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Two law firms have been hit with a legal malpractice suit seeking hundreds of millions of dollars for their roles in the collapse of a company that owned a pair of D.C. hospitals. The suit, filed in the U.S. Bankruptcy Court in the District, seeks $242 million in damages from Kutak Rock and Epstein, Becker & Green. The firms were counsel to Doctors Community Healthcare Corp., which owned Greater Southeast Community Hospital and Hadley Memorial Hospital, both in Anacostia. The suit claims that Kutak and Epstein, Becker lawyers committed legal malpractice and aided and abetted the deepening insolvency of DCHC and the hospitals it owned. Also named as defendants in the suit are executives and former executives of DCHC, including Paul Tuft, DCHC’s chief executive officer and a former partner in Kutak’s Atlanta office. At its heart, the suit, filed by trustee Sam Alberts, alleges lawyers at Kutak and Epstein , Becker negligently signed off on opinion letters for DCHC that allowed the cash-strapped hospitals to borrow money — at unusually high costs — from a company whose practices later came under federal scrutiny. It also accuses the law firms of harming the interests of the company and its creditors by advising on hospital acquisitions that hastened DCHC’s insolvency. Lawyers for Kutak and Epstein, Becker deny the allegations. Kutak’s attorney, F. Joseph Warin, who was the managing partner of Kutak’s D.C. office until 1994 and is now at Gibson, Dunn & Crutcher, calls the accusations “completely without merit.” Epstein, Becker’s lawyer, Neil Dilloff of DLA Piper Rudnick Gray Cary, says Alberts’ allegations are “defamatory.” “This kind of attack has made the folks at Epstein, Becker beyond angry,” Dilloff says. Both firms filed motions to dismiss, arguing the lawyers had no knowledge that the transactions in question would be harmful to the hospital company and that they were merely doing what their clients requested. They also claim that the three-year statute of limitations for bringing such an action has expired. A hearing on these motions is scheduled for July 27 before U.S. Bankruptcy Judge S. Martin Teel Jr. LAWYERS FOR DOCTORS Alberts, a partner at White & Case, said in a written statement that the law firms had “a long-standing, unusually close, and unorthodox relationship with DCHC and its directors and officers.” According to the complaint, the relationship between Kutak and DCHC dates to 1992, the year the Arizona-based hospital company was founded by Tuft, the former Kutak partner. Tuft soon turned to his old firm to help build a company whose stated mission was “providing quality health care services to inner-city residents.” George Krauss, a corporate banking and finance specialist and former firmwide presiding partner at Kutak, joined the company’s board of directors. Cynthia Sehr, another Kutak partner, was later hired as DCHC’s vice president of legal affairs. DCHC’s first acquisition was the $10.3 million purchase of Hadley Memorial, a specialist in long-term acute care located in D.C.’s hardscrabble Anacostia neighborhood. By June 1993, according to the complaint, the hospital company struck the first of what would become a long series of financing agreements with Ohio-based National Century Financial Enterprises. In essence, the deal was this: National Century would lend Hadley a lump sum of cash, secured by the rights to Hadley’s accounts receivables from insurers and patients. Within a year of the financing deal, according to the suit, Hadley refinanced its original loan without paying any of the principal. By 1998, the suit states, Hadley was on its fourth funding agreement and owed the finance company $27.4 million. The complaint states that by September 2001, a hospital purchased for $10 million had received a staggering $209.7 million in loans from National Century. According to the complaint, Hadley’s debt was more than 40 times its total balance of accounts receivables. Kutak Rock, the suit states, had provided Hadley with legal advice necessary for the approval of each of these transactions. According to the suit, over a three-year period in the late 1990s, DCHC bought two hospitals in Southern California and one in Chicago. After each purchase, DCHC, using opinion letters from Kutak, opened financing agreements with National Century that were secured by the hospitals’ accounts receivables due from government and private insurers. By the time DCHC made its bid to buy Greater Southeast out of bankruptcy for $21.3 million in 1999, the company was $205 million in the red. Much of its debt was owed to National Century, which had taken a minority stake in DCHC in the mid-1990s. The Greater Southeast deal was put together by Epstein, Becker, which had also done work for DCHC over the previous five years, the trustee’s complaint states. The money for that purchase, according to the suit, had come entirely from National Century. Soon afterward, DCHC and Epstein, Becker arranged the first of a series of financing agreements with National Century similar to those reached with DCHC’s other hospitals. The agreements were primarily secured by the patients’ accounts receivables, the complaint alleges. By 2002, National Century was under investigation by state and federal authorities for securities fraud. In November of that year, shortly after its Dublin, Ohio, offices were raided by the FBI, National Century filed for bankruptcy, claiming $3.5 billion in debt. Two days later, DCHC filed for Chapter 11 bankruptcy, taking D.C.’s Greater Southeast and Hadley Memorial hospitals along with it. By the end of 2002, the hospital company was $460 million in the red, according to the complaint. Among the creditors lining up to be paid were Kutak and Epstein, Becker. According to bankruptcy records, Kutak claims it is owed $63,433. Epstein, Becker did not request a specific amount. The U.S. Attorney’s Office for the Southern District of Ohio filed criminal charges against three National Century managers in 2003 and 2004, alleging they defrauded investors by shifting hundreds of millions of dollars among various bank accounts to hide the company’s losses. These executives eventually pleaded guilty to securities fraud and money-laundering charges. In November, Alberts, the liquidating trustee in the DCHC bankruptcy, filed suit against Kutak; Epstein, Becker; and current and former DCHC executives, claiming they helped National Century “perpetuate a Ponzi scheme.” Alberts represents hundreds of creditors, including Progressive Nursing Staffers of Virginia, Raytheon Aircraft Credit Corp., Washington Gas Co., and the Internal Revenue Service. In his complaint, Alberts describes the relationship between National Century and DCHC as “incestuous” and a “black hole,” alleging that some of the opinion letters signed by Kutak and Epstein, Becker had actually been drafted by National Century. SUING THE LAWYERS Bankruptcy experts say it has become routine for creditors to seek out funds from law firms that advised failed companies. Last year, Pepper Hamilton was hit with two legal malpractice suits stemming from its representation of Student Finance Corp., a loan company that collapsed amid widespread allegations of fraud. In that matter, Pepper was sued by the loan company’s insurer and the bankruptcy trustee, who claimed the firm became an “insider” that helped the company disguise bad loans. Both cases are still pending. In 2002, Curtis, Mallet-Prevost Colt & Mosle agreed to pay $24 million to settle a class action alleging fraud and breach of fiduciary duty for its work on behalf of a San Antonio investment company that went bankrupt. The suit alleged Curtis, Mallet-Prevost attorneys defrauded investors by helping the company set up offshore shell companies and drafting illegal investor agreements. Early last year, Simpson Thacher & Bartlett paid an estimated $6 million to settle a malpractice claim brought by the trustees of bankrupt Global Crossing Ltd. It paid another $19.5 million to the company’s shareholders to help settle a securities class action. Simpson Thacher was criticized in an outside report by Coudert Brothers for conducting a “flawed and incomplete” investigation of accounting irregularities that led to Global Crossing’s collapse. “What happens when a business fails is, the people cleaning up the mess are going to be looking for deep pockets,” says John Olson, a bankruptcy partner in the Tampa, Fla., office of Stearns Weaver Miller Weissler Alhadeff & Sitterson who has represented trustees and filed similar suits against law firms. “[Law firms] certainly have a duty to think through the implications of their advice.” Key to the suit for Kutak and Epstein, Becker will be whether Judge Teel finds the firms contributed to the company’s “deepening insolvency.” According to bankruptcy experts, deepening insolvency is a relatively new method of measuring damages, based on the idea that corporate officers and directors, as well as the professionals who advise them, have an obligation not only to the company but, as it approaches insolvency, to the company’s creditors, as well. The idea is to discourage managers of troubled companies from engaging in corporate waste or looting, or from otherwise harming their creditors before filing for bankruptcy. In the case of DCHC, the suit alleges that Tuft and other top executives paid themselves millions of dollars in salary, travel allowances, and personal loans that were later partially forgiven, even as the company owed hundreds of millions. “The gist of the allegations are that the lawyers knew the company foolishly took on more debt and contributed to the company’s worsened financial position,” says William Reid, a plaintiffs lawyer who specializes in insolvency litigation in the Austin, Texas, office of Diamond McCarthy Taylor Finley Bryant & Lee and who has reviewed the complaint. In court filings, attorneys for both Kutak and Epstein, Becker have pointed out that none of the accusations against their clients faults the quality of the legal advice rendered on DCHC’s repeated loans from National Century. Rather, they say, the suit attacks the wisdom of the transactions as “business judgments,” which are not the responsibility of lawyers but of corporate executives. But accusations of financial mismanagement haven’t stopped one DCHC executive and former Kutak partner from moving forward. Last spring, Teel approved the bankruptcy sale of Greater Southeast to a group of investors. The leader of that group: DCHC’s Paul Tuft.
Jason McLure can be contacted at [email protected].

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