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Duane Morris has agreed to pay an undisclosed sum to settle a legal malpractice suit brought by a former corporate executive who claimed the firm hid a serious conflict of interest from him and that he was forced into bankruptcy, where he had to sell his home and his stock interests in the company that had fired him. The settlement keeps John J. Edwards’ suit from going to trial in U.S. District Court. However, a Hofstra University law professor concluded in an expert report prepared for trial that Duane Morris and attorney Donald R. Auten “committed serious, multiple breaches of their ethical and contractual obligations to Edwards relating to conflicts of interest … loyalty, diligence and zeal … [and] by engaging in conduct involving dishonesty, fraud, deceit or misrepresentation.” The expert report was included in the litigation’s case file at the federal courthouse. In briefs filed by Duane Morris’ lawyers — Stephen D. Brown and Patricia A. McCausland of Dechert — the defense was sharply critical of Edwards for rejecting a very good settlement offer, and exonerated Auten and Duane Morris for handling his case properly at every step. Edwards is the former president and one-third owner of Pilot Air Freight Corp. His lawsuit is captioned Edwards v. Duane Morris. In 1995, Edwards hired Duane Morris to negotiate his exit from PAF — a matter that focused mostly on Edwards’ sale of his stock interest. But Edwards claimed Auten never fully informed him of a serious conflict of interest that stemmed from Duane Morris’ representation of Mellon Bank, which had loaned $8 million to PAF — a loan that had been personally guaranteed by Edwards. Edwards’ lawyers — L. Oliver Frey and Jonathan M. Petrakis of Frey Petrakis Deeb Blum Briggs & Mitts — argued in court papers that Duane Morris hid the conflict from Edwards and secretly agreed to honor Mellon’s request to avoid filing a lawsuit on behalf of Edwards against PAF. When Mellon moved to foreclose on Edwards’ home, the suit said, Auten promised to “take care of” the issue. But instead of filing an answer to the foreclosure action, the suit alleged that Auten instead tried to find an outside lawyer to take it on because Duane Morris could not litigate against Mellon. When the outside lawyer declined, Auten did nothing, the suit said, and Edwards was hit with a default judgment. Edwards claimed Duane Morris then advised him to file for bankruptcy, but was unable to represent him. Duane Morris, in its court papers, argued that Auten engaged in “extraordinary efforts” to work out a favorable deal for Edwards in his departure from PAF that included $10,000 monthly payments on two mortgages and $5,000 weekly paychecks, as well as a $6 million offer for his stock holdings. But Duane Morris said Edwards “continued to maintain an unrealistic view of the value of his interest in PAF and could not resist picking a fight with his successor.” As a result, Auten’s efforts “were for naught” and Edwards was fired from PAF and found himself with no income and huge expenses, the firm’s brief said. But in the bankruptcy, Duane Morris said, Edwards walked away with about $7 million after his house and stock were sold. Hofstra University Law School professor Monroe H. Freeman’s expert report was based on his review of Edwards’ version of the facts and his attendance at Auten’s deposition. In his report, Freeman found that Duane Morris and Auten violated numerous ethical rules by failing to disclose the Mellon Bank conflict to Edwards, and by failing to work diligently and loyally for Edwards. Freeman opined that “the potential for harm — the significant and plausible risk that Auten and Duane Morris might be less than loyal and zealous in their representation of Edwards — was clear almost immediately after the firm first undertook representation of Edwards in May 1994.” All of the ethical violations, Freeman said in his report, “could have been avoided … if they had withdrawn from representing Edwards at the outset of the representation as required under Rule 1.7.” Freeman focused on Edwards’ desire to file suit against PAF and his claim that Duane Morris decided not to do so because Mellon did not want the issues litigated. By honoring Mellon’s request, Freeman said, Duane Morris violated its ethical obligations to Edwards of loyalty, diligence and zeal. Freeman noted that Auten testified that he told Edwards that Mellon would not be named in the complaint, but found that Auten also “admits that he did not explain to Edwards the disadvantages of his being represented by a law firm that could not sue a party that would otherwise have been named.” Auten also “failed to review the Mellon Bank refinancing documents, but nevertheless advised Edwards to sign them,” Freeman said in his report. Duane Morris and Auten “compounded their disloyalty to Edwards in favor of loyalty to Mellon,” Freeman’s report said, “by disregarding Edwards’ handwritten instructions forbidding Duane Morris to relinquish his claims against Mellon.” Freeman’s report also said Edwards had instructed Auten to file suit against PAF when a “standstill” agreement expired, but that Auten instead extended the standstill without consulting Edwards. “Although disloyal to Edwards, this was consistent with Duane Morris’ loyalty to Mellon, whose interests favored a negotiated settlement over litigation,” Freeman wrote. In an especially critical section of his expert report, Freeman accused Duane Morris of perpetrating a fraud on the bankruptcy court in securing a payment of $230,000 in fees. Freeman said he found that PAF had agreed to pay $28,000 of the fees, but that Duane Morris did not disclose that fact to the court. Another $111,000 in the claimed fees was also improperly requested, Freeman found, since Edwards’ fee agreement was a contingent one. Freeman was sharply critical of Duane Morris’ response to the accusations. The firm’s defense, Freeman said, was to argue that its fee request was “filed and it was on the record and the trustee had a copy.” In his report, Freeman characterized the firm’s defense as a “catch-me-if-you-can” or “we-got-away-with-it” response. Freeman opined that such a defense is “a particularly repugnant form of confession and avoidance.” Duane Morris, Freeman wrote in his report, was arguing that it “bears no responsibility for having made the false claim, and that it should be permitted to keep Edwards’ money simply because they got away with it without getting caught in the bankruptcy proceeding.” In an interview last week, Brown declined to discuss any of Edwards’ specific allegations, but said that the Duane Morris firm was “pleased with the settlement.” Petrakis was also reticent, saying he, too, did not want to discuss the details of the case, but that he was “pleased with the outcome.” In court papers, Edwards said he was seeking more than $19.6 million in damages. But in a ruling handed down on Jan. 31, U.S. District Judge Petrese B. Tucker significantly trimmed Edwards’ damages claim by ruling that he could not present a damages expert who would have testified that his home and PAF stocks were worth considerably more than he received when they were sold in bankruptcy court. Tucker sided with the Dechert lawyers and held that Edwards was collaterally estopped from challenging the value of the assets since he had an opportunity to do so in bankruptcy court.

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