittman, argued several points on the dangers of claims splitting.

Montali said he would issue a ruling in the next few days.

If the banks have to pay back the $50 million, they would become the biggest unsecured creditor, with a $50 million claim. It would still improve the percentage of payback each creditor walks away with, Willoughby said.

Winning a suit against the banks would add a lot of meat to an estate that's looking quite asset-starved recently. A monthly operating report filed Wednesday showed only an $8 million drop in accounts receivable since the bankruptcy filing. That report lists $69 million in collectible accounts receivable.