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Jenkens & Gilchrist’s plan to erase in one fell swoop potential liabilities related to tax-shelter advice is in jeopardy. A proposed $75 million class action settlement between Jenkens and some 1,100 disgruntled former clients who received tax advice from the Dallas-based firm hit a snag last week that could ultimately unravel the tentative deal. Specifically, at least 40 former Jenkens clients have notified court-appointed special masters that they will opt out of the proposed class action settlement in Thomas Denney, et al. v. Jenkens & Gilchrist, et al., which is pending in the Southern District of New York before Judge Shira A. Scheindlin. The opt-out deadline for the former Jenkens clients was Sept. 28. The proposed settlement, announced in March, was negotiated between lawyers representing Jenkens, class counsel and the firm’s insurance carriers. But now that some of the class members have opted out, Jenkens and the lawyers representing the class have 60 days to persuade the opt-outs to rejoin the proposed settlement. The former Jenkens clients are mostly wealthy individuals who sought advice on how to shelter millions of dollars of income from the Internal Revenue Service. If the firm fails to convince those who have opted out to rejoin the class, Jenkens or its insurance companies could refuse to participate in the proposed settlement. Jenkens Chairman Thomas Cantrill says he hopes the firm can bring the opt-outs back into the fold before the Nov. 26 deadline. He worries about the consequences if that doesn’t happen. “If we have opt-outs at the end of the 60 days, this firm or the insurance carriers may elect not to proceed with the settlement. We would have to start a whole new round of negotiations with class counsel about how to bring closure to this case. I don’t think the plaintiff lawyers want to do that, and we don’t want to that,” Cantrill says. It’s important to the firm to get the tax shelter-related liabilities behind it, Cantrill says. “Any time you have continuing litigation that is unresolved, that is a threat to the firm’s finances,” Cantrill says. The litigation has been taxing on Jenkens. The firm had more than 600 lawyers three years ago. But now, after a steady stream of negative publicity related to the tax litigation and after a steady stream of departures, the firm has 460 lawyers. When the proposed settlement was announced on March 5, Cantrill embraced the deal as one that “would have a positive effect in a lot of ways.” David Deary, a member of Dallas’ Deary Montgomery DeFeo & Canada, represents the class of former Jenkens clients who have agreed to the proposed settlement. “We are extremely optimistic that it’s doable,” Deary says about the settlement. “If the settlement doesn’t go through, it’s going to be a mad scramble to find money from Jenkens.” “To walk away is foolhardy,” he says. To get the opt-outs to drop their opposition to the proposed settlement, Deary says he is “going to explain what the true facts are and show them [the opt-outs] what needs to be shown to them. Any reasonable person is going to understand this is the best deal for them against Jenkens.” But the lawyers representing former Jenkens clients who have opted out of the settlement have a different view about the settlement. “We believe that the proposed settlement is unfair and contains inequitable provisions and it does not provide in the slightest the compensation that taxpayers should be able to recover against Jenkens & Gilchrist,” says Blair Fensterstock, who represents six former clients of Jenkens who have opted out of the proposed settlement. “We believe that the basis on which the settlement was put forward was erroneous,” says Fensterstock, a partner in Fensterstock & Partners in New York. Fensterstock says he believes his opt-out clients will ultimately recover damages in excess of the settlement. Two of his clients, William Melton of Virginia and Myer Berlow of New York, had sought advice from Jenkens on sheltering sums totaling in excess of $200 million, Fensterstock says. Patrick J. O’Brien, a member of O’Brien & O’Brien with offices in Washington, D.C. and Chicago, also has clients who have opted out of the proposed settlement. O’Brien says his clients believe the proposed dollar amount was too low. They also fear the settlement as proposed would hamper efforts to pursue litigation against other parties involved in the tax shelters, such as investment banks, he says. But Deary discounts that concern. He says terms of the proposed settlement give the former Jenkens clients the same rights to sue other parties that they would have if involved in a trial where some parties had previously settled. O’Brien concedes his clients might reconsider their opt-out if Jenkens would propose substantial changes to the settlement within the next 60 days. An exact number of opt-outs, as well as the potential damages sought by those former clients, was not available before press time.. Only the parties still participating in the proposed settlement, such as Jenkens, have access to information about the number of former clients seeking to opt out and the damages sought by those former clients. The former Jenkens clients who opted out of the settlement do not have access to information about how many other former clients have done the same. According to two lawyers involved in the litigation, at least 40 class members had opted out of the settlement by Sept. 29. If the settlement, as currently proposed, is finalized, the firm would contribute $5.25 million to the pot, insurers would pay $63.5 million and three Jenkens shareholders in the firm’s Chicago office, who offered much of the tax shelter advice under scrutiny by the IRS, would individually contribute as much as $3.96 million. The proposed settlement also locks in the cash that Jenkens’ insurers, including excess carriers such as Lloyds of London, bring to the table. Executive Risk Indemnity Inc., the primary insurance carrier for Jenkens, earlier had resisted covering the claims stemming from tax shelter litigation. The insurer filed a suit in October 2003 in the Northern District of Illinois, Executive Risk Indemnity Inc. v. Jenkens & Gilchrist, et al., seeking a declaration of no coverage. Several lawyers in the settlement negotiations say the insurance companies have agreed to abate coverage claims pending completion of the settlement. But Cantrill says the insurance companies would not be bound by the settlement if opt-outs remain after the November deadline. For his part, Fensterstock says he is not worried about the consequences if the proposed settlement unravels, or even a scenario that involves the break-up of Jenkens, which is under financial pressure because of the litigation. “If Jenkens wants to dissolve that’s their choice, but every one of their partners is going to be a target for recovery,” says Fensterstock. Rod Phelan, a partner in the Dallas office of Baker Botts who represents Jenkens in the litigation, bristles at Fensterstock’s comment. Phelan insists individual Jenkens lawyers have “no personal liabilities” if they were not involved in rendering the legal services under scrutiny in the tax litigation. “He’s just wrong,” Phelan says about Fensterstock, “and that kind of scare tactic is going to be futile.” Cantrill is hopeful that, given the stakes and the work involved in achieving a proposed settlement, no one will quit on the idea of finding peace among the parties even if the Nov. 26 deadline comes without everyone opting into the tentative deal. Notes Cantrill, “For sure, at that point everyone’s positions will have crystallized, and we are not just going to pack our briefcases and go home.”

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