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West Palm Beach, Fla.-based Gunster Yoakley & Stewart faces two upcoming legal malpractice trials in which plaintiffs accuse the law firm and its attorneys of conflict of interest and are seeking tens of millions of dollars in damages. One of the suits seeks $170 million in damages. The other lawsuit does not seek a specific amount, but alleges that Gunster’s actions cost it a minimum of $10 million. The firm’s malpractice insurance policy is for $20 million. Should the venerable law firm lose the cases, some experts say it could be forced into bankruptcy under the weight of huge damage verdicts. But the firm insists the cases pose no threat to its viability and is confident it will prevail in both. In one of the lawsuits, filed in U.S. Bankruptcy Court in Miami, a Gunster attorney admitted in a deposition that he failed to obtain a written conflict-of-interest waiver from the plaintiff to represent more than one party to a transaction. Mark J. Scheer, a shareholder in Gunster’s Miami office, also said he could not recall being given an oral waiver, although he believed he had one. Both suits claim that Gunster lawyers failed to properly notify a client that the firm represented one or more other parties with whom the client did business. In the second malpractice case, Gunster is being sued by two brothers who are heirs to the Gannett newspaper fortune. They allege that the law firm committed negligence, fraud and conspiracy in the handling of their father’s $66 million estate. Last month, Palm Beach Circuit Judge Jonathan Gerber rejected a motion for summary judgment filed by Gunster in that case. He dismissed one count of the complaint but let other allegations go forward. A trial date has not been set. Gunster managing shareholder Donald J. Beuttenmuller Jr. was not available for comment. Robert S. Hackleman, a member of Gunster’s governing committee who heads the firm’s litigation department, said, “We expect to be vindicated in court.” “We do not expect either case to have a material impact on our financial future or well being,” he added. Hackleman declined to answer any other questions. Gunster, which long has been noted for its handling of large trusts and estates, has 120 lawyers in six offices throughout Florida. It was founded 80 years ago and is the oldest and largest firm based in Palm Beach County. Nova Southeastern University law professor Robert M. Jarvis said any verdict approaching the damages sought in the suits could cause the firm “to fold.” “Law firms lease everything, except for a few Oriental rugs, maybe,” he said. “They would have to go into bankruptcy.” Edward Poll of Edward Poll & Associates, a Venice, Calif.,-based law firm management consulting company, said if the law firm’s insurance carrier senses “an aroma of liability,” the insurer would settle for the policy limit and the firm would be liable for the balance of the verdict. “Were that to happen,” Poll said, “they would most likely walk away from the corporation and start anew. Assuming no liability of individual partners, the plaintiffs would get $20 million, and that’s all.” PERMITTED CONFLICTS? The suit involving Scheer is an action for $170 million in damages by E.S. Bankest, a bankrupt factoring firm once co-owned by Miami’s Espirito Santo Bank and brothers Hector and Eduardo Orlansky. It formerly bought accounts receivable at a discount from other companies. After E.S. Bankest failed, the Orlansky brothers and several associates were indicted by federal prosecutors on fraud charges, accusing them of swindling investors by selling worthless promissory notes. There is no allegation that Gunster was in any way involved in the alleged fraud. The plaintiff in the case is E.S. Bankest, which is in the hands of a court-appointed receiver. The lawsuit alleges that Gunster represented parties on both sides of debtor-lender relationships — which are adverse relationships — without obtaining proper conflict of interest waivers from any of the clients. The suit claims that Scheer and Gunster Yoakley had extensive conflicts of interest in acting as lawyers for at least 16 other individuals and business entities whose interests — often as E.S. Bankest borrowers and customers — were directly opposed. The complaint says Scheer and Gunster permitted the conflicts because the law firm’s Miami office was suffering financial problems and needed the legal fees generated by representing a broad client base. The lead counsel for the plaintiff, Steven W. Thomas, a partner at Sullivan & Cromwell in Los Angeles, characterized Gunster’s conduct in the matter as “the worst case of malpractice I’ve ever seen.” But last September when the suit was filed, Beuttenmuller, the managing partner at Gunster, told the Daily Business Review that “it’s outrageous that they’ve sued us. We’re the victims here. The corporation and the people who ran it lied to us as they did to their accountants. They went through a massive effort to do it.” E.S. Bankest was organized in 1998, and went into receivership in August 2003 when it failed to make good on promissory notes it had sold to investors. Espirito Santo Bank, which had sold out its half interest in November 2002, reimbursed the investors and absorbed the losses it now seeks to recoup. The bank is the largest creditor in the E.S. Bankest bankruptcy. Because E.S. Bankest has only about $20 million in assets and $200 million in claims against it, creditors have been looking for other well-heeled defendants to sue. They’ve turned their attention to Gunster and Bankest’s auditors. Lewis B. Freeman, a Miami forensic accountant who serves as the court-appointed receiver for bankrupt E.S. Bankest, said the $170 million sought from Gunster is a realistic figure for damages. As for the impact of a verdict approaching that figure on Gunster, Freeman said “my job is to get maximum recovery for the creditors. We got approval from the [bankruptcy] court to file suit because it works in the best interests of the creditors. I’ll leave the collecting for the lawyers.” TOLD ANOTHER LAWYER In a deposition taken last year, Gunster’s Scheer said he believed he had properly elicited a conflict waiver from E.S. Bankest because he’d told an attorney who worked for Espirito Santo Bank, one of the factoring company’s owners at the time, that Gunster represented other companies that did business with E.S. Bankest. “I think if I raise the issue with … other counsel to the party, who is going to explain, or I believe is going to explain, what the issues are, and I have no reason to believe that he is not capable of doing so once I put the issue to him, I expect that he would have the discussion, which if he were not there I would have myself.” “So you don’t know if he gave you a waiver or not?” Scheer was asked in the deposition. “I don’t recall today,” Scheer replied. In his deposition, Scheer said Gunster’s policy on waivers was to follow Florida Bar rules, which he believed were followed in this case. Jarvis, who’s not involved in the case, said Florida Bar rules do not require written conflict waivers. But he said he’s not sure under Bar rules whether informing a client of a conflict is a nondelegable duty that could be carried out on the lawyer’s behalf by another lawyer for the client. “The key is informed consent, what the client knew and understood,” he said. “The ethics rules are designed to protect the client. It’s up to the lawyer to create documentation that the client was informed and understood.” Miami attorney Warren R. Trazenfeld, who focuses on representing plaintiffs in legal malpractice cases, said the standard in a malpractice case would not be Florida Bar rules but the standard of care in the community. After reading the complaint in the E.S. Bankest case, Trazenfeld, who’s not involved in the case, said Scheer should have gotten the waiver in writing. “A casual conversation regarding a waiver is insufficient,” he said. “If it’s not written down, it didn’t happen.” Most large law firms, Trazenfeld said, designate a partner to review potential conflicts. It’s “very problematic,” he said, for the billing lawyer in a large firm to make such a determination on his own. “If the facts in this case as alleged in the complaint are correct, then this firm has substantial exposure,” Trazenfeld said. Thomas of Sullivan & Cromwell said a trial date should be set by November. ACCUSED OF COLLUSION In the second malpractice case, Charles McAdam III and Frank McAdam allege that Gunster colluded with its client JPMorgan Trust Co., a subsidiary of New York City-based JPMorgan Chase & Co., in running up fees for planning and administering the estate of their father, Charles McAdam Jr. of Wellington, who died in early 2003. Gunster shareholder Daniel A. Hanley is also named as a defendant in the suit. The suit alleges that Gunster failed to disclose that JPMorgan Trust Co. was a client of the law firm while the law firm represented the McAdam estate. “Our contention is that Gunster took better care of JPMorgan than it did of the McAdam family,” said the lead plaintiff counsel, Steven M. Katzman, a partner at Katzman Wasserman & Bernardi in Boca Raton. That suit seeks no specific damage figure. But the plaintiffs maintain that Gunster’s actions cost the estate almost $8 million in legally avoidable taxes alone. The McAdam brothers are grandsons of Frank Gannett, who founded the Gannett newspaper chain in Elmira, N.Y. Gannett, now headquartered in Virginia, is a publicly owned media giant that owns 22 television stations, 100 newspapers, including USA Today, and grosses about $6.5 billion annually. The brothers’ father, the late Charles McAdam Jr., married Sarah Gannett, Frank Gannett’s daughter. Despite the potentially large damages associated with the two malpractice suits, legal recruiter Joseph E. Ankus, of Ankus Consulting in Fort Lauderdale, said he sees no exodus of lawyers from Gunster Yoakley. “I just don’t see any sign that the wagons are circling at Gunster more than at any other firm,” Ankus said. Thomas, the lead plaintiff lawyer in the E.S. Bankest case, said that Gunster “couldn’t pay this judgment.” But Ankus said it’s in the interest of the plaintiffs in both suits to arrive at settlements that would keep Gunster, which is registered with the state of Florida as a corporation that indemnifies its officers and directors, out of bankruptcy. “Any managing partner of any large firm can tell some of the same horror stories you’re hearing about in those suits,” said Ankus, who’s also a lawyer. “Human beings make mistakes. You don’t want to kill the golden goose. You want to keep it alive in a crate producing those eggs.”

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