(John Disney/Daily Report)
Call her a former employee, nonequity partner or contract worker, it doesn’t matter to Sheila M. Gowan—Diamond McCarthy has no claim to $1.4 million she earned while working on a huge Chapter 11 bankruptcy. That’s what she argued in a recent response to a breach-of-partnership lawsuit that her old law firm filed against her in Harris County state district court.
According to the original petition in Diamond McCarthy v. Gowan, which was filed on July 2, Gowan was a nonequity partner in Diamond McCarthy from April 2008 until February 2013. In December 2008, she was appointed Chapter 11 trustee of the Dreier LLP estate, a law firm that filed for bankruptcy after “its principal was indicted for committing investment fraud using a Ponzi scheme,” according to the petition. [See " Firm Sues Former Partner Over $1.4 Trustee Fee Earned in Drier Bankruptcy," Texas Lawyer, July 14, 2014, page 1.]
Under the contractual terms of her employment with the firm, all fees Gowan would earn from her engagement as the Dreier trustee would be the property of and owed to Diamond McCarthy (DM), according to the petition.
Gowan worked almost exclusively on her engagement as Dreier trustee during her time with the firm. The firm provided substantial support for those efforts, it alleges in the petition, paying Gowan’s biweekly “partner draws,” as well as insurance and substantial outlay of resources in reliance on its contract with Gowan that it would be entitled to the Dreier trustee fee when it became payable.
On Aug. 11, Gowan, who is now of counsel at New York’s Sadowki Fischer, filed a blistering 12-page response to the petition—a filing that she alleges “is premised on a number of erroneous allegations.” She argues that:
· She did not sign a partnership agreement with DM;
· She was not a financial burden on DM. Rather DM “was cash-strapped, at the limits of its credit lines, and sought to pledge to third-party lenders the Drier bankruptcy estate attorney fees receivables and, upon information and belief, the Chapter 11 trustee’s compensation, and other attorney fees receivables. If DM successfully hypothecated the trustee’s compensation, DM may have made material misrepresentations to the bankruptcy court.”
· While DM claims she “earned” trustee compensation while employed by the firm, “bankruptcy trustees have no right to compensation; their compensation is entirely the court’s discretion.”
The response also alleged that her terms of employment with DM do “not reference payment over to DM of any trustee commissions that might be awarded to Gowan by a bankruptcy court.”
“Whether Gowan was labeled an employee or a contract attorney or a nonequity partner is not important,” according to Gowan’s response. “Nonequity partners at DM do not have an interest in DM’s assets, cash, profits, accounts receivable, unbilled work in progress, furniture, fixtures or equipment. Nonequity partners do not share in the debts, obligations or liabilities of the partnership, do not make any decisions about compensation and are not required to make capital contributions,” according to the response. “DM’s nominal ‘partners’ like Gowan have none of the legal indicia of partnership. They are employees.”
The response also alleges that “DM earned approximately $11 million in legal fees for its work on the Drier bankruptcy case. DM would not have been hired or approved as the trustee’s counsel if Gowan had not been appointed as the Chapter 11 trustee and filed an application seeking to employ DM as her counsel.”
Gowan did not immediately return a call for comment. Neither did her lawyer, George R. Gibson of Houston’s Nathan Sommers Jacobs.
Allan Diamond, Diamond McCarthy’s managing partner, did not immediately return a call for comment. Kathy Patrick, a partner in Houston’s Gibbs & Bruns who represents Diamond McCarthy, also did not return a call for comment.