Harrisburg-based firm Schutjer Bogar spent a year expanding across the country to meet the needs of a single client, but now that relationship has soured and the firm’s principals say the resulting loss of revenue has put the firm on the brink of bankruptcy and possible dissolution.

Without the client that once made up a third of Schutjer Bogar’s total billables, the firm is barely hanging on, CEO and Co-Chief Financial Officer Chad Bogar told The Legal on Thursday.

Bogar said the firm laid off two people in late January and is looking to lay off two more.

According to Bogar, the firm also recently reduced all of its employees’ salaries and he and firm co-founder Brad Schutjer have taken steep pay cuts.

"Brad and I are each making a third of what we were making," Bogar said, noting that the firm is now in the process of looking for bankruptcy counsel.

"There is a strong chance that if our creditors can’t continue to work with us we’ll have to dissolve the firm," Bogar said.

It all started with a growth opportunity that seemed too good to pass up.

According to Bogar, his firm began negotiations with Kentucky-based long-term care center operator Kindred Nursing Centers East in 2010.

The firm had been doing some work for the company for a few months, but now the plan was for Schutjer Bogar to handle Kindred’s Medicaid eligibility and reimbursement claims across the country, Bogar said.

According to Bogar, however, the company was initially concerned whether a firm of Schutjer Bogar’s size would be able to handle the work.

As young firm leaders determined to land a big client, Bogar said he and Schutjer put up about $1.5 million and took out lines of credit in order to open and staff new offices across the country.

Bogar said he and Schutjer were eager to grow the firm they had opened in 2002 and were excited by the opportunity to take on a multibillion-dollar company as a client.

"We got a little starry-eyed there," Bogar admitted to The Legal on Thursday, but said that, at the time, there were no obvious red flags.

And for about a year, Bogar said, it seemed like Schutjer Bogar and Kindred might make great business partners.

The firm began leasing Regus office space across the country and hiring attorneys to handle the influx of work it began receiving from Kindred, according to Bogar.

"They became a third of our billables — 25 to 35 percent," Bogar said.

Bogar estimates that the firm had about 14 attorneys when it brought on Kindred as a client and grew to about 23 attorneys after that, opening offices in South Carolina, Boston and Georgia, among other locations.

Bogar acknowledged that some might say the firm was overly aggressive in its growth, but noted that the firm had hired attorneys and opened offices for other single clients in the past without issue.

In February 2012, however, the firm received what Bogar called a "strange call" from Kindred complaining about legal bills.

According to the amended complaint the firm filed in its suit against Kindred in the U.S. District Court for the Middle District of Pennsylvania in September 2012, Kindred did not raise these billing issues until after it was confronted by the firm about its habitual lateness in making payments.

In its answer to the amended complaint, Kindred rejected this notion, maintaining instead that "the excessive billing practices of plaintiff were a cause of alarm to Kindred and were brought to the attention of plaintiff."

But in a separate suit filed earlier this month in the Middle District, Schutjer Bogar now alleges that Kindred’s decision to cease working with the firm was precipitated by the September 2011 departure of attorney Kelly Kjersgaard Hayes.

According to the complaint in that suit, Hayes "abruptly" left Schutjer Bogar to work for South Carolina firm Maring & Moody in September 2011.
The complaint alleges that prior to leaving Schutjer Bogar, Hayes had arranged with Kindred to terminate its relationship with the firm and to continue working with her.

The complaint further alleges that Hayes arranged to continue training Kindred employees using methods developed by Schutjer Bogar.

According to the complaint against Hayes, the employment agreement Hayes executed with Schutjer Bogar when she joined the firm states that, if she were to leave, she or her new firm would be required to pay Schutjer Bogar 40 percent of any revenue earned from its clients for a period of 18 months following her departure.

Thus far, Schutjer Bogar has not received an accounting for that revenue or any portion of that revenue, according to the complaint.

Within a few months of Hayes’ departure, the billing disputes between Kindred and Schutjer Bogar arose, according to court documents.

On April 25, 2012, Schutjer Bogar and Kindred entered into a settlement agreement under which Kindred was required to pay the firm $201,000 in order to satisfy its February and March obligations, according to Schutjer Bogar’s amended complaint against Kindred.

The settlement agreement also provided that Kindred would pay the firm 80 percent of its total legal fees for April. That arrangement was to continue thereafter until either the firm closed all of its Kindred matters or the two parties agreed on another fee arrangement, the amended complaint said.

According to the amended complaint, Kindred complied with those terms and paid 80 percent of its May invoices as well but, on June 29, 2012, the company sent a letter to the firm stating that it wished to terminate its relationship with Schutjer Bogar within four days.

Kindred’s counsel sent a letter to the firm in July 2012 indicating that the company intended to pay only 34 percent of its total legal invoices for the previous month, Schutjer Bogar said in its amended complaint.

Kindred said in its answer to the amended complaint that Schutjer Bogar’s "services were terminated due to continued problems with excessive billing."

Now, Bogar said he and Schutjer are desperately trying to keep the firm afloat.

"Both Brad and I have each borrowed $100,000 from our parents, we’ve each borrowed $200,000 from friends, I’ve sold both my cars," Bogar said, adding that the firm’s banks, Metro and PNC, have been understanding, but that he’s "sure their patience is wearing thin."

The firm has brought on new clients to replace Kindred, including one of the company’s largest competitors, but continues to struggle to recoup what it lost, Bogar said.

Bogar explained that the real damage to the firm was caused not by Kindred going elsewhere, but by the company failing to give the firm enough lead time to prepare for the loss.

Had Kindred told Schutjer Bogar in September 2011, when Hayes left, that it wanted to terminate the relationship, the firm could have restructured and moved on, Bogar said.

Instead, the firm continued to expand and do work for the company for months until the situation finally came to a head, Bogar said.

"If they had just told us in September 2011, we would have survived this," Bogar said. "But in September and November we were opening offices."

Likewise, had Kindred adhered to the settlement terms and allowed Schutjer Bogar to wrap up the remaining cases it had been working on for the company, the firm could have remained solvent, Bogar said.

Kindred, however, maintained in its answer to the amended complaint that it did not violate the settlement agreement.

Boston-based legal consultant Jeff Coburn, who does not work with Schutjer Bogar, told The Legal that the firm’s situation exemplifies the importance of maintaining a diverse client base.

Coburn said there’s something of an unwritten rule that no client should account for more than 10 or 15 percent of a firm’s total billables.

"The higher you go in that percentage, the more assurance you have to have" that the client is going to stay with the firm, Coburn said.

Bogar said the firm was wary of becoming too dependent on one client but was also loath to turn down business.

"We tried our best to not let that happen, but they kept calling with work and work and work," Bogar said. "You know what happens when you say no, you don’t get the work and it goes to somebody else."

Bogar maintains, however, that the problem wasn’t that the firm relied too heavily on Kindred’s business so much as it was that the firm allowed itself to incur too much expense without getting paid.

"I would do it again but I would be smarter about it," Bogar said of entering into a similar arrangement with another client, but noted that he would be careful "not to get so leveraged."

Both Bogar and Schutjer agreed that if Kindred were to come to them now and offer to settle, they’d be more than willing to work something out, but Bogar said a recent mediation session with Kindred was fruitless.

Kindred’s counsel, Jeffrey S. Adler of Burns White in West Conshohocken, Pa., forwarded a statement from the company to The Legal. "Kindred does not comment on pending litigation as a matter of policy," the statement said. "Kindred’s legal position is well articulated in its pleadings filed with the court. Kindred is, and will continue to, arduously defend against the unmeritorious allegations brought by Schutjer Bogar."

Hayes, who now works for a firm called Burgeon Legal Group in South Carolina and has yet to file an answer to Schutjer Bogar’s complaint, did not return a call seeking comment Friday.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.